Sunday, April 18, 2010

A Gold Rush in Green Technology

I am not surprised to see so many solar technology players - strapped for cash – are looking to file for IPO. However, their revenue model today largely depends upon government subsidies in terms of long term feed-in-tariffs. Most of these firms do not have stand-alone sustainable business models or robust technology. In the field of solar, there are many competing technologies that have yet to mature and of course commercialize. Many European governments have huge budget deficits and are starting to reconsider large subsidies to forms of clean technologies that are cost-competitive vis-a-vis traditional forms of energy.  For solar, any form of subsidy needs to incentivize more research & development, prototyping, field testing etc rather than purchasing guarantees over decades at 4-5 times traditional costs. Wind energy, energy conservation and water management technologies appear more attractive investment domains in the mid-term. Here’s an article from this week’s BusinessWeek:

On tap, a slew of IPOs from clean energy companies, many of them subsidized—at least for now

By Mark Scott and Alex Morales

Like bright sunshine charging up solar panels, investor fervor is fueling the market for public offerings of green companies. Electric automaker Tesla Motors, U.S. green energy producer Ameresco, and Spain's T-Solar have filed to go public, and many more are waiting in the wings. "There's renewed appetite for green IPOs," says Luigi Ferraris, chief financial officer of Italian utility Enel, which plans to sell a minority stake of its renewables subsidiary Enel Green Power for $5.4 billion by the end of the year. That would be Europe's largest listing since 2007.

Green companies have said they hope to raise $9.6 billion worldwide, according to Bloomberg New Energy Finance. That's more than triple the total for eco-IPOs during all of last year. Renewable energy projects such as wind farms and solar parks still garner the most interest, but energy conservation and water management are also winning financial backing.

British solar energy producer Engyco wants to secure $1.4 billion, while its Madrid-based rival Renovalia could raise more than $300 million. Indian clean-tech manufacturer Indosolar aims to raise $88 million in Mumbai. San Diego-based Fallbrook Technologies, a maker of efficient transmissions for vehicles, is looking for $50 million. And Tesla is aiming for $100 million. "Investment bankers are out there soliciting business," says Nigel Meir of Ludgate Environmental Fund in London, which invests in clean technology companies. "The green sector has a lot of forward propulsion."

Some of the fuel is coming from national governments around the world, which have earmarked billions to fund renewable energy installations and projects such as modernizing the electricity network. Climate change regulation could also help eco-firms lock in revenues from customers required to reduce their carbon footprint. "A big part of the renewables market is the stimulus provided by governments," says Chris Thiele, a Morgan Stanley (MS) investment banker in London.

Some worry that the rapid flow of state funding may end as abruptly as it started. Governments, particularly in cash-strapped European countries, face growing deficits. Costly green initiatives such as cheap loans for homeowners who install solar panels could be cut by politicians reluctant to curb spending on, say, health care or defense. Subsidies "are at the whim of whichever party is sitting in power," says Walter Nasdeo of Ardour Capital Investments, a New York investment bank that specializes in clean technology.

Concerns over government cutbacks haven't stopped Enel Green Power. The company has secured $61 million in U.S. stimulus money for two geothermal power plants in Nevada, and hopes to land further millions in federal support for American wind, solar, and geothermal projects. "The U.S. offers a huge opportunity for growth," says Ferraris. In its home market, the Rome-based utility benefits from rules that let it charge customers above-market prices for energy from renewable sources. All told, Enel Green Power plans to invest $6.9 billion in renewables across three continents by 2014. The IPO money will help pay down its parent company's $69 billion debt.

Before the fiscal crisis, even companies with few customers and unproven equipment could get funding. These days, steady sales from proven technology are a must—something virtually all the companies looking to list now have. "People once backed hope," says Stephen Mahon, chief investment officer at Low Carbon Investors in London. "Now they back revenues."

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