New Energy Finance Sees 2009 as Year of Consolidation for Clean Energy

With Barack Obama now firmly installed in the White House – after a historic U.S. election that felt like it lasted decades – we can now declare that 2009 has truly begun. This is the time of year when we go out on a limb and predict what sort of year it is going to be. Some years are easy to call; this one is not.

What is clear is that if anyone thinks the correct strategy for 2009 is to hold tight and wait, that a few billion dollars of taxpayers’ money and an easing of the credit markets will bring a return to business as usual, they are in for a rude awakening. As usual, we try to come up with 10 fairly specific predictions, which we will revisit and mark in December.

For the past few years, the cost of clean energy has been unnaturally high, defying the experience curve because of supply-chain bottlenecks and soaring commodity prices, a seller’s market that hid all sorts of sins. But the investment surge of recent years was just starting to ease the bottlenecks when the credit crunch arrived to put the squeeze on demand. The result will be a dramatic and permanent change to the dynamics of the industry. No more silicon shortage; no more extended turbine waiting lists. Now buyers with cash to spend hold all the power. Prices will plummet towards marginal costs, and the world is going to be stunned at how cheaply the best companies can deliver clean energy and still make a profit. This is very good news for developers with access to funds, but very bad news for equipment manufacturers with poor cost positions.

On the demand side, meanwhile, the era of investing in non-economic projects for strategic or marketing reasons is over. Shareholders will not tolerate management wasting money on green-wash. Breathless announcements of carbon neutrality are sooooo 2007. But we are not going to see things come grinding to a halt, as we did in the 1970s and 1980s. 

This time round there is a strong core of demand for clean energy based on firm mandates: renewable portfolio standards, renewable fuel standards, building codes, efficiency regulations and the like. There are also markets where clean energy can provide strong economic returns, even in a period of lower energy prices. Generally, these are still underwritten by a web of regulation and government support — feed-in tariffs, green certificates, subsidies, tax credits, carbon finance and so on — and this will be the case for some time. However, as the cost of clean energy now plummets, it will increasingly win on an unsubsidized basis, as it already can in the case of Brazilian ethanol, the best wind farms and many energy efficiency applications.

So this is clean energy investment, 2009 style. On the supply side, plummeting prices and the long-awaited shake-out. On the demand side, a much clearer focus on sectors, geographies and models that work.

Underlying all this, a huge dose of hope for the future. Not only are all the drivers that propelled the sector along so dramatically for the past five years still at work — climate change, energy insecurity, fossil fuel depletion, new technologies — but there are reasons why the clean energy sector can enter 2009 with a sense of optimism unmatched by any other sector of the faltering global economy.

Central bank rates are at historic lows — lower than any time since the seventeenth century in the case of the UK — but banks are still too worried about solvency to lend. But be in no doubt: a flood of money will hit the economy sooner or later. If not, there will be bailout after bailout until it does, culminating if necessary in outright nationalization. And when lending does start to flow, clean energy projects stand to be among the early beneficiaries — they produce a reliable stream of revenues from good counter-parties, the utilities. By the middle of 2009, borrowing costs for projects should be lower than they were in the middle of 2008, and we should start to see the return of debt syndication — even if it has to be underwritten by governmental involvement. 

As governments around the world have struggled to head off the worst recessionary scenarios and have found that monetary stimulus alone is not enough, they have placed clean energy at the heart of their fiscal stimulus packages — most notably the incoming U.S. administration, with its talk of US $150 billion in clean energy funds and at least $78 billion in targeted measures for the sector.

Last week, at the Masdar World Future Energy Summit in Abu Dhabi, a big cheer went up among those gathered around the television screen to listen to President Obama’s inauguration address when he mentioned harnessing “the sun and the winds and the soil” to power America’s cars and factories. The hope has to be that good intentions and soaring rhetoric will be matched quickly by concrete financial incentives.

And finally, there are high hopes that this year could see the most significant breakthrough in international climate negotiations since Rio in 1992. This is seen as the year in which we have to come to an agreement over a successor to the Kyoto Protocol if we are to avoid a disastrous hiatus before any new regime can be implemented. December’s COP/MOP meeting in Poznan, Poland was, frankly, a failure. Falling after President Obama’s election but before his inauguration, no significant progress was made.

Immediately after his election, President Obama signaled his intention not just to take part in the final year of negotiations, but to play a leading role. His selections of Stephen Chu, Carol Browner, John Holdren, Lisa Jackson and Jane Lubchenco further raised expectations that he intends to take his campaign pledge seriously, and that can only be good news for the climate talks, the carbon markets and the clean energy sector.

In summary, therefore, 2009 will be characterized by a confusing mix of consolidation and optimism. It will start slowly, with project developers struggling to find banks willing to lend; with the profits that drive tax equity as rare as hens’ teeth; and with shell-shocked stock markets effectively shut for public fund-raising. There will be casualties and there will be forced marriages, as companies run out of cash. It will be a year of extraordinary volatility in all markets, and in clean energy, some sub-sectors will surge while others will wilt.

Here at New Energy Finance we are looking forward to supporting you as you work to meet the challenges of these extraordinary times. We now have 130 staff, some 35 more than a year ago, with offices in 11 cities. With your support and feedback we will continue to develop our core services in renewable energy, energy technology and the carbon markets. In addition, we have been building new services around energy efficiency, digital energy, nuclear power and carbon capture and storage, which we will be rolling out during the course of this quarter.

We have also been busy preparing the second New Energy Finance Summit, which will take place in London from the 4th to the 6th of March. It is an invitation-only, 200-person event, with an emphasis on discussion and debate between senior decision-makers.

I do hope to see you at one of our events around the world during the course of 2009. It is already shaping up to be an extraordinary year in the history of clean energy and the carbon markets.

Boring it won’t be.

Happy New Year! 

Click here to download and read our 10 detailed predictions for 2009, compiled by the New Energy Finance research, editorial and analytical teams.

Michael Liebreich is Chairman and Chief Executive of New Energy Finance, a leading independent provider of information and research to investors in clean energy and the carbon markets. Prior to founding New Energy Finance in 2004 Michael helped to build over 25 companies as a venture capitalist, entrepreneur and executive. Michael earned a Master of Arts in Engineering with First Class Honours from the University of Cambridge and has an MBA from Harvard Graduate School of Business, where he was a Harkness Fellow and Baker Scholar.

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