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The recession is withering the alternative-energy business. Can the federal government's stimulus package revive it?
Kate O'Sullivan, CFO Magazine
April 1, 2009
In 2008, alternative energy seemed poised to become the next big thing. As oil prices soared, seed money poured into the sector, and some saw a new investment bubble forming. Pundits envisioned a green future where wind farms would generate clean electricity for office buildings and factories, which in turn would be outfitted with solar-panel arrays, geothermal heat pumps, and low-energy lighting. Employees would commute to work in electric or ethanol-powered cars.
That future seems much farther away in 2009. Alternative energy is withering, thanks to the recession and the credit freeze. Companies and governments that only months ago were committed to funding green initiatives are now struggling with budget cuts. Wind turbine manufacturers have made layoffs, as have companies in the solar and biofuel arenas.
David Mortensen, U.S. finance chief at Grundfos Pumps, a manufacturer of water pumps, says he's suffering a bout of déjà vu. "My first job out of college in the 1970s was at [California utility] PG&E as a solar project coordinator, and it felt exactly the same then as it does now," he says. "There was a gas crisis, solar was just around the corner, and everyone thought energy prices would continue to go crazy. Then energy prices came way down and solar was back where it started."
Yet three decades after that first exposure to solar power, Mortensen took the plunge. Last year Grundfos installed a solar array at its Fresno, California, manufacturing facility. The project caught the attention of a fellow CFO at a neighboring company, but Mortensen says that executive is now wholly focused on his company's near-term survival. "They're not sure they'll be around to use the energy," says Mortensen.
Banks Bail Out
Tobin Ginter, CFO of Rodney Strong Vineyards, says when his company spent $2 million to build its solar array in 2003, the alignment of tax incentives, concern about energy prices, and a corporate commitment to environmentally friendly practices made solar very attractive. The project improved the company's cash flow from the outset, thanks in no small part to those incentives, which included the ability to accelerate depreciation. Now, says Ginter, "if your business is struggling, [solar] will be a tough call to make, especially if financing isn't available."
Banks like Morgan Stanley once financed or invested in many solar and wind projects. (In Grundfos's case, Morgan Stanley paid for the installation of the solar array.) The banks typically benefited from the tax credits they gained from investing in alternative energy. Now, "Morgan Stanley seems to have exited that business," says Eileen Kamerick, finance chief at TectaAmerica, a commercial roofing company with a growing portfolio of energy-efficient roofing options. And the ailing bank is not alone: of the 18 financial institutions that were frequent backers of wind and solar projects, only 4 are still in the business.
Venture capitalists, who flocked to clean-energy start-ups after the dot-com bust, all but closed their wallets late last year. Fourth-quarter venture investment in the sector was down 44 percent from the previous year, according to Ernst & Young.
Filling the Void
But the federal government's massive stimulus package may provide the alternative funding that the alternative-energy sector so badly needs. Passed in February, the $787 billion American Reinvestment and Recovery Act includes billions of dollars of incentives for green energy (see "Seed Money" at the end of this article). Many in the industry think the incentives will provide a lifeline to better days. "It looks like, feels like, and tastes like it's going to be very, very good for us," says Art Hennessey, finance chief at American Capital Energy, a solar project management company. Ethan Zindler, head of U.S. research at New Energy Finance, a research firm focused on investment trends in renewable energy, says he expects the stimulus to help offset the impact of the recession. "This kind of support should allow the market to open up, and should allow the renewable-energy sector in the U.S. to grow somewhat from where we were last year," he says.
The stimulus package is not the only force working to sustain the sector, although it is certainly the strongest. For one, mandated clean- energy standards, which typically require utilities to generate 10 to 20 percent of their power from renewable sources in the next 5 to 10 years, will keep many municipalities focused on ways to reduce their carbon footprints. Zindler says about 30 states have adopted such standards.
Such policies could help get venture dollars flowing again, notes Christopher Scott, CFO of BlueFire Ethanol, which has developed technology to turn urban and agricultural waste into ethanol. "The more government interest there is in terms of policy that gets pushed through, the more investor interest there is," he says.
Other capital sources may also spring up to fund alternative-energy research and solar and wind installations. Cash-rich companies and wealthy individuals could step in to fill the void left by banks, says Zindler. Deep-pocketed oil companies like Chevron and Valero are developing wind farms; BP already has several. With oil around $35 a barrel, "the [oil companies'] return on investment on a wind farm looks a lot better," says Zindler. Costs for solar panels have fallen by 25 percent since last summer and are expected to decline further; wind turbines have also become cheaper. As a result, dollars flowing to the sector will go further.
Finally, while the dramatic falloff in new construction has certainly hurt many green companies in the building-materials sector, "some infrastructure investment you can't defer forever," says TectaAmerica's Kamerick. She notes that there are still buildings going up at medical institutions, universities, and municipalities. "We are finding that if people are going to build something, they are willing to look at the capital costs of adding some sort of green solution to the roof," says Kamerick.
Thus there are signs of growth for the alternative-energy sector. Executives throughout the industry are optimistic about the stimulus package, although they are still unsure about the details and how to access the funds. It could take time for the enormous package to make its way through the congressional appropriations process, and individual projects may need to pass regulatory muster, says Kamerick.
Finding conventional financing for alternative energy remains a challenge. But a substantial dose of federal aid, long-standing concern about energy security and price volatility, and widespread new standards for renewable-energy use may help green avoid a repeat of the 1980s, when it experienced its own lost decade.
Kate O'Sullivan is a senior writer at CFO.
The American Recovery and Reinvestment Act of 2009 provides $50 billion for a variety of green-energy initiatives. Here are some of the provisions:
• Smart-grid investments: $11 billion
• State and local energy-efficiency grants: $6.3 billion
• Weatherization of houses for low-income families: $5 billion
• Federal green-buildings program: $4.5 billion
• Clean-coal projects: $3.4 billion
• Research on electric-car batteries: $2 billion
• Worker training for green jobs: $500 million
The act also extends the production tax credit for wind energy and converts solar-energy tax credits to tax rebates.