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Oil price fall checks enthusiasm for alternatives

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By Fiona Harvey in London, Richard Waters in San,Francisco and Sheila McNulty in Houston

Published: November 11 2008 02:00 | Last updated: November 11 2008 02:00

Renewable energy has been one of the star sectors of the market in recent years, with a rash of flotations, fundraisings and expansion into the sector by many heavyweight existing energy companies.

New investment in clean, or low-carbon, energy stood at $148bn last year, according to New Energy Finance. Including mergers, acquisitions and buy-outs, the total deal value in the sector last year was $205bn.

Deals have included the €1.45bn ($1.86bn) paid this year by Scottish and Southern Electricity for Airtricity, an Irish wind energy company, and £1.4bn ($2.2bn) paid by Eon for Airtricity’s US assets last year. These prices included some wind farms already built, but also many still under construction or in planning.

The activity was driven by the high price of conventional energy, as oil repeatedly hit fresh price highs; concerns over energy security; and the need to tackle climate change.

But such exuberance could not last. Renewable energy projects often have high capital costs, and the credit crunch has shut down many sources of financing.

The plunging price of oil has also changed the economics of clean energy. When oil was at record highs, alternative energy looked cheap. Today, it looks much more expensive.

Lord Browne, former chief of BP and now managing director of Riverstone Holdings, which invests in clean energy, this month predicted a shake-out in the sector, which had seen “a great bubbling” of new developments. “There has been a tremendous amount of activity. There might have been too much . . . It’s producing a lot of casualties,” he said. “Maybe some of the more unlikely-to-succeed things will just be shut down.”

The US ethanol market was the first to suffer, with many companies finding their debt- and subsidy-fuelled bonanza wrecked in the past few months. Other markets, including wind and solar energy, are also now feeling the chill.

“Many ethanol, biodiesel, wind and solar businesses are all facing substantial insolvencies and restructurings,” said Karl Miller, founder of MMC Energy, the US energy acquisitions group. “These businesses were launched and funded based upon flawed economics and were never on solid financial grounds. Some will survive; most will not.”

Investors with long memories have seen this before. The oil shocks of the 1970s led to a huge growth in the development of renewables.

But when oil prices fell in the 1980s, these companies were left stranded. Many failed, or their technology lay dormant for 20 years.

Will the same fate befall the clean technology companies of today?

It seems unlikely, say many observers. “This is nothing like the 1980s,” said Lord Stern, former World Bank chief economist and author of the landmark 2006 Stern review of the economics of climate change.

He said concerns over climate change, the need to move to a low-carbon economy and growing energy hunger meant demand for clean technology would remain. “I don’t think that’s a big worry unless you think we are in for a 10-year depression.”

Also, last time, solar energy “was 10 times more expensive than fossil fuels and hadn’t reached any scale,” said Suvi Sharma, chief executive of Solaria, a solar cell manufacturer.

But although they may not kill off the renewables market, falling energy prices are having an impact. “The significant drop in the price of oil and natural gas has now raised the minimum banker lending hurdle. The decreased cost in competing energy sources has increased alternative energy project risk and the ability to get funding,” said Mark T. Williams, professor of finance and economics at Boston University.

Also damping the market is the loss or new-found quietness of many proprietary trading desks of investment banks, which led the way in investing in many renewable projects such as wind farms and solar parks. Mortimer Menzel of Augusta and Co said: “We expect the proprietary trading groups which were significant investors in renewables, especially in Europe, are no longer investing to the same extent.”

Project financing for big renewables projects, such as wind farms, was also harder to find, he said.

But Michael Liebreich, chief executive of New Energy Finance, said the longer-term outlook was bright. “Governments are stuffing money into the pockets of banks, and they will need to find receptacles for large amounts of cheap debt – and infrastructure plays, which is what clean tech is, will be a very good place to invest,” he said.

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