15 December 2008 - Mike Foster
Environmental concerns give way to fears of recession
A slackening in the growth rate of fossil fuel consumption gave comfort to environmentalists in 2008, as recession began to grip global economies. But, in most respects, this year was awful for the green bandwagon, which came to a halt as debt and equity finance dried up.
Clean energy stocks crashed by two thirds. The chart of the WilderHill New Energy Global Innovation index resembles the Nasdaq Technology index in 2000.
The quality of management for projects has come into question, with analysts saying enthusiasm for a good cause has been getting in the way of operational efficiency.
State subsidies are distorting the market. Governments are failing to force companies to disclose emissions. A replacement to the Kyoto climate change protocol, expiring in 2012, has yet to be agreed. Global leaders will debate the next protocol in Copenhagen, Denmark, next year, but preliminary meetings have failed to achieve common cause.
Carbon trading is dependent on good results. Post-2012 carbon emission permits are trading at half the price of this year’s equivalents, which have fallen in value. Slovakia has dumped 10 million surplus credits and Russia rushed out a statement denying it would sell its mountain of surplus credits.
International Energy Agency analyst Ralph Sims, who attended Poznan, said everything depended on US President-elect Barack Obama rebuilding momentum. He would deliver comfort, but an effective response to climate change would need him to push the political, business and fiscal agenda in favour of a green new deal. This is a tall order when his priority is to rebuild the US economy.
Elsewhere, New Zealand decided to review its support for a carbon trading initiative out of concern about its impact on local agriculture. Power companies, led by Germany’s RWE, are objecting to a European initiative to put a price on carbon dioxide emission permits via auction in 2013.
Independent analyst Bjørn Lomborg told a Financial News conference this month that temperature rises can be seen as beneficial and investment in other areas could deliver a better return to society. Scientists argue, however, there is a risk of runaway climate change if carbon dioxide emissions continue to rise and Arctic ice melts.
Sims said: “It looks like emissions will now lead to a dangerously high temperature increase of more than two degrees.” He said annual coastal flooding, droughts, heatwaves and irreversible climate change will result from a three degree increase, but he added that change is hard to prove.
Delegates at the Financial News Green Investing conference were concerned by events. Adverse conditions in the market have pushed last year’s debt spreads of 50 basis points to more than 200, where clean energy projects can find funds at all.
Simon Drury, partner at Climate Change Capital Private Equity Fund, said 25% of banks are prepared to commit to clean energy, 25% are not, and 50% are receiving phone calls, but not lending at present. He said: “The funding gap on some deals is 100%.”
From covenant-lite, banks have moved to a position where operational statements are regularly inspected. Conference sponsor WestLB is still a participant, but global energy director of the German bank, Stephen Spencer, told the FN conference: “There has been a tightening. Transactions are being done using a much more conservative structure.”
He said lenders are keen to ascertain local regulatory requirements. Another delegate said governments could encourage banks to take a localised approach, but international syndication would be impossible.
Funds in Morningstar’s ecology sector, which invest in a range of sustainability stocks, are less affected than the Nex index, but have underperformed mainstream funds. The Virgin Climate Change Fund, advised by GLG, is down 48% since February, against the MSCI World’s 18.5% fall. The next-worst performer is an ecological fund sponsored by Dresdner RCM, which fell 34.6%, after raising €1.5bn in 2007.
Wayne Woo, director of investor Good Energies, said founders are becoming more willing to part with equity to fund clean technology operations: “In the past, they resisted selling more than 50%. They are now prepared to go to 75%.” He said terms from financiers had become “a bit onerous”, but added this was to be expected.
Venture capitalists in Silicon Valley have lost a fortune on biofuels and have become cautious. Listed clean energy companies are struggling and a few have gone bust.
UK-listed Ceres Power Holdings has developed expertise in boiler technology and enticed utility company Centrica into buying a 10% stake at 300p a share last February. Its shares have since fallen 102p.
Rob Wylie, co-founder of clean technology venture fund Wheb Ventures, said he could not make out a business case for projects depending on state subsidies for long-term finance: “I found it particularly hard to understand the enthusiasm for biofuels. There’s too much competition from Brazil and oil.” Wheb concentrates on energy efficiency and related information technology.
Peter Horsburgh, founding partner of the Environmental Technologies Fund, said ventures that save energy and promote clean energy would succeed. He is interested in a project that creates biofuels out of waste products from pulp and paper manufacturing, plus another which seeks to create energy out of vibrations. He said: “You need to be quite eclectic.”
Simon Thomas, chief executive of data provider Trucost, has put together a passive fund with a bias to companies that emit 35% less carbon than mainstream stocks.
Venture Business Research has surveyed 600 industry participants, according to chief executive Douglas Lloyd. It confirmed developers are less interested in capital intensive projects, such as tidal and wind power. Solar power and energy efficiency are more popular.
Large companies ranging from steel producer ArcelorMittal to retailer Wal-Mart have developed environmental credentials. However, their decision to back initiatives predates the credit crunch. The amount invested in the sector fell from $148bn (€112bn) to $142bn in 2008, according to information service New Energy Finance. The rate of decrease could accelerate in the next few months.
Data supplied by New Energy Finance shows landfill projects are lagging expectations. Hydro and wind projects are also behind target, although industrial gas projects are doing well.
Registration of carbon projects has stagnated, while applications have risen. Issues relating to audits carried out by Norwegian agent DNV, which historically verified nearly half the total, have led to its suspension by the UN, although it hopes to regain accreditation within two months.
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