By David A. Hill

Last week’s Euromoney Renewable Energy Finance Forum in New York painted a rather dismal picture for the current state of clean tech investment — direct from the mouths of the lendors and investors on hand. The numbers don’t lie, but is it a half full or half empty proposition?

From a stock perspective, the overall performance of renewables has been brutal, with clean energy equities having lost anywhere from 40% to 72% of their value over the past 24 months, a market performance that obviously jams up the entire system, said bankers at the conference. There has been a “flight to quality” in the space.

“The capital is there … but having a project that can be financed is difficult. I think the developers are struggling. So we have not been as busy as we’ve been in the past,” said Kevin Walsh, managing director of renewable energy at GE Energy Financial Services.

Lenders pointed out that low oil and natural gas prices coupled with reduced power demands due to the recession have held back growth in renewable energy sectors, particularly wind. The U.S. wind installation base is expected to fall by 40% this year. Because major shale gas finds are adding to the supply, most experts at the conference and elsewhere expect natural gas to remain well below $8.00/Mcf for the foreseeable future. Even with subsidies, it is tough for solar and wind to compete when fossil fuels remain relatively cheap.

Also gumming up the investment picture is the lack of policy guidance from the feds, including adoptation of a national Renewable Energy Standard(RES) similar to the one recently passed in Colorado. In addition, carbon pricing has yet to be acted upon. Without a national target or a price on carbon, renewables may look less attractive to investors.

Kevin Genieser of Morgan Stanley said the private companies looking to pay off their early investors (private equity, venture capital, etc.) with initial public offering (IPO) proceeds have been met with stiff resistance. Major IPO’s in the sector have suffered and their sour performance has a ripple effect all the way down the investment chain.

As Nick Hodge of Green Chip Stocks notes in his post-Forum blog, the crux of the problem is that if VCs and private equity fund managers don’t see a profitable exit, they aren’t going to lend money in the early rounds. The overall result is what we have now: Lenders with much-needed capital refusing to play the game either 1) because everyone that has played recently has lost; or 2) because the rules aren’t clear enough.

EFFICIENCY AND GRID STILL ATTRACTIVE

The consensus at the Forum about the less glamorous area of energy efficiency was that it has a proven payoff. It doesn’t matter how cheap natural gas goes… If homeowners and businesses consume less electricity, they save more money.

Investing in the Grid is also still viewed as sound. Upgrading and expanding the national electric infrastructure will also pave the way for the introduction of more renewable capacity in the future.

SOLAR FASTEST GROWTH SECTOR

Solar PV will be the fastest growing segment of renewables because it is a less capital intensive industry, and does not face the same regulatory challenges as wind and goethermal, GE’s Walsh told Bill Opalka. His company is now looking to invest in large scale solar PV plants.

“We really like what we see in solar right now. That’s going to be a greater focus for us as well.”

Companies like GE have changed up their investment strategies over the last 18 months. Tax equity was the popular project financing option in 2008. Those were the days when tax equity players owed enough money in taxes to take advantage of the credits. Then the financial crisis slammed the country, and the tax appetite of investors dropped like a dead weight. The problem was particularly bad in the wind industry. Nowadays, because of the grant program created by the stimulus package, the tool of choice is debt.

More than $5 billion was invested in wind energy projects in the U.S last year, with only $1.8 billion in the form
of tax equity.

Many developers are borrowing against the cash grant to raise money for construction, then handing the payment over to the construction lender when the project is completed. The program has already helped bring about 4,200 MW of projects online.

While the grant program has been a lifeline for developers in the last year, fewer of them are able to take advantage of it because there is less demand for their energy.

A U.S. CLEAN ENERGY BANK?

Another hope raised at last week’s Forum is that of a government-funded bank to support clean energy technologies that would become self-sustaining over time. Currently, versions of it are in energy legislation pending in both houses of Congress.

“A Clean Energy Deployment Administration (CEDA) is so vital to the future of renewable energy in the United States,” said Dan Reicher, director, climate change & energy initiatives at Google, who delivered the Green Bank message in a speech. Reicher is also the co-chairman of the American Council on Renewable Energy (ACORE) a REFF sponsor.

And he evoked yet another image, one that is mentioned in clean energy circles more frequently: the “elephant in the room,” or the “oil disaster in the Gulf of Mexico,” as Reicher said.

According to the International Energy Agency released earlier this month, fossil energies received about $550 billion in subsidies in 2008, compared to $50 billion for renewables. With such heavy support for fossil energies, renewables will continue to be dependent on public policy. Without the grant program, a national renewable energy standard and/or price on carbon, the sector may not attract the investment it needs to fuel scale-up.

Michael Liebreich, CEO of Bloomberg New Energy Finance, said that these are all factors that the industry must deal with. They are creating the “New Normal,” where renewables grow at a more subdued and sustainable pace.

“We’re neither in the depth of a trough, nor are we in an overheated stage. So this is a kind of normal year in the development of an industry,” Liebreich said.