[R-G] Alternative Energy Suddenly Faces Headwinds

[Steven L. Robinson]

Alternative Energy Suddenly Faces Headwinds

By Clifford Krauss
The New York Times
October 21, 2008

For all the support that the presidential candidates are expressing for
renewable energy, alternative energies like wind and solar are facing big
new challenges because of the credit freeze and the plunge in oil and
natural gas prices.

Shares of alternative energy companies have fallen even more sharply than
the rest of the stock market in recent months. The struggles of financial
institutions are raising fears that investment capital for big renewable
energy projects is likely to get tighter.

Advocates are concerned that if the prices for oil and gas keep falling, the
incentive for utilities and consumers to buy expensive renewable energy will
shrink. That is what happened in the 1980s when a decade of advances for
alternative energy collapsed amid falling prices for conventional fuels.

"Everyone is in shock about what the new world is going to be," said V. John
White, executive director of the Center for Energy Efficiency and Renewable
Technology, a California advocacy group. "Surely, renewable energy projects
and new technologies are at risk because of their capital intensity."

Senator Barack Obama and Senator John McCain both promise ambitious programs
to develop various kinds of alternative energy to combat global warming and
achieve energy independence.

Mr. Obama talks of creating five million new jobs in renewable energy and
nearly tripling the percentage of the nation's electricity supplied by
renewables by 2025. Mr. McCain has run television advertisements showing
wind turbines and has pledged to make the United States the "leader in a new
international green economy."

But after years of rapid growth, the sudden headwinds facing renewables
point to slowing momentum and greater dependence on government subsidies,
mandates and research financing, at a time when Washington is overloaded
with economic problems.

John Woolard, chief executive officer of BrightSource Energy, a solar
company, said he believed the long-term future for renewables remained
promising, though "right now we are looking at tumultuous and unpredictable
capital markets."

Venture capital financing for some advanced solar projects and for
experimental biofuels, like ethanol made from plant wastes, is drying up,
according to analysts who track investment flows.

At least two wind energy companies have had to delay projects in recent days
because of trouble raising capital. Several corn ethanol projects have been
delayed for lack of financing in Iowa and Oklahoma since last month, and one
plant operator in Ohio filed for bankruptcy protection last week.

Tesla Motors, the maker of battery-powered cars, recently announced it had
been forced to delay production of its all-electric Model S sedan, close two
offices and lay off workers.

Investment analysts say initial and secondary stock offerings by clean
energy companies across global markets have slowed to a crawl since the
spring, and for the full year could total less than half of the record $25.4
billion for 2007.

Worldwide project financings for new construction of wind, solar, biofuels
and other alternative energy projects this year fell to $17.8 billion in the
third quarter, from $23.2 billion in the second quarter, according to New
Energy Finance, a research firm in London. The slide is expected to be
sharper in the fourth quarter and next year.

In the United States, financing for new projects and venture capital and
private equity investments in renewable energy this year might still top
last year's results because so much money was in the pipeline at the
beginning of the year, but the pace has slowed sharply in the last month.

The next presidential administration, to make good on campaign rhetoric and
continue supporting renewables, will have to choose alternative energy over
other programs at a time of ballooning deficits. Analysts say that is no
sure thing.

"Government funding for renewables is now going to have to compete with
levels of government funding in other areas that were unimaginable six
months ago," Mark Flannery, an energy analyst for Credit Suisse, said.

The central questions facing renewables now, experts say, are how long
credit will be tight and how low oil and natural gas prices will fall. Oil
and gas are still relatively expensive by historical standards, but the
prices have fallen by half since July. Some economists expect further
declines as the economy weakens.

Wall Street analysts say most utilities and other builders can profitably
choose big wind projects over gas-fired plants only when gas prices are $8
per thousand cubic feet or higher. Natural gas settled Monday at about $6.79
per thousand cubic feet, down from about $13.58 on July 3.

"Natural gas at $6 makes wind look like a questionable idea and solar power
unfathomably expensive," said Kevin Book, a senior vice president at FBR
Capital Markets.

Government mandates already on the books, including state rules requiring
renewable power generation and federal requirements for production of
ethanol, ensure that to some degree, alternative energy markets will
continue to exist no matter how low oil and gas prices go. But the credit
crisis means some companies that would like to build facilities to meet that
demand are going to have problems. "If you can't borrow money, you can't
develop renewables," Mr. Book said.

Renewable energy now meets 7 percent of the nation's energy needs, and
public subsidies have promoted a leap for several alternative energy sources
in recent years.

Ethanol is sold nationwide as a gasoline additive, and federal legislation
aims to replace a major share of the oil now imported into the United States
with domestically produced biofuels in the next 15 years. Enough new wind
power was installed in the United States to serve the equivalent of 4.5
million households in 2007, the third year in a row the country led all
nations in new wind power.

Renewable energy has become a big business worldwide, with total investment
increasing to $148.4 billion last year, from $33.4 billion in 2004,
according to Ethan Zindler, head of North American research at New Energy
Finance. Mr. Zindler said the upward momentum had halted, and that total
investment this year was likely to be lower than last.

In the 1970s, just as in recent years, high prices for fossil fuels led to
rising interest in renewables. But when oil prices collapsed in the 1980s,
the nascent market for renewable energy fell apart, too. Congress eliminated
tax credits for solar energy, ethanol could not compete with cheap gasoline
and a wind farm boomlet in California failed to catch on in the rest of the
country.

The epicenter of investment and development moved to Europe, with its strong
government support for renewables, and began shifting back only when heating
oil and natural gas prices shot up again in recent years.

There are some differences this time. Coal, another major competitor of
renewables, remains expensive and is facing increasing scrutiny over
environmental concerns.

Most important, renewable energy entrepreneurs and experts say, is the
growing government and public backing for renewable energy in the United
States.

"What is driving the market this time is that we're at war and this is a
security issue," said Arnold R. Klann, chief executive of BlueFire Ethanol,
a California company that is planning to make ethanol out of garbage with
the help of $40 million in financing from the Energy Department.

In its recent financial rescue package, Congress provided $17 billion in tax
credits to promote various forms of clean power, for everything from plug-in
electric vehicles to projects that will capture and store carbon dioxide
from coal-burning power plants. Production and investment tax credits were
extended for wind energy for one year, geothermal energy for two years and
for solar energy for a full eight years.

Meanwhile more than 30 states have enacted standards demanding that
utilities generate a minimum proportion - typically 10 to 20 percent - of
their power from renewable sources in the next 5 to 10 years.

But some analysts say the government supports may not be enough to propel
continued growth for renewables, noting that several states have already
relaxed their goals.

"When they can't meet their targets," Mr. Book said, "they change them."

Copyright © 2008 The New York Times


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