Renewed confidence in alternative energy

Following the 2011 Fukushima disaster, Germany decided to phase out nuclear energy by 2022 and concurrently increase the renewable energy market share to 35% of supply. This transition is said to cost the country €335bn - ­ a funding gap that private equity could bridge. Yet GPs' sentiment towards investing in renewable energy is less than enthusiastic as the sector relies on subsidies and has suffered a spate of insolvencies recently.

"As a rule we only invest in companies that are profitable in their original business model as opposed to a model that relies on subsidies," says Marco Brockhaus of Brockhaus Private Equity. Others echo this sentiment: "These companies can't sustain themselves. When subsidies stop, there are no revenues," says a partner at a global PE house, adding: "Renewable energy used to be a very attractive market but what went on in the past few years, particularly with module makers, was an absolute disaster. There has been one insolvency after another in Germany. I don't think anyone invests in that part of the market anymore."

Overcast investments
Among the companies entering administration was Q-Cells, which was once the world's largest solar photovoltaic manufacturer and roundly regarded as one of Europe's best ever exits when Apax floated the business. Q-Cells' sister company Sovello, which is owned by German private equity firm Ventizz also went under, as did Solon, IDInvest-backed Odersun and even project developers Solar Millennium and Solarhybrid.

The bulk of the insolvencies were a direct effect of a recent Chinese policy to radically oversaturate the market with photovoltaic elements. The country built up two to three times the capacity of the world market for solar-modules, it is said. As a result, module prices fell, pushing companies worldwide into financial losses. Helmut Vorndran, general partner at Ventizz, explains: "These capacities made no economic sense. Modules were sold for fractions of what they were worth, in extreme cases even half their full cost, that's why everyone is losing money."

He adds: "In China this is not a problem because the financial sector takes over the operating losses of these companies." In Germany however, this inevitably turned into a major problem. It left little hope for companies to be able to recover without political intervention. Ironically, some German companies found hope in the form of a takeover by their Chinese counterparts. Hungry for German technological competencies to advance their own solar products Hanergy bought Q-Cells' sister Solibro and LDK bought Sunways.

Sun still shines on solar
Despite the failing of his photovoltaic portfolio company Sovello, which he bought from shareholders Evergreen Solar, Q-Cells and REC ASA in early 2010, Vorndran still believes in opportunities in the sector, particularly for project developers: "It is absolutely possible for private equity investors to reach low double-digits in returns in both the solar and wind segments of the market. You wouldn't be able to reach that kind of return easily at the moment, unless you invest in government bonds." Ventizz is currently invested in US company 1366 Technologies, a business that develops manufacturing solutions for silicon cell manufacturers.

"I am convinced solar is the cheapest form of energy," says Vorndran.
"It's similar with wind. If we don't make the offshore model a success then we have an underlying problem in the power supply of one of the most developed economies in the world." He adds: "Advanced technology has solved many problems. Nuclear energy in Germany will be replaced and I doubt it will be replaced by nuclear energy from abroad."

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