The renewable question

Returns from biofuels are declining in the US. Ordinary investors, largely left out from ethanol's early years, jumped at the opportunity to buy into the industry when some producers announced they were going public. But oversupply appears to have severely damaged the sector. The question now is whether a similar thing will occur within the wider alternative/renewable energy industry, given the current economic turmoil.

Increasing interest

According to unquote"s proprietary database, Private Equity Insight, the number of investments recorded in the renewable energy and cleantech sector increased from 27 deals between 1999 and 2003 to 150 in the five years that have followed. Furthermore, investment value has also significantly grown, from EUR382m to almost EUR7bn. European figures appear to reflect the global trend. According to a study recently commissioned and published by the United Nations Environment Programme (UNEP) - Global Trends in Sustainable Energy Investments 2008 - venture capital and private equity investments in sustainable energy companies reached $13.2bn in 2007 - an increase of 42% from 2006. "Investments in renewable energy (and cleantech) have seen a tremendous increase over the last four years, growing at 30-40% per year," confirms Francesco Giuliani from First Reserve Corporation.

Fundraising for the sector has also picked up. In Europe, dedicated funds profit from the advantageous conditions presented by the current environment. The increased maturity of the renewable energy sector in recent years has attracted increasing numbers of investors to the space, with industry experts noting that thousands of LPs are now targeting the sector, compared to just a handful in the past.

While there have historically been a high number of specialist funds investing in technological developments, today the growing sophistication of the sector is reflected by a shift in investment strategy. The highest deal volume continues to be represented by expansion investments, followed by early-stage, yet both have seen a drop (4.6% and 12% respectively) in the period since 2004, compared to 1999-2003. The buyout sector has been the happy beneficiary of the difference. "There are less early-stage specialists as venture capitalists have shifted to include investments in the renewable/cleantech sector as part of their general portfolio. Later stage investments seem to be attracting the most interest at this time," Mounir Guen, CEO at private equity advisers MVision, explains.

Economic incentives

This increased interest in the renewable energy sector in Europe can perhaps be attributed, at least in part, to initiatives launched by both the EU and national governments aimed at increasing the use of alternatively-sourced energy to 20% of the total energy mix by 2020. The necessity to lower CO2 emissions has been widely accepted and countries are, in varying degrees, adopting measures in order to meet the reduction targets to which they have committed. "The incentives have served to encourage investments in the sector as most investors can now see stable profitability in their investment," says Armando D'Amico, managing partner at Acanthus Advisers. "However, equally important, at least in Europe, has been the entry into force of legislation favourable to investments in the sector," adds D'Amico.

One may wonder whether such initiatives can continue amidst the current financial and economic crisis. After all, economic incentives are not conceived to be permanent solutions but as necessary encouragement to allow specific sectors to develop enough to stand on their own two feet. However, the nature of the sector is such that increase in energy consumption remains the leading factor driving investment. "In the current economic environment, governments will seek to continue to stimulate the economy and the renewable energy sector has the necessary ingredients to continue to grow," argues Giuliani.

In France, for example, a country where 70-80% of the electricity is generated through nuclear energy, solar energy capacity has doubled to 73MW. This is in part due to the price of the MW/h, which has remained at EUR550 since 2006. This in turn has pushed consumers to equip their houses with PV cells, even ahead of companies or the public sector. Meanwhile, in Spain the sector is preparing for what would be the largest deal in the photovoltaic sector, Solaria, with GE and Landon-backed Fotowatio among the interested acquirers. And experts expect many more transactions to take place in the months to come, as the sector remains highly fragmented and consolidation opportunities abound.

Pros and Cons

There are, though, elements that could negatively affect the sector. Tougher economic conditions means increased deficit for many governments, and this may push some countries to reduce their support for the sector in the hope that the incentives so far allocated have provided the required momentum to maintain its growth. Energy requirements could also decrease as consumers tighten their belts given the current economic outlook.

But there are strong financial, economic and political factors playing in favour of the industry. For one, investment activity does not overly rely on leveraged acquisitions, with many deals taking the form of project financing. This quality renders transactions less risky and banks are therefore still willing to participate in such projects. "The pros and cons affecting renewable energy and cleantech investments seem to balance each other out. Whether the current economic climate affects investment in the sector remains to be seen over the next six months," concludes Giuliani.

Failures will be part of the picture but investors are confident: the deal flow is a healthy one. Certainly, debt is more expensive but some banks remain interested in lending - although mostly through club deals - defaulting is not a major concern when it comes to the sector. Financial muscle is paramount especially as holding periods increase and follow-on investments are necessary. Sector specialists concur; this is a good time to invest in renewable energy and related technologies.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Send to  

• Topics
• UK / Ireland
• DACH
• Nordics
• France
• Southern Europe
• Benelux
• CEE
• Cleantech