Renewable Energy at Tipping Point
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Musical musings on a market conundrum
Economic crisis has hit renewable energy investments just when they were making genuine progress, placing the industry at a cross roads for change and greater innovation. Elliott Mannis highlights the financial and social benefits of the sector proposing aggregation as the best way forward to ride out the funding gap.
Don’t let it bring you down
Don’t let it bring you down
It’s only castles burning
Find someone who’s turning
And you will come around [1]
The renewable energy sector is at tipping point. Despite the social imperative of developing new technologies to address climate change and the huge demand for clean energy, many renewable energy companies are struggling financially. The economic crisis and ensuing recession have caused havoc in the capital markets leaving many businesses unable to raise much needed capital and therefore facing ruin. Times of great crisis typically lead to innovation and I believe that we are now at that juncture.
Stormy Weather
Life is bare
Gloom and misery everywhere
Stormy weather[2]
The past twelve months has seen a massive institutional de-leveraging and flight to relative investment safety across world markets. This has posed a very substantial challenge for the renewable energy sector, which is involved in developing new technologies. Faced with relatively uncertain outcomes on higher risk, new endeavours and with less capital generally available for investment, funds have been diverted to other areas focusing on higher grade proven businesses. That is great for short- term investment safety and our pensions, but it does not address the post industrial legacy of climate change nor the inheritance we bequeath to future generations.
 A 44% plunge in investment has caught up with the clean energy sector since the crisis hit, according to a report by New Energy Finance. According to the report, it took until the first quarter of 2009 for the credit crunch and the recession to catch up fully with investment in renewable energy, low-carbon technologies and energy efficiency. “Despite the sector’s medium-term and long-term growth prospects, it suffered in Q1 2009 from a severe shortage of bank finance for projects and the parlous state of overall stock market confidence. Over $150bn of stimulus spending around the world has been earmarked for clean energy, but... it has not started to flow fast enough to fill the current funding gap.”
The bare headlines are startling enough, but they do not tell the entire story. Renewable energy exists in a two tier world. The first tier lives in a world of relative comfort whilst the second tier is struggling in a manner not seen before.
The first tier is comprised of divisions within major corporates, generally larger businesses with relatively stable cash flows and financial support. These organisations must compete for internal capital, and that is becoming a higher hurdle, but if there is broad corporate support, projects and investment are delivered. Shell, BP and E-ON are examples of the first tier.
The second tier includes stand-alone smaller organisations, public and private, directly reliant on external sources of capital. And it is these organisations, most vulnerable to the vagaries of the capital markets, that are totally exposed to the chill winds of the world economic crisis and recession. Without essential capital, companies and their related technology endeavours stumble and fail.
So the mission becomes clear: innovate or perish.
The Times, They Are A Changin’
Come gather round people
Wherever you roam
And admit that the waters
Around you have grown
And accept it that soon
You’ll be drenched to the bone.
If your time to you
Is worth savin’
Then you better start swimmin’
Or you’ll sink like a stone
For the times they are a changin’.[3]
The renewable energy sector needs to adapt in order to address present market circumstances as do investors need to adapt their philosophy and thinking.
 Outside of the major corporates, the renewable energy sector is characterised by a large number of individually smaller businesses, each pursuing their own different technologies. Very few businesses are achieving critical mass and dominant market share. A vast number are still in the early stages of delivering their business plans and proving out their investment case.
Such broad diversification and low level focus is typical of an early stage industry, but the time is ripe for change. I believe that aggregation is the next logical phase of industrial development. Bundling companies together will facilitate access to quality management and capital by providing scale and diversification in a manner that does not exist today.
This will provide a very different investment case for markets to contemplate. In many cases lack of scale has been a barrier to investment. Investors, however, also need to assess the early stage nature of many renewable energy businesses and weigh up the demand for short-terms profits and cash flow versus the essential social benefit being delivered. Making money is one dimension of an investment case. Consideration also needs to be given to the legacy bequeathed to future generations. It is essential to contemplate the sustainability of an investment proposition.
Heart of Gold
I want to live,
I want to give.
I’ve been a miner
For a heart of gold.[4]
Economic turbulence in all of its various guises has cut to the heart of company valuations. Clever money is now beginning to invest on very favourable terms, securing the future for some renewable energy companies. In change lies opportunity. The time for mining is now.
Kermit’s last word
It’s not easy being green.[5]
The past eighteen months has provided a great discontinuity in world markets. And the renewable energy sector, far from being immune, is in the forefront of the peril. But is has a choice, and it will re-invent and re-structure itself to create an alternative future. It’s not easy being green, but it is essential and it is the way forward.
1 Neil Young, 1970, from the album After the Gold Rush
2 Ted Koehler and Harold Arlen, 1933
3 Bob Dylan, 1964, from the album of the same name
4 Neil Young, 1972, from the album Harvest
5 From Being Green by Joe Raposo, 1970, originally performed by Kermit The Frog (voiced by Jim Henson)
Elliott Mannis
is an independent turnaround executive who was previously Chief
Executive Officer of D1 Oils plc, an AIM listed biofuels technology
business. Elliott is also a non executive director of
The Woodland Trust. Prior appointments include Group Finance Director of AWG Plc,
the holding company for Anglian Water, and Group Financial Controller
for Aegis Group plc, both following nine years with Price Waterhouse in
Vancouver, Canada and London.
Elliott has a keen interest in music, believes all of life’s mysteries
can be answered by Neil Young, but does not typically score highly in
Popmaster. Contact Elliott via phone on +44 (0) 7789 917 083 or via email at elliott.mannis@googlemail.com
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