Cleantech faces up to the credit crunch

So, the good times are officially over. Following a financial crisis in which the markets lost a quarter of their value in the space of a month, we are now in a situation where credit is very difficult to come by, and where cleantech ventures must have significant financial prospects if they are to be considered viable.

Don't take our word for it - go and read the slides from Sequoia Capital that were leaked onto the internet a couple of weeks ago. They crystallise the situation nicely. All the rules of the market are reversed. Cash is now king, and credit is hard to come by.

The slide deck, entitled RIP Good Times, says that you can forget ideas of a fast, V-shaped recovery. Instead, expect a longer road to recovery as the markets take time to get over a credit-driven recession.

Sequoia's slides particularly address the technology sector, and don't specifically break out the fortunes of cleantech. But the indicators look pretty similar for both areas, and if anything, they apply even more to cleantech companies.

Technology startups centering on the internet can often be executed with relatively little up-front capital. There are no manufacturing plants to buy, and people will often take a cut in pay to work for options. Sequoia's advice to young technology companies tackling the recession (rule 1: have a business model) isn't the kind of thing you should have to tell a startup, but internet startups are strange animals, predicated as they often are on user growth now, and revenue models later.

In contrast, cleantech investments are generally more cash intensive. Renewable energy firms need R&D facilities and manufacturing plants to make solar, wind, and water-based energy products. Then, it takes money to install those products in renewable energy projects, which generally need to work on a large scale to be cost effective. Project owners can ease the burden on customers by getting credit and selling the energy as part of a power purchase agreement, which can help sales in a cash-constrained market. But the project owners still have to finance those initiatives, and at the moment, even companies with good credit histories are having trouble finding lenders.

The Wildershares Clean Technology Index reflects these concerns. The index, developed to reflect companies that are important to the growth of the clean energy sector, broadly reflects the losses experienced by both the technology-focused Nasdaq, and the S&P 500, both of which are mirroring the problems in the broader economy. But while the shape of the Wildershares chart may be the same - it was buffeted by the same market conditions as the rest of the economy - its losses are greater.

Cleantech investment experts are taking notice. Over at the altenergystocks blog, they're selling equity in anything that needs new cash, on the assumption that it's going to be hard to find.

Experts have said that companies at the venture capital stage will be relatively well protected, because many such venture agreements have a multi-year focus. However, if the Sequoia slides are right, funding rounds are still likely to be smaller and harder to come by in the coming couple of years.

Those young companies that are turning a profit, but which will still find it hard to jump the project funding gap, could become ripe for acquisition if they can't ride out the downturn. "The top 10 oil companies are still spending 95 per cent of their capex in oil-based projects. So in the long term, you'll see cleantech firms get picked off," predicts Paul Herman, CEO and founder of cleantech investment advice group HIP Investor.

Renewable cleantech ventures will be banking on the fact that in the long term, the energy crunch will create a consistent need for their products and protect their value.

In the short term, however, much of that expected demand is connected with oil pricing, and as oil prices fall on weaker demand interest in the sector could wane. "Historically, if you look at interest in alternative energy, it's directly correlated with the price of fossil fuels," argues Paul Sidlo, CEO of SunRGI, a startup focusing on solar concentrators.

Oil pricing has been on a rollercoaster ride over the past few weeks as the market tried to work out whether we were in a recession or not, creating further uncertainty in cleantech stocks.

But startups aren't going to be the only part of the cleantech economy affected by the financial crisis. The carbon trading markets will also be affected. Much is going to depend on Copenhagen, says Jurgen Weiss, managing director of advisory services at carbon trading analysis and advisory firm Point Carbon, referring to the UN Climate talks scheduled for Copenhagen in December 2009 where the details will be thrashed out for a scheme that picks up where Kyoto left off.

Nicholas Stern, who produced the now famous Stern Review on the cost of climate change, has said that something concrete must come out of Copenhagen if the carbon markets are to flourish, pointing out that markets depend on rule structures. Without the rule structures, you seriously hinder the market. So Copenhagen will be crucial.

"The price of carbon now depends on what you think will happen in 2012," says Weiss, but adds that the other issue is how successful the bailout announced by Congress in October and subsequent international activity to try and buoy up the markets will be. If recessionary fears pan out, it could have a knock-on effect on carbon markets.

"We'd see slower economic growth in the parts of the world that committed to mandatory reduction," says Weiss. "In the EU-28, that will have an impact on carbon prices, because lower economic growth means lower emissions."

On the other hand, the credit crunch's impact on the deployment of renewable projects could buoy up carbon markets.

"The same problem of credit availability in the relatively near future may also have some impact on technology deployment in Europe," says Weiss. "So to the extent that you slow down the process by which fossil intensive power generation is replaced with renewable, then you get higher carbon emissions in the power sector relative to what you would have expected."

At least the passing in the US of an eight-year extension to the solar investment tax credit and a one-year extension to the production tax credit, used by wind and other renewables, will help to buoy up the fortunes of the renewable industry somewhat. Lobbyists for that industry will have breathed a sigh of relief when the House of Representatives passed the tax package as part of the bail-out bill in early October.

But clearly, in a world where the volatility indices (known as the VIX, used to indicate market volatility and uncertainty) keep breaking records, nothing is certain, other than the fact that things are going to be tight for a while - and that anyone wanting to take a bet on cleantech stocks while expecting a flurry of successful IPOs in the next two years probably needs to reassess.

By Danny Bradbury

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