2009: Boom or Bust for Clean Energy?

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Although the macro economic environment continues to display signs of weakness, many of the sentiment measures analysts use such as TED spread and consumer confidence, show improvement. The US yield curve has moved to an "incredibly positive reading, says research firm Cannacord Adams. Many analysts are looking for recovery to begin in the second half of 2009.

Banks still aren't lending much, but with central bank rates at historic lows, a flood of money will hit the economy sooner or later. By the middle of 2009, loan costs for projects should be lower than they were in mid- 2008 and debt syndication should return, even if it's underwritten by government.

Clean energy projects should be early beneficiaries because they produce a reliable stream of revenues from strong counter-parties, the utilities.

"Now is a very favorable time to be committing new funds to equities on a 5-10 year time horizon," says Cannacord Adams. "From the recent lows, the odds of the North American markets in general and Canada's TSX in particular having double-digit annual returns over the next decade are very high."

"In summary, 2009 will be characterized by a confusing mix of consolidation and optimism. It will start slowly, with project developers struggling to find banks willing to lend; with the profits that drive tax equity as rare as hens' teeth; and with shell-shocked stock markets effectively shut for public fund-raising. There will be casualties and there will be forced marriages, as companies run out of cash. It will be a year of extraordinary volatility in all markets, and in clean energy, some sub-sectors will surge while others will wilt," remarks Michael Liebreich, CEO of New Energy Finance.

"Underlying all this," he continues, "is a huge dose of hope for the future. Not only are all the drivers that propelled the sector along so dramatically for the past five years still at work - climate change, energy insecurity, fossil fuel depletion, new technologies - but there are reasons why the clean energy sector can enter 2009 with a sense of optimism unmatched by any other sector of the faltering global economy."

Gone are the supply chain bottlenecks, high silicon prices and soaring commodity prices that created a sellers' market for wind and solar. When the credit crunch eases, the world will be stunned, he says, by how cheaply the best companies can deliver clean energy and still make a profit. This is very good news for developers with access to funds, but very bad news for equipment manufacturers with poor cost positions.

By the end of 2009, we should see clean energy stock valuations rise (they're up 25% so far) and a possible return of the IPO market - a backlog of deserving companies and their investors are waiting. Weaker companies will have been acquired by stronger firms looking for deals.

The first half of the year will be hard on wind turbine and solar manufacturers and for project developers, but we're already seeing some projects getting financed. The thaw should come sooner in Europe thanks to their feed-in tariff system. German lenders are showing signs of life with a preference for smaller projects.

By year end, credit should be freed considerably with lower rates, setting the stage for growth in 2010. Turbine prices will be lower thanks to lower steel prices, solar prices will lower thanks to a silicon surplus and supportive federal policies will be in place in the US. The biofuels space will continue to grow quietly, investing in research and new cellulosic plants.

Wind and solar could hand over the spotlight to geothermal and the smart grid in 2009.

Geothermal, the only renewable energy source that can compete with large scale energy sources like coal and nuclear, has yet to see its day. Over the past few years it's been held back by costly drilling rigs, which now look cheap after plunging oil prices cut demand.

If Obama makes the Smart Grid a reality, that would lead to a sea change in investment in smart meters (giving people feedback about their energy use) and demand response (enabling utilities to control energy flows through the grid and transmitting clean energy throughout the country). The switch from analog to digital energy will result in an information explosion and an investment explosion as worlds of opportunity open up.

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