"Going green" doesn't have quite the cachet it used to, at least on Wall Street. Investors in renewable energy stocks have seen their sector hit hard in recent weeks on concerns that tightening credit and a weak global economy could arrest growth of the high-flying industry despite its long-term promise.
"The general economic slowdown is taking everybody's eyes off what was an increasing momentum around concerns of climate change and the cost of energy," said Paul Maeder, a general partner with venture capital firm Highland Capital Partners.
Until credit becomes more available, big solar and wind projects will be more difficult to finance, and certainly more expensive. A drop in demand will also mean lower prices on solar panels and wind turbines, hurting manufacturers' profitability.
In the end, experts said, the downturn will determine who the winners and losers are in what had been a booming environment for all. "There are too many players out there, and there are too many smaller players," Chris Walsh, manager of the $28 million Alger Green Fund, said of the burgeoning solar industry. "You have to be careful about which ones you invest in now."
Solar stocks, considered the darlings of alternative energy for their meteoric rise in 2007, have retreated so much this year that most have given back the triple-digit gains they logged last year. Investors fear that scarce access to credit will threaten development of costly solar and wind projects, while falling oil prices are dampening interest in alternative energy across the board. To make matters worse, a frozen market for initial public offerings and an increasingly picky venture capital community have restricted key avenues of funding for start-ups.
Long term, many investors expect renewables to be a much bigger part of world-wide energy consumption due to increased concerns about climate change and high energy prices. Dour announcements, however, are cropping up nearly every day.
Most recently, FPL Group, the largest US operator of wind generation, said on Monday it would slash its 2009 spending and reduce its wind turbine additions, citing the bleak economic climate. The Florida utility also warned of more spending deferrals if conditions worsen.
The announcement came a few days after the American Wind Energy Association said construction starts for new wind farms would slow in 2009, citing the "evolving financial crisis." On the solar front, Duke Energy Corp last week cut in half a $100 million plan to put solar panels on customers' roofs. The utility had faced pushback from North Carolina Utility Commission staff, who raised concerns about the program's cost to residential customers.
"Wind and solar are still very attractive - the question is when," said Walsh of the Alger Green Fund. "I don't see a near-term catalyst in the next few months... You need to free up lending for people to feel more comfortable investing."
The credit squeeze has already taken a toll on small ethanol producers, resulting in a string of bankruptcies this year. The latest, Kansas-based Gateway Ethanol LLC, filed for bankruptcy earlier this month.
Market turmoil has also brought the IPO market to an effective halt. The two US alternative energy issues this year, solar companies Real Goods Solar Inc and GT Solar International Inc, are trading well below their offering prices. In addition, venture capital funding for green energy start-ups is expected to be down dramatically in the fourth quarter after hitting a record $2.6 billion in the third quarter, according to research firm The Cleantech Group.
Solar companies have said an eight-year extension by the US government of tax breaks for solar projects will go a long way toward boosting demand next year and offsetting a pullback in subsidies in Germany and Spain, the biggest solar markets.
Top solar companies including SunPower Corp and Suntech Power Holdings Co Ltd have acknowledged, however, that borrowing costs will be higher due to tightening credit. Smaller rival Evergreen Solar even warned earlier this month that if credit markets do not improve in the next nine months, it will not be able to fund a $400 million production facility it needs to deliver on its 2010 contracts.
Solar companies have long expected prices on their panels to come down next year due to falling costs on polysilicon, the industry's key raw material, and large amounts of new solar capacity. But in a client note on Monday, Friedman Billings Ramsey analyst Mehdi Hosseini said prices on solar panels were falling faster than many predicted and could harm profit margins in the burgeoning industry.
"There is now more pressure on solar photovoltaic executives to finally treat this industry as a commodity, for which margins are thin," Hosseini wrote. "What we need to see ... is capitulation among company management teams. Until then, we expect stocks to sell off following any rally."
Increasingly, investors are betting that a global downturn will speed a shakeout in the solar industry, with low-cost producers such as thin-film company First Solar Inc and high-efficiency cell makers such as SunPower emerging as the winners over many of their Chinese rivals.
"The decline in prices that we could see in solar could really shake out some of the weaker producers," said Carey Callaghan, manager of the Lebanon, New Hampshire-based American Trust Energy Alternatives Fund. "Unless the Chinese significantly stimulate domestic demand, then even though they have a cost advantage they are not going to achieve the cost position of First Solar."
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