Betting on Green

Falling oil prices mean tough times for renewable energy, but experts expect the industry to bounce back.

Falling oil prices helped kill the alternative-energy business in the late 1970s. So plummeting prices combined with nearly frozen credit markets and a grim economic outlook paint a bleak picture for today's alternative-energy market. Still, concerns over global warming and energy security could mean that alternative energy remains a good prospect for future investment.

Credit: Technology Review

Over the past few months, the credit crisis has been accompanied by a precipitous drop in the price of oil, which peaked at almost $150 a barrel in mid-July.

Data from New Energy Finance, a market research firm based in London, shows that alternative-energy companies received $13 billion in venture and private equity investments from the start of the year to the third quarter of 2008--more than the $9.8 billion invested throughout 2007. But these numbers have started to dip: between the second and third quarters, spending on large-scale projects fell from $23.8 billion in the second quarter to $17.7 billion in the third quarter, and smaller amounts are expected for this quarter and the next.

This underscores the relative risks for different alternative-energy companies, according to Travis Bradford, founder and president of the Prometheus Institute for Sustainable Development, based in Cambridge, MA. Bradford says that biofuel firms in particular face a more complex set of problems than other alternative-energy companies do. The risk for these companies is worse, he says, because "you don't know what your feedstock costs are going to be for the next 20 years, and you don't know what the price of oil and gas will be."

A spokesman for AE Biofuels, based in Cupertino, CA, which operates both traditional ethanol and cellulosic ethanol production facilities, admits that "this terrible financial market . . . is going to definitely affect our ability to finance any activities."

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And Ethan Zindler, head of North American research for New Energy Finance, notes that cellulosic ethanol companies were already facing problems because their technology remains unproven and because the oil market that they hope to disrupt is so volatile. "This is not a new problem," he says. "It's been an issue for cellulosic ethanol makers, and probably will continue to be an issue [after the current crisis is over]."

Still, observers say that two things make the current situation different from the 1970s. First, geopolitics has made clean energy and energy security a national priority in many countries, including the United States. Second, alternative-energy technologies are now much better.