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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.

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.”

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.

The importance of oil independence may soon be underscored in the latest World Energy Outlook report from the International Energy Agency (IEA), which is expected to suggest that oil production could decline more rapidly than previously thought unless new investment is made. The importance of renewable energy to the United States is already reflected by government involvement in renewable energy, including state and federal mandates for alternative-energy use, as well as subsidies and tax credits.

Charles Gassenheimer, chairman and CEO of Ener1, which makes lithium-ion batteries for the car market, says that his firm had planned to expand the capacity of its Indianapolis plant to meet growing demand. “All the major car companies have made the strategic decision to move forward [with battery power],” he says. That should make his firm a low lending risk, compared with other alternative-fuel companies. But since the credit market has dried up, Ener1 will instead use a loan program sponsored by the Department of Energy.

It might not be an easy few months for any alternative-energy company, especially those that have reached the stage where they need a few hundred million dollars of investment, but this doesn’t mean that things will come to a standstill. “The best projects will get done,” says Erik Straser, a general partner at Mohr Davidow Ventures, “but with tremendous scrutiny.”

Even the more established solar-energy industry is expected to run into problems. Zindler says that large-scale solar projects have tended to be financed via tax equity, which means that banks have invested in exchange for tax credits to offset their profits. But banks that aren’t making profits don’t need these tax credits. So Zindler expects a “temporary disruption” in the market until other firms start funding solar projects.

One consolation is that renewable-energy firms aren’t the only ones facing financing troubles. “If you want to build a coal plant, you have the same problem [getting capital],” says Ron Pernick, founder and principal of Clean Edge, a clean-technology research firm based in San Francisco.

“This is not the end of the world,” adds Zindler. “It’s a market disruption, and the smaller guys will sell their projects or themselves to the bigger guys.”

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