How this recession has affected green energy start-ups
During our last class session, Prof. Webber mentioned that one of the reasons AEP has a footprint into alternative energy is because their clean energy project was funded prior to the downturn. That made me ask the question – how are green energy start-ups faring in this economy? Do they still have the funds they need in order to grow, or are their projects on a standstill due to a lack of money coming in?
On doing some very basic research, I have come across an article that partly provides an answer to the aforementioned questions. This article, “Could The Credit Crunch Kill Green Energy?” by William Pentland for Forbes.com (http://www.forbes.com/2008/10/01/energy-credit-solar-biz-energy-cx_wp_1001energy08_credit.html), is summarized below.
What Pentland has found is that the green energy companies and start-ups received a little over two million dollars in funding during 2007. (Note: no source is cited, and the green energy industry is not broken down or defined in the article.) In particular, companies delving in solar energy technology received approximately $600 million in funding from venture capitalists and other investors. Many of these solar energy companies are currently working on projects that will enable their technologies to be commercialized through scale production.
The issue, however, is that these companies still need cash to continue operations. And the present market situation is of little help to that end. For example, Lehman Brothers acted as an underwriter for many solar energy companies in their quests to raise funding – but Lehman exists no more, and any company shares loaned to Lehman may not be recoverable. This has led to company devaluations. Additionally, several solar energy companies have had to shelve their IPO plans because they feel that the current market situation will not be conducive to funding. Thus, many companies could close operations due to current market conditions. To avoid this fate, some green energy companies are partnering with or consolidating operations with Fortune 100 companies such as Chevron. Others are holding out hope for renewable tax credits.
In any case, the one glaring question to students aiming to work in this industry in the very near future is – what value will you bring to such companies that will enable them to weather this recession?
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The 2008 financial and subsequent economic crisis have undoubtedly affected the green energy start-ups and we have probably not measured all the consequences yet.
However, I found a few articles on the web that point out the potential benefits of the credit/funding crisis on the green energy sector. This seemed to me surprising enough to share it on this blog.
According to Martin LaMonica writing on CNet's Green Tech blog , "smaller green-tech firms appear to weathering the storm the best, allowing them to continue developing new energy technologies". According to him, the reason is that smaller companies need less capital to operate, whereas large companies need large funding to build their facilities.
Even further, Michael Kanellos writes on Greentechnmedia blog that although there may be less funding in 2009, the new investments may be better shared among large and small companies. According to him, “roughly 40% of the funds now are getting sucked up into massive rounds for individual companies”, leading to “a lopsided market which has created unrealistic expectations for well-funded and underfunded companies.”
So the real question is rather how long the crisis will last and whether the decline in funding could be seen as a general lack of confidence in green technologies.
To answer this question, many green energy companies and investors are waiting to see the measures of the Obama administration. In a recent speech, the new president called for doubling renewable energy in 3 years (Obama Calls for Doubling Renewable Energy in Three Years ).
As Kanellos points out, 2009 is going to be an interesting year.
In response to this post, I came across an article titled “Despite economy, 3 companies stay on alternative-energy path” by Paul Davidson of USA Today. He agrees that the economic recession and fall in energy prices are compelling green energy companies to scale back or cancel projects. According to research firm New Energy Finance, total spending on clean-energy projects in 2008 is expected to fall 4% to $142 billion from 2007. On the other hand, the author states that venture capital and private-equity firms are still investing in emerging technologies and their investments in 2008 would have been to the tune of $14.2 billion as compared to $9.8 billion in 2007.
The article details the operation of three green energy companies that are doing well in these tough times. One of them is Austin’s own startup, “HelioVolt!” HelioVolt is a manufacturer of building-integrated photovoltaics (BIPV), a technology in which roof tiles and building exteriors are doubled as solar panels. The BIPV segment makes up just 5% of the industry because such systems tend to be expensive. However, HelioVolt is using, Copper Indium Gallium Selenide (CIGS) instead of Silicon to make their thin films. CIGS has a better performance, longer life and can be printed on variety of materials. This reduces the cost by 40% as compared to the current BIPV models.
HelioVolt opened its Austin factory in October 2008 and plans to start production by the end of 2009. I think the only way startups can survive the economic downturn is by investing in R&D that leads to cost reductions. Hence, students aiming to work in such companies need to focus on taking emerging technologies from the laboratory to the market. This will help the green energy startups weather the recession.
The frozen credit markets and the economic recession will indeed have many green energy start-ups strapped for cash. Some start-ups will falter amidst financial strain and others will be engulfed by larger oil and gas companies looking to expand their green energy portfolios. However, the economic crises may be a blessing in disguise for green energy start-ups.
Our economy is facing its biggest economic challenge since the Great Depression. As a result, the Keynesian school of thought, which promotes government spending to stimulate the economy and the private sector, has resurfaced. Many within the government see the economic crisis as an opportunity to invest in green energy technology. The thought process is as follows. In the short-term, green investments will create jobs and public projects that will spur economic activity. Over the long-term, which is equally as important, investments in green energy will once again put the United States at the center of innovation. Thus giving the country a core competency that will ensure the well being of our economic engine for decades to come.
President Obama has recently unveiled an $825 billion stimulus package (the plan is currently up for vote in the House of Representatives), of which $54 billion is dedicated to promote clean, energy efficient projects. Exact expenditures have yet to be detailed, but the administration intends to set aside $8.4 billion for loan guarantees for renewable-energy investors. Although $54 billion is not nearly enough to bring green energy technology into the mainstream, it is a start. If it was not for the economic downturn, it is highly doubtful any government money would have been dedicated to green energy investments.
Another major side effect of the current recession is the decline in oil consumption. Citing the EIA's Short-Term Energy Outlook, motor gasoline consumption in the U.S. was down 3.3% in 2008 relative to 2007. This decline is attributed to a very high average price of oil and the weakening economy. I guess if people buy and build less stuff, less stuff has to be moved around, and less gasoline will be burned.
Of course, this marked decrease in domestic demand is now being reflected in the utter collapse of worldwide crude oil prices. And it didn't take very long for people to wonder if low gas prices would clobber the previously-burgeoning green energy biz. This article describes the "double-blow" of cheap oil and the credit crunch on green energy startups. Obviously the lack of available credit makes it tough to start such capital-intensive operations as say, making solar panels. But how serious a psychological impact will these low gas prices have on the minds of politicians and their constituents? Will it be like the early 80's, with cheap oil coming back and stopping the green energy folks dead in their tracks? I'm hoping no.
In response to the previous post, I want to expand a little bit more about how this recession has affected green energy start-ups in Mexico for example.
I come from a country where in recent years there has been a modest shift towards green energy. With or without government aid, some entrepreneur people have tried to start developing this green, eco-friendly energy. But with the current economic recession, the future seems unpromising for two reasons.
First, in my opinion in Mexico the government has not made the proper policies and constitutional changes needed to exploit this growing industry. As an example, last August, the Mexican congress approved the green energy act which allows private companies to generate electricity. But these companies can only sell the electricity to the government who, later on, sells the electricity back to the people. This leads to obsolete power grids, terrible service, electricity stealing, null competence, and so on. My point here is that a policy is urgently needed on letting the private companies compete within each other and provide electricity directly to the people. This would enhance green energy development, better service, low cost, and modern power grids.
Second, the current economic crisis in Mexico and Latin-America would hold back the banks and private loaners to foster green energy start-ups companies in the region. There will not be funding for new and promising energy projects due to the riskiness itself undermining entrepreneur projects to vanish and be forgotten.
As an example, In Mexico last October 2008 the Soriana supermarket chain was planning to build a $300 million, wind-powered electricity plant in Oaxaca, and Wal-Mart -Mexico was also building such a plant as part of a broad sustainability program in the region. This kind of projects might be affected by the unemployment, inflation and the general Mexican crisis.
In a report from the Economic Commission for Latin America and the Caribbean.mentions that as for Latin America and the Caribbean, the region’s economy is projected to grow only 1.9% this year amid a rising unemployment, from 7.5% last year to 7.8%-8.1% this year (1).
As in the report presented by the CIECO (Centro de Investigaciones en Ecosistemas) called Revolucion energetica (2). By 2020 the constant declining of the oil production in Mexico will not meet the energy demand. It is therefore urgent to start building and investing in energy facilities such as geothermal energy which Mexico is the 3rd world largest producer. Biomass, hydroelectric, bio fuels, and other green energies must start intensively developed in Mexico to overcome the upcoming future oil shortage.
(1) http://biz.thestar.com.my/news/story.asp?file=/2009/1/3/business/2923821&sec=business
(2) http://www.jornada.unam.mx/2008/11/20/index.php?section=sociedad&article=043n1soc
(3) 2008 IEA Key World Energy Statistics: "Total Primary Energy Supply"
Nate brings up a good point about how a weakened economy affects the oil price. Believe it or not, oil and oil services companies are also suffering with low oil prices. A good friend of mine works for an oil services company in Houston and there are talks of layoffs because cutbacks need to be made when oil is ~40/barrel. Just something to keep in mind.
It's true - ConocoPhillips recently announced layoffs - 4% of it's workforce, to be specific. Source: http://www.chron.com/disp/story.mpl/front/6215681.html
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