Financial Hardships for the RE Industry

Every sector is being hit hard by the global economic downturn, and the renewable energy (RE) industry is no different. Energy investment funds soared at one time, but have since plunged and many analysts predict the amount of private money entering the sector worldwide this year to fall for the first time since the boom began in 2000.

“These very small companies have no reserves to carry them through a downturn like this,” said Nick Butler, chairman of the Center for Energy Studies at Cambridge University. “They’re in an investment phase rather than getting profits in, and that’s just when you need credit and capital.”

Factories building parts for these industries in the US have announced a wave of layoffs recently, and trade groups are projecting 30%-50% declines this year in the installation of new equipment – a decrease that bars more help from the government.

Some big US-based wind developers like NextEra Energy Resources and even the Texas billionaire T. Boone Pickens, a promoter of wind power, have cut back or delayed their plans for wind farms.

RE sources like biomass, which involves making electricity from wood chips, and geothermal, which harnesses underground heat for power, have also been slowed by the financial crisis, but the effects have been more pronounced on once fast-growing wind and solar sectors.

In Africa, projects have been delayed in lieu of the financial crisis. Zambia’s 750 MW Kufue Gorge Lower hydropower station was set to begin construction in 2009 with about 15 firms interested in investing. Cornelis van der Waal, Frost & Sullivan energy industry manager, wrote in Alternative Energy Africa’s January/February issue that it was “unclear if and when this project will continue.” He also said, “The impact of the financial crisis will probably not have a massive influence on projects already in operation, but will have an influence on new projects.”

Even supermajor oil companies are slowing down their focus in the RE sector as Vivian Cox, BP’s chief of alternative energy projects, said at the World Future Energy Summit in Abu Dhabi this past January that the company was avoiding certain areas.

The IEA’s senior RE analyst Ralph Sims said that for developing countries like those in Africa, the expansion of locally generated alternative power is crucial to economic development.

Take South Africa, where green building has become somewhat of a norm, institutional investors have been slow to take advantage of the opportunity. Although Goldman Sachs launched an environmental policy framework in 2005 to show that valuing the environment could go hand-in-hand with wealth creation. Goldman Sachs since increased its investment of $1 billion by 50% after the growth in demand of the renewable sector in South Africa. However, the lack of funding is still a major obstacle for the country’s RE industry.

“While it is not all doom and gloom for the RE industry in the long term, the next few years will be tough,” said van der Waal.