Uncertain Future: Equity Investment In Renewable Energy Projects Continue To Slow

The fallout from the global economic contraction has touched nearly every industry segment. While many hoped that the renewable energy industry would remain unfazed, reduced equity activity, along with contractions in renewable equity markets, has blown threads of caution into the wind. One example that illustrates the plight of the renewable energy sector is the recent cancellation of First Wind's IPO. In what would have been one of the the first IPO's by a wind company in the United States, power developer First Wind recently announced that it is withdrawing its Nasdaq listing and will be exploring other options. Market conditions were cited as the causal agent, despite the fact that the company reduced the price of the IPO 25% from US$24-26 per share to US$16-18 per share. As the company noted, many investors continue to remain skeptical of the wind industry's competitiveness, particularly when its costs are compared to other fuel sources. Moreover, First Wind's s unproven technology, heavy debt load (US$582 million as at September 30, 2010) and negative cash flow, arguably contributed to dampen investor interest.

While First Wind's failure is not unique, its inability to attract capital highlights how prevalent instability within the renewable energy industry has become. According to the American Wind Energy Association (AWEA), the third quarter of 2010 represented the slowest quarter in three years for the wind industry. In fact, the United States wind industry added just 395 megawatts (MW) of generating capacity in Q3, a figure which is down by over 72% compared to prior years. What is also shocking is how quickly investor behavior changed. A recent report from the US Energy Information Administration (EIA) showed that while wind accounted for 39% of new installed capacity last year (versus just 13% from coal), in the first nine months of this year, wind accounted for just 14% (while coal contributed 39%).

While the credit crunch is partly responsible for the equity slowdown, another critical factor influencing the performance within the renewable sector is a lack of legislative support. Based on the discrepancy between pricing of renewable energy versus conventional sources, it is quite clear that legislative support for clean energy is needed to ensure that the renewable energy sector remains viable and attractive. Unfortunately, many politicians continue to drag their feet. While motivations vary, some politicians in the United States appear hesitant to support clean energy, particularly because of the relatively cheap natural gas prices (which are expected to continue over the coming years). Additionally, with citizens demanding that government's tighten their coffers, investment in higher priced energy projects seems hardly justified (even is those sources would ultimately produce energy in a more environmentally unfriendly way). The same kind of behavior is also being observed in Europe, where legislation alterations aligned with the recent austerity measures continue to threaten future renewable energy investment. With these factors in mind, as well as the recent struggles of a number of other major renewable projects, it is clear that the wind sector's (and quite possible the entire renewable energy industry's), short term equity outlook remains weak.