Big is Best in Resilient Renewables Sector

Gerard Wynn and Timothy Gardner, PlanetArk 2 Oct 08;

LONDON/ NEW YORK - The "green economy" will rebound faster than most from global financial turmoil, because of government-guaranteed revenues for renewable energy.

Paralysed credit markets will hurt small project developers and herald buying opportunities for cash-rich utilities, speeding up what has been a transition from a niche to multinational renewable energy industry.

National and regional renewable energy targets worldwide -- meant to curb carbon emissions and improve energy security -- have created huge unfulfilled demand and a booming industry for makers of solar cells and wind turbines.

The resulting scramble has raised development costs for operators, and the added debt squeeze will now likely dent growth, strengthening the hand of utilities already muscling in to a recently cottage industry.

"The big projects being built by big utilities don't need to borrow from banks for short-term loans," said JP Morgan analyst Chris Rogers. "But if banks don't lend to each other they certainly won't lend to small project start-ups."

Even if utilities do have to borrow, they can do so cheaply as government-regulated businessess with guaranteed rates of return which can pass on costs to consumers, said analyst Pavel Mulchanov at Raymond James & Associates in Houston.

Big renewable energy companies including partial utility spin-outs are in the same, privileged credit position.

"Eighty percent of (our) capital is owned by the Iberdrola group, which translates into important financial support and access to capital markets under the umbrella of the parent company," said a spokesman for Iberdrola Renovables SA.

Denmark's BTM Consult estimates that utilities owned just 40 percent of global installed wind power capacity at the end of 2007, but that picture was changing rapidly.

"I would say about 80 percent will be owned by the utilities in the next five years," said BTM Consult analyst Per Krogsgaard, adding that the credit crisis would speed up that transition as utilities race to fill any gap.


WEAKER

A credit squeeze on smaller companies will weaken growth across the industry, curbing price too, analysts say.

"It's still early to understand the impact at the moment, but the recent reduction in valuations definitely reflects the prospect of slightly lower growth," said Luciano Diana at Morgan Stanley.

Shares in the world's biggest wind turbine maker Denmark's Vestas have fallen as much as 25 percent since a Morgan Stanley downgrade last week, on demand concerns, but rallied some 4 percent in afternoon trading on Wednesday.

"I can't say anything about a week or a month from now but so far we haven't met (seen) that (softening demand)," said Vestas spokesman Peter Kruse. "Of course, Vestas is not an island but our customers are energy companies, and have not yet been hit."

Morgan Stanley predicts 15 percent growth in global wind turbine installation in 2009 compared to 25 percent or more growth in the past two years.


GUARANTEED

The green economy will rebound well, however, provided government support remains in place, for example guaranteeing higher prices through feed-in tariffs for "green electricity" across much of Europe.

"Even though the stocks have been choppy to say the least, the underlying fundamentals of wind and solar would definitely not be my biggest concern even under a severe recession scenario," said Mulchanov.

There are some, very limited signs of weakness in government commitment.

On Monday, US lawmakers said they could run out of time to extend a wind power production tax credit (PTC) and a solar power investment credit (ITC), which have been powerful spurs for installations, in time for a Dec. 31 expiry deadline.

Failure to extend the credits in time would add to negative sentiment on the sector, analysts say.

Clouding the issue of PTC funding is the fact that just a few banks bought these tax credits from wind farms, allowing developers to monetise them upfront, several of which have since withdrawn from that market, an analyst said.

The United States represented about 30 percent of growth in the wind power industry this year, says Morgan Stanley.

But Germany recently strengthened its subsidy support for wind power. More broadly, Norway on Wednesday said it would double a state fund promoting investments in renewable energy to 20 billion Norwegian crowns (US$3.42 billion) in 2009.

(Additional reporting by Martin Roberts in Madrid and Kim McLaughlin in Copenhagen; editing by Christopher Johnson)