AS PREDICTED, 1Q-‘09 VC SPENDING ON NEW ENERGY WAY OFF

VC spending for alternative energy tumbles 63 pct
Ernest Scheyder, May 11, 2009 (AP)
and
Clean-Tech Investment: Dismal First Quarter, Waiting for Washington
Keith Johnson, May 11, 2009 (Wall Street Journal)

SUMMARY
Spending for New Energy R&D and on New Energy start-up companies in the first quarter of 2009 dropped 63% from the level of spending in 2008. This is thought to be a measure of the impact of the global recession.

From January to March 2009, venture capitalists spent $277 million on New Energy projects; from January to March 2008, venture capitalists spent $715.3 million (Ernst & Young, E&Y, analysis based on Dow Jones Venture Source data).

Stock market numbers have been way off on New Energy, Old Energy and all other investments. This E&Y analysis confirmed that wealthy and institutional investors, for the last few years fearless spenders on New Energy, have also backed off.

The trend is clear. Click thru for the PowerShares WilderHill Clean Energy Index. (click to enlarge)

The good news: Some investment is flowing to less capital-intensive technologies, Energy Efficiency technologies and energy storage technologies.

Battery storage received 41% of all VC funding in the quarter, more than doubling its 1Q 2008 backing of $50 million to $114 million. One deal, $69 million raised by battery maker A123 Systems from GE, was the bulk of the energy storage boom.

Battery innovators like A123 Systems are getting rare play. (click to enlarge)

Fuel cells, which got no investment in 1Q 2008, found $45 million in VC funding during the first quarter of 2009. BASF, the world's biggest chemical company, spent $10+ million for a fuel cell plant in New Jersey, following a pattern that has seen them invest $100+ million in fuel cell research in recent years.

Electricity generation received $56 million in 1Q 2009 VC funding, far below 2008 levels. The NRG Energy/Acme $40 million investment in eSolar’s solar power plant technology was most of that total.

A measure of how little action there was in the sector is that a mere 5 deals accounted for 62% of all VC New Energy investing in the entire 3 months.

Disappointment at the investment drop-off in the first half of 2009 was offset by expectations of a 2010 boom fueled by funding from the stimulus packages of October 2008 and February 2009. The former package allotted money and long term extension to New Energy tax credits while the latter shifted the credits to grants, funded grid development and the efficiency upgrading of federal buildings and private homes.

eSolar's power plant technology rated investment. (click to enlarge)

COMMENTARY
Spending on both New Energy and Old Energy is down at present, partially due to a lack of financing and partially due to a lack of demand for energy in a less productive economy.

Though both the AP and the Wall Street Journal take their lead from E&Y and report VCs are waiting for Washington, that is not precisely correct. The truth is, VCs are in the process of evaluating stimulus programs as much as they are awaiting federal agencies to be ready to process their applications for funding. (See FOR WIND, A SLUMP IN ’09 AND A BOOM IN 2010)

As a result of the financial crisis, access to capital has dramatically diminished. Tax credits that last year drove investment were of no value to institutions that are earning no profits and don’t need to offset income taxes. Example: Of 15 financial institutions taking an ownership role in wind projects in return for the opportunity to use tax credits in 2007 and early 2008, 6 remain active this year. Some, like Lehman Brothers, are gone. Some, like AIG, have been absorbed by the government. Some, like GE Finance, have merely backed away from the market.

The trend was evident by the end of 2008. (click to enlarge)

In the American Recovery and Reinvestment Act (ARRA) stimulus plan of February 2009, New Energy investors were given new options. The most attractive benefit will likely turn out to be a cash grant from the U.S. Treasury but different benefits will apply and appeal in different ways.

The new options created a new time line: (1) The applications for these benefits, which may be put together and used in yet-to-be devised ways, will not be filed until July and will likely not be fully processed before September. (2) ARRA requires many projects, to be eligible, to begin by the end of 2010 and be producing by the end of 2012.

The results: (1) Investors will likely spend the rest of 2009 understanding the benefit options, deciding how and when and where to apply for them and preparing to put them to work. (2) They wlll leap into action by the start of 2010.

The many benefits of ARRA will likely spawn more than normal action and carry the New Energy industries a long way toward fulfilling President Obama’s goal of doubling U.S. New Energy capacity in 3 years.

Some the ARRA benefits currently being studied. (click to enlarge)

The things that could interrupt the coming boom would be either (1) a failure of adequate transmission to carry the new capacity generated from funded solar, wind, geothermal, hydrokinetic, biomass and other electricity generation projects or (2) an unexpected economic event that reverses all the good ARRA will do.

The first quarter 2009 numbers will likely hurt New Energy longer than Old Energy because the oil and gas companies have cut back on investment in exploration while the New Energy industries have been forced to cut back in R&D.

There is no way to know if these new numbers represent the bottom of the recessionary trend but there are indications of a recovery even in advance of the ARRA funds being put to work. A market analyst recently observed that GE Finance, which was the 2nd biggest user of the wind industry’s tax credit in 2007 and 2008 but had backed completely out of the market in recent months, is now testing the waters.

Wind's potential rebound scenarios typify the sector. (click to enlarge)

QUOTES
- Joseph A. Muscat, Americas Director of Cleantech, Ernst & Young: "Investors took a deep breath and paused...The weak economy has caused demand for energy in general to go down."
- Horst-Tore Land, fuel cell division head, BASF: "Fuel cell technology is one of the most important on the quest toward sustainability..."
- Ethan Zindler, North American research head, New Energy Finance: "The long-term trends are still there for clean energy...This is a period of doldrums, where we're stuck between the last massive wave of investment and waiting for some of the major support from stimulus packages around the world to kick in."
- Muscat, Ernst & Young: "While the timing of the receipt of government funding is uncertain, we expect that loan guarantees and other government financing structures, as well as corporate adoption rates of clean technologies, will be early indicators of an upward investment cycle..."