INDIAN WELLS, Calif.--There's a new cliche in the clean-tech investment community, and we can thank Charles Dickens for it.
As Dickens put it at the start of A Tale of Two Cities: "It was the best of times, it was the worst of times." Who knew pulp fiction about pre-revolutionary France had lessons for 21st-century clean-tech investment?
Here at the Clean-Tech Investor Summit, investors say that signs indicating the energy business is poised for dramatic change have never been stronger, with an Obama administration making energy central to a massive stimulus package.
To understand the "worst of times" part, however, investors are looking at several challenges, starting with the obvious: the slumping stock market.
The credit crisis and recession also have combined to make the current tax-based renewable energy subsidies ineffective in serving their purpose, investors said. Current renewable energy subsidies rely on a tax credit, but with fewer corporations expecting a big tax bill, that means less money is available for clean energy.
As a result, projects in an otherwise fast-growing wind and solar power business are being slowed or scrapped.
"It's a very, very difficult market to get things built," said Scott Brown, the CEO of New Energy Capital, which finances renewable energy projects mainly in wind and biomass these days. "We're only looking at a very, very conservative class of projects."
And because banks are reluctant to loan money, any project with technology risk is a tougher sell. That means it's unlikely that many new technologies from the throngs of clean-tech start-ups will make it out of the labs and into the ground in the upcoming months.
Tax equity and debt double whammy
The funding challenges apply primarily to companies that want to build a large project, such as a wind farm or solar installation, or that need project financing to build a pilot facility to test a new technology like a cellulosic ethanol plant for making biofuel from non-food sources.
These sorts of projects, which can be hundreds of millions of dollars, are typically financed through a combination of debt and equity. But because lenders have become so tight-fisted, there's an absence of debt to finance deals, a situation that isn't expect to change overnight, investors said.
"Ultimately, banks and financial institutions need to lend money. That's how they make money," said Kevin Walsh, managing director of renewable energy at GE Energy Financial Services. "But '09 is going to be tough."
Raising money through an initial public offering (IPO) on the stock market is possible, but likely for only the most promising firms with a combination of healthy revenue and compelling product. "Even during a downturn, IPOs do get done but initially the bar will be higher," said Jeffrey Lipton, managing director at Jefferies & Company.
The overall slumping economy is taking its toll on clean-energy projects in a perhaps unforeseen way.
Right now, investors in renewable energy receive a 30 percent federal tax credit. But because so many more corporations don't foresee having a hefty tax bill in the coming years, sources of "tax equity" have all but dried up, said investors.
GE's Walsh and others are lobbying to have the renewable energy subsidy altered to fit the current economic environment. One idea is "renewable tax credit" that would go directly to a clean-energy company, like a project developer, and to other co-owners of a project.
New Energy Capital's Brown said a simpler and more flexible model than tax-based incentives is to a feed-in tariff, now used in Europe, where utilities need to purchase electricity generated from renewable energy sources at above-market rates.
"It's a much more transparent, much more efficient type of program," Brown said. "In the long run, it can be structured in a way that can be much more effective in bringing these benefits to different parts of the country that rely on different natural resources."
Waiting for policy clarity
The financial doldrums are likely to lead to a wave of mergers and acquisitions, panelists said.
In some cases, that could actually depress the market further. Brown said that ethanol company VeraSun, which declared bankruptcy last year, is trying to sell a number of its biorefineries at what could be firesale prices.
What about that "best of times" part?
In other clean-tech product areas, consolidation could make sense. A smart grid company that planned to go public, for example, could instead merge with another firm to create a more full-featured product line, said Jefferies' Lipton.
Investors expect smart-grid technologies, energy-efficiency companies, and firms that provide weatherization services will benefit the most from the stimulus plan. Another positive note, said GE's Walsh, is that the U.S. has world-class resources for solar, wind, and biomass energy.
The same trends that drove the investment boom in clean tech over the past four years, including steady concerns over national security and climate change, remain despite the financial meltdown. Also, there is a growing number of corporations looking into green-tech products, such as Wal-Mart and General Electric.
Government loans are emerging as a critical piece of the financing puzzle, said investors. A number of companies have applied for existing Department of Energy loan guarantees and the stimulus plan calls for billions more. This is particularly crucial for companies seeking to cross the so-called Valley of Death, where they try to test their products at commercial scale for the first time to prove their viability.
"The projects least likely to get done are the ones with technology risk. This is where a government-supported loan guarantee program has to come in," said Brown.
Investors are also waiting for the stimulus plan to be passed, which could happen as early as next month. They're also watching changes in state energy policies and how the next installment from the financial industry bailout plan, called Troubled Assets Relief Program (TARP), will be allocated.
"Institutional investors hate uncertainty--it's seen as volatility," said Lipton. "Until a lot of this settles down--and it will probably a quarter or two--we'll have more clarity and that's the key."
Updated on January 26 12:45 p.m. Pacific to clarify the meaning of a refundable tax credit."