Clean-Tech Predictions for 2012by Michael Butler
February 20, 2012
At Cascadia Capital, we predict that upcoming political and economic debates will drive increasing interest throughout the sustainable industries this year. We also believe that financing and M&A will continue to accelerate, led in part by activity in the solar and energy efficiency sectors. Below are our 2012 predictions for the sustainable industries:
1. Renewable project financing market in turmoil as European banks pull out
It’s no secret that banks across Europe have been experiencing the stress of the region’s ongoing economic crisis and fluctuating capital markets. To prepare for further market volatility, European banks are increasing their capital ratios and turning their focus back to their core business. As a result, many European banks are pulling out of the U.S. project finance market for renewable energy products, which will likely result in an overall downturn in financial activity across the sector.
However, we expect that this void in European investments will be filled by US regional banks along with private placements/144A financing throughout the next year. These investments will likely come from insurance companies such as John Hancock, Metlife, and Prudential. Union Bank, Wells Fargo, and Key Bank have also indicated that they will be expanding their project finance teams. Furthermore, tax-exempt bonds are now being used to fund qualifying projects. This was evidenced in 2011 when UTS Biogas issued a $24 million bond to finance its two California biogas projects.
Two recent biomass financings illustrate that private equity investors are also stepping up to provide debt. Starwood Energy joined Prudential in providing debt to its Berlin Station biomass plant, and Carlyle recently provided construction financing for the Plainfield Renewable Energy Project, developed by Enova, through the Carlyle Energy Mezzanine Opportunities Group. We expect this to continue throughout 2012.
2. Renewable energy and climate change come back into public focus as XL pipeline protests gain attention
We predict that the attention around the XL pipeline will draw interest to the controversy that surrounds broader natural gas and fracking related issues. In the last several months, conservationists and conservatives alike have come together to object the XL pipeline, framing it as an energy-intensive, pollution creating oil extraction process. In 2012, this debate will challenge U.S. commitment to a clean-energy economy as natural gas continues to make inroads in the mainstream energy matrix.
3. Renewable energy M&A accelerates, led by energy efficiency
2011 saw a shift in transactions as money left capital-intensive sectors, such as biomaterials, biofuels and wind, and was invested in asset light sectors such as energy efficiency. As a result, we predict managed services providers like Honeywell, Siemens, and Johnson Controls will look to acquire energy efficiency companies to meet growing customer demand for real-time energy solutions. Schneider Electric’s acquisition of Summit Energy Services, is the strongest signal to date that the energy efficiency sector is ready to go to market, and is putting pressure on other large corporations.
4. Despite speculation, solar continues to dominate the renewable energy mosaic
As the cost curve of panels continues downward, we predict the growth of solar will continue to accelerate and reach price parity with traditional energy sources in certain geographic regions such as California and areas in the Southwestern United States. While many are weary of the solar market due to Solyndra’s failure, it’s important to keep in mind that the company did not fall victim to a weak solar market, but failed to prepare for a decline in panel pricing. While solar projects have bright futures, investors will still look for sound business models, technological innovation, and continued cost reduction. Policymakers must also provide the kind of regulatory stability that attracts investors and encourages these projects to develop. We believe the current situation is part of an industry maturation process, and that the category has significantly outperformed all expectations and will emerge stronger than ever.
Renewable energy will come to the forefront of many political and economic discussions in 2012 due to the presidential election, environmental policy debates, and decreased investment by European banks. Despite some uncertainty in the market, we believe renewable energy project financing will remain steady in 2012 due to investment from alternative sources. We expect this dynamic industry landscape to be highlighted by M&A in energy efficiency, and continued adoption of solar as the barriers to entry rapidly decline.
The co-founder of Cascadia Capital, Michael Butler leads the firm and is an emerging thought leader in the New Energy Economy. His recent focus on sustainable technology has helped propel Cascadia into some of the most important transactions in this market.