Alternative Energy Companies Stung by Tight Credit
Alternative energy stocks were battered on Wall Street in 2008 as volatile commodity prices, a continuing global recession and tightening credit markets drove one ethanol company into bankruptcy protection and sent shares of others down more than 90 percent.
Wind and solar companies fared slightly better, but the worldwide economic downturn overshadowed $17 billion in new federal tax incentives that had those industries poised to take off.
"Those are the two ends," said Joseph Muscat, Ernst & Young's Americas director of cleantech and venture capital. "As we end the year, I think right now the challenges in the economy are weighing more heavily than those incentive programs to try to keep the industry moving along at a good pace."
It was a tough year for stocks overall as bad bets on mortgages erupted into a global crisis that seized up credit markets.
While the Dow Jones Total Market Index fell 40 percent and the Standard & Poor's 500 index fell 39 percent, shares of companies like Suntech Power Holdings plummeted 86 percent and First Solar lost nearly 50 percent of its value.
In wind, which is dominated by companies that trade on foreign exchanges, shares of Denmark's Vestas Wind Systems logged large share-price declines.
One of the hardest hit alternative energy segments was biofuels, as tightening credit markets erased the sector's lifeline to weather volatile corn and fuel price swings.
Near-zero profit margins caused by rapidly rising corn costs and declining ethanol prices helped drive VeraSun Energy , the nation's No. 2 ethanol producer, into Chapter 11 bankruptcy protection. And shares of Aventine Renewable Energy Holdings , Pacific Ethanol and BioFuel Energy all lost more than 95 percent of their value during 2008.
Oil is trading at low levels not seen in more than four years, prompting naysayers to once again chant "ethanol is dead." That statement couldn't be further from the truth, said Tim Hannagan, a grains analyst at Alaron Trading in Chicago.
The U.S. government has set an aggressive renewable fuels standard that will require 36 billion gallons of biofuels to be blended into gasoline by 2022, and it continues to give refiners a blenders tax credit, although it's set to drop to 45 cents from 51 cents on Jan. 1.
"It's a bumpy road, but I still think it's only the beginning," Hannagan said. "We're just pausing a little bit in here right now."
Companies embarking on large solar and wind projects need large sums of capital to build, and such ventures are often put on hold if firms can't access cash, Ernst & Young's Muscat said. The tight credit also affects smaller businesses in the supply chain.
"The credit markets are important for all of those companies," he said. "And the inability to access credit, to finance even short-term activities in these businesses, is proving very problematic."
The U.S. Energy Department's Energy Information Administration in a recent report projects virtually no growth in U.S. petroleum use through the year 2030 because of wider use of ethanol and biodiesel.
The report said that while total electricity use will increase, more of it will be produced from burning natural gas and renewable sources such as wind, solar and geothermal energy.
Congress in its $700 billion financial services bailout included an eight-year extension of solar incentives and a one-year extension of wind tax credits, setting the stage for scores of new large-scale power projects. And President-elect Barack Obama, who takes office in January, has pledged to invest $15 billion each year during the next decade to support private sector efforts toward clean energy.
Muscat said governmental incentives will continue to drive demand, and the positives in the industry will eventually outweigh the negatives.
The sector might see some mergers or buyouts in the short-term, but the companies that emerge should be stronger.
"I do believe that the cleantech renewable energy sector will be the first to emerge when the market stabilizes," he said.