Economic downturn takes solar winds out of green energy's sail

26/09/2011

As governments cut back on public spending in response to the downturn in the global economy, the clean energy industry is facing a funding crisis.

The US credit downgrade by rating agency Standard & Poor's and the economic problems now facing a growing number of western nations has raised a huge question mark over the future financing of clean-energy projects.

The annual growth rates of around 25 per cent in some western countries' clean energy sectors have until now been fuelled by large government subsidies. But these are now under threat, something that could prove disastrous for the future of wind and solar projects.

Until recently, the economies of western Europe were capable of supporting clean energy through subsidies. But the continuing financial crisis facing southern European countries such as Spain and Greece could be set to spread to other formerly robust economies of Europe. Two of the continent's leading adopters of clean energy in Europe, Germany and Italy have both been slashing subsidies. Germany cut solar subsidies in 2010. Italy has also capped its solar energy subsidies.

As these economies were already being forced to cut back radically on clean energy funding before the current downturn, it is hard to see how they could do anything but cut back their clean energy investment even further. This could mean some schemes already under way are scrapped and others in the pipeline never leaving the drawing board.

The clean energy industry would be further damaged by investor perception that solar and wind energy projects are essentially uncommercial schemes borne of a mixture of outdated technology and woolly idealism. This would effectively put the clean energy industry back 25 years and wipe much of the value off solar and wind energy stocks around the world.

But the US credit rating downgrade and the events that rapidly followed it can hardly be blamed for a consistent fall in clean energy subsidies across the West during 2010 at a time when many analysts around the world held that the recession in the West was nearing its end.

Even before the current financial upheaval, the number of wind turbine installations dropped for the first time last year after 20 years of growth. In the US, the number halved. The WilderHill New Energy Global Innovation Index, which tracks the performance of 100 clean energy stocks worldwide, dropped 14 per cent.

The underlying problem is the clean energy industry's over reliance on subsidies. While governments may pay lip-service to the importance of the adoption of clean energy, their priorities are generally elsewhere. Should the current financial upheaval be as bad as some analysts believe, few governments will have many qualms in reducing clean energy subsidies when the alternative is to slash spending on things like public health programs and welfare.

In the US, the majority of clean energy subsidies come from the federal government. While the subsidies appear extremely generous in comparison to some other countries, they are vulnerable to downward shifts in the overall economy. Key federal clean energy subsidies expire every few years.

With these uncertain conditions in place, investors often prefer to become shareholders in those companies which offer low-risk established clean-energy technologies that can be built quickly before the next downturn. This results in a vicious circle where companies that lack innovative new technologies continue to require government subsidies.

Should the global economy fail to grow, it is hard to see how governments can continue to bail out loss-making projects and companies.

But, if governments do not want to pull the carpet from under projects and companies they have already invested heavily into, they will have to find ways of channelling money into clean energy. Rather than subsidising it, governments have the option of passing laws that require more energy be produced from clean sources.

While this seems a simple solution to the problem of subsidies, many voters are clever enough to see these kind of rulings are merely forms of subsidies paid for by large corporations. In economically prosperous times, this formula is likely to win a degree of popularity with voters, many of whom may feel that the big multinationals' carbon footprint should be reduced. In economically disturbed times, the reverse may be true. This is not as likely to be the case if otherwise environmentally polluting corporations that are required to produce more energy from clean sources and feel they may have to stop recruiting staff or even make layoffs to comply fully with legislation.

But private investors of all sizes across the world can still influence government clean energy policy strategies. By continuing to buy shares in truly clean energy companies that provide solar energy and wind power, investors cannot only help fund the clean energy industry but also back smaller companies with lower overheads. They could also find themselves in on the ground floor of one of the 21st century's biggest industries.

thenational.ae

Economic downturn takes solar winds out of green energy's sail

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