Green Bubble Goes 'Pop'

DECEMBER 21, 2008, 7:49 P.M. ET
Clean-Energy Firms Struggle for Funding; Key Index Slides 66%

By MIKE FOSTER
A slackening in the growth rate of fossil-fuel consumption provided a little comfort to environmentalists in 2008, as recession took a grip on global economies. But, in most respects, this year was awful for the green bandwagon, which came to a halt as debt and equity finance dried up for companies with an environmental focus.
The chart of the WilderHill New Energy Global Innovation index, or Nex index, which tracks clean-energy stocks, resembles the Nasdaq Technology index in 2000. The Nex fell 66% from the start of 2008 to Dec. 2. Analysts say problems have been caused by companies not paying enough attention to operational efficiency, state subsidies distorting the market, and the failure of global leaders to find common ground as they seek a successor to the Kyoto emissions protocol, which expires in 2012.
Funds in Morningstar's ecology sector, which invest in a range of sustainability stocks, are less affected by the trend than the Nex index, but have underperformed mainstream funds. The Virgin Climate Change Fund, advised by GLG Partners, is down 48% since February. The next-worst performer is an ecological fund sponsored by Dresdner RCM, which fell 34.6%, after raising €1.5 billion ($2.1 billion) in 2007.
Doubts about the emissions market when Kyoto expires mean that carbon-emission permits for years after 2012 are trading at half the price of this year's equivalents, which have fallen in value too.
Adding to the downward pressure on prices for current permits, Slovakia sold 10 million surplus credits into the market. Russia has also accumulated credits, which it has said it won't sell.
Clean-energy projects are finding it hard to secure credit at levels that make them viable. Simon Drury, partner at Climate Change Capital Private Equity Fund, said 25% of banks are prepared to commit to clean energy, 25% aren't, and 50% are receiving phone calls, but not lending at present.
"The funding gap on some deals is 100%," meaning the companies raised no funding whatsoever.
Banks are also paying greater attention to their lenders' operational statements. "There has been a tightening," Stephen Spencer, global energy director of WestLB said earlier this month at the Financial News Green Investing conference, which WestLB sponsored. "Transactions are being done using a much more conservative structure."
Wayne Woo, director of investor Good Energies, said start-up companies' founders are becoming more willing to part with equity to fund clean-technology operations. "In the past, they resisted selling more than 50%. They are now prepared to go to 75%." He said terms from financiers had become "a bit onerous," but added this was to be expected.
From Financial News at www.efinancialnews.com.