Renewables desperate to feel breath of funds

By Sheila McNulty in Houston
Published: March 31 2009 02:34

Renewables groups squeezed by the economic crisis are going bankrupt in spite of the billions in new funding for the sector earmarked by the administration of Barack Obama.
It could take several months for the government to establish a regulatory framework to disburse the funds set aside in the administration’s stimulus package to build a “green” economy. In the meantime, some companies already are in an untenable position.

Investment in renewables has been delayed or even terminated as the credit crisis has dried up capital. The slowdown has also resulted in sluggish sales of clean technology while plunging oil and natural gas prices have made such projects less economically viable.
“That has put a lot of pressure on companies operating in the renewable area,’’ said Charles Swanson, the managing partner of Ernst & Young’s Houston office. “They are starting to struggle mightily.’’
Ethanol producers in particular have been under pressure as a result of volatile corn prices.
VeraSun, Greater Ohio Ethanol and Gateway Ethanol were among the first victims, filing for Chapter 11 bankruptcy protection last October. The trend has continued this year, with Renew Energy and Northeast Bio-fuels filing in January.
The latest victim, Aventine Renewable Energy, told investors on March 16: “We do not expect to have sufficient liquidity to meet anticipated working capital, debt service and other liquidity needs during the current year unless we experience a significant improvement in ethanol margins or obtain other sources of liquidity.’’
The company is seeking additional debt and equity financing, as well as a potential sale of all or part of the business but admits it might not be successful in the current environment.
“If we cannot obtain sufficient liquidity in the very near term, we may need to seek to restructure under Chapter 11,’’ Aventine said.
The Obama administration says renewables were not given enough attention under the previous administration of George W. Bush. It has uncovered a backlog of 200 solar power project applications and 20 wind project applications awaiting action.
Ken Salazar, interior secretary, quickly established a taskforce to spur the development of such projects. “For the last administration, renewable energy simply wasn’t a priority,” he said. “They focused their time and resources almost exclusively on permitting for oil and gas.”
The Obama administration’s stimulus package includes $56bn in grants and tax breaks for US clean energy projects over the next 10 years and a budget calling for $15bn annually for renewable energy programmes. Yet Mr Swanson said: “Few, if any, of the funds have actually been distributed.’’
Once they are, he says, the financial support will enable many distressed companies to survive. “It’s certainly going to be a lifeline to get through the next five years.’’
Yet for renewables to take off long term, they must be able to compete with fossil fuels economically without government assistance. Estimates of the potential contribution to US energy supply of renewables varies from 10 per cent to 20 per cent in 20 years.
Rex Tillerson, chief executive of ExxonMobil, the world’s biggest publicly listed oil and gas company, said this month that the US needed to be realistic about how much renewables could add to the energy mix and within what timeframe. Exxon is not, at present, making any renewable investments, but Mr Tillerson said it had plenty of time. “We just think the timeline is very, very long, so we’re not going to miss anything.”’
Karl Miller, an energy expert and institutional investor with experience in utilities and energy trading, intends to hold off investing in renewables.
“Investors like me will be waiting on the sidelines ­during the short-term boom period and will look to step in and buy assets for pennies on the dollar when the renewable bust comes in a few years,’’ Mr Miller said.
By then, he said, the market would be littered with uneconomical renewable projects. As an investment model, he suggests, one need only look at the ethanol boom and bust of the past three years. “It was a clear demonstration that government handouts simply do not work.’’
Copyright The Financial Times Limited 2009