You can run, but you can't hide. A report by Bloomberg New Energy Finance earlier this month called out world governments by noting that new investment in clean energy fell 11% in 2012. The headline of the Bloomberg report might inspire some doomsday predictions, but even the company notes that there are many reasons investment is down – some good, some bad, some out of clean tech's control. In fact, chief executive Michael Liebreich was surprised that the decline wasn't bigger. Let's reflect on what the macro trends tell us about the short-term outlook for renewable energy.
Lost incentives key fall
The expiration of various wind and solar subsidies in the world's largest economies were responsible for much of the drop. It is important to remember that these subsidies – along with the budgets of corporate sponsors of clean tech – were scheduled to fade away before 2012 arrived on the calendar. So governments, multinationals, and individuals alike rushed to seize last-minute opportunities to fund projects in 2011. That's important to note because it not only pushed up the total for 2011, but made 2012 look weaker. Of course, a lack of incentives is a good way to discourage investment in any industry.
I recently wrote about the importance of the Renewable Fuel Standard (RFS) and renewable identification numbers, or RINs, in the biofuels industry. While smaller companies I have spoken to lament government involvement, there is no debating that the system works as designed.
The government creates incentives to ramp up production by subsidizing fuels that are new to the market. Tying the market price of the incentives to demand ensures that the government doesn't drown a saturated market with easy handouts and that only the most efficient producers survive. It is not perfect, but without the mandate the United States would not have produced over 13 billion gallons of ethanol or over 1 billion gallons of biodiesel last year – enough to offset 768 million barrels of oil.
Outlook for advanced biofuels
Fresh incentives will be critical for advancing costly next-generation biofuels. While Brazil, the world's sugarcane and biofuels hotspot, saw a decrease of 32% in new projects last year, it is likely that 2013 will be a tremendous year for growth. The country has been hit with lackluster crop yields (only 510 million metric tons last season) since harvesting a record 557 million metric tons of sugarcane in 2010-2011. But sugar industry experts believe the country will need to cultivate up to 1.2 billion metric tons by 2020 to keep up with domestic growth and stave off increasing imports of ethanol. That number couldn't be further out of reach.
Solazyme (SZYM +0.00%) started 2013 by securing $120 million in financing from the Brazilian Development Bank for its 100,000 metric ton per year renewable oils facility with Bunge. The next generation biorefinery represents less than 20% of the company's targeted 2016 capacity worldwide, which may increase as chemical companies and refiners drool over the good news trickling out of the company. After becoming the first industrial biotechnology company to scale to 500,000 L fermenters, Solazyme is tantalizingly close to the 750,000 L volumes needed to achieve economical production of its high-quality oils.
Amyris (AMRS +0.00%), which is quickly looking for reasons to put 2012 behind it, could enjoy a much-needed boost this year. The company has finally completed its first farnesene biorefinery in Paraiso, Brazil. Should the company achieve favorable commercial metrics in the first quarter it could easily get the green light from investors to bust the locks off of a shuttered plant in Spain. While Paraiso will be the lone production facility until 2015 at the earliest, the prospects for Amyris – and the industry – will improve significantly with favorable data.
Outlook for solar
The second-biggest reason for a decline in new investments was the fall in solar panel prices, which dropped 24% since 2011. Considering that solar investments made up 53% of all new investment that is no surprise. Investors in the sector are well aware of the troubles within the industry, but things are starting to improve. The EIA estimates domestic solar growth to grow 31% in 2013 and 28% in 2014.
Warren Buffett kicked off the new year by buying the Antelope Valley Solar Projects from SunPower (SPWR +0.00%) for at least $2 billion. The purchase will boost the bulging 1,830 MW portfolio of MidAmerican Renewables and allow Buffett to boast one of the largest solar projects in the world. As the ultimate gatekeeper for finding undervalued investments, Buffet's latest splurge may be a sign of things to come.
Not even market leaders are spared when an industry suffers from external forces. First Solar (FSLR +2.37%) had to gut-check its ambitious plans for growth after losing valuable subsidies throughout the world. The company delayed a production plant in Mesa, Ariz., and considered closing its Frankfurt, Germany, facility on overproduction fears in 2012.
After reporting losses of over $941 million in 4Q11 and 1Q12, the thin-film manufacturer has corrected course and has rebounded nicely from lows under $12. Analysts expect the company to continue its upward swing and grow at a 25% clip for the next five years.
Outlook for wind
On a BTU basis, wind power is the most successful domestic supply of renewable energy behind hydropower and wood biomass. The growth of wind projects is projected to slow in coming years after exploding onto the scene since 2005. The EIA states that domestic wind generation grew 17% in 2012, but projects growth of just 13% in 2013 and flat growth in 2014.
At first glance the EIA's domestic numbers may seem to cast a dull light on carbon-fiber manufacturer Zoltek (NASDAQ: ZOLT), which is a key supplier to the industry. Just don't write the company off with pullback in the United States. Consider that Northern Europe funded four of the largest stand-alone projects, all off-shore wind farms, in all of clean tech last year. The total cost of the projects stood at $6.4 billion and will generate 1.17 gigawatts of clean electricity.
Zoltek claims that the largest wind turbines in the world operate "almost exclusively" with its carbon fiber. A 23% increase in sales last year seems to back up that statement. The company's low-weight, high-strength blades can capture up to three times as much power from the wind as glass fiber-reinforced competitors.
Foolish bottom line
It is important to acknowledge that investments – even really big ones – go up and down with the ebb and flow of the world economy. Rather than looking at the pullback as a reason to sound the alarm, perhaps it is best to gather ourselves and find some great long-term opportunities. When renewable energy industries pick up again it may be too late. As Warren Buffett once said: "Price is what you pay. Value is what you get."
