Climate Change Worries,
High Oil Prices and Government Help Top
Factors Fueling Hot Renewable Energy
Investment Climate
Investors Flock to Renewable Energy and
Efficiency Technologies; Transactions Leap
to Record $100 Billion in 2006, Says UNEP
Study; Renewables Shed Fringe Image; American,
European Markets Dominate
But 9% of Global Investments are in China,
21% in Developing Countries
Paris, 20 June 2007 - Climate change worries
coupled with high oil prices and increasing
government support top a set of drivers
fueling soaring rates of investment in the
renewable energy and energy efficiency industries,
according to a trend analysis from the UN
Environment Programme.
The report says investment capital flowing
into renewable energy climbed from $80 billion
in 2005 to a record $100 billion in 2006.
As well, the renewable energy sector's growth
"although still volatile ... is showing
no sign of abating."
The report offers a host of reasons behind
and insights into the world's newest gold
rush, which saw investors pour $71 billion
into companies and new sector opportunities
in 2006, a 43% jump from 2005 (and up 158%
over the last two years. The trend continues
in 2007 with experts predicting investments
of $85 billion this year).
In addition to the $71 billion, about $30
billion entered the sector in 2006 via mergers
and acquisitions, leveraged buyouts and
asset refinancing. This buy-out activity,
rewarding the sector's pioneers, implies
deeper, more liquid markets and is helping
the sector shed its niche image, according
to the report.
While renewable sources today produce about
2% of the world's energy, they now account
for about 18% of world investment in power
generation, with wind generation at the
investment forefront. Solar and bio-fuel
energy technologies grew even more quickly
than wind, but from a smaller base.
Renewables now compete head-on with coal
and gas in terms of new installed generating
capacity and the portion of world energy
produced from renewable sources is sure
to rise substantially as the tens of billions
of new investment dollars bear fruit.
Says UNEP Executive Director Achim Steiner:
"One of the new and fundamental messages
of this report is that renewable energies
are no longer subject to the vagaries of
rising and falling oil prices-they are becoming
generating systems of choice for increasing
numbers of power companies, communities
and countries irrespective of the costs
of fossil fuels.
"The other key message is that this
is no longer an industry solely dominated
by developed country industries. Close to
10 per cent of investments are in China
with around a fifth in total in the developing
world. We will need many sustained steps
towards the de-carbonizing of the global
economy. It is clear that in respect to
renewables those steps are getting underway."
Says Yvo de Boer, Executive Secretary of
the UN Convention on Climate Change: "As
governments prepare to launch begin a new
round of post-2012 climate change-related
negotiations later this year, the report
clearly shows that, amid much discussion
about the 'technologies of tomorrow,' the
finance sector believes the existing technologies
of today can and will 'decarbonize' the
energy mix provided the right policies and
incentives are in place at the international
level."
The report represents "a strategic
tool for understanding the energy sector's
development in both OECD and developing
countries," says Michael Liebreich,
CEO of New Energy Finance Ltd, a leading
provider of research and analysis on the
clean energy and carbon markets, which prepared
the report for UNEP's Paris-based Sustainable
Energy Finance Initiative.
The report attributes the sector's boom
to a range of global concerns - climate
change, increasing energy demand and energy
security foremost among them.
It credits as well the November 2006 U.S.
mid-term elections, which confirmed renewable
energy as "a mainstream issue,"
moving it up the political agenda.
Also spurring the sector's growth has been
the persistently high price of oil - averaging
more than $60 a barrel in 2006 (although
one report conclusion is that the sector
is becoming more independent of the price
of oil).
"Growing consumer awareness of renewable
energy and energy efficiency - and their
longer term potential for cheaper energy,
and not just greener energy - has become
another fundamental driver," it says.
"Most importantly governments and politicians
are introducing legislation and support
mechanisms to enable the sector's development."
Among the report's other key points and
conclusions:
• Renewable energy and efficiency markets
are growing more global and enjoying easier
access to capital markets;
• Capital is coming from the venture investment
community, the stock markets and internal
refinancings, signaling the sector's a shift
to a more mainstream status;
• Risk and uncertainly can be reduced through
diversification across technologies and
geography;
• Energy efficiency is a significant but
largely invisible market, attracting increasing
attention as investors realize its important
role in meeting rising energy demand;
• Capital investors are now more closely
aligned with industry proponents in their
views of expected growth.
Wind, solar, biofuels attract greatest investment
dollars
Renewable energy sectors attracting the
highest investment levels are wind, solar
and biofuels, "reflecting technology
maturity, policy incentives and investor
appetite," according to the report,
adding that the NEX index (www.tsx.com/en/nex/)
of clean energy stocks increased 64% in
the 15 months to April.
Stock market investments in technology
development, commercialization and manufacturing
firms leapt 140% in 2006 compared with 2005,
while venture capital and private equity
investments jumped 163%. Financings of energy
generation assets and capacity grew at "a
more sedate 22.9%," the analysis says.
Asset financing of new generation capacity,
the largest single source of renewable energy
investment, accounted for nearly 40% of
the $70.9 billion invested in 2006, a reflection
of the sector's coming of
age, the report says. The trend continues
in 2007. Most asset financing deals were
in the relatively mature wind sector, with
biofuels (which experienced a surge of interest
in 2006) in second place.
Venture capital and private equity investors
in 2006, meanwhile, poured $2.3 billion
into biofuels, $1.4 billion into solar and
$1.3 billion in wind, much of it to increase
manufacturing capacity.
Around 40% of the capital invested in solar
went towards new technology development.
In biofuels, the proportion was about 20%,
reflecting a surging corn-based ethanol
industry in the U.S., as well as research
into second generation biofuels, including
cellulosic ethanol.
Renewable energy investment is almost evenly
split geographically between United States
and Europe. U.S. companies receive more
technology and private investment (with
high profile investment interest shown in
biofuels during 2006 by entrepreneurs such
as Vinod Khosla, Bill Gates and Richard
Branson). Europe's publicly quoted companies
attracted the most public stock market investment
dollars: $5.7 billion compared to $3.5 billion
in the U.S.
The pattern reflects the earlier arrival
of enthusiasm for renewable energy in Europe
and its ratification of the Kyoto Protocol,
unlike the US and Australia. As well, government
support is particularly strong in some European
countries.
The European markets' relative maturity
also helps explain its dominance of merger
and acquisition activity in 2006, with deals
worth more than $20 billion in 2006 compared
with $8.8 billion in the U.S., many of the
corporate acquisitions being made by investors
from developing countries, notably India.
Comparing the renewable energy and dotcom
booms, the report says the former is "underpinned
by real demand and growing regulatory support
(which the dotcom boom did not enjoy), considerable
tangible asset backing, and increasing revenues."
Strongest growth of all worldwide has been
in venture capital and private equity investment,
totaling $7.1 billion in 2006, up 163% from
2005. Investment via public markets increased
140% to $10.3
billion, with initial public offerings (IPOs)
of renewable energy companies particularly
strong in the second and final quarters
of 2006.
Most energy efficiency investment has been
in early-stage funding. Venture capital
and private equity investment rose 54% between
2005 and 2006 to $1.1 billion. Some merger
and acquisition activity also occurred in
the energy efficiency industry, notably
the Australian Bayard group's $705 million
acquisition of US smart-metering company
Cellnet in December.
Among other insights:
• Investment in sustainable energy is still
mostly in OECD countries, with the US and
EU together accounting for more than 70%
in 2006. However, investment in developing
countries is growing quickly: 21% of the
global total in 2006 occurred in developing
countries, compared with 15% in 2004;
• A healthy 9% of global investment occurred
in China, helped by significant asset financing
activity in wind and biomass as well as
the waste sectors. Investments in China
came from across the spectrum, from venture
capital through to public markets, "reflecting
the country's increasingly prominent position
in renewable energy";
• India lagged a little behind China but
was the largest buyer of companies abroad
in 2006, most of them in the more established
European markets;
• Latin America took 5% of global investment,
most of which financed Brazilian bio-ethanol
plants;
• Sub-Saharan Africa notably lagged behind
other regions;
• Global government and corporate research
and development spending rose 25% to $16.3
billion;
• Investments in small-scale projects rose
33% from an estimated $7 billion in 2005
to $9.3 billion in 2006.
Small-scale projects attract growing interest,
driven partly by opportunities in developing
countries, which stand to benefit most from
small-scale installations (e.g. solar roof
panels and micro turbines).
"The finance community has been investing
at levels that imply expected disruptive
change is now inevitable in the energy sector,"
says Eric Usher, Head of the Energy Finance
Unit at UNEP's Paris-based Division of Technology
Industry and Economics. "This report
puts full stop to the idea of renewable
energy being a fringe interest of environmentalists.
It is now a mainstream commercial interest
to investors and bankers alike."
"This is a powerful signal of the
arrival of an alternative future for today's
fossil fuel-dominated energy markets,"
he adds. "Signals move markets and
the signal in these investment numbers is
that the sustainable energy markets are
becoming more liquid, more globalized and
more mainstream."
This is full-scale industrial development,
he added, not just a tweaking of the energy
system. Growth is underpinned by a widening
array of clean energy and climate policies
at the federal, state and municipal levels.
With respect to the energy efficiency sector,
the investment trends are harder to identify
but the impacts of improving energy efficiency
can be valued economically, notes Virginia
Sonntag-O'Brien of UNEP's Sustainable Energy
Finance Initiative (SEFI). Investments in
supply side and demand side efficiency have
been helping decrease global energy intensity,
which on average has been dropping 1% to
1.5% per year.
Since 11000, energy efficiency has met one-half
of all new demand for worldwide energy services.
These savings - 3 billion tonnes of oil
equivalent - have a value of $6 trillion
if an average oil price of $27 is assumed.
The challenge is to accelerate energy intensity
improvement to levels of 2% or above, which
compounded to 2030 would mean a 61% improvement
from today.
Says Mohamed El-Ashry, Chair of the Renewable
Energy Global Policy Network REN21: "The
findings in this report are adding to the
mounting evidence that renewable energy
is going to play a far greater role in the
energy mix than many expected."
