Greenhouse emissions reduction projects and the renewable energy sector are forecast to suffer in the fallout from in the latest round of global credit turmoil following the collapse of US investment bank Lehman Brothers. But there are signs of optimism in the assessment by some that at least these sectors stand to fare better than others in the competition for increasingly tight investment capital.
The global credit crunch began in the US, where a large proportion of home loans to the enormous US housing market this decade were advanced on very loose "sub-prime" lending standards. It became clear last year that many borrowers were defaulting on these loans. This caused a ripple effect across the US and well beyond its borders given the size of the market and the fact that many banks and financial houses worldwide had been involved directly or indirectly in lending to it.
This has caused a crisis of liquidity, meaning banks and other lenders are much less willing to lend to each other in the wholesale credit market because they uncertain whether their loans will be repaid. This inevitably flows on to business lending, hitting hard those sectors of industry on a high growth path with a thirst for capital, of which renewable energy and the broader energy sector are examples.
Loan finance for new renewable energy infrastructure, investment in cleaner fossil fuel energy and energy efficiency measures, including emissions offset projects in the developing world, is becoming harder to get.
Rabobank green energy executive Tanja Cuppen told an industry conference this week the credit crunch will have a major impact on renewable energy and the worst is yet to come, Reuters reports. The European renewable energy sector would see loan finance availability reduced by €21 billion ($US30bn) up to 2020, Cuppen said. This compares to estimates that the sector needs €85 billion worth of investment in wind, solar and other forms of zero-emissions power over that time to meet the EU’s target for 20 per cent of electricity to be generated from green sources by 2020.
Project developers may well have to seek alternative sources of finance from pension funds and equity investors, Cuppen and other analysts are saying. This includes project developers in the carbon offset space, dominated by the UN Clean Development Mechanism (
CDM) market for
CERs. More than a thousand projects are at various stages of generating carbon credits and many rely on upfront financing from the intending credit buyers – often investment banks. There are already reports that project owners are getting nervous about whether their credit buyers will be able to continue funding existing projects or step up with capital for new projects.
As far as the direct effect of the Lehman collapse goes, there is a small exposure among developers given the investment bank’s limited involvement in the emissions project market. Reuters reports Lehman having stakes in only 10 CDM projects, mainly high-quality ventures to Gold Standard criteria, a virtue which may well help them survive.
On a positive note, the clean energy sector appears well-placed to compete with other industries for what finance is available as the imperatives of rising energy demand and global warming hit home to more and more people and their governments. Clean energy proponents argue that a green-led revival offers a more sustainable recovery, given it will help ease the constraints imposed by increasingly limited oil supply and growing carbon emissions regulation.
GE Capital’s Europe chief Andrew Marsden says despite "the worst liquidity crisis in recent memory", money is still there for renewables, particularly in private equity.
Last week, a report released by the Center for American Progress concluded that a big boost in government spending in energy efficiency and renewables was one of the best ways to underpin a weakening US economy and create millions of jobs. Such investment would help direct the economy to a low-carbon, less-oil-dependent footing, offering great medium and long term benefits, the report said. And, hence, attractive returns to investors.
On carbon markets, the normal energy market influences on carbon prices appear to have been lessened in the climate of great uncertainty following this latest chapter in the global credit crunch. In short, everything dropped in the wake of the Lehman announcement; oil, gas, coal, power and carbon.
The benchmark EUA Dec 08 contract fell 87 cents on the European Climate Exchange on Monday to close at €23.03 while Dec 08 CERs were down 51 cents to €19.23. These opening falls this week have added to a general decline in EUA and CER prices so far in September as the oil price continued to ease, but carbon prices are still higher than they have been for much of this year. Point Carbon and Bloomberg report Lehman’s existing holdings of EUA and CER carbon assets would be sold off as early as next week. Quantities are unknown.
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