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Why Investors Have Turned Their Back on Clean Energy

Clean energy was a hit in 2010. Global investments rocketed to a record $243 billion by the end of the year and that optimism and interest was expected to roll on into 2011. My oh my, how three months can change everything. Clean energy investments didn't just slip; they plummeted, according to Bloomberg New Energy Finance. Is the world simply recovering from its end of the year investment blowout? Turns out the investment hangover is only part of the story.

New investment in clean energy fell 34 percent from fourth quarter to $31.1 billion -- the lowest level in two years. To be clear, New Energy Finance doesn't offer a complete investment picture. A couple of categories such as distributed power generation -- which boomed 91 percent last year -- and research, development and deployment weren't included in the quarterly figures. Instead, it focused on three types of funding: asset finance of utility-scale renewable projects like wind farms, solar parks and biofuel refineries; public market investment in clean energy companies; and investment by venture capital and private equity players in unquoted clean energy firms.

Headwinds facing clean energy
There was a flurry of investment activity in the fourth quarter, largely spurred by expiring subsidies. So, it's reasonable to conclude the drop in this latest quarter was to due a collective investment hangover. But there are considerable headwinds facing clean energy, especially in the U.S. and Europe.

In Europe, policy uncertainty has killed the investment mood. Subsidies for solar, such as feed-in tariffs, are expected to be either reduced or capped in major European markets including Germany and Italy. In the U.S., natural gas prices are to blame. Natural gas prices are at their lowest levels since 2002, making it difficult for wind energy to compete with gas-powered turbines.

Where have the venture capitalists gone?

Venture capital and private equity investment in the first quarter is still 38 percent lower than the same period last year. But they do appear to be recovering, just ever so slightly. Investment hit $1.8 billion in the first quarter, about $100 million more than the fourth quarter of 2010. Those VCers who joined the party were interested the techier side of clean energy and put money in companies like electric vehicle maker Fisker Holdings.

Some other numbers:

  • U.S. wind and European solar suffered. In fact, these two areas experienced the biggest declines in asset finance in the first quarter.
  • Europe's wind investment numbers would have been worse had it not been for several large offshore projects;
  • No surprise here, China was immune to the investment downturn. Investment in China's wind sector was up 25 percent at $10 billion from the same period last year.
  • Brazil was another bright spot, especially its wind sector which doubled investment to $2.1 billion.
Photo from Flickr user Jenny Downing, CC 2.0
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