Brighter days seen for solar, next-gen biofuels

NEW YORK -- Big changes are afoot in the fledgling alternative-energy industry.

As the sector recovers from the 2008 financial market meltdown, insiders look for next-generation biofuels and solar technologies to start joining mainstream energy markets, while wind power continues to lean heavily on government support.

"Grid parity" for photovoltaic technology is imminent, solar executives say, as prices slide and the industry devises marketing strategies to entice both large electric utilities and small-scale customers while slowly freeing itself of government subsidies.

Biofuel executives, meanwhile, speak of an inevitable turn from corn-based ethanol into more efficient cellulosic feedstocks like sugarcane, switchgrass, and wood waste -- all spurred by an infusion of capital from big oil companies and large timber and farming concerns.

Wind power developers, meanwhile, say their future depends on tax credits and other government efforts to encourage investment. Even as solar and biofuel players say they aim to cut production costs to be competitive at current energy prices, wind operators say their customers must accept higher utility bills to support the industry.


"The key is the regulators and customers need to be willing to pay the higher prices," First Wind's chief financial officer, Michael Metzner, told an investor gathering hosted here last week by Lazard Capital Markets. "What you're betting on is the increasing demand for renewable energy."

Overall, renewable energy companies are starting to talk less of competition with oil and gas and more about an intensifying competition between alternative-energy technologies.

Market monitor New Energy Finance on behalf of the U.N. Environment Programme issued a report last week showing that alternative-energy sources attracted more investment than fossil fuels for the first time in 2008, netting $155 billion in net capital inflows against $110 billion of new investment in oil, natural gas and coal. That figure includes money for large- and small-scale hydropower, but more than $100 billion in new funding last year went to biofuels, wind and solar companies globally.

Wind power has long been the dominant new alternative energy entrant in the United States and elsewhere and is likely to continue evolving as a major force. Though not cheap, wind facilities can be built quickly and have contributed far more megawatts to the grid than solar power plants. But wind power's 2008 investment performance, along with other trends that executives and analysts are reporting, suggests that solar and biofuels are poised to become the new rising stars.

Though wind power still drew the most cash last year, some $51.8 billion globally, investment grew by 1 percent over 2007, while investments in solar boomed by 49 percent even as advanced nations fell into an economic recession in 2008.

Wind power companies and their financiers still fret about the relative lack of capital now available to grow the industry. Wind has relied heavily on tax credit financing that has ceased being an option as big banks stopped pulling in profits following last fall's Wall Street collapse. A Treasury program designed to offset the need for the credits will help, experts say, but that program has yet to roll out completely.

Though it has not dispensed the stimulus cash, "the Obama administration, with the new Energy secretary, is certainly cracking the whip," said Prakash Ramachandran, CFO of Nordic Windpower. "No checks issued, but certainly a lot of progress."

Solar power rising

Meanwhile, experts say the solar power industry is evolving fast.

"There is some data that suggests [alternatives] can come down the cost curve pretty rapidly, which is what I think the solar industry is referring to," said Sanjay Shrestha, managing director at Lazard Capital.

Analysts worry the world is facing an overcapacity of both solar and wind resulting from a large buildup that occurred just before energy demand fell. But solar is arguably feeling that impact the most, with New Energy Finance analysts predicting that photovoltaic prices could fall by 43 percent or more this year.

Solar company executives, meanwhile, say they welcome the change, as it reduces their reliance on government support and makes their firms more attractive to utilities facing state and federal renewable energy quotas.

The mergers and acquisitions that will inevitably come as the 100-plus producers are whittled down to a dozen or so survivors will show solar is maturing rapidly and may soon be market competitive without government support, experts say.

"The only way to get to that point is to get costs lower," said Reyad Fezzani, CEO of BP Solar.

Still, the solar industry is "wildly over-focused on the price of the module," argued Tom Werner, CEO of SunPower Corp. Though falling module prices are positive in terms of residential and commercial rooftop sales, firms should push more sales to energy providers, focusing on the increasing cents per kilowatt-hour value that solar is gaining as production costs fall faster than for wind power, Werner and others say.

Some utility company executives are advising solar makers to go even further.

Michael Freeman, senior originator for Exelon Generation Co., the nation's largest gas and electric utility, tells solar firms to "stop using the phrase 'grid parity'" in their discussions with his company.

"Grid parity, from a market perspective, is a meaningless concept," Freeman said.

Instead, solar is increasingly attractive to Exelon and others as the best option for filling gaps in energy supply during peak demand periods.

Electricity usage tends to spike on the hottest, sunniest, windless days of the year -- perfect operating environments for solar panels. Freeman maintains that solar companies could take advantage of this fact and sell Exelon and other firms "hourly call options" to help utilities meet demand spikes.

Solar executives also see strong near-term expansion opportunities even in countries that have been hit hard by the economic downturn. Firms are particularly excited about new opportunities in Spain, Germany, Italy and South Korea.

The United States seems like the brightest spot for solar in the longer run, but industry officials speculate that China could eclipse the United States and the largest solar market within three years.

Biofuels companies connect with oil, timber interests

Meanwhile, biofuel executives are talking up their burgeoning relationship with the oil and gas industry.

"The level of interest from oil companies is very high," said Mascoma Corp. CEO Bruce Jamerson, who added that his company would soon announce a new partnership with one of the oil majors.

Last month, Royal Dutch Shell PLC's CEO, Jeroen van der Veer, said his company would turn away from solar and wind to concentrate instead on biofuels in its alternative-energy strategy. Shell -- already a big player in Brazilian sugarcane ethanol -- and others are turning to North American biofuels in an apparent bid to diversify energy sources away from volatile oil-producing regions like the Middle East.

Verenium Corp. has partnered with BP to develop cellulosic ethanol. Chevron Corp. and Weyerhaeuser Co. recently announced a deal whereby the lumber giant will grow switchgrass that Chevron will use to produce liquid fuel. And ConocoPhillips and Archer Daniels Midland have a biofuels joint venture under way.

"Oil companies in particular make particularly good partners," Verenium CEO Carlos Riva said. Their recent interest in biofuels, he said, is a sign that oil companies are tired of energy-price volatility and eager to "find a long-term, secure supply at prices that will be relatively stable."

Weyerhaeuser, International Paper Co. and other large lumber companies are also interested in expanding their customer base by selling wood waste to biofuel producers and even growing non-food crops to supply the industry.

But timber companies have been hit hard by the collapsed housing market and do not have nearly the cash on hand that energy firms do to invest. Nevertheless, cellulosic-ethanol companies speak of accessing unused forests to harvest material for themselves.

Though solar and biofuels may be approaching market competitiveness faster than other technologies, Lazard Capital's Shrestha cautions that government support, already robust for fossil fuels, will continue to be an essential ingredient.

"Government support is extremely important, but overall government involvement is not good because to sustain the long-term growth of the industry it has to come from an economic value proposition," Shrestha said. "Government support should really be to stimulate the industry, not to regulate the industry."

And all cleantech executives say they still need credit markets to reopen and the biggest banks to return to project financing. But most see a quick rebound coming, fueled by strong government, public and market support.

"It's almost like we're in a market that's constipated," said Roger Efird, president of the large Chinese solar manufacturer Suntech. "It will be very, very interesting to see what happens when credit gets rolling again."

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