The Downturn Hits Green Energy

Cheaper oil is diluting demand for energy efficiency in Europe, and tighter financing is making expansion, or even survival, more difficult

By Mark Scott

It was only a matter of time. As the impact of the global financial crisis spreads into all corners of the economy, Europe's world-beating green energy sector is starting to feel the pinch. Plunging oil prices have made renewable energy sources relatively less cost-effective, while thinner profit margins have prompted big industrial users of power to tighten their budgets for sustainable energy programs—cutting into sales by green energy suppliers.

At the same time, the rising cost of capital is making it harder for both consumer and suppliers of alternative energy equipment and services to finance new green projects. The impact will be felt especially acutely by small, independent manufacturers and electricity producers, some of whom could go out of business or be forced to sell out to larger companies. "Small companies are more fragile, and some will have difficulties in financing their projects," says Colette Lewiner, global energy, utilities, and chemicals leader at consultancy Capgemini.

It's a dramatic change from just a few months ago. Earlier this year, European alternative energy companies such as German solar panel manufacturer Q-Cells (QCEG.DE) and Danish wind-turbine maker Vestas (VWS.CO) were scrambling to keep up with global demand as prices for solar cells and wind turbines soared. Regulatory carbon reduction requirements in Europe and elsewhere, coupled with rising public eco-consciousness, promised a bright future for renewable power.

Seeking Government Aid

Now, with demand weakening and prices in decline, the green sector is hoping for more government support to carry it through the economic turmoil. Many forms of alternative energy already enjoy government subsidies to move the cost of green power closer to parity with cheaper fossil fuels. Now companies are looking for direct investments by governments in clean energy projects.

Politicians already are responding. On Nov. 17, the French government created a new feed-in electricity tariff that will subsidize the use of solar power. Under the plan, which mirrors similar incentives already available in Spain and Germany, electricity producers that invest in solar will be paid an above-market rate for the power they generate. By 2020, France hopes to increase the supply of domestic solar energy 400-fold and produce 23% of its entire electric output from renewables, compared with the current 10.4% figure.

The European Union is also getting into the act. On Nov. 26, the European Commission announced a €200 billion ($252 billion) economy recovery plan (BusinessWeek, 11/26/08) that includes targeted investments in carbon reduction as a linchpin to reignite Europe's struggling economy. The programs may include additional green energy subsidies and support for energy efficiency by consumers.

"We're going to see a lot of money from the public sector spent to help eco-friendly projects," says Martin Porter, managing director of policy think tank The Centre in Brussels. "It's a good way to combine an economic response to the financial crisis with long-term goals of sustainability and CO2 cuts."