The Downturn Hits Green Energy

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A Lift from Obama?

Aside from support in the Old World, the European green energy sector may be able to take advantage of an unexpected new source of backing: the United States. President-elect Barack Obama is expected to focus some of his estimated $700 billion stimulus package (BusinessWeek, 11/26/08) on eco-friendly businesses. Denmark's Vestas, for example, already manufactures wind turbines in the U.S. and could be well placed to profit from government investment in clean technology. Iberian renewable energy producers Iberdrola Renovables (EBER.F) and EDP Renovaveis (EDPR.LS)—already America's second- and third-largest wind energy producers, respectively (BusinessWeek.com, 10/28/08)—similarly stand to benefit from federal assistance for renewables.

Renewed government intervention comes after years of steady private-sector investment in Europe's green sector, which has placed the Old World at the forefront of tackling climate change. The EU Emission Trading Scheme—which assigns an amount of CO2 companies can emit each year, then allows them to trade these allowances in an open market—has led utilities to spend billions of dollars on renewables (BusinessWeek.com, 08/03/08) to cut their carbon footprints.

Yet as the price of oil has tumbled from its record high in July 2008, the cost of offsetting CO2 emissions also has halved over the same period. Without this economic incentive to invest in green energy, companies have started to curtail their spending on solar, wind, and other environmentally friendly technologies. "With the oil and natural gas prices falling, the competitive case for renewables won't be as strong," says Capgemini's Lewiner.

Despite the expected state aid for green energy, market watchers still expect a number of renewables firms—particularly those that are highly leveraged—to fall afoul of the economic downturn. The combination of slack demand and higher project financing costs could be too much for weaker players. The result could be a round of merger and acquisition activity as larger, better-funded companies swoop in. Big utilities like France's EDF (EDF.PA) and Spain's Iberdrola (IDRO.F) are among the most likely buyers.

No matter which companies survive the current financial crisis, extra state investment certainly will be necessary to get the European renewables sector through the storm. While some may decry yet more governmental involvement in the economy, in this case politicians have little choice. Caught between an economic crisis and tough CO2 reduction commitments, leaders have to keep the green sector alive or risk blowing past their carbon targets—and potentially facing further problems down the road from global climate change.

Scott is a reporter in BusinessWeek's London bureau .