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Now, an Alternative to Alternative Energy


Big money is starting to flow into biomass, geothermal, and marine wave power projects

London - When oil prices crashed and credit markets froze in 2008, private investment in alternative energy withered. "The last 18 months have been extremely difficult" as risk-averse investors shied away from green tech, says Martin McAdam, chief executive of Aquamarine Power, an Edinburgh-based company developing power plants that tap energy from waves. Wind and solar projects were kept alive, however, thanks to some $3 billion in government subsidies in the U.S. alone, and many more billions overseas. Nearly 8,000 megawatts of new wind capacity was installed in the U.S. in 2009, according to Bloomberg New Energy Finance (NEF).

Now, backers of other green projects—largely shut out to date—are seeing some government lucre as well. "Solar and wind got all the attention, but new funding is putting geothermal and other technologies front and center," says Karl Gawell, executive director of the Geothermal Energy Assn. in Washington. So far, at least $500 million in government backing has gone to such projects worldwide.

TURNING TIDE

It's a big boost for what you might call alternative alternative energy. Geothermal power (tapping into heat deep inside the earth) will increase by more than 40% by 2013, according to NEF. The firm expects power from biomass—organic material such as wood chips, farm waste, and grass clippings that is burned to produce electricity—to jump by nearly a third over the same period. And market researcher Frost & Sullivan figures output from systems that harness ocean waves will go from almost nothing to more than 3,000 megawatts, equivalent to four coal power plants, by 2020. "Governments want to fund as many technologies as possible to meet their [green energy] commitments," says Alex Klein, research director at Emerging Energy Research in Cambridge, Mass.

While they're generally more expensive, these technologies offer at least one advantage over wind farms and solar arrays: They don't depend on favorable weather, a problem for wind and solar on calm or cloudy days. That helps developers negotiate better financing terms because they can guarantee a steady supply of electricity—for which utilities are willing to pay a premium. Düsseldorf-based power company E.ON and Britain's Scottish and Southern like the idea so much they're spending more than $500 million for their own biomass plants, which will benefit from government price supports.

These technologies aren't without peril. Newer geothermal plants in California and Switzerland that drill deeper than traditional setups are believed to have caused small earthquakes, leading to questions about the technology's safety and viability. Marine energy has yet to be proven at scale. And investment in biomass may stall if prices for wood chips and plant waste climb as demand surges.

Despite those concerns, increased state backing has started to unlock private capital. Some European governments guarantee above-market prices for energy from such installations, allowing investors to lock in profits. Aquamarine, for instance, has secured $10.2 million in British government grants and promises of a minimum price for power, which has helped attract new backers.

Boston private equity firm Denham Capital Management knows the value of such support. Denham holds a controlling stake in Hamburg-based Novus Energy, which operates two biomass plants in Germany. Scott Mackin, a partner at Denham, says German price guarantees for the plants' output mean the company can count on stable returns. "The subsidies," he says, "were the main reason we invested."

Scott is a correspondent in BusinessWeek's London bureau.

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