Clean energy set for consolidation says E&Y

LONDON Thu Feb 16, 2012 2:26pm EST

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LONDON (Reuters) - The clean energy sector is unlikely to sustain its frenzied rate of investment growth and looks set for consolidation led by Asian players, said Gil Forer, head of global cleantech at Ernst & Young.

"The (renewables) space has grown dramatically in the last seven to eight years. No industry can continue to grow indefinitely at such rates, there is always a point of correction," he told Reuters on Wednesday.

Forer leads research on clean technologies and E&Y's global tax, transaction, assurance and advisory services on the sector.

"You cannot anticipate 40 to 50 percent growth rates year-on-year indefinitely," Forer said, referring to a global clean energy sector which drew a record $260 billion in investment in the face of the financial crisis, a report showed last month.

Driving growth are countries keen to replace fossil fuel energy with cleaner sources, but the rate of growth faces challenges as cost-cutting governments reduce their support and project finance remains scarce.

"In developed markets you see continuous growth, although its more pressured. Clean tech is not in bad shape right now but it's in a correction period," he added.

"On the other hand, many markets in the developing world have seen increases in government commitments such as in South America, Africa and the Middle East."

"We will definitely see shifting trends but it takes several quarters for industry to synchronize and move from one market to another and this will take time to stabilize."

Forer expects much more consolidation among renewable firms this year as they look at new partnerships, vertical integration and new markets to survive.

"We will see consolidation for sure and big players doing acquisitions, particularly the Chinese, Japanese and South Koreans," Forer said.

CAPITAL

Uncertainty about governments' renewables policies and support is having an impact on financing projects in the sector.

"When investors do not have a stabilized long-term horizon they do not invest and they sit on the money. Capital is scarce right now across the board, from venture capital to project finance," Forer said.

That is spurring a search for new instruments to ease the flow of capital into the market such as green bonds and new fund structures.

"They are also looking at ways to move pension money into the industry because if you look at renewable energy projects, if they have power purchasing agreements, there is not that much risk," Forer said, referring to contracts between electricity providers and buyers.

Venture capital firms are having difficulties raising cash regardless of sector as they depend on a vibrant capital market and IPOs, he said.

"Without many IPOs it is difficult for VCs to prove their exits and raise capital for the next funds. For clean tech specifically, many have realized they don't want to play in this space because they don't have the expertise."

Forer said there was a shift to more technology-focused investments from infrastructure.

"It doesn't make sense to invest in new solar manufacturers as China dominates, but there are still lots of opportunities in smart grid technology, electric car technology, solar components and wind turbine niche markets," Forer said.

(Editing by Jason Neely)

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