European funding gap widens: latest research into cleantech and renewable energy

• The early-stage funding arena has been deserted by most venture capital funds and the private equity community en masse
• A scarcity of pre-construction financing is likely to drive consolidation among independent project developers  
• Governments need to make a long-term commitment to the sector: stable, long-term government policies and support frameworks are essential to underpinning sector confidence and investment
• Technology-mature and capital efficient sub-sectors like solar, onshore wind, energy efficiency and energy storage, are attracting the majority of equity and debt finance
• Less advanced subsectors such as biofuels, marine and green transportation are proving harder to finance

Cleantech & renewable energy - European funding gap survey

International law firm Taylor Wessing has launched the latest research into the financing challenges confronting companies and project developers in the European cleantech and renewable energy industry. Bridging the Funding Gap: The financing challenge for European cleantech and renewable energy was compiled in conjunction with specialist data and research provider Clean Energy pipeline (owned by VB/Research) and is based on a survey of over 200 senior executives active in the sector. The report looks behind the figures and examines the important issues for market participants. The following represents a summary of the key findings.

Industry growth hampered by acute “early-stage” funding gap

The survey highlights an acute early-stage funding gap for European corporates. This has been created by a funding drought that has seen average quarterly early-stage venture capital investment since 4Q08 drop 40% below total quarterly investment levels registered in 3Q08.

More significantly, this situation is now being compounded by many non-specialist venture capital investors targeting later-stage, less risky investments. Private equity investors who had previously invested at an early-stage to gain exposure to the sector have also fled the early stage arena. This lack of funding and a weak economic environment has hampered the growth of many corporates in the sector. The majority of surveyed corporates indicated that raising equity over the past twelve months has been harder than a year ago. Companies needing significant capital to commercialise new technologies (such as wave) struggle to raise funding. The venture capital and grant funding made available to develop the technology is only a small part of the finance required to bring it to market.

Increasing consolidation predicted among independent project developers

Life has not been much easier for project developers, particularly at the “early” pre-construction stage of a project. The two issues that are deterring investors most frequently are: uncertainties over planning and consenting processes; and uncertainties over securing a satisfactory off-take / power purchase agreement (PPA). Investors also remain very concerned about a project’s ability to secure the requisite construction funding post the permitting stage. These “concerns” have made securing external equity for pre-construction stage projects (including land acquisition, front-end engineering design works and the permitting process) particularly difficult. This is putting significant pressure on independent developers. Only well-capitalised developers are able to maintain control of their projects at the pre-construction stage, essentially by injecting much more of their own equity. Developers without sufficient capital are likely to pursue co-development opportunities with joint venture partners, even if they would prefer to remain independent. In the short to medium term this is likely to lead to consolidation within the industry.

Governments need to make a long-term commitment to the sector

For companies and investors the most important driver for future investment is the removal of uncertainties related to national regulatory policy and support frameworks.

During the next 18 months, surveyed debt providers are specifically targeting countries that have long-term financial incentives in place, such as feed-in tariffs – more than two thirds expect to provide debt financing in France, Germany, Ireland, Italy, Spain and the UK. In contrast they are waiting on the sidelines in Eastern Europe (specifically not investing in Hungary, Romania and Bulgaria).
Corporates and project developers are similarly influenced by government initiatives – over 70% of surveyed corporates and project developers indicated that regulatory stability and availability of public funding, grants and incentives are vital factors in choosing where they operate.

Debt financing remains demanding particularly in capital intensive sectors

On-balance sheet debt remains highly elusive for most corporates in the sector, with uncertainties over their ability to raise equity funding to support future growth one of the most significant obstacles. The reality is that few corporates in the sector have developed cash generative businesses that can be leveraged. From the project financing perspective the debt funding gap is less acute. Project developers themselves are divided as to whether financing conditions have improved or deteriorated during the past year. However, it is generally agreed that if the project is good enough there is no debt funding gap. That certainly is not the case for corporates.

European Investors have a clear preference for the wind and solar sectors, and energy efficiency and energy storage sub-sectors. In contrast the more capital intensive sub-sectors, and in particular the marine sub-sector, are likely to continue to be sidelined by the financial community.

In terms of financing cleantech assets or renewable energy projects, confidence in technologies produced or deployed is paramount. Projects that depend on technologies mature enough to generate stable cash flows (such as solar and onshore wind) will continue to attract debt and equity during the next 18 months. On the flip side, developing projects or assets in the biofuels, marine and green transportation sub-sectors that rely on technologies under development are expected to prove much harder to finance.

ENDS

Lawyers Dominic FitzPatrick, Simon Walker, Carsten Bartholl

Notes to Editors

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