Feature: Alternative energy firms rely heavily on venture capital and lending from banks, which has become more difficult.
Green firms to power through
Two years ago, when Sami Khoreibi set out to raise capital for a new solar company he was creating in Abu Dhabi, the pitch to investors could not have been stronger. The UAE's economy was bubbling along under sunny skies virtually untapped by solar firms. Rising interest in alternative energy among consumers, as well as substantial commitments from the Abu Dhabi Government in the form of the Masdar Initiative, a green investment fund, were set to create a large market. Investors warmed to Mr Khoreibi and gave their consent. His company, Enviromena, was launched in October last year and, he says, "has blown earnings estimates out of the water". An industry publication last month named him "Entrepreneur of the Year". These days, although still upbeat and optimistic, Mr Khoreibi acknowledges the challenge of raising funds is much tougher. "We are in the middle of a fund-raising, we are very much exposed to some of the difficulty in the market," he says. "Absolutely, it is harder to raise the necessary funds." Enviromena, which selects and installs solar panels and equipment, has sought capital from clean technology funds and banks in the US and Europe, where the financing structure for alternative energy firms is more developed than in the Gulf. But today, entrepreneurs like Mr Khoreibi must walk a fine line between raising the necessary funds and selling off too much of their companies at undervalued prices. "You have to be prudent and not really focus on the valuations of today's market," he says, estimating that valuations for firms in his sector "are cut in half" today. As in so many other areas of the economy, the financial crisis is hitting the global alternative energy industry hard. Despite a surge in interest in the first half of the year, investment in clean technologies, including alternative energy, is expected to fall 4 per cent this year to US$142 billion (Dh521.56bn) globally, according to estimates by the research firm New Energy Finance (NEF). Alternative energy firms rely heavily on venture capital and lending from banks, which has become more difficult. Falling oil prices have compounded the problem, analysts say, because governments and investors are now less likely to devote precious funds to developing alternatives to fossil fuels. The crisis has already claimed some victims: several large biofuel makers in the US have declared bankruptcy and a number of large wind projects in Europe are on hold because banks have suspended financing. Although alternative energy is still seen as a good investment compared with other industries, banks have been forced to raise the requirements for issuing new loans, says Andreas Knorzer, the head of sustainable investing for the Sarasin Group, a Swiss bank that has long specialised in green investments. "Financing projects has become more difficult," he says. "The required equity proportion of an entire deal has substantially increased." Borrowers accustomed to demonstrating an equity proportion of 10 to 15 per cent have seen that requirement jump to a minimum of 20 to 25 per cent. Mr Knorzer believes investment in the sector will fall next year. "We have to anticipate much lower levels of investment." Business has fallen 25 to 30 per cent in the past few months for Solitaire Solar International, a Dubai-based company that sells solar water heaters and other solar services across the UAE, says Felicia Simion, the firm's area manager. The company is part of Conergy, a multinational alternative energy firm. "Business is going pretty slow," Ms Simion says, adding that projects at big commercial developments have stalled, but orders from owners of private villas remain strong. Ultimately, the burgeoning UAE alternative energy industry will be cushioned to some extent simply because most of the sector is concentrated in government entities, which both dwarf the new private firms and guarantee a market. Masdar has signalled that it fully intends to move ahead with plans to invest in alternative energy at home and abroad, and remains committed to building the word's first zero-carbon city at the edge of the capital. The cost of the city is estimated at $22bn, for which Masdar has raised $4bn from the Abu Dhabi Government. Last month, Steven Geiger, the director of Masdar's industries unit, said the company's investments were going ahead according to plan, despite the economic crisis. "We plan to invest a few billion dollars in 2009," he said. "We are going ahead strongly with our investments." The Government has indicated on several occasions that it sees Masdar as a strategic priority. In an interview with the Egyptian daily newspaper Al Ahram last month, Sheikh Khalifa bin Zayed, President of the UAE, singled out Masdar as a key part of the country's drive to diversify the economy away from simple crude oil exports. Sheikh Mohammed bin Zayed, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the UAE Armed Forces, has taken a personal interest in the project. In Dubai, the Government has created a market for green technologies by requiring that all new buildings meet high environmental standards. The requirements have encouraged builders to buy technologies to increase energy efficiency and invest in solar technology. Government investment and interest will continue to be crucial in ensuring the fledgling green industry is not destroyed by the cycle of oil prices, says Eckart Woertz, the programme manager in economics at the Gulf Research Centre in Dubai. "Alternative energies require a strategic long-term view, which can only come from the Government and associated enterprises such as Abu Dhabi-based Mubadala," he wrote in an e-mail. "Especially in current tight credit markets, such a commitment and according industrial policies are needed; once the market matures and economies of scale can be harvested, the private sector will become more important." If solar firms can weather the next several months, operating costs will fall substantially, according to a forecast by NEF. The firm predicts that the cost of refined silicon - the main ingredient in most solar panels - will fall by 31.5 per cent next year. Makers of lower-cost, thin film photovoltaics - the alternative to silicon - also plan to increase production, which could drive the costs of solar panels down even further. Mr Knorzer says a reduction of subsidies in Germany, leading to increased competition, and higher production volumes mean solar power is bound to become cheaper. "Most likely, analysts are underestimating the growth of this industry." NEF says investment from venture capital and private equity firms has actually increased this year to $14.2bn, from $9.8bn last year, despite the fall in overall investment. The funds are in short supply, but available for the best projects, Mr Knorzer says. Mr Khoreibi and Ms Simion are both optimistic about the prospects for continued growth after the financial crisis subsides. Solitaire Solar is still planning to begin manufacturing solar water heaters in the UAE this year and is confident that its parent company, Conergy, will see the region as a strong market and provide the necessary funds. Dubai's green building requirements will ensure that the market continues to grow, Ms Simion says. "The people in this country are really thinking about these matters. They are willing to invest any amount of money." Enviromena continues to enjoy a "first-mover advantage", Mr Khoreibi says, which makes it attractive to the few investors who are still opening their wallets. "We're in the unique situation where we're one of the few companies operating in the MENA region," he says. "We expect that we'll still see a pattern of growth in the marketplace." email@example.com