Is Clean Energy Investment on Life Support?

Clean energy investment dropped 11% last year to $268.7 billion according to Bloomberg New Energy Finance. After years of growth in a variety of industries, this could be the bursting of a bubble in green investments spanning from venture capital to the stock markets.  

But the surface numbers don't tell the whole story -- there are some green shoots in the green investment world that investors should be aware of.

Fear takes over
One of the logical reasons for the pullback in investments is the performance of green investments since the middle of 2011. The chart below shows just a few of the bigger names in clean energy; they're results only a short seller would love:


data by YCharts

The clean energy business has really been a victim of its own overinvestment in many cases. Wind and solar got billions upon billions of dollars in funding to expand capacity in the late 2000s and the result was overcapacity in both markets that caused prices and profits to tumble.

In biofuels, the quick rise of oil prices in the 2000s led to a lot of hope for advancement, but profits have been fleeting. Take ethanol: When feedstock prices go up so do costs, and eventually the economic viability of biofuels falls apart. Solazyme , which may have the best chance to survive, has signed a number of partnerships to expand both energy and non-energy production, but revenue is declining and losses are growing.

Wind has seen similar investment and bust around the world. Wind investment grew rapidly until the financial crisis, but when credit dried up, so did the profits of manufacturers.

With financial results anything but strong for most clean energy companies, it's easy to see why investors have pulled back on investments over the past year.

Clean energy is still big business
Bloomberg points out that while investment may have declined year over year, 2012 was still the second-biggest year on record, with five times what was invested in 2004.

Lower costs may have also skewed the numbers lower in 2012. According to GTM Research, the cost to install utility-scale solar in the U.S. fell 30.4% in the third quarter of 2012 from a year earlier. First Solar's low-cost modules and huge scale has helped drive that cost down to just $2.40 per watt.

Global installations were about flat in 2012, but with that kind of drop in price, it's easy to see how the dollars invested went down significantly. This cost reduction could be applied to both solar and wind -- lower investment doesn't necessarily mean lower installation.

Bright spots in 2012
Global investment in clean energy may have fallen 11% in 2012 but there were some bright spots in some major markets.

  • China topped the list with $67.7 billion in investments in 2012, 20% higher than a year earlier. China is putting billions into its solar industry, so similar growth in 2013 should be easily attainable.
  • South Africa came out of nowhere in 2012 to invest $5.5 billion, driven by wind and solar projects.
  • Japan's clean energy investing picked up after the Fukushima disaster in 2011 and $16.3 billion was invested last year, up 75% from the year before. With heavy subsidies to the solar industry in the near term, we should continue to see strong numbers in 2013.

These markets are primed for long-term growth because they will be driven by economical clean energy investment (even after Japanese subsidies are reduced) and a need for more clean energy.

There are strong developments in clean energy in the U.S. Clean Energy Fuels is building a natural gas fueling infrastructure that will make it viable for trucking fleets to transition to natural gas over the next few years. When it launches its new line of heavy-duty engines later this year the transition will really take hold. Electric vehicles from Tesla Motors have also proved that electricity can be a viable automotive fuel, at least for those who can afford it. But, even this investment wasn't enough to push the U.S. higher in 2012.

The losers
With the bright spots come some big declines in 2012, although many of them aren't big surprises. The U.S. experienced a drop of 32% in investments as investors pulled back due to uncertain global conditions and heavy losses in other clean energy investments.

Italy and Spain dropped off the map, although their heavy subsidies to clean energy couldn't last for long with austerity hitting most of Europe. Investment in Italy fell 51% to $14.7 billion last year and Spain dropped 68% to $3 billion. Spain had a moratorium on subsidies for projects that hadn't been approved, continuing a boom or bust investment situation there.

The drop in Europe has been painful for Chinese solar companies over the past year and is one reason China has stepped up its game. Trina Solar and Suntech Power are two of the manufacturers there that lost sales and profits when the European market shut down; investors have been crushed by the financial results. The chart above shows that investors have lost over three-fourths of the value in each company, driven by the pullback in Europe.

Foolish bottom line
The drop in clean energy investment is alarming on the surface, but I don't think it is cause for panic. Europe's drop in particular was expected given the financial hardships governments are going through there. Europe also wasn't the best market for one of its biggest clean energy investments -- solar. Germany isn't  known for being sunny; it's time for more sustainable markets to take over.

That's why growth in China, South Africa, and Japan is so encouraging. The U.S. is even growing some important clean energy markets. Solar is growing rapidly across the U.S., and natural gas and electric vehicles are becoming more viable by the day.

Overall, I think the clean energy industry is healthier today than it was a year ago, even after the drop in investment. Investors are funding fewer high-risk investments and are focusing on returning to profitability in those that are sustainable in the long term. That's good for the industry, even if this year was a blip on the radar. 

One company that has maintained profitability through the hard times in the industry is First Solar. But there are challenges ahead as the company's technology becomes less competitive. So, is the stock a buy? We've created a brand-new report that details every must know side of this stock. To get started, just click here now.

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Fool contributor Travis Hoium has no position in any stocks mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDrawThe Motley Fool recommends Clean Energy Fuels, Tesla Motors, and Westport Innovations. The Motley Fool owns shares of Clean Energy Fuels, Solazyme, Tesla Motors, and Westport Innovations. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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