Alternative Energy Hit by Slowing Economy

Mon, Aug 30, 2:55 PM ET, by Vincenzo Desroches

The global economic recovery is hitting a major wall of resistance in the industrialized nations. In the United States, the economic recovery is slowing significantly, and talking heads in the financial media are beginning to debate the probability of a double-dip recession.

While it does not appear that the U.S. is headed for a double-dip recession, it is clear the recovery is stalling. Unemployment remains at stubbornly high levels, retail sales figures are down, and economic growth is beginning to slow. The Federal Reserve came out at the end of July and downgraded growth prospects for the United States. The Fed’s decision sent the U.S. Dollar tumbling and began to weigh heavily on equity markets.

The current state of the U.S. economy stands in strong contrast to where economists thought we would be at this time back in January and February of 2010. During the winter, the Federal Reserve actually started discussing when it may be appropriate to remove economic stimulus from the economy by hiking interest rates. The market was fully expecting the Federal Reserve to raise rates in the 2nd half of 2010. It now seems clear that the Fed will not be hiking rates until well into 2011. Some economists are even saying 2012. The slow-down in the U.S. economy is weighing heavily on the alternative energy industry.

In 2009, renewable energy development was huge. In fact, in 2007-2009, the renewable energy industry experience record growth each year with growth peaking in 2009 at 9800MW. However, 2010 has experienced a dramatic slowdown due in large part to a severely weakening economy. In 2010, growth is not only expected to grow in the industry, but growth is actually expected to contract by 40-60%. This depressing statistic is worrying many industry experts, analysts, and, most of all, company owners. The precipitous decline in growth is due to three main reasons: the absence of strong federal policy, low power demand, and lack of bureaucratic funding.

In 2009, the stimulus bill helped create tens of thousands of jobs and released funding for many projects. As these stimulus measures have subsided in 2010, the industry has taken a huge hit. The American Wind Energy Association wrote a letter to Harry Reid, Senate majority leader urging a National Renewable Energy Standard to be included in the energy bill. The letter stated, “Without immediate passage, hundreds of thousands of future jobs in the clean energy sector could be lost and surrendered to other countries forever.’

The renewable energy industry has also been hit negatively by a huge drop in energy demand during the last two years. The recession of the last two years has reigned in energy demand quite significantly. The industry is expected to only add about 5,500 megawatts (MW) this year, falling far short of the 10,000MW for 2009.

Another major concern for the renewable energy industry is funding. Companies are relying more on investor capital than government grants and investor capital is hard to come by. If the economy continues to slow as expected by economists and financial analysts, investment capital will most likely become even harder to secure.

The reason is simple. During times of economic uncertainty, investors tend to keep assets in liquid investments, and not tied up in companies. As a result, both public and private funding seem to be drying up for the renewable energy industry. Long-term growth prospects are still very strong for the industry, but it will have to survive this next stretch of economic hardship.

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