Nathan Field: Downturn a tough challenge for green power

Renewable energy seems to have gone out of fashion in the past two years. The financial crisis didn't help, with the middle classes suddenly more worried about saving their jobs than saving the planet.

The 2008 food shortage raised serious questions about the potential of biomass as a fuel source. And then there was Climategate, a PR disaster for the clean green crowd even though the witch-hunted scientists have since been exonerated.

Sensing the mood of the public, governments responded with a pathetic display at last year's Copenhagen climate summit, opting to sit on their hands rather than commit to policies that could hurt short-term growth. And given the lack of anger on the streets (at least on environmental issues), cash-strapped European governments are eyeing green energy as a source of budget cuts.

Unsurprisingly, investors are beginning to cool on the sector, too. The RENIXX world index for renewable energy stocks is at its lowest point since June 2005. This year, the index has lost 30 per cent.

Renewable energy, once the sexy young sub-sector of dreary equity markets, is suffering an early mid-life crisis.

Solar stocks have been hardest hit. Europe is still the largest regional market for solar products and in the past year, countries such as France, Germany and Spain have either cut or announced plans to cut subsidies offered to solar panel producers.

Bureaucrats and dirty power lobbyists have argued that scaling back subsidies will encourage solar firms to get bigger and more efficient.

Others believe the cuts will stymie a young and vulnerable industry just as it is beginning to flourish.

Wind companies haven't fared any better.

Wind installations were all the rage a few years ago but the market hasn't grown as fast as it anticipated. As a result, pure play turbine manufacturers such as Vestas and Gamesa have been dogged by overcapacity, negative cash flows and intense margin pressure.

Add to the mix an uncertain regulatory environment and it's little wonder that both stocks have fallen 50 per cent this year.

But while Europe is busy capping subsidies on renewable energy, there are more hopeful signs from the world's two biggest polluters: China and the US. China, in particular, seems determined to be the Middle East or Silicon Valley of clean energy.

Already the world's largest manufacturer of solar panels, it is also on track to be the largest producer of wind turbines by 2013.

And of course, every day trader and conspiracy theorist knows that China has a monopoly on the rare earths needed to make rechargeable batteries.

Admittedly, China is also investing heavily in coal, oil, and virtually everything else you can think of. But at least its commitment to renewable energy will ensure capital and talent continue to flow into the sector.

The US is making noises about a green economy, too. After the BP oil spill, President Barack Obama boldly announced that America would invest in clean energy and reduce its dependence on foreign oil.

However, as highlighted by Jon Stewart on The Daily Show, George W. Bush made virtually the same promise in 2004, as did Bill Clinton and George Snr in the 90s, Ronald Reagan in the 80s, all the way back to Nixon in 1973. So no one is holding their breath.

One thing is clear: renewables cannot become a meaningful source of power without substantial government support.

This is unavoidable given the cost advantage of burning fossil fuels.

Renewable energy isn't going away - both wind and solar power remain long-term growth industries. But how far and how quickly down the cost curve these industries can go will depend largely on government policy.

Because as the recent nosedive in wind and solar stocks has proven, when regulatory support waivers, investors don't hang around.

* Nathan Field is a senior equity analyst at Gareth Morgan Investments.