Once again, global investment in sustainable energy broke all previous records, with $148.4 billion of new money raised in 2007, an increase of 60% over 2006. Total fi nancial transactions in sustainable energy, including acquisition activity, was $204.9 billion1. Asset finance – investment in new renewable energy capacity - was the main driver for this surge in investment, rising 68% to reach $84.5 billion in 2007, fuelled mainly by the wind sector. Public market investment also raced ahead in 2007, with investment of $23.4 billion in 2007, more than double the $10.5 billion raised in 2006.

The impact of the credit crisis in the fi nancial markets started to show through in early 2008, with few new listings on the public markets and stock prices down 17.9%. Corporate M&A surged forward, refl ecting the consolidation that tends to accompany tighter market conditions. However, by the second quarter investor uncertainty seems to have passed and overall investment during the fi rst half of 2008 has been just above what was seen in the fi rst half of 2007. Although asset fi nance is down somewhat, VC/PE investment, public market capital raising and stock prices are all healthy, indicating that the fi nance community still sees strong fundamentals underlying the sector and is increasingly looking to take part in its future growth.

This bodes well for the industry. Investment in the sustainable energy sectors must continue to grow strongly if targets for greenhouse gas reductions and renewables and efficiency increases are to be met. According to New Energy Finance (Global Futures 2008), investment between now and 2030 is expected to reach $450 billion a year by 2012, rising to more than $600 billion a year from 2020. The sector’s performance during 2007 sets it on track to achieve these levels, with the current credit crunch testing the markets resolve, but not dislodging it.

Investment fl ows have not only continued to grow, but have broadened and diversifi ed, making the overall picture one of greater breadth, depth and scale in sustainable energy. The mainstream capital markets are now fully receptive to sustainable energy companies, supported by a surge in funds destined for clean energy investment. At the other end of the spectrum specialist fi nancing has also opened up with the development of innovative financing structures for distributed renewable generation and demand-side management.

Another aspect of this industry deepening has been greater activity in next-generation technologies, such as cellulosic ethanol, thin-fi lm solar technologies and energy effi ciency. Wind continues to dominate sustainable energy investment, but the portfolio of available technologies has both widened (as nascent technologies start to come into their own) and deepened (as existing technologies are refi ned). This is partly in response to changing supply/demand patterns (e.g. continuing silicon shortages, or the controversial competition
between food and fuel from food-based ethanol feedstocks), but also refl ects improved efficiencies and decreasing costs as renewable technologies strive to reach grid parity. Furthermore, the willingness to look beyond mature technologies suggests that investors are taking renewable energy and energy effi ciency increasingly seriously.

The year 2007 also saw a geographic broadening, with renewable capacity rollout continuing to shift away from Europe and towards China and the United States. In recent years, sustainable energy investment in China has been largely for manufacturing expansion as an export industry. In 2007, however, the 2008 Beijing Olympic Games sharpened the country’s political resolve and strengthened programmes to promote cleaner generation and cut energy intensity. During 2007, investment in renewables capacity (excluding large hydro) in China increased by 91% to $10.8 billion.

Acceptance of sustainable energy also became more widespread in the US, extending beyond its traditional heartland of California. A new administration in 2008 is expected to make renewable energy and energy effi ciency a political priority and in recent months, regulatory uncertainty in the US (particularly over the possible introduction of a carbon tax) has put a number of coal-fi red generation plants on hold. The fi nancial sector is also gearing up for a major shift in political attitude. Citi, JPMorgan Chase and Morgan Stanley have jointly established a set of “Carbon Principles”, which will guide how they lend to and
advise major power companies in the US. The three banks expect future investment in fossil fuel energy projects to be required to supply “reliable electric power to the US market” and have developed the principles to evaluate risks in fi nancing these carbon-emitting projects, given the growing uncertainty around regional and national climate change policy. Under the Principles the banks will also consider power companies’ inclusion of energy effi ciency and
renewable resources in their portfolios as part of an “enhanced diligence process”.

Political landmarks in 2007 included the Bali talks in December, which were attended by representatives from 180 countries, where a roadmap for future discussions towards strengthened international action on climate change was set out with a target for agreeing a way forward by the end of 2009. This was immediately preceded by a change of leadership in Australia, and with it, a dramatic shift in the country’s attitude to renewable energy.

This report presents the fi nancial perspective, or ‘dollar view’, of the current state of play in sustainable energy development. The analysis in this report consists of actual data on the different types of capital fl ows and their movement over time, combined with analysis of regional and sectoral trends. This information is intended to be a strategic tool for understanding the status of the clean energy sector’s development and for weighing future public and private commitments to the sector.

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