The current global financial turmoil and plunging fossil fuel prices are affecting companies' willingness to carry out energy-saving programs, according to experts.

"Companies are cautious about making investment decisions, especially in projects such as energy-efficiency improvement," Lin Boqiang, director of China Center for Energy Economics Research at Xiamen University, said at a recent forum on energy-efficiency investment and financing.

He noted that dropping oil and coal prices had eased energy costs for enterprises but as a result had made them reluctant to invest in energy-saving facilities.

China recently lifted tax rebates on a series of products, including some high-energy consuming products, and this will affect energy conservation, he said.

Factories were also receiving fewer orders than usual, which made them unwilling to make additional investment in energy saving, Lin said.

But in the long run, the business in relation to energy-efficiency improvement and the generation of clean and renewable energy will be attractive as long as there is an energy crisis, he said.

For example, venture capitalists, traditionally a funding source for start-ups, spent a record-high US$1.6 billion on "cleantech," or energy-technology, companies during the past quarter, according to accounting firm Ernst & Young.

For the first three quarters of 2008, US$3.3 billion was invested in cleantech, up 71 percent year on year, it said.

While the market is potentially huge, the question remains as how projects can be better financed.

In China, bank loans are the main way to finance energy-efficiency and renewable-energy projects, while other funding channels such as debt, venture capital and private-equity markets are not well developed. But domestic commercial banks typically don't favor such projects given their high-risk nature, although their interest is rising.

VCs have appeared to be more cautious in investing in energy-efficiency projects as they turn to other highly profitable sectors which they believe could grow rapidly.

Of all the cleantech projects invested by VCs in China, energy-efficiency projects accounted for 26 percent in 2007 but the proportion declined significantly to just 2 percent so far this year, according to the Cleantech Group, a pioneer of clean technology as an investment category. Cleantech expects a slight decline globally in VC investment on cleantech, down from an estimated US$8 billion this year to US$7 billion next year.

Ernst & Young also said the VCs' investment in cleantech may be entering a "transitional period" because of the financial crisis.

Experts said government should play a more positive role in encouraging more capital into energy-efficiency and renewable-energy projects.

Nicholas Parker, Executive Chairman of Cleantech, said last week, during the 20th Cleantech Forum in Shanghai, that the attitude of government was important and they had to create platforms for technology transfer in the cleantech sector where many technologies are owned by private companies.

Currently, developers of China's energy-efficiency and renewable-energy projects are mainly financed under programs by agencies such as the Asian Development Bank which participates as guarantor for banks to lend.

Domestic projects developers could also participate in certain global programs to get financial support such as the United Nations-led Clean Development Mechanism, which allows industrialized countries with a commitment to reducing greenhouse gases to invest in projects that reduce emissions in developing nations as an alternative to more expensive emission cuts on their own turf.

Nine clean technology predictions for 2009 made by Cleantech Group

More investment will be injected in the energy-efficiency sector, whose average return on investment is fourfold, and there will be more construction of green-energy facilities.

Global climate talks are not likely to yield significant results before 2011 and it's hard to see frequent technology transfers or global deals over the next year.

America will not see the passing of a new carbon cap and trade bill because of complexity and political factors. A national renewable portfolio standard, however, may be passed next year.

Wind energy stocks will rebound next year after falling 80 percent form their peak price among emerging awareness of wind as one of the most cost-competitive alternative energy sources. Over-investment in thin-film photovoltaics and inflated valuation in the public stock market will bring failures and consolidations in the thin-film solar sector in 2009.

Venture capital may see a slight decline globally with the total amount around US$7 billion and private equity players playing a more active role.

Clean-technology investors will focus on the most promising companies which will bring less-competitive start-ups to bankruptcy. The failure rate may increase to 40 percent from the typical 20 percent.

More IT companies, after Intel, IBM and Cisco, may shift their focus to energy opportunities. Growth sectors are expected to include integrated energy management systems and carbon content reduction technologies.

Investment in R&D will shrink from the previous year while there will be more acquisitions of green technology.

A one-time solution for energy, food and water challenges will be embraced by the market with the increasing realization of the importance of handling the relationship among all three sectors.

(Shanghai Daily December 11, 2008)