Foreign currency

The dollar and the Dow are down. Unemployment and fuel and food prices are up. The U.S. economy is in a recession or teetering on the brink of it, depending on whose data you choose to believe. In past recessions, things such as green building and solar energy have been put on the backburner. But this time around, energy efficiency is worth something—if not in the United States, then certainly overseas.

Many companies in the “green” space have been selling their products and services to other countries for years anyway. As parts of the U.S. market dry up, they are well positioned to simply turn their attention elsewhere—namely China and India for green building products or services and Europe for solar and biofuels. Despite increased shipping costs, the low value of the dollar enables U.S.–based companies to sell products at a lower cost than competitors with similar quality levels.

U.S. companies with manufacturing facilities could stand to benefit from the recession as well, particularly as European companies struggle to sell to American consumers at competitive prices.   In June 2008 The Wall Street Journal reported on U.S. companies bringing previously outsourced manufacturing back home to combat rising shipping costs. In the same month, BusinessWeek reported that some European automakers are contemplating shifting manufacturing to the U.S. to reduce shipping costs and reach profitability in the face of a challenging euro-dollar exchange rate.

But are lower-cost U.S. goods and increased access to a global market enough to insulate “green” businesses from a recession? Some analysts are saying, “Maybe.”

“We have not seen a slowdown of capital or entrepreneurs or scientists interested in cleantech in any fashion because of the slowdown of the U.S. economy,” John Balbach, managing partner of The Cleantech Group, says. “I’m not saying the sector is recession-proof, but it appears that the drivers—energy costs, government policies, scarce resources—will continue and remain viable for some time to come, recession or not.”

Innovation Fuels' biofuel plant in Newark, N.J. Courtesy Innovation Fuels.

The green dragon
As the residential housing market dips in the United States, it continues to boom in China, where green building measures are increasingly mandated and U.S. architects are in high demand. Andrew Feola, president and founder of F+A Architects in Pasadena, Calif., is one of dozens of West Coast architects who have been asked to design homes in China that recreate the “West Coast lifestyle.” While critics charge that sprawling residential developments named “Orange County” and “Napa Valley” are a sign of China repeating the mistakes of the West, Feola says environmental concerns have become a part of the design conversation in China.
“If you remove a tree you have to plant another one, and there are environmental groups that you have to deal with now,” Feola says. “It’s not to the extent of using LEED criteria yet, but I think that’s probably coming.”

In fact, there are currently 50 construction projects in China that have applied for LEED certification. A key objective of China’s current Five-Year Plan includes reducing energy consumption per unit of GDP by 20 percent and China’s total carbon dioxide emissions 10 percent by 2010. In order to meet the goals set out in the plan and build the 100 million homes currently required to house the country’s booming population, green building will play an important role. And as the country begins to adopt U.S.-drafted criteria for green building, it stands to reason that China could be a large and lucrative market for U.S. architectural and engineering firms with solid green building portfolios.

Meanwhile, as of 2008 the government of Dubai has mandated that all new buildings meet LEED criteria. They do not have to be certified, but they must meet the basic criteria, according to Feola, whose firm also works regularly in Dubai. He adds that several municipalities in India are also establishing departments that will certify new buildings for LEED compliance.

In Europe, as is the case in the United States, there are fewer new homes being built, but there is still a brisk market for energy-efficient upgrades or remodels of both homes and offices. 

“When it comes to the materials and skills required for new building, you see much more demand overseas than in the U.S., but when it comes to retrofits and efficiency you’ll see demand in countries with mature housing,” says Balbach. “You have to pick your market.”

Where the sun shines
Solar subsidies in Europe, particularly in Spain and Germany, have long made it easy and lucrative for American solar companies to sell into European markets.

SunPower Corp.'s plant in Daegu, Korea, buffers the company's U.S. deals. Courtesy SunPower Corp.

And while rising shipping costs may have some companies scrambling for more domestic customers, solar companies large enough to site manufacturing centers in other countries will continue to sell into the European Union for the foreseeable future.
At the Jefferies 5th Global Clean Tech Conference in June 2008, SunPower CEO Tom Werner said his company would simply shift its focus to other markets if U.S. tax credits for renewable energy weren’t renewed. 

“If the ITC doesn’t happen, we can move our business elsewhere and make up for that,” he said. “Is that a preferred solution? No. Does America lose jobs with that? Yes. But can we as a company hit ‘08 and ‘09 without the ITC? Yes.”

Further bolstering the supply of U.S. photovoltaic panels and thin film solar to the EU are a host of recent European investments in U.S. solar, particularly at the project finance stage.

“Large European companies, especially wind and solar companies that are comfortable with project finance, are doing well in the U.S.,” says Balbach.

Jay Tannon of DLA Piper says he has also seen an increase in European investment in U.S. solar and wind companies and projects. Novus Energy, a trans-Atlantic cleantech fund with both American and European investors, is currently looking at projects in Oregon and Spain, according to Tannon.

“They are seeing a lot of opportunities over here, a lot of innovation and good pricing,” Tannon says. “The solar and wind markets are more mature in Europe, but they’re seeing some innovation and the ability to stretch their money further here.”

Full steam ahead
The biofuel market is also more mature in Europe, with incentives and strict mandates in place, as well as preferential pricing for biofuels derived from more environmentally responsible feedstocks. Current predictions of the total European consumption of biodiesel for 2008 put the number at 1.5 billion gallons, with a predicted increase to 3 billion gallons in 2009. According to John Fox, CEO of Innovation Fuels, prices are set higher for fuel derived from less desirable feedstocks, such as corn or soybeans, which is one of the reasons Fox’s company is looking into more renewable feedstocks such as pennycress and camelina.

Innovation Fuels currently sells 80 percent of its fuel into the European market, predominantly through a joint partnership with the Antwerp-based Arpadis Group (AIM/NYSE: AEPA), the largest biodiesel distributor in Europe, according to Fox News.
The market for biodiesel is particularly strong in Europe due to the number of diesel-fueled cars and mandates by EU governments to mix diesel with biodiesel.

And when it comes to investment, biofuel companies, along with solar and wind, may be somewhat insulated from a recession, particularly if the ITC is renewed and then improved by the next administration, according to Tim Carey, who leads PricewaterhouseCoopers’ U.S. Cleantech Group.

“Solar and biofuels and wind have an advantage in a recession,” Carey says. “When investors are looking at alternatives there’s a tendency to invest in things they know. Solar is a semiconductor type tech, which plenty of investors understand, and biofuel and wind are proven investments if you look at the valuation and growth of companies in those areas.”

It takes a research lab
Despite the opening up of global markets and the universal nature of the problems solved by “green” products and services, all U.S. companies will be affected in some way by a tightening of capital.

Where a recession could really hurt green business, however, is on the research and development front. Foreign investors are unlikely to invest in U.S. research, and federal funding for R&D continues to land on the chopping block.

“There is a deep concern that not enough basic R&D budget has been applied worldwide to cleantech, and that’s particularly true in the U.S.,” says Balbach. “If you look at the daily cost of the war in Iraq versus the cost of R&D for technology that would make that war irrelevant, it’s orders of magnitude.”

In fact, Balbach points out that many of the technologies now entering the market were driven by a push for research and development in the 1970s. “The U.S. budget for research and development has been declining on a real and percentage basis since then, and the current administration’s commitment to R&D is really disappointing,” he says.