"I don't think it's the end of the world," said Nicholas Parker, chair and managing partner of the Cleantech Group, which pioneered "clean technology" as an investment category back in 2002. "Things will still get done, but it will be a flight to quality, and money will only flow to the best deals."
Still, if the cost of debt financing jumps from 2 per cent to 8 per cent, "it will throw a lot of projects out of whack," he said.
In Ontario, which has hundreds of small to large clean-energy initiatives at various stages of development – everything from farm-based biogas systems to massive solar farms to industrial-scale ethanol plants – there are fears that some projects will grind to a halt as lenders grow more discriminating.
"It's not going to stop any of our projects, but it's slowed them down already because we have to be a little more prudent," said Bliss Baker, vice-president of corporate affairs at Toronto-based Greenfield Ethanol, a large developer of corn and cellulosic ethanol plants. "There's going to be some pressure on our industry for sure."
Kerry Adler, chief executive of Toronto-based wind developer SkyPower Corp., said the credit crunch is making it difficult to accurately estimate project finance costs.
"This could in effect end up forcing developers to make very conservative estimates on cost of capital and thus bidding up prices for wind energy that may be artificially inflated."
Ontario, added Adler, should delay its plans at the end of October to award 20-year power purchase contracts to more big wind projects, "until the credit markets stabilize."
Alex Winch, president and founder of Toronto-based Mondial Energy Inc., a solar-energy service provider, said smaller projects are likely to take an even bigger hit as money flows to larger-scale projects perceived as less risky.
He said dozens of projects under Ontario's standard offer program, which supports the development of solar, wind, biomass and hydroelectric projects under 10 megawatts in size, could soon be in trouble. "I wouldn't be surprised to see some of the announced projects get mothballed," said Winch, adding that Mondial will also feel some impact. "At some point these projects go from thin (margins) to not viable."
It's not that the financing isn't out there, said John Kourtoff, president of Trillium Power Wind Corp., which has plans to build a 750-megawatt offshore wind farm in Lake Ontario.
"The world is awash with money, it is just that most of it is very, very nervous so they will only invest if the underlying assets are transparent, as opposed to the subprime nonsense that started these problems, and that there is a fairly dependable revenue stream," Kourtoff said.
Renewable-energy projects that have signed long-term contracts for the sale of their power, guaranteeing a steady cash flow, could be viewed as safe havens for investment, he said. That's assuming, of course, they can get the contract.
Some companies have been lucky enough to raise enough private equity that they can ride out the turbulence over the short-term. Ryan Little, vice-president of business development at Toronto-based StormFisher Biogas, which turns cow manure and other organic material into saleable electricity, has a number of multimillion-dollar projects on the go.
The company announced earlier this month it had entered a partnership with Wisconsin-based Sanimax to build eight biogas plants for a total investment of $160 million.
"We're lucky insofar as our equity partners are in for the long term and, if we needed to, we could deploy all equity on projects and then back-lever them once things loosen up," Little said. "Certainly, it's not affecting our plans in terms of number of plants we are building and when we're building them, and we don't expect that to change."
Likewise, Ottawa-based Thermal Energy International Inc. raised $15 million in private equity in June and believes it can, along with a $2.5 million open credit line at TD Financial, get through the economic rough patch.
Thermal sells energy efficiency to industrial customers by installing waste heat recovery systems, at its own expense, then making its money back through a customer's energy savings. "If we do take on a deal under debt, we underwrite as much as possible through Export Development Canada, then leverage our credit line with TD."
But MacMurray Whale, an alternative energy analyst at Cormark Securities Inc., said some "green" developers are naively underestimating how much the credit crunch could affect their business, and risk being blindsided a few months down the road. "Everything is just going on hold until there's less uncertainty."
If a global recession does take hold and the price of oil and natural gas continues to fall, "the expectation is there will be a lot less demand for anything green," said Whale, adding that funding projects with 100 per cent equity, while doable, is expensive and limits growth.
"The problem with private equity and venture capitalists is that money usually comes with lots of strings attached," he said. "They'll extract more ownership of the company from the existing shareholders as more money is raised. So there's a limit to how much of this money a firm would like to use."
Whale said that for many there will be no easy way to outlast the situation. "Many companies will go bankrupt."
Private investors will no doubt exploit that vulnerability.
Already, venture capitalists have been spending on clean technology companies in record amounts, according to third-quarter figures from the Cleantech Group. About $2.6 billion (U.S.) was invested across 158 companies globally, bringing the year's total to $6.6 billion – ahead of investments for all of 2007.
(Canadian cleantech companies, it should be pointed out, stood out as big losers in the quarter, raising a puny $49 million.)
But even private-equity investment is expected to slow down for the next few quarters.
"The dual blow of a stagnant U.S. economy and Wall Street turmoil is expected to shrink the size of funding rounds and valuations," said Brian Fan, senior director of research for the Cleantech Group.
"Cleantech companies in need of cash will likely turn to the more-expensive option of bridge financing, rather than traditional loans or equity financing."
Parker makes a distinction between "innovation" and "infrastructure" companies. He said long-term equity investments on the innovation side, such as companies developing new solar cells or biofuel enzymes, are expected to continue at a healthy pace and debt financing will be less important.
On the infrastructure side, debt financing becomes much more important as a way to fund large projects, from wind and solar farms or commercial biofuel plants. "That's where there's going to be a short- to medium-term crunch," said Parker.
At the same time, customers of big-ticket items will defer spending until the economic dust settles. Last week, Railpower Corp., a Quebec maker of low-emission hybrid locomotives, said it had to postpone construction of a manufacturing plant and cut staff because railway customers are holding off on orders for their fuel-efficient locomotives.