Venture capital for alternative energy tumbles 63%

Venture capitalists cut spending on renewable energy so far this year, with funding for research and start-up projects falling 63% through March, according to an industry report released Monday.

The drop is the latest indicator of just how badly the global economic downturn has dampened the rush to alternatives to fossil fuels. Oil and gas companies have also been hurt as demand for all kinds of energy has fallen.

From January through March, venture capitalists spent $277 million on clean-energy projects, compared with $715.3 million in the same period last year, according to an Ernst & Young analysis based on data from Dow Jones Venture Source.

"Investors took a deep breath and paused," says Ernst & Young's Joseph Muscat.

There were already signs that stock investors had pulled back on clean energy spending. The report Monday shows how wealthy and institutional investors, some of the most ardent backers of alternative energy, have been forced to tamp down spending as well.

There were some surprises, with comparatively big money going to the critical technology of storing energy. New investments more than doubled to $114 million, making energy storage the biggest lure for venture capital in early 2009.

The fuel cell sector attracted $45 million in the quarter, vs. none a year earlier, according to the analysis released Monday.

BASF, the world's largest chemical company, recently spent more than $10 million to build and open a fuel cell plant in Somerset, N.J. The German company has spent more than $100 million on fuel cell research in recent years.

"Fuel cell technology is one of the most important on the quest toward sustainability," said Horst-Tore Land, head of BASF's fuel cell division.

Battery storage companies raised $69 million in the first quarter, up 37% from a year earlier, according to the investment report.

A123 Systems, which makes lithium ion batteries for electric cars, signed a deal with General Electric this year.

While oil and gas companies have cut spending, alternative energy start-ups can be more vulnerable because many rely heavily on venture capital.

It is not known if the first quarter represents the bottom for new investments in clean technology; industry observers say conditions appear to have improved marginally.

The government stimulus package contains billions for research into renewable resources, money that should help boost investment, said Muscat.

Large chunks of funding have been set aside for such measures as upgrading the nation's electrical-distribution system, tax cuts to promote alternatives to oil, and to make federal buildings and private homes more efficient.

"The long-term trends are still there for clean energy," says Ethan Zindler, head of North American research at New Energy Finance. "This is a period of doldrums, where we're stuck between the last massive wave of investment and waiting for some of the major support from stimulus packages around the world to kick in."