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Solar, wind feel heat from low natural-gas prices

Morgan Stanley banker Paul Leggett handicaps prospects for clean-energy investment this year, predicting lots of activity despite policy and financial challenges.

BOSTON--Relatively clean natural gas, not dirty coal, is a major hurdle to broader use of solar and wind power in the near term, according to a Morgan Stanley banker.

Paul Leggett, who oversees Morgan Stanley's clean energy banking practice, provided a snapshot of the green-tech investment area to professionals in advance of the GoingGreen East conference in March here on Friday. Overall, he foresees significant activity in the clean-energy areas this year, driven mostly by concerns over the economy and energy security, despite financial and policy challenges.

One is the low price of natural gas used to make electricity at power plants. Even though the cost of solar and wind power installations continue to go down, having natural gas near 10-year lows makes it tougher to compete strictly on price, Leggett said. "It's one of the biggest threats to what we need to do in the clean-energy sector," he said.

Politically, natural gas has a lot of allies as well. Large reserves have been located in Pennsylvania, making it a domestic fuel and, if more supply comes online, prices could go down further. Environmentally, it's far less polluting than coal.

Meanwhile, Morgan Stanley expects that interest rates will go up, which makes renewable energy projects less attractive places to put money. With current interest rates, about one-third of solar projects that Leggett deals with don't offer a high enough premium over low-risk bonds to attract investors, he said. That situation only gets tougher as interest rates go up, he said.

The other challenge facing investors in the clean-energy area is the uncertainty in policy. With the fractured debate around health care, it's unclear what the prospects for a sweeping energy and climate bill are. "Everybody (in clean energy finance) is saying the same thing: We just need to know the rules," Leggett said.

Although there's a great deal of focus on venture capital investment in green-tech start-ups, the project finance sector, which bankrolls large-scale energy projects, remains troubled. The total amount of money that went into clean energy financing last year actually went down $10 billion in 2009 to $145 billion, with 92 billion going to project finance, according to Morgan Stanley numbers.

Even with those challenges, though, Leggett expects to see more investors--including those from China and sovereign wealth fund--put money into clean energy. That's because there have been a few early successes, notably the initial public offering of battery company A123 Systems, and a number of promising companies have been formed.

"Twelve months ago, the challenge wasn't telling a story, it was getting the investors off the sidelines," Leggett said. "Now, we can show how some investors made money by investing in early or mid-stage companies. That speaks volumes."