A couple weeks ago I asked Mike Lichtenfeld, a deal associate with MMA Renewable Ventures what the impact was on the Project Finance business was after the first bailout package wasn’t approved. Here is a synopsis of his written response:
“Credit contraction, if sustained, will hurt the clean energy sector as much as any other industry – our projects, our manufacturing capacity, our corporate development and expansion all depend on access to debt capital. That much is clear. In addition, we know that the bailout debacle has stalled negotiations on an energy bill that would include extension of critical tax incentives for clean energy. However, even under a scenario in which the credit markets open and tax incentives are extended, the financial distress experienced market-wide to date has probably changed the landscape of tax equity investors for the worse, not only by reducing the numbers of players through outright institutional failure, but also by drastically reducing the tax equity appetite among those players still standing.
Financial institutions large and small that have been active in renewable energy from a tax advantaged equity position have recently underperformed or experienced losses in the economic maelstrom. The outlook for the US economy – even under a bailout scenario – is at best a mild and short-term recession, so a constricted tax equity universe could continue for 12-18 months or more….
…. When the political, economic, and technical bottlenecks open in 18-24 months, developers and financiers with construction-ready utility scale projects will be well-positioned.”
Mike’s colleague Mark Higgins wrote a note discussing the impact of the constrained credit market on the US and I spoke with Bill Hargett yesterday; he relayed the market in Spain didn’t look very good for project developers looking for funding there. Accordingly, research analysts like Renewable Analytics are sensing that module pricing may continue to fall making projects cheaper.
We have a classic economics case before us, as projects become cheaper new market entrants will come. The question is who are they given that investment in CleanTech and renewable energy is a 10-figure endeavor if it is to have any impact at all? In the past banks, insurance companies and mortgage lenders had the capital and tax exposure to invest. Given the turmoil and the capital needed, who will be poised to make these enormous investments and take advantage of depressed module prices, feed in tariffs in Europe, RECs in the US and the UK and long-term (eight year) tax incentives in the US?* Government backed utilities? Large private equity houses?
How about Hedge Funds? Could hedge funds that shorted the market over the past few months be interested? It isn’t their typical investment profile, and the returns are not typical, but it is a strong “hedge” in that they can reduce their enormous tax exposure and have a steady and healthy annuity…
Oil companies? They know about exploratory investments and long horizons on returns already…
I think capital constraints will help to stimulate more innovation in the space. I’m of the opinion that government subsidies and easy financing actually constrain innovation (sort of like having oil tends to limit a country’s economic development.)
If companies are forced to develop products for lower end markets to survive, that benefits the entire clean tech space as the technologies become the 1st choice where they can provide the most benefit economically as well as ecologically.
Thus I think the beneficiaries will be the companies that have focused on the lower end of the market.
Sure… I agree but who are the financial backers going to be?
Cross over funds (Hedge funds that invest in both public and private deals)?
PE Funds? Will it be smaller guys that have concentrated on developing solar projects for residential and have figured out how to economically scale many small projects?
There is definitely interest among regulated utilities to enter the Solar PV market, both as financiers and as owners and operators of the systems. Duke Energy, Southern California Edison and San Diego Gas & Electric have all announced plans to own and operate distributed rooftop solar PV systems connected at the distribution level. And PG&E recently told Fortune Magazine that it is interested in providing financing for solar projects.
Unlike the independent developers, however, utilities don’t reap the benefits of lower capital costs in their rate of return. Since utilities generally earn a fixed rate of return, the main impact of lower project costs will be that utilities will have a better argument before utilities commissions and the public that they can develop projects at an acceptable cost to the ratepayer. Already, Duke Energy has cut in half the size of its Solar PV project to mollify a number of groups that complained about the high cost of the project.
At the same time, if restricted access to capital were to stall PV development in states that have made solar a priority, those states might turn to utility solar projects as a way to continue the pace of PV deployment.
PE probably has the best chance to do something in this market *if* they have available funds and don’t have to pay out cash in the next 2 years or so. However most PE funds at the moment are chasing distressed cos as the return potential frankly exceeds financing most green projects.
I see the financing coming through thru banks and financial corps set up to deal directly with financing these projects. I really think the emphasis is going to be on smaller scale projects, as funds dry up at the government level and the oil price continues to drop.
… a few very well positioned grid companies. That is to say that in the United States, utilities that were previously excluded from the ITC benefits can now enjoy them. Given their relative inelasticity during economic downturns (everyone still needs to power their televisions), they will be one of very few tax equity investors to benefit from the ITC tax shield. Additionally, they also have controlling access to the grid, large balance sheets for leveraging available finance, and capacity to negotiate large quantities of juicy and cheap panels.
Independent developers are going to suffer and we may see some Utility-driven consolidation.
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