March 20, 2009
NEW YORK -- There are signs that the federal stimulus might be pumping a little life into the alternative-energy industry.
Financiers and law firms specializing in renewable energy say they see growing interest in reviving moribund projects and breaking ground on new deals. And while big banks that have braced the industry's backbone are still on the fence, some hedge funds and private equity and venture capital firms are cautiously looking to take advantage of stimulus provisions that temporarily eliminate the need for tax equity financing, which has long been a mainstay for renewable energy projects.
"Whether it's the stimulus package or the return of the banks, there is early evidence of a growing appetite for the types of small- to medium-sized projects that they sponsor," said Tucker Twitmyer, managing partner at the venture capital firm EnerTech Capital.
The stock markets are still no place to raise cash, but if activity from many nontraditional sources of financing lifts the cleantech sector faster, as many experts predict, that may encourage banks to ease their strict lending requirements and again lift renewable energy finance if credit markets start to normalize.
"I'd say it's a little bit like March in your garden," said John Gulliver, a specialist in renewable energy financing at the law firm Pierce Atwood. "There are some shoots of green coming up out of the frozen ground in the snow, but they're not ready to harvest yet."
There is some dispute among insiders as to which sectors are seeing the most benefits. Some are confident that solar energy companies are enjoying a big lift from the stimulus, while others observe signs that wind power is seeing more gains. Most assume that energy efficiency provisions in the law will see home and building weatherization fill up much of the activity, but analysts see opportunities for photovoltaic companies here, too.
But what is clear is that parts of the American Reinvestment and Recovery Act that replace the need for tax credits are giving the industry its biggest boost.
Prior to the financial crash felt in the second half of 2008, most alternative energy projects owed their life to federal investment tax credits and production tax credits that allowed banks backing projects to offset tax liabilities against their investments in wind farms and solar plants.
The structure worked as long as the banks pulled profits, but with most financial institutions expected to post steep losses for 2009, tax credit finance has become all but obsolete.
According to figures from the private equity firm Hudson Clean Energy Partners, about 25 of the largest financial firms were active in tax equity financing for alternatives in 2007, the year most analysts see as the historic height of the cleantech market.
At least 16 of those firms left the field last year, including the permanent departures of Lehman Brothers, Wachovia, Merrill Lynch and American International Group (AIG). For 2009, Hudson Clean Energy counts six bank investors, although 12 could return if the tough financial climate stabilizes.
Congress getting credit
Signs of life in cleantech are mostly due to Congress allowing companies to opt for Treasury grants in lieu of investment tax credits, experts say.
Biomass, geothermal, solar and wind power project developers can now elect to use the investment tax credit to get a federal rebate for the amount of the tax equity money that would have backed their projects.
The advantage, Hudson Clean Energy managing partner Neil Auerbach says, is that the new structure is much simpler and more affordable than the old periodic tax credit schemes favored by Congress in the past. The Treasury grants significantly lower the cost of financing, an important component given the high cost of capital in today's economy.
"Instead of accessing the currency traders in the financial institutional community that charge tremendous transaction costs to access their tax capacity, instead you go to the federal government, specifically the Department of Treasury, and you hand in your tax credit and you get 100 cents on the dollar supposedly within 60 days of a satisfactory application," Auerbach explained in a conference call hosted by the American Council on Renewable Energy (ACORE) on Wednesday.
Aside from the tax credit fix, new and better federal loan guarantees have considerably reduced the cost and risk of financing projects and are helping to lure jittery investors back into renewable energy.
Analysts expect that some of the $6 billion appropriated for loan guarantees will provide the foundation for at least $60 billion in new lending for clean energy projects over the next two years. The financial community is taking notice.
"I'm not saying they've jumped in, but we've gotten more phone calls, and there seems to be a greater degree of interest on the part of nontraditional equity investors, in which I would include things like hedge funds, private equity money, etc.," said Phillip Spector, an attorney specializing in energy and renewables at Troutman Sanders.
A possible stabilization of the fossil-fuel energy markets could also boost optimism and encourage even more firms to take advantage of the new government carrots.
Crude oil prices are now hovering around $50 a barrel. While the market may still see some price swings, many energy analysts theorize that oil prices have probably found a floor and will either stabilize at the $40 to $50 range or steadily rise over that mark in the coming months.
"There may be a perception that oil has bottomed out, and I think that will help if people get confident that they're not going to be competing in a $20 a barrel oil market but one that's $40 to $50 or $60," Gulliver said. "That changes the economics quite a bit."
Anticipating a renewable mandate
Cleantech watchers are also crediting the stimulus for funding several previously authorized measures to lift renewable energy in the United States, in particular programs managed under the Department of Energy that have existed for years but never received funding when Republicans dominated Washington.
But most DOE projects have yet to take effect as stimulus money gets pumped into the economy in pulses. Analysts say it is too soon to tell what impact those appropriations will have on the now stirring alternative energy and clean technology industries.
Insiders also report that, while signs of fresh activity are promising, investors with the most money to spend on cleantech are holding out for indications that forthcoming energy and transportation bills will provide more solid regulatory support for the industry.
While the stimulus is helping to prime the marketplace, there is much hope and anticipation that the federal government will establish a national renewable portfolio standard, or RPS, a mandate that the country generate a specific proportion of its energy needs from wind, solar, geothermal and other such sources. That, along with rules that place a price on a ton of carbon dioxide and other greenhouse gas emissions, will do far more to stimulate cleantech than the law passed last month.
"Everybody is waiting for the next piece, which is the national RPS," said Peter Fusaro, founder of Global Change Associates and organizer of the upcoming Wall Street Green Trading Summit. "The market is going to track legislation. And we're going to get all that next month, hopefully."
Fusaro also expects the industry to get another big lift should Washington adopt a national utility earnings "decoupling" program along the lines of a successful California initiative. Decoupling eliminates the paradox whereby utilities that promote greater energy efficiency see profits fall as demand for their power decreases, establishing structures that guarantee that energy generators can retain their expected earnings.
Ultimately, banks are key
But experts say the renewable energy industry will only return to its heyday once the major banks final loosen up credit and re-enter the fray.
While an important part of the picture, venture capital and private equity investors have nowhere near the amount of capital needed to fuel the industry on the scale that the new leadership in Washington is hoping.
For the Obama administration to meet its goal of doubling renewable energy generation by 2011, Hudson Clean Energy estimates that about $134 billion in new capital investments will be required by then. To reach a 10 percent penetration of renewables in the nation's energy mix by 2012, as President Obama has proposed, about $217 billion will be needed.
The most important remaining impediment to cleantech investing "is the banks not lending," Fusaro said. "We need the capital markets moving again."
The large-scale wind and solar projects of the sort that moved along before the economic crash can get a lift from nontraditional sources of finance, but they almost all still need heavy debt financing to help see them to completion.
While the renewed interest in renewables is promising, the industry won't experience a real breath of life until the banks relax and open up their tight wallets again.
"It's too early to call it spring with the daffodils and tulips up," finance specialist Gulliver said, "but I think you can see signs of green poking up underneath the earth, so that's good."
Copyright 2009 E&E Publishing. All Rights Reserved.
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