State of the Renewable Energy Finance Markets

Post-stimulus Financing: Will Renewable Growth Continue?

FULL CREDIT TO Renewable Energy World, Elisa Wood

Original News Source >

Will private lenders and investors pick up where government leaves off in a post-stimulus world?

LONDON – Money is flowing worldwide for many forms of renewable energy, as the industry presses forward with dramatic growth. CleanEdge reported US$188.1 billion in global revenue for biofuels, solar and wind energy in 2010, a 35.2% surge over 2009. Bloomberg New Energy Finance (BNEF) found that clean energy investment worldwide reached $243 billion in 2010, nearly double the sector investment just four years earlier. And venture capital investment for clean technology in the US rose 54% in the first quarter of 2011 compared with the same period one year earlier, in a trend led by solar energy companies, according to Ernst & Young.

What has buoyed the market? Many in the renewable energy sector thank stimulus funds infused into the industry by governments throughout the world. But will the growth continue as stimulus funding winds down? Will private lenders and investors pick up where government leaves off in a post-stimulus world?

Several deal makers describe the state of today’s finance markets and provide their outlook into 2012 and beyond, including how hard – or easy – it is to attract private tax equity, project finance, venture capital and other types of loans and investments. Even as the world economy continues to struggle, renewable energy fares far better than many sectors.

REVIVAL OF U.S. TAX EQUITY?
Jonathon Gross, a principal with US accounting firm Reznick Group and head of the firm’s alternative energy practice in North Carolina, helps match renewable energy project developers with investors. He specialises in tax equity investments, where the investor, in effect, buys a project’s tax benefits to offset tax liability. Goldman Sachs was one of the more notable tax equity investors before the financial collapse. But when profits dropped after the crash, so did tax liabilities. As a result, tax credits had little value and investors fled.

In response, the US government created a cash grant to help renewable energy projects during this phase. The grant differed from a traditional tax credit in that developers received money up front, rather than after the project was built or operating. This helped renewable energy developers secure project financing when tax equity investors vanished. The grant, however, is being phased out beginning in 2012.

Fortunately, tax investors are returning to the market, said Gross. But, he added, “I don’t know if it will be fast enough for the developers who are getting the grant.” Gross predicts a dip in US project development in early 2012 when the federal cash grant expires for projects that do not meet certain predevelopment requirements.

Meanwhile, a player known as the tax equity syndicator is increasingly moving into energy. Syndicators, such as Stonehenge Capital Company and Red Stone, connect private equity investors with developers. They more commonly work in low-income housing investment, but syndicators lately have been attracted to state renewable energy credits, Gross said.

Flat Water Wind Farm, a 60-MW Nebraska project, was a recent beneficiary of a tax equity deal. Completed in April 2011, the deal was arranged between U.S. Bancorp (USB), Gestamp Wind North America, Spanish Banco Santander and other lenders. USB has committed more than $400 million of renewable energy tax equity to finance over $800 million of renewable energy projects in the US, primarily in the solar and wind energy markets.

INNOVATIONS, CREDITS AND PROJECT FINANCING
In Europe, it’s unclear where the renewable energy sector will find the capital to build enough projects to meet 2020 renewable energy targets. Assuming it will cost about €350 billion to achieve the goals, each of Europe’s 40 banks that are active in the sector would need to loan €750 million annually for the next 10 years, according to Ernst & Young’s paper, Funding Renewable Energy in a Capital-Constrained World.

What will those sources be? European utilities might fill in some of the gap, but renewable energy will still need alternative pools of equity and debt to finance projects. One source might be industrials, especially those that act as supply chain co-sponsors in the project development phase, said Ernst & Young.

In the US, renewable energy credits are gaining importance in helping developers secure financing. Banks are apt to take an applicant more seriously if it has a long-term contract to sell its RECs to a utility or other credit-worthy buyer (as opposed to selling RECs on the spot market or under short-term deals).

Solar renewable energy credits (SRECs), only available in certain states, are created by solar energy projects. One MWh generated by a solar installation equals one SREC. Utilities and retail suppliers buy the credits from projects and use them to meet state government requirements that a certain amount of the electricity they sell comes from solar.

But there was much talk in Spring 2011 about the collapse of the famed New Jersey SREC market. New Jersey is a crucial market for solar developers in the US, the second largest to California, with an exceptionally mature SREC market, according to the Solar Energy Industries Association’s US Solar Market Insight: First Quarter 2011.

New Jersey’s SREC was a victim of its own success. The state’s high SREC prices attracted so much solar development that the market became oversupplied with SRECS and trading prices plummeted for the credits. SEIA predicts an end to New Jersey’s market growth in late 2011/early 2012 as a result of the overheated SREC market.

However, Kent Rowey, head of Freshfields’ Americas Energy and Infrastructure practice, says that stories are overblown about the death of New Jersey’s SREC market. “Smart traders think that the market has mispriced the SREC, that the forward curve is incorrect,” he said.

Why? Too often analysts forecast SREC supply based on the project applications that are before regulatory bodies, and not on the actual projects being built, according to Rowey. This creates an overly high forecast for solar development. In reality, a good number of the projects that are proposed will never be built. Rather than counting applications, savvy financiers conduct their due diligence “the old-fashioned way” – they count rooftops from helicopters to determine what’s really being installed. What they are finding is that fewer projects are being built than expected, and therefore fewer SRECs will be available in the future than is now believed. Therefore, the New Jersey SREC market may not be as overheated as some believe.

Beyond SRECs, Rowey sees the overall debt market for renewable energy as buoyant. “If there is any kind of limiting factor, it is probably that there is an inverse relationship between the size of the deal and the work that goes into it,” he said. Big banks prefer large loans because it takes just as much work to administer a large loan as a small loan, but the returns are lower.

German commercial banks are leaders in providing debt capital for project finance. Rowey also sees more US banks eyeing renewable energy projects; some are teaming up with pension funds.
“There still is liquidity in the debt market for renewable projects. It is one of the sectors in the infrastructure market that hasn’t really been hit as hard,” he said. Even though underwriting standards are more stringent since the market crash of 2008, “for the right project and right sponsor, renewable energy is a space where traditional financing is available.”

WHAT FINANCIERS LIKE
Michael Lorusso, managing director and group head for US-based CIT Energy, which focuses on project and structured finance, shares this view. He says that if the developer offers a financeable project, the lender will be there. “It is incumbent on the developers to do something that is financeable and not push the market to the point where they are stuck with a project that cannot be financed,” Lorusso said.

CIT Energy evaluates projects much the way large banks do. The financing and advisory firm prefers proven technologies and shies away from technology risk. Projects should have equipment contracts with established manufacturers, and a solid construction contract, Lorusso said. Applicants for finance also should produce a power purchase agreement with a solid buyer, like a utility or industrial customer, which minimises the project’s price risk in the eyes of the investor. Or the project may use a short-term contract that relies on commodity price hedges with third parties, like Goldman Sachs or Morgan Stanley. All government permits must be in place.

Lorusso likes wind, solar and geothermal energy, as well as hydroelectricity, although he noted that less hydroelectricity is in development than the other three resources. He is skeptical about biomass because he sees its fuel source as less reliable, or at least harder to quantify through statistical analysis than wind, solar and geothermal. He receives many inquiries for new technologies that use fuel cells, wave energy, biofuels and gasification, but says often they are unproven, unreliable or uneconomic, and therefore not yet good candidates for financing.

Even though wind energy is high on his list of strong investments, Lorusso sees that market slowing. The sentiment is that “the best sites have been taken, the low hanging fruit has been picked,” so it’s becoming more difficult to develop wind farms, he said. In addition, utilities are less apt to enter into lucrative long-term power sales agreements with wind farms, given today’s low natural gas prices and depressed demand for electricity. Solar energy, on the other hand, appears to be more quickly moving toward grid parity. It also offers the promise of adaptable consumer applications as it becomes integrated into shingles, windows and signs, he said.

Not all solar, however, is created equal when it comes to financing. The industry seems to be developing under what Lorusso described as a bifurcated “barbell effect.” On one side of the barbell is the proliferation of small rooftop solar installations, almost “real estate plays,” he said, that are increasingly aggregated to make them more appealing to financers. On the other side of the barbell are fewer, but massive, utility-scale projects with well-structured deals that attract financial backing. One example is the 392-MW Ivanpah Solar Energy Generating System, being built in California’s Mojave Desert with the help of a $1.6 billion loan guarantee from the US Department of Energy.

While small and large deals make it onto the barbell, mid-sized solar projects often find it hard to secure traditional financing. These $2-3 million installations on commercial roofs lack the economies of scale to attract large banks. As far as the banks are concerned, he said, conducting due diligence on these projects takes too much time for the size of the transaction. Therefore this mid-range solar project often must rely on all equity deals, aggregation, or in some cases small regional banks.
A solar company needs roughly a $20-$50 million pipeline of projects just to catch financiers’ attention, said Scott Wiater, president of Standard Solar, the highest ranking renewable energy company on Inc. magazine’s top 500 fastest growing American companies for 2010. “It’s all about scale, you have to have scale,” he said.

Having a signed power purchase agreement is crucial, Wiater added. “The people that offer tax equity and debt – their mindset is we don’t want to take any pre-development risk.” With a power purchase agreement in hand, a solar company can secure debt financing relatively easily now; tax equity financing less so, he said. “You can find tax equity, but it is expensive.”

Meanwhile, Standard Solar has seen an uptick in the number of commercial enterprises that install solar panels to hedge against future energy rate hikes. Some of these deals are all cash and others operate under power purchase agreements. ‘We are seeing just normal commercial customers installing fairly large systems,’ he said, adding, “If natural gas pricing wasn’t as low as it is, we would have much more business. But with that said, we can still be competitive even with the currently depressed energy prices.”

COMMUNITY BANKS FOR SMALL PROJECTS
For the truly small renewable project, conventional financing can be extremely hard to find. But small specialised or community banks are increasingly filling this niche by lending to ventures that have a hard time accessing conventional capital. Many of these banks function as non-profit institutions that do not have to answer to shareholders, so focus on investments with social impact, such as day care centers or schools. For such projects, “there are a world of government programmes that aren’t going to go anywhere, that are not in danger of being zeroed. We have been looking for how to take those tools and put capital in the green economy,” said Melissa Malkin-Weber, green initiatives manager for Self-Help Credit Union, nonprofit community development lender, real estate developer, and credit union with offices in California, North Carolina, and Washington, D.C.

For example, in the US small renewable energy projects can take advantage of the new markets tax credit, set up in 2000 for real estate construction and renovation in low-income areas. “Renewable energy looks a lot like commercial real estate from an underwriting perspective,” she said.
Renewable energy developers, such as solar installers, can use such credits to attract private capital. The developer can parlay the credit into a below-market interest rate and more flexible loan term. Loans can be as small as $5000, although the sweet spot tends to be $75,000 to $10 million, she said.

YOUNG AND UNSUBSIDISED
New technologies, those just getting off the ground, typically seek out a different kind of investor than those already accepted by commercial markets. Still unproven, and not ready for full-scale commercial deployment, these technologies often look to angel investors, venture capitalists and government funding.

The good news is that an increasing amount of VC money has been flowing to renewables. In the US, investors in new technologies look to renewable energy as the “next major economic transformation frontier,” according to Venture Capital’s Role in the US Renewable Energy Sector, a white paper by the US Partnership for Renewable Energy Finance. Before 2005, renewable energy accounted for two percent of VC investment in the US; by 2010 it had reached 15 percent.
China, too, with its growing appetite for clean energy, can be a rich launching point for new renewable energy technology, according to Stephen Edkins, partner in Diverso, a Shanghai-based venture capitalist firm that specialises in connecting technology innovators with opportunity in China. Diverso’s clients included Ilika, a clean-tech materials company that works in energy storage, and TMO Renewables, the developer of a new process for converting biomass into fuel ethanol. Both are based in the UK.

Direct subsidy is difficult to come by in China, and that’s just fine with Diverso. Much like other VCs, Diverso looks for technology that can stand on its own.

“Technological innovation is about allowing renewable energy to be competitive in the absence of subsidy,” said Edkins. While direct subsidies may be hard to come by in China, the government backs renewable energy in other ways, particularly through favourable terms from its state-owned banks, which “act as a lever,” Edkins said.

Opportunity is great for new technology in China’s hungry energy market, but also daunting. The language barrier alone can stymie outside businesses, according to Diverso.

Brian Kinane, managing director at Yorkville Advisors, also works with junior energy companies, but in Europe, where the challenges are different. “Equity markets are difficult to access for companies at present. Many investors are concerned that there is correction coming in the market. There is a feeling that the market has had quite a high run-up and now there is a greater sense of volatility,” he said.
This slowdown is being spurred by government austerity measures throughout Europe, as well as talk that China’s economy is cooling. The correction is expected to be temporary, with a positive economic trend reasserting itself, but investors “don’t want to be caught up in that correction,” he said.
Longer term, Europe’s renewable energy finance sector is likely to benefit from Germany’s decision to close down its nuclear power stations, he added.

HELP FROM EXPORT BANKS
Meanwhile, government export credit agencies, such as the US’ Export-Import Bank (Ex-Im Bank), Export Development Canada and Germany’s Hermes Cover, have been filling in the financing gaps for equipment suppliers. Export banks are especially well suited for small transactions that hold little interest to conventional lenders.

For example, Ex-Im Bank offers a streamlined application process known as Renewable Express. Solyndra saw its financing processed in just 41 days. The manufacturer used the programme to finance its sale of solar panels to an international supermarket chain in Belgium. The June 2011 deal offered Solynda not only a favourable interest rate, but also a long financing term. The US export bank guaranteed an 18-year €7.7 million loan ($10.3 million) to finance panels for the 3 MW project.

NOT A BUBBLE
Kathleen Marshall, managing director at Green Solar Finance, says that stimulus funding did what it set out to do. Financing is again available for renewable energy. “What we are seeing is tremendous movement on almost all fronts,’ she said. “We’re seeing many more financial entrants coming in – philanthropic investors, insurance and bank lenders.” She credits much of the movement to the cash grant offered in lieu of a tax credit. “It provided a strong initial catalyst to start moving things. I think what it really did is it created scale. It created tremendous scale and success in getting projects done.”
Ultimately, though, for a financing deal to work it takes “tremendous collaboration,” she said. If a subsidy goes away, parties must be willing to be flexible and realistic about yields. And then “a deal will get done,” she said. In any case, whether stimulus money stays or goes, what’s clear to renewable energy investors now is that this industry is “not a bubble – the horses are out of the gate and they are running,” Marshall said.

Studying Potential Loss of 1603 Cash Grant, 1705 Loan Guarantee, ITC and PTC

What Happens When the Incentives Expire?
By Bruce Hamilton, Director of Energy, Navigant Consulting, Inc.,
Reproduced from RenewableEnergyWorld.com

May 17, 2011

Sacramento, CA, USA -- Wind projects, along with other renewable energy technologies, have benefitted in a variety of ways from federal incentive programs. The Section 1603 cash grant program, the Department of Energy Section 1705 Loan Guarantee program and the Bonus Depreciation schedule are among the federal programs that are scheduled to expire by the end of 2012. The Production Tax Credit (PTC) and Investment Tax Credit (ITC) are also scheduled to expire for wind projects at the end of 2012. In today's budget-cutting environment, it's possible that none of these incentives will be renewed.
The Section 1603 cash grant has been a popular and successful program and is generally credited for keeping the U.S. wind industry healthy during the 2009-2010 recession1. Since the program was initiated in 2009 through the first quarter of 2011, $5.6 billion in cash grants has been awarded for wind projects, representing more than 80 percent of all Section 1603 funding to date.
The DOE Section 1705 loan guarantee program has a current allocation of $2.5 billion that can support up to $30 billion of loan guarantees. As of April 2011, three wind plants have received commitments for loan guarantees totaling $1.5 billion, including $1.3 billion for Caithness's 845 MW Shepherd's Flat project.

Under the federal Modified Accelerated Cost-Recovery System (MACRS), wind and other renewable energy properties are classified as five-year property for depreciation purposes. Eligible property placed in service after Sept. 8, 2010 and before Jan. 1, 2012 qualifies for 100 percent first-year bonus depreciation, meaning that 100 percent of the project cost can be expensed in the first year. For 2012, a 50 percent bonus depreciation is still available. After Dec. 31, 2012, the allowable deduction reverts to the original five-year MACRS recovery. The value of the 100 percent bonus is estimated to be 40 percent of the value of the Section 1603 cash grant.

To determine the impact of the pending expiration of these programs, Navigant calculated the Levelized Cost of Energy (LCOE) for a 100 MW wind plant in various time frames with the following project finance structures:

•Case 1. Circa 2008, using the PTC, equity from the project sponsor (20 percent), and a tax equity partnership flip (80 percent).2

•Case 2. Circa 2011, using the cash grant (30 percent), equity from the project sponsor (20 percent), a DOE loan guarantee (40 percent) and a private loan (10 percent). 3

•Case 3. Circa 2013, using the PTC, equity from the project sponsor (20 percent) and a tax equity partnership flip (80 percent), assuming that the PTC will be renewed.4

•Case 4. Circa 2013, using the project sponsor's equity (70 percent) and a private loan (30 percent), assuming that the PTC is not renewed.5

Navigant also calculated the range of LCOE prices from natural gas fired power plants during these same time periods.6 The results of the four cases are shown in the graph.

The case studies show that wind plants are competitive with gas plants in Cases 1 and 2, which is consistent with the fact that many utilities have installed wind plants well in excess of their Renewable Portfolio Standard (RPS) requirements. In comparing Cases 1 and 2, the combined effect of the cash grant and the DOE loan guarantee cuts the cost of a wind farm nearly in half. In comparing Cases 1 and 3, increased return requirements from tax equity investors are a significant factor in driving wind LCOEs higher. In comparing the wind plant LCOEs of Cases 3 and 4 with their corresponding gas plant LCOEs, wind will not be competitive with gas in 2013, either with or without the PTC. Plenty of wind plants will still be built, but with the current cost structures in place and unless federal incentives are renewed or replaced, post-2012 U.S. wind markets will be driven primarily by RPS requirements rather than competing head-to-head with gas projects.

Bruce Hamilton (left) is Director of Energy at Navigant Consulting, Inc.
--------------------------------------------------------------------------------

Footnotes
1. According to the DOE's Preliminary Evaluation of the Impact of the Section 1603 Treasury Grant Program on Renewable Energy Deployment in 2009 (Bolinger, Wiser, and Darghouth, April 2010), the grant program may have helped directly motivate as much as 2,400 MW of wind capacity to be built that would not otherwise have come online in 2009.
2. Case 1 assumes a 6% annual return for tax equity investors, which was typical in 2008 when there were plenty of investors compared to the number of quality projects. The wind plant capital cost is assumed to be $2,000/kW for all cases.
3. Case 2 assumes a 2011 cost of debt of 4%/year plus a 2.5% up-front fee. The cost of tax equity is currently 9%/year, plus a 3% premium for projects with debt. Only Case 2 assumes bonus depreciation.
4. Case 3 assumes a 9% annual return for tax equity investors in 2013. If the number of tax equity investors does not significantly increase and new structures do not appear, the cost of tax equity will remain at the elevated 2011 levels.
5. Case 4 assumes that the cost of project debt in 2013 will follow inflation and return to 2008 levels of 6%/year plus a 2.5% up-front fee.
6. Natural gas prices are assumed to be $3.48 to $4.91/MMBtu in 2011 and $4.14 to $5.75/MMBtu in 2013.

Update on Treasury's Cash Grant Program

April 16, 2010

Tax Cuts, Renewable Energy Grants Attract Unlikely Allies

By JOEL KIRKLAND of ClimateWire, New York Times

They might seem like strange traveling companions, but solar power companies and chemical manufacturers are riding the same bandwagon to urge Congress and the Obama administration to expand tax cuts and grants for clean energy.

The push in the past two days has corresponded nicely with Tax Day. With health care reform in the rearview mirror and talk of more economic stimulus bills around the bend, industries are going hat in hand to Congress for extensions of tax credits and government financing programs that could run out this year.

Wind and solar energy companies are desperate to maintain subsidies they say are needed to carve out a permanent place in the U.S. economy. Heavy industries, such as Dow Chemical Co., are looking for help retooling factories to shift some of their business to clean energy technology.
Two programs created by the 2009 economic stimulus package, the clean energy manufacturing tax credit and Section 1603 grants for renewable projects, are at the center of discussions. Since the departments of Energy and Treasury began administering the programs, hundreds of individual projects or companies have accessed the government's largesse.

Obama administration officials, along with industries that have benefited, tout the programs as big job creators, and according to DOE, they have created thousands of jobs. But in a political atmosphere colored by tea party protests, Congress battles perceptions among conservative Americans that the stimulus funding has not created jobs, even as companies press for expansions of the government financing programs that they say will yield concrete clean energy jobs growth this year and next year.
"The competition for these funds was oversubscribed 3-to-1 in competitive projects," said Matt Rogers, head of DOE's stimulus funding program, referring to the manufacturing tax credit.

Grant program made solar industry shine in '09

The Treasury Department had anticipated that it would distribute about $3 billion in renewable energy grants by the end of 2010. Treasury has already surpassed that figure. Companies ate up the $2.3 billion clean energy manufacturing tax credits quickly, and the administration has requested another $5 billion in its fiscal 2011 budget.

Wall Street has not fully recovered, according to the solar industry's top trade group. If it wasn't for the grant program, which pays companies upfront cash in lieu of tax credits, the industry in 2009 would have been held hostage to a banking sector that had frozen tax equity lending.

Rhone Resch, president of the Solar Energy Industries Association, yesterday called the Treasury program "instrumental in spurring industry's growth" and urged Congress to extend the program beyond this year. It expires at year's end.

By February, 182 solar projects had received Treasury grants totaling $81 million, which helped attract nearly $300 million in additional financing. The grant program "reduces the need for tax equity partners and significantly lowers the transaction costs for a solar project," the industry said in a report issued yesterday.

"The combination of the 48C program and 1603 renewable generation payments has put the United States on a path to doubling high-technology clean energy manufacturing and renewable generation capacity by 2012," Rogers said. "These programs are bringing private capital off the sidelines and back into the clean energy financing markets."

Chemical industry wants tax credits expanded

The manufacturing tax credit has been just as popular. Yesterday, the American Chemistry Council (ACC), a powerful Washington-based industry group that represents the nation's largest chemical manufacturers, urged Congress to expand the so-called 48C program.

"Policies that drive expansion of low-emission industrial technologies and clean energy innovation are important elements of any national greenhouse gas emission reduction policy," said the ACC.

"ACC fully supports the effort to encourage investment in energy efficiency and re-tooling for clean energy manufacturing via programs such as a manufacturing revolving loan fund, expansion in the 48 (c) advanced energy manufacturing tax credit, and other tax incentives," it said.

Officials from the trade group said Dow Chemical, for example, has used the manufacturing tax credit to encourage the development of an advanced auto battery that will make use of clean energy technology. The credit has also been of use in Dow's development of solar shingles. The profitability remains uncertain, but the tax credit has gotten the manufacturing off the ground.

Chemical companies are an active player in a group of major industry trade organizations pushing for industry-friendly policies in energy and climate change policy being crafted in the Senate. The ACC, while mentioning its interest in additional tax credits, said Congress should take the lead on any climate-related policy ahead of pending U.S. EPA regulations under the Clean Air Act to reduce greenhouse gas emissions.

Copyright 2010 E&E Publishing. All Rights Reserved.

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Chadborne & Parke Project Finance Feb 2010 NewsWire

Chadborne & Parke Project Finance NewsWire contains great up-to-date information on the word of clean energy project finance.

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Table of Contents
1 The Year Ahead: What to Expect from Washington
11 DOE Moves on Loan Guarantees
17 Treasury Cash Grant Update
22 Update: M&A Market
28 Update: Tax Equity and Debt Markets
35 Islamic Project Finance: Structures and Challenges
40 Cross-Border Renewables — Baja to California
43 Finding Development Capital
48 A New Transmission Superhighway Takes Shape in the West
54 Environmental Update

Wind Farm Finance Picks Up

Wind Farms Set Wall Street Aflutter

By RUSSELL GOLD

Associated Press

A new program offering cash rebates on renewable energy investments is sparking interest in wind farms. A worker atop a windmill in Maine.

After nearly a six-month lull, Wall Street is getting back into the business of financing new wind farms.

Morgan Stanley and Citigroup Inc. have invested $100 million each to finance separate wind farms this month, taking advantage of a brand-new federal program that is paying substantial cash grants to help cover the cost of renewable energy investments.

Bankers say this is the beginning of an active pipeline of new wind-farm financing, as well as investment in large solar installations and geothermal facilities. Project developers and Wall Street appear to be viewing the federal cash grant program as such a good deal, industry experts say, it may grow much larger than its Washington creators expected.

"The money is coming back," says Ethan Zindler, head of North American research at consultant New Energy Finance Ltd.

Under the program, the government will give a cash rebate for 30% of the cost of building a renewable-energy facility, awarded 60 days after an application is approved. Investors are also given valuable accelerated depreciation deductions, which help offset taxes.

The Energy and Treasury departments have said they expect to spend $3 billion on the program, which started July 31 and runs through the end of 2010, and was part of the stimulus bill. But a government spokesman says requests for $800 million in grants were submitted during the first four weeks.

Some Wall Street bankers say they expect applications to grow to $10 billion, based on projected wind-power installations.

"We see opportunities and we are pursuing them pretty actively," says Kevin Walsh, managing director of General Electric Co.'s GE Energy Financial Services division, which was a major financier of wind deals in the past.

The strong interest echoes the $3 billion cash-for-clunkers program that provided incentives to trade in older, lower-gas mileage cars, and which was quickly overwhelmed by demand. "We are concerned that this may evolve into a cash-for-clunkers version 2.0," says a spokesman for Rep. Darrell Issa, a California Republican.

But unlike the popular cash-for-clunkers programs, there is no spending cap on the renewable energy grants, and the government has committed to spending as much as is needed to keep renewable-energy investments flowing.

Under an earlier renewable energy program, the government gave companies tax credits over 10 years, which were attractive as long as financial firms believed they would be generating taxable profits for years to come. When Wall Street imploded last year, profits turned to losses and appetite for these investments disappeared quickly. Some of the companies most active in these deals -- including Lehman Brothers Holdings Inc. and American International Group Inc. -- were hobbled or destroyed by the turmoil.

But the new cash grants are offering the potential for attractive returns. Several bankers interviewed said they expected deals to provide an annual return of anywhere from 9% to 15%.

Most of the investments are expected to go to wind projects, because the industry is more mature and in a better position to capture limited funds. "I would not be surprised if the program is ridiculously successful and spurs a huge amount of development," says Liz Salerno, director of industry analysis for the American Wind Energy Association.

More

• Duke Energy Makes More Investments in Wind Farms

Even capital-constrained financial giant Citigroup has been drawn to wind power. In August, it made a $120 million investment in a large wind farm under construction in the rolling hills of northern Pennsylvania. The project, called Armenia Mountain by developer AES Corp., will deliver about 100.5 megawatts of power-generation capacity from 67 turbines, each the size of a 20-story building.

The quick returns provided by the cash grant "made it an attractive investment option," said Sandip Sen, Citi's global head of alternative energy.

It's not just Wall Street banks that are attracted. Iberdrola SA, a Spanish company that is the world leader in renewable energy by capacity installed, said in July that it expects to tap $500 million in cash grants for U.S. wind projects. "We've been in contact with the Treasury Department and we think the $3 billion is a minimum-type number," said Ralph Curry, chief executive of Iberdrola's U.S. business unit.

The Treasury Department didn't return calls seeking comment.

Additional financing from the grants would potentially benefit major wind-farm developers such as Florida utility FPL Group Inc. and large-scale solar developer Edison International. It could also give a boost to manufacturers who make the turbine blades and solar panels, such as Vestas Wind Systems A/S and First Solar Inc.

Morgan Stanley recently made a $120 million investment in a Montana-based wind farm developed by Grupo Naturener SA. "The cash grants are a good deal for both developers and financial backers," says Martin Torres, a Morgan Stanley vice president who worked on the deal.

"If we have a quick recovery and we're going like gangbusters again, you could easily get to $10 billion in two years," says Kevin Book, managing director of ClearView Energy Partners LLC, a Washington consultant.

Write to Russell Gold at russell.gold@wsj.com

Stimulus and the Effects on Renewable Energy Finance

March 20, 2009

Stimulus seen sowing seeds for renewable energy's revival

By NATHANIAL GRONEWOLD, Greenwire (New York Times)

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.

For more news on energy and the environment, visit www.greenwire.com.

Update on Tax-equity Markets

Renewable Energy Developers Eye Tax-equity Revival

by Cassandra Sweet Dow Jones Newswires

Wednesday, March 04, 2009

SAN FRANCISCO (Dow Jones)

The financial crisis has opened a void in financing for renewable-energy projects as troubled investment banks have pulled back.

The situation has left developers scrambling for funds and eyeing new ideas to fix the broken system.

Some banks, funds and utilities are expected to step up their investment in renewable-energy projects, which had been dominated by big participants like Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM) and Morgan Stanley (MS). But money hasn't come fast enough for many developers of wind, solar and other clean-energy projects.

Lending was fluid when the banks had large balance sheets and could make use of a 30% renewable energy investment tax credit. The banks would invest in clean-energy projects in exchange for the developing company's tax credit and a related tax write-off called accelerated depreciation. But as losses have mounted, the big investment banks still standing have cut back on their tax-equity financing.

"There have been no unconventional additions to the tax-equity market," said Nick Allen, an equities analyst at Morgan Stanley (MS) in San Francisco. "No one has stepped in and provided funding yet. We hope something will change."

This has left many renewable-energy companies struggling and prompted market participants to pitch new ideas to the federal government to fix the system, even as the Obama administration promises a flood of money in the hope of kick-starting investment in a sector seen key to rejuvenating the economy and weaning the country off fossil fuels.

Tough Choices For Developers; Fixes Pitched

The strains from the collapse of the tax-equity market are starting to show.

Privately held thin-film solar panel maker OptiSolar this week sold its entire portfolio of planned solar power plants, about 1,850 megawatts, to leading thin-film solar panel maker and developer First Solar Inc. (FSLR) for $400 million in stock.

In a similar move, eSolar last month sold off its pipeline of solar-thermal power plants to independent power producer NRG Energy Inc. (NRG) for a $10 million equity investment and a promise by NRG to develop the plants.

Meanwhile, eSolar competitor Ausra, also privately held, said in late January it was abandoning plans to develop and own large-scale solar plants to focus instead on selling its technology to others.

To spur repairs to the system and jump-start investment, market participants like brokerage Meridian Investments Inc., which pegs the value of the renewable energy tax-credit market at $6.5 billion to $9 billion a year, are pitching proposed fixes to the federal government.

Meridian is shopping a tax-credit financing proposal in Washington that the firm says could attract as much as $3 billion in renewable energy investments from Fortune 500 companies this year.

Under the proposal, an investing company would borrow money directly from the Treasury Department at a 10-year Treasury note rate. The company wouldn't make any payments for the first five years, and would pay off the note in the second five years, when the note would fully amortize, said Jack Casey, the firm's vice chairman in Washington.

"We think this is the best way to do it," said Casey, whose firm has placed about $15 billion in tax-credit equity financing over the last 28 years. "It's no handout, it's just timing and credit."

Meridian's investor-note financing proposal would boost the yield on such transactions from about 8% currently, to as much as 14%, Casey said, adding several large companies, including utilities and non-energy firms, have expressed interest in the plan. The firm hopes to speak with Treasury Secretary Timothy Geithner this month about the proposal, which would include tax credits for investments in low-income housing and historical restoration projects.

Opportunities Emerging?

The pullback by the big investment banking houses also may be creating opportunities for regional banks to expand their role in renewable-energy investment. Banks with experience in affordable-housing tax credits and new-markets tax credits for developing retail and other commercial operations in low-income areas may be especially well placed.

"There's a lot of talk about who's going to fill the void," said Russ Landon, managing director of investment banking at Canaccord Adams in Boston, which helps put financing deals together and provides research on public companies. "I think you'll see some of the regional (banks) come in and do it if they have money."

Minneapolis-based U.S. Bancorp (USB) has invested in about a dozen renewable energy projects over the last year by providing tax-equity financing, and the company said it will likely expand its investing in renewables, drawn in part by government incentives in the economic-stimulus bill passed last month.

"We're interested in growing our presence in that space, from the project finance side and the tax-equity side," said Zack Boyers, chairman and chief executive of U.S. Bancorp's Community Development Corporation in St. Louis, the unit that makes the investments. He added that the bank has received numerous inquiries from renewable-energy developers in recent weeks.

Meanwhile, California's Union Bank just closed on $20 million in project financing for SunEdison, a Beltsville, Md.-based solar-panel installer backed by Goldman Sachs Group Inc. (GS), Allco Finance Group Ltd. and other investors. The bank has invested in about 17 projects over the last five years, with about nine of those deals done in the last six months, said Lance Markowitz, senior vice president at Union Bank.

"Given the impetus from the government, there are a lot of people working on a lot of projects," Markowitz said. "We're hoping to do more."

(Cassandra Sweet covers power, natural gas, renewable energy and carbon markets for Dow Jones Newswires.)

Copyright (c) 2009 Dow Jones & Company, Inc.