The financial crisis has opened a void in financing for
renewable-energy projects as troubled investment banks have pulled
back, potentially providing opportunities for smaller banks,
investment funds and utilities as new government backing for clean
energy starts to flow.
Some non-traditional firms are expected to step up their
investment in renewable-energy projects, which had been dominated
by big players 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, which are scrambling to secure funds, even as the U.S.
government promises a flood of money in the hope of kick-starting
investment in a sector seen key to rejeuvenating the economy and
weaning the country off of fossil fuels.
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.
This has hurt companies like OptiSolar and eSolar, privately
held solar power developers in California that have had to sell
their project development businesses due to a lack of
financing.
Medium-size banks like U.S. Bankcorp (USB) and Mitsubishi UFJ
Financial Group Inc. (8306.TO) unit Union Bank N.A. say they plan
to expand their tax equity investments in renewable projects, and
utilities like California's PG&E Corp. (PCG) and Sempra Energy
(SRE) have said they're interested in financing such projects for
the first time. The firm has spoken to U.S. House Banking Committee
Chairman Barney Franks about its proposal, in which the Treasury
Department would provide investor-note financing to eligible
corporations that have tax capacity, said Jack Casey, the firm's
vice chairman in Washington.
Under the proposal, an investing company would sign a note with
the Treasury Department at a 10-year 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, during which the note would
fully amortize, Casey said.
"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."
Several large companies have expressed interest in the plan,
including PG&E, Sempra, Exelon Corp. (EXC) and non energy
companies including Internet giant Google Inc. (GOOG) and pharmacy
Walgreen Co. (WAG), Casey said. He added that his firm hopes to
speak with Treasury Secretary Tim Geitner this month about the
proposal, which would include tax credits for investments in
low-income housing and historical restoration projects.
At the moment a big gap persists between what developers need
and what money is available.
"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."
Tough Choices For Developers
The stress has started 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. 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.
The lack of tax equity financing could affect larger renewable
power developers. U.S. utility holding company and power generator
FPL Group Inc. (FPL), said in late January it might have to scale
back its wind farm development plans this year if the financing
environment doesn't improve.
Filling The Void
In addition to companies outside the financial sector, renewable
energy market participants see opportunities for regional banks,
particularly those with experience in tax equity investments, to
expand their renewable energy footprint.
"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."
U.S. Bancorp (USB) a Minneapolis-based bank with a market
capitalization of about $22.45 billion, for one, 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.
The company is exploiting its experience with other forms of
tax-equity financing, such as investment in affordable-housing tax
credits and new-markets tax credits for developing retail and other
commercial operations in low-income areas. Union Bank, which says
it's the 25th-largest bank in the U.S., has 30 years of experience
providing tax equity financing for power plants, low-income housing
and in the last five years renewable energy projects, said Lance
Markowitz, senior vice president. He added that Union Bank plans to
accelerate its investment in renewable energy projects.
"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."
Union Bank just closed on $20 million in project financing for
SunEdison, a Beltsville, Md.-based solar-panel installer backed by
Goldman Sachs, Allco and other investors. The financing will be
used for a 1.7-megawatt solar array in Rifle, Colo., and another
solar project. Union Bank, has invested in about 17 projects over
the last five years, with about nine of those deals done in the
last six months, including the SunEdison financing and an
investment the bank recently closed for a large wind farm in
Minnesota, Markowitz said.
In November, U.S. Bank provided up to $105 million in tax equity
to San Francisco-based residential solar installer SunRun, to
install solar systems in 2,000 homes. In December, the company
provided tax equity financing to a unit of Hoku Scientific Inc.
(HOKU) to install solar panels at airports across Hawaii.
"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.
The renewable energy tax credit market is worth about $6.5
billion to $9 billion a year, according to Meridian Investments
Inc., a brokerage that puts together tax credit financing deals for
renewables projects as well as low-income housing, historic
rehabilitation and new market projects. Companies are eager to
invest in these public-private partnerships, said Casey of
Meridian. The company's investor-note financing proposal would
boost the yield on such transactions from about 8% currently, to as
much as 14%, Casey said.
"What you're effectively doing is saying to Fortune 500
companies, 'We're giving you a low cost of capital if you
participate in a public-private partnership," Casey said. He added
that his firm sees this model as the only viable way to replace the
large banks, which used their low cost of capital to finance these
types of investments.
Casey said large companies are seeking out these types of
investments, to take part in fighting climate change and also as a
hedge against expected higher taxes in coming years. These
companies haven't invested in this area previously because the
yields were not competitive with the yields in their own
businesses, Casey said.
"Every utility in the U.S. has a statutory return of 10% to 12%,
they can't invest in an energy deal that yields 8%, the
shareholders will go crazy," Casey said.
Utilities in states that have state mandates to increase use of
renewable power, such as PG&E's Pacific Gas & Electric and
Sempra, are getting more involved in renewable-energy financing, in
part to ensure that new projects they need to meet state rules get
built.
PG&E and Sempra executives said this week their companies'
utilities are looking at making direct investments in renewable
energy companies or projects, rather than simply signing power
purchase agreements for the output.
PG&E Corp. (PCG) unit Pacific Gas & Electric would like
to provide financing to renewable-power developers to help them
build new projects, said Chief Executive and President Peter
Darbee. Such financing might include convertible debt, in which
PG&E would make a loan with the option to convert the debt
repayment into equity, Darbee said. "If there's a way for PG&E
to participate...we foresee an opportunity to be a green knight to
provide financing," Darbee said.
Sempra Energy (SRE), of San Diego, is aggressively investing in
solar power at its unregulated Sempra Generation unit, but the
company also wants to boost renewable energy investment at its
regulated utility San Diego Gas & Electric.
Both utilities are required to use renewables for 20% of their
retail power by 2010, with pending rules boosting that amount to
33% by 2020. The companies would need approval from state
regulators to invest in renewable companies or projects.
As renewable energy market participants wait for the tax equity
market to revive, it'll be up to the federal government to provide
incentives for companies to invest.
"The devils are in the details," said Casey of Meridian
Investments. "They're going to get it. They undrstand the
math."
(Cassandra Sweet covers power, natural gas, renewable energy and
carbon markets for Dow Jones Newswires, and can be reached at
415-439-6468 and cassandra.sweet@dowjones.com.)
TALK BACK: We invite readers to send us comments on this or
other financial news topics. Please email us at
TalkbackAmericas@dowjones.com. Readers should include their full
names, work or home addresses and telephone numbers for
verification purposes. We reserve the right to edit and publish
your comments along with your name; we reserve the right not to
publish reader comments.