The Future of Renewable Energy Finance

This spring, a team from the law firm of Mintz Levin Cohn Ferris Glovsky and Popeo presented its retrospective of renewable energy project finance in the U.S. and a forecast for this year and next in a conference sponsored by GTM Research. Through 2013, Mintz Levin says it anticipates the U.S. renewable power sector “to seek over $90 billion in project financing. We also predict—stipulating significant uncertainty exists for domestic energy policy and global capital markets—the capital demands of renewable projects seeking project financing will continue to grow at a compounded annual growth rate of approximately 16.2% over the next two years, increasing to $41.2 billion in 2012 and $48.9 billion in 2013.”

The period of 2009 to 2011, says Mintz Levin, represented “the boom years” for renewables, particularly wind, solar, and biofuels. The boom was driven by government policies and dollars: outright subsidies and tax benefits from the federal government, and state renewable energy mandates. The Sect. 1603 Treasury Grant program—providing upfront cash against future loan guarantees—“supported over 5,195 projects representing over 15 GW in installed capacity and $35.9 billion in total investment,” says their report (see sidebar). The Department of Energy’s Sect. 1705 loan guarantee program “provided $16 billion in loan guarantees to 28 projects, representing over 4 GW of installed capacity and $22 billion in total project investment.” The Department of Agriculture’s Sect. 9003 biorefinery loan guarantee program “is supporting the first commercial U.S. advanced” cellulosic ethanol projects “by allowing developers to tap the institutional investor market through credit-enhanced, project company bond offerings.” More than 30 states provide “demand drivers” through renewable portfolio standards.

But that’s about to change. Mintz Levin’s Mark Riedy told reporters at the online conference in mid-March that future federal funding will be “ratcheted back quite a bit.” The loan guarantee program is out of money, the current Congress is “budget-conscious,” the U.S. economy is shaky, and the nation is in an election cycle, he explained.

Jordon Collins said the renewable power business is at an “inflection point,” where the business could move in the same or a new, unknown, direction. He noted that the 1603 cash grant program has died and the renewable production tax credits are expiring. Also, the Obama administration’s American Recovery Act stimulus program—which heavily targeted renewable projects—is winding down, European banks are exiting the U.S. market because of their own debt problems, and a glut of natural gas undermines the economic case for renewable power.

If renewable project finance has to rely solely on the availability of tax benefits to the equity market, said Collins, there could be 50% less capital available for renewables.

Nevertheless, said Riedy, “the fundamental case remains, and demand is outstripping supply.” What may change is the nature of the players on the renewable energy field. The paper the firm presented at the online conference predicts that “Project financing constraints are likely to disproportionately impact smaller projects, less established developers, and/or projects with higher technology and regulatory risks.” New entrants, relying more on tax equity markets and less on direct subsidies, may come from “non-financial industries such as oil, technology, and utility companies” and these new entrants “will experience steep learning curves” that could dampen their investment enthusiasm.

“Tax equity investor participation,” says the Mintz Levin report, “will be limited to the largest renewable energy projects or project portfolios. Tax equity investors will conduct protracted diligence on projects to minimize risk exposure, and seek guaranteed or increased returns on their investment as a condition of their continued participation.”

Kennedy Maize is MANAGING POWER’s executive editor