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If Renewable Costs Are Down, Why the Financial Uncertainty?

Over the past few years, renewable costs have been on the decline, particularly solar and wind. According to industry experts, we are getting closer and closer to grid parity. So why is there still such financial uncertainty? This was a prevalent question at the 2011 Renewable Energy Finance Forum (REFF) co-hosted by the American Council on Renewable Energy (ACORE) and Euromoney Energy Events in New York City.

Though there is financial investment uncertainty, one thing is certain: costs for solar and wind have dropped dramatically. “In the past three years, wind costs have dropped 40 percent, due to bigger and better blades, etc. Call it grid parity or what you will, it's happening folks and it's exciting,” said Kevin Walsh, Managing Director at GE Energy Financial Services. And according to Yunquan Sun of ENN Group North America, CSP is expected to drop 40 percent over the next two to three years, while solar PV prices are already low, and expected to drop below $0.10 per kWh in the near future.

So, if prices have dropped significantly, what is holding back a flood of renewable energy investment?

Market Uncertainty

Over the past year, there have been many factors that led to initial renewable enthusiasm such as the gulf spill, nuclear crisis and oil prices. But according to Kevin Genieser of Morgan Stanley, there are still a lot of overhangs in the market. “Once again, we haven't seen a real focus on policy. Most notably, UK uncertainty about solar caused a lot of turbulence in the market. There are many real challenges that have caused investors to lose money that they put into these projects originally,” he said. This has unfortunately caused an overall mixed receptivity for the market.

Ray Wood, Co-head of Global Alternative Energy at Credit Suisse agreed, “initial enthusiasm gave way to pessimism about near term direction of panel prices.” There has also been a bifurcation in the wind industry. Manufacturers see an ongoing reduction in prices and a need to improve efficiency, but these price reductions hurt their profitability. Meanwhile, developers capitalize on these lower prices to get better penetration and returns on invested capital. “This makes it very hard from a financial planning perspective – it's more dramatic from a utility-scale side,” Wood said. 

This market uncertainty has had a major impact on the stock market. Garvin Jabusch of Green Alpha Advisors, LLC explained how damaging this uncertainty can be in his article, “Wall Street's Irrational, Dangerous Hatred of Solar Stocks.” Amy Smith, Managing Director and Co-head of Global Cleantech Investment Banking at Jeffries & Co., agrees with many of Jabusch's statements. She explained that the vast majority of stocks are in the solar space and people use solar to define what is going on in the clean tech space overall. Currently, she said, subsidies are driving growth, but the question is whether there is sufficient demand and at what price.

Smith expressed frustration with the current state of the market, “one of the reasons people are naysayers around solar is that they think it's too expensive. When fully installed system costs have now been cut almost by a third, now they don't like the stocks. Which is somewhat ironic," she said.

She offered some cautious optimism for the market going forward but believes the volitility will remain for a while longer. "We'll see where prices settle. Prices are going down, everything is going in the right trajectory and people still aren't happy. But we'll get there.”

Turbulent Tax Credit Environment

Many financial institutions are also concerned about whether tax credits will be extended, particularly the 1603 grant qualifying period. The grant played a huge role in ensuring liquidity for developers in both wind and solar, said Arno Harris, CEO of Recurrent Energy. "During the global financial crisis in 2008 and 2009, if we hadn't had the grant program, I probably wouldnt be here talking to you today. That grant is what enabled companies to continue to put projects in the ground," he said.

This uncertainty leaves big investors out of the game – many will not push past their comfort zones. “We need [tax credits] to settle down and have something more predictable. These are complex multi-year transactions and it doesn't help to have annual subsidy programs changing underneath us every year,” said Brad Nordholm, CEO of Starwood Energy Group. But there are other ways to drive capital into the market, as evidenced by Google and other investors. There is also more money coming in from Asian and European banks who want to own pieces of capital structure for solar projects, “this doesn't solve the tax credit problem, though,” said Nordholm.

Harris explained that we cannot keep depending on tax credits alone, but we need them in the interim as a crutch to move forward. “We are nowhere near the amount of tax equity needed to maintain solar's momentum. If we don't bring tax equity back...the industry is going to run out of gas really fast,” he said.

Developer Reliability

Many investors are weary of inexperience or under-prepared developers. Brian Steele of PG&E explained that key investment concerns include poorly designed projects. He also emphasized the need for a strong developer balance sheet. “Companies need to prove that they have accurate, detailed balance sheets and prove that they can be successful, which is what SunRun and SolarCity did,” he said. Developers need to convince the market that they are getting more for less operating costs.

Steele closed his address with a heavy statement:

We could solve grid parity right now. If we brought down the cost of financing by 250 basis points we are at grid parity in many of the major markets. And it's not unreasonable to think about when you actually start getting to risk adjusted returns on some of these deals that the market can move that way when we have more efficient structures and different parties coming to the table.

There is hope for renewables to succeed in the market but all parties need to work together to solve this financial crisis. As Arno Harris stated at the close of his address, "we need crisis to spur action and I hope this crisis is what will do it.”

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