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What's Good for the Lease is Good for the Lender

Trying to identify the Next Big Thing in renewable energy investment? You could do a lot worse than stake a claim at the point where two trends – growing ones that may have escaped your notice – meet.

A report issued last July by the UN Environment Programme and Bloomberg New Energy Finance found that in 2010, for the first time, developing countries dominated in terms of “financial new investment” – spending on utility-scale renewable energy projects and provision of equity capital for renewable energy companies. Renewables investment in the Middle East and Africa was up 104 percent over 2009, up 39 percent in Latin America, and 25 percent in India.

Secondly, renewables investment within Europe underwent a similarly seismic shift. The same report found that while new financial investment in large-scale renewable energy declined by 22 percent in 2010, the drop was more than offset by a surge in small-scale project installation, especially rooftop solar – up 150 percent in France, 132 percent in Germany, and 59 percent in Italy. Much of the increase was owed to countries’ generous feed-in tariffs and a sharp decrease in the price of photovoltaic (PV) modules.

So: where exactly do emerging markets – where great energy needs are complicated by financial risk and lack of capital – and small-scale projects meet?

In a word – leasing.

Underwhelmed? Granted, it’s not sexy, state-of-the-art, within-the-realm-of-the-transformational – but leasing does fill a gap, meet a need, and altogether satisfy the many other business clichés that over time are proven right by strong economic performance.

Indeed, leasing of renewable energy equipment has already caught fire in Europe. A 2010 article in Leasing Life described renewable energy as “Italy’s leasing success story [for the year].” [Italian leasing association] Assilea figures showed that in the first half of 2010 alone, renewable energy leasing was up a staggering 295 percent over the same period the previous year. Assilea recorded 551 transactions over the period, totaling 1.04 billion euros.

And the fire is spreading to the United States.  A National Renewable Energy Laboratory (NREL) study out last month found that solar lease models are surging in southern California. Press reports point to similar trends in other states, and last summer three U.S. Senators introduced the Renewable Energy Access through Leasing Act to enlist the U.S. Department of Energy to support the creation of a stable market for renewable energy system leases to residential customers. NREL study author Easan Drury said, “What is so interesting about the southern California data is that the strong decrease in PV prices – from lower retail costs and stronger federal incentives – didn’t pick up a new demographic. But the new business model – leasing – did pick up a new customer demographic.” 

And what makes leasing so attractive in the U.S. and Europe may very well enable it to work in developing countries. Simply, leasing drastically reduces upfront costs for the installation of renewable energy equipment, in effect democratizing lower-income populations’ ability to purchase RE technology to resolve energy deficits. For emerging markets, any means that get around their paucity of capital could be transformative for all customer types.

Of significance to prospective investors, opportunities to expand the leasing of renewable energy equipment are not limited to residential users.  Commercial enterprises looking to reduce energy costs, but which are also unable to budget large upfront costs, can achieve the necessary savings over the longer term by acquiring leased assets.

Reasons to lease in emerging markets abound, in fact. As a recent article in this publication pointed out, “PV companies offering a lease make the entire process of going PV seem simple. They provide the energy use and budget analysis, decide on the equipment, and provide a minimum production guarantee. The lessee simply reviews the contract and begins making monthly or sometimes annual payments once the system is installed.”

And, for both RE equipment providers and leasing companies, a final point of entry into emerging markets: whereas much RE investment growth in recent years has been incentivized by government mandates for utility-scale projects, most populations in most developing countries live off-grid, often in rural areas where large energy projects simply don’t make sense. But leasing of renewable energy equipment does. 

So the essential elements of an RE leasing success story for emerging markets seem to be in place. People in developing countries are in desperate need of energy, governments and international organizations are prioritizing the use of renewable energy, and equipment providers are producing solar panels, small renewable generators, electric vehicles and other RE solutions at a record clip.

Moreover, accelerated use of RE technology through leased equipment would in turn encourage tangential economic growth in emerging markets – another benefit for investors (not to mention local populations). Access to stand-alone energy systems spurs economic growth as stores are able to stay open later and reduce costs; education is improved as students switch on the lights to study past dusk; and communications are improved as cell phones can be readily charged without driving long distances to commercially-operated charging locations.

But it’s not happening just yet.

The reality is, emerging markets scare off many equipment providers, who can find easier markets to sell their products in without worrying about uncertain regulatory regimes, capricious governments, and local partners’ lack of financial wherewithal.  International financial institutions have found it difficult to lease in these markets as well. 

The largest impediment to rapid lease origination is the lack of match-funding.  Unless a lessor can obtain its own financing – which is extremely difficult given the private bank market these days – leasing companies have be content with a no-growth scenario. To date, other than vehicle-focused businesses, only a couple of U.S. leasing companies have even expressed interest in developing countries, let alone in leasing RE and clean tech equipment.

The Overseas Private Investment Corporation (OPIC), the U.S. Government’s development finance institution, is trying to grease the wheels of the leasing sector’s entry into emerging markets by promoting the U.S. private sector in developing countries.

Our strategy is to tailor traditional loan structures in order to make financing available to leasing companies, which can then work with equipment providers to lease RE equipment to commercial, residential, and municipal customers in emerging markets.

What we’re really trying to do in these early days is match-make – identify RE equipment providers and leasing companies that can work together to take advantage of what promises to be an enormously lucrative opportunity in emerging markets where regulatory environments support standard leasing. As U.S. clean tech equipment manufacturers are in the growth stage, lease providers should offer a springboard for early entry and a distribution network in new, supply-short markets. And once those parties are identified and come together, we can provide the final puzzle piece.

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Lynn Tabernacki is the director of Renewable Energy and Sustainable Development at the Overseas Private Investment Corporation (OPIC), a U.S. government agency designed to support U.S. investment in emerging markets.

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