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In Climate of Cheap Gas, Forecast for Renewable Energy Finance is Cloudy: Q&A with Michael Butler, CEO of Cascadia Capital

Cascadia Capital CEO Michael Butler knows renewable energy finance. His investment banking firm has been a key player in some of the clean technology sector's most significant transactions. His forecast for renewable energy is "near term cloudy." The rush of investments into natural gas is siphoning capital that would have gone into the renewable energy sector. Renewable energy is a viable industry long term, it's just going to take longer than we all hoped.

Cost parity with fossil fuels has long been the holy grail of the renewable energy industry. When shale exploration in the United States began producing abundant natural gas, prices began falling and didn't pull the rip cord before hitting ten-year lows.

What impact is that having on the renewable energy sector's ability to attract essential capital investment? Denis Du Bois asked Cascadia Capital CEO Michael Butler for his outlook from an investment banker's perspective.

Denis Du Bois:  Natural gas prices are at their lowest point in a long time. What effect is that market dynamic having on renewable energy investments?

Michael Butler: As an investment bank we follow capital, and the reality is, capital is going into the natural gas industry and coming out of renewables.

Capital is going into not only natural gas projects, but all the infrastructure that needs to be built out to support the sector, and the tertiary industries that are developing because of the sector. Natural gas is also attracting investors who would otherwise have probably stayed on the sideline because they're not finding the returns they need in renewables.

Du Bois:  Why isn't renewable energy more attractive to investors?

Butler  It's the economics. Solar is on a steep enough cost-reduction curve that it still could be competitive with gas. We're still seeing a lot of investment in solar projects. The economics right now are pretty challenging for biomass and wind energy. Wind projects aren't producing the electricity needed to justify their costs. Then on top of that, natural gas plants are base load, not intermittent. That makes them even more valuable to a utility.

Du Bois:  How is this trend affecting energy efficiency plays?

Butler:  We still see a lot of investment and interest in energy efficiency. The returns on energy efficiency are still attractive, and there's still capital going into that sector. There's also capital that would like to go into the smart grid sector. Most investors are just wary about the pace of adoption, or how fast utilities will move.

I think those two sectors long term are going to be just fine.

Du Bois:  A natural gas power plant is a long-term investment. This trend is largely triggered by the low cost of natural gas. How long do you think that will last?

Butler:  From what we're hearing, it could last a long, long time. Most of the people we talk to are telling us this is a 30- or 40-year play. Now, prices may not stay this absurdly low for 30?40 years, but investors are viewing it as a long?term play.

What we're being told is there's so much natural gas out there that if prices rise, the response from the industry will be to increase drilling, and that will add enough supply to maintain low prices.

Du Bois:  There's been talk about pulling long?standing subsidies from the oil and gas industries. Are investors considering that possibility?

Butler:  The reality right now is, even if the government did that, gas projects would still make just incredible economic sense. I don't think the oil and gas sector needs those subsidies. I don't think they should get the subsidies, and quite honestly, the numbers work wonderfully well without the subsidies.

Du Bois:  Then in sectors like waste energy, wind, biomass, what do those companies need to do to attract capital?

Butler:  Number one, they need to cut expenses and focus on technology development to make their technology more efficient and more economic. The other route is to drive down the cost of renewables, but I don't think there's going to be enough demand to get the benefit of economies of scale, other than in solar.

The companies that are going to attract capital are those who can show that they have a roadmap to develop technology that will become economically competitive with natural gas.

Du Bois:  When natural gas prices begin to rise, as the Energy Information Administration predicts, do you see us going back to a coal-driven energy industry, or advancing again toward renewable energy?

Butler:  We'll go forward again towards renewable energy. I don't think we're going back to coal -- I would be very, very surprised. We've seen a few coal deals, and coal companies are desperate to get capital. I just don't see any interest from investors in coal. I think coal is about done.

Du Bois: But you don't seem ready to pronounce wind or biomass energy dead.

Butler: As much as environmentalists are fearful that natural gas is becoming a threat to renewables, I don't actually see that. The near-term phenomenon is crowding investment dollars out of renewables, but that's not a long-term situation. The next couple of years will definitely be tough for renewables, but I do think that natural gas will serve as a bridge to renewable energy.

Du Bois:  How is it a bridge?

Butler:  Because there's not enough gas to last the next 100 years. There will be an opportunity for renewables to attract capital, just not in the next year or two.

With the amount of capital coming into this sector, I think we'll see the infrastructure be built out over the next several years. Once that starts to slow down, that capital will then need a place to go within the energy complex. I envision it flowing back into renewables.

During the interim period, there's still some technology development that needs to be done to improve the efficacy of renewables.

Du Bois:  And you believe there are investors out there still willing to fund that development?

Butler:  Selectively, yes. We are finding that for the right companies, with the right pedigree, the right technology development path, there's still capital available. The capital is much more discriminating today, and they'll pick the ten best companies and fund those, not 100 like before.

Du Bois:  What's the role of government subsidies and incentives in crossing that bridge sooner?

Butler:  Investors are taking the approach of only making investments assuming no government involvement. If some government subsidies or involvement happens, that's great. It's a bonus. Renewables are going to have to stand on their own. That's absolutely the way that investors are looking at renewable investments today. What the government gives, the government can take away.

Image: Josemaria Toscano via Shutterstock

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Volume 18, Issue 4


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