The World's #1 Renewable Energy Network for News, Information, and Companies.
Untitled Document

Renewable Energy REITs or MLPs Would Unlock Billions for Project Development

Top engineering, procurement and construction firms gathered to network, learn and do business with corporate-level project developers at the PGI Financial Forum, one of four co-located events that took place in Orlando, Fla. earlier this month. Richard Kauffman, Senior Advisor to the Secretary of the U.S. Department of Energy, gave the keynote address during a luncheon that took place during the conference.

During the luncheon, Kauffman explained to the 100 attendees that as someone who originated from the private sector, in his DOE role he is trying to understand where market forces can be harnessed in order to unleash the flood of investment that is needed to bring about large renewable energy projects.

Kauffman explained what he sees as a disconnect between returns in renewable energy projects compared to returns in other investments.  On the one hand, today, renewable energy projects are financed in what he called an “old-fashioned, archaic way” where for the most part, projects rely on private sector money that is looking for high rates of returns, typically around 12-14 percent.  On the other hand, money managers, wary of the stock market and its risks, have returned to the bond markets, which offer more steady (but lower) rates of return, in the 5 or 6 percent range. Kauffman explained that this “wall of money” that is looking for a stable rate of return, such as what can be found in the bond markets, could easily invest in renewable energy projects if only the financial vehicle existed that allowed it to.  Renewable energy projects with signed power purchase agreements (PPAs) will deliver a healthy rate of return to their investors, one that will be stable for 20 years, exactly what the money managers are looking for.

In other words, he said, there is all this money looking to invest in yield but it can’t flow to where it is needed because the financial vehicles don’t yet exist that would allow it to.

Enter Real Estate Investment Trusts (REITs) or Master Limited Partnerships (MLPs). 

According to Kauffman, REITs and MLPs, function like a bond and are currently used in more mature markets for project development. If they were available to renewable energy projects, said Kauffman, they would unlock loads of money for project development.  Two separate bills have already been introduced in Congress seeking to allow renewable energy projects to be financed through REITs and MLPs but neither bill has come up for vote yet.

Kauffman asked Financial Forum attendees to imagine for a minute what would happen if MLPs or REITs could be used to finance renewable energy projects. He asked attendees to imagine that they would have a yield of 5 or 6 percent and simply through that yield, the cost of capital would go down by 50 percent (since private sector funding demands returns in the 12 to 14 percent range.)

“But I think it would do five other things,” he explained.

First, Kauffman said that renewable energy REITs or MLPs would accelerate standardization in the contracting process.  With so many projects now eligible for project finance, the markets would demand a streamlined contracting process.  This would remove more of the soft costs from project development. 

Second, these renewable energy financial vehicles would continue to force down solar and other supply chain costs. Kauffman explained that we are good at logistics in the U.S. and if we were funding solar projects at increasing rates, we would improve the logistics in the supply chain.  He pointed to the decreasing costs of residential solar customer origination through the explosion in solar leasing as an example of taking costs out of the supply chain.

Third, Kauffman said all of this would then lead to greater market aggregation of smaller projects. Large projects backed by stable project developers already have no trouble finding money to fund their projects.  Smaller projects, however, have a much more difficult time finding cash.  If there were REITs or MLPs available to renewable energy projects, smaller projects could be aggregated.  This would again improve efficiency and unleash funding for smaller projects.

Fourth, Kauffman believes that REITs or MLPs would encourage innovation in the industry.  He said that capital markets are much better than banks at assessing risk.  If a bank provides debt to a large innovative project and that project is unsuccessful, it’s difficult for the bank to recover from that loss.  However, imagine a $100 million fund that holds a portfolio of projects. If one project defaults, the fund would still be able to recover because it would hold many other projects as well. “That’s why the capital markets do a better job at assessing risk,” said Kauffman.

Finally, if REITs or MLPs were available to renewable energy projects, the industry would scale very fast, which would again drive down costs and even open up the possibility of a forward market. Kauffman said that renewable energy is the only energy source that gets cheaper the more you make.  So, more projects coming online would help to align the supply chain and create a forward market.

Since renewable energy is all about the upfront costs, Kauffman believes that there hasn’t been enough thought put into how to reduce the cost of capital to finance projects.  REITs or MLPs could play a huge role in the future because the way renewable energy projects are being financed today just doesn’t make sense, said Kauffman.

The MLP Parity Act was introduced in Congress earlier in 2012.

Lead image: Calculator and Investment Charts via Shutterstock

Untitled Document

RELATED ARTICLES

Sunrise in Pakistan as the Country Delves into Solar PV

Robert Harker Pakistan has joined the list of countries that are exploring solar power as a means to bridge critical energy generat...

Global Renewable Energy Roundup: China, Kenya, Turkey, India Seeking More Renewables

Bloomberg News Editors China is being encouraged by three industry groups to double the nation’s solar-power goal for 2020 to make up for sh...

Why Smarter Grids Demand Smarter Communications Networks

Mark Madden

Historically, utility networks and communications networks have had little in common.

The Importance of “Switching Costs” to the US Residential Solar Industry

Paula Mints The DoE and numerous organizations and governments globally are focused on driving down the cost of solar convinced t...

PRESS RELEASES

Array Technologies’ DuraTrack HZ v3 Continues to (R)evolutionize at SPI

Array Technologies, Inc. (ATI) prepares to showcase its recently launched tracking syst...

Appalachian's Energy Center assists counties with landfill gas to energy projects

The Appalachian Energy Center at Appalachian State University recently completed a proj...

Early Bird Registration Deadline for GRC Annual Meeting is This Week

The deadline for early-bird rates for registration for the biggest annual geothermal ev...

Redesigned HydroWorld.com Video Gallery

Hydropower news and information, and interesting promotional announcements are now avai...

FEATURED BLOGS

Transitioning to Net-Zero Living

Judith and Jeffrey adore living in Belfast, Maine – a quaint harbor town of Belfast, Maine. They previously res...

The True Cost of Electric Vehicles in Australia

In order to avoid increased congestion, further greenhouse warming and lessen Australia’s reliance on imported ...

The Coming Multi-trillion Dollar Energy Investment Drive

In coming years, a multi-trillion dollar low-emission energy investment drive will get underway. Three catalysts wil...

The Perfect Elevator Pitch

The elevator pitch is a concise statement that grabs attention and communicates value, ideally leading to a next step...

FINANCIAL NEWS

Jennifer Runyon is chief editor of RenewableEnergyWorld.com and Renewable Energy World magazine, coordinating, writing and/or editing columns, features, news stories and blogs for the publications. She also serves as conference chair of Renewable ...

CURRENT MAGAZINE ISSUE

Volume 18, Issue 4
1507REW_C11

STAY CONNECTED

To register for our free
e-Newsletters, subscribe today:

SOCIAL ACTIVITY

Tweet the Editors! @jennrunyon

FEATURED PARTNERS



EVENTS

Doing Business in South Africa – in partnership with GWEC, the Glob...

Wind Energy in South Africa has been expanding dramatically, growing fro...

Intersolar North America 2016

Exhibition: July 12 - 14, 2016; Conference: July 11 - 13, 2016 Intersola...

Intersolar South America 2015

Exhibition and Conference: September 1-3, 2015 Intersolar South America ...

COMPANY BLOGS

Less Is More

When you’re giving a presentation, one of the easiest things to do...

Captivology

One of the biggest challenges we face as efficiency sales professionals ...

How To Optimize Your Meeting Schedule

Do you spend more time in meetings than you do actually working? While m...

NEWSLETTERS

Renewable Energy: Subscribe Now

Solar Energy: Subscribe Now

Wind Energy: Subscribe Now

Geothermal Energy: Subscribe Now

Bioenergy: Subscribe Now  

 

FEATURED PARTNERS