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Finance Outlook 2012: Can Projects Move Ahead In This Difficult Economic Environment?

For the past two years, the North American renewable energy industry was able to take advantage of a powerful financial vehicle, namely the 1603 Grant in Lieu of Tax Credit that was offered to developers of qualifying projects. But with the grant set to expire at the end of 2011, many are wondering how the industry will fare without it.

"The financing of wind projects and solar projects and other technologies is going to fall back to the pre-grant incentives, namely the production tax credit and the investment tax credit," said Jeff Davis, a partner and co-head of the renewable energy practice at Mayer Brown.

During those pre-incentive days, projects relied on funding from tax equity markets, which at the time had plenty of money to offer. But since the crash in 2008, the tax equity market hasn't bounced back as much as many hoped it would. "Unfortunately, corporate America still hasn't returned to the halcyon days of yesteryear where there were significant profits and thus tax bills," said Davis.

He thinks the tax equity markets are still under tremendous pressure. "We are still in a situation that we've been in since 2008 where the tax capacity or the ability to monetize those production tax credits and investment tax credits hasn't really recovered," he said.

Jonathan Postal, senior vice president at Main Street Power, also thinks the grant will be allowed to expire and that it will cause "a significant hiccup to the financing market."

Postal thinks we'll see more innovation in deal financing, similar to what we saw before the grant was passed. "You're going to need multiple partners, different ownership structures. Banks aren't going to just do the financing, " he said.

"I don't think the private equity groups are going to be as game to do just the pure equity play, so it's going to make things significantly more challenging," he continued.

Ed Feo of USRG Renewable Group said he'd expect to see the capacity of the tax equity market drop by as much as 40 percent if the grant is allowed to expire, something that he is prepared to fight tooth and nail. He said of the grant, "the smarter bet is that it is going to expire and those of us who are willing to fight to the death are going to say 'call me on December 24th and I'll let you know.'" Feo believes that there is still more analysis that needs to be done on the number of jobs that will be impacted in the renewable energy sector if there is no grant. He isn't prepared to write it off yet.

Main Street Power's Postal isn't that worried about losing the grant. He indicated that his company is actively seeking good deals and is ready to scoop up those solar deals that have all their ducks in a row but just can't take the project "across the finish line."

He thinks the grant program allowed a lot more players into the field, many of whom brought just one deal to the table. After the grant expires, "the guy that has one good project will be in trouble," he said. "We'll be happy to look for partners to sell those."

Another issue that will surely play out in 2012 will be the extension of the production tax credit (PTC) for wind energy projects. That program is scheduled to sunset on Dec. 31, 2012. Feo thinks it will be extended but admits that the political climate is pretty difficult right now. "This is not a happy time for renewables on the political side," he said.

Mayer Brown's Davis thinks 2012 could be tough on the wind market one way or another but especially by the end of 2012. "It's a little easier to say that at the end of 2012, we'll see a significant falling off if that [the PTC] is not extended regardless of what happens to the grant," he said.

Will that mean that solar will maintain a steady project pipeline but wind won't? "For 2012 it's hard to say who's going to feel more pain or who's going to withstand the pending expiration. Certainly, once you get past 2012, unless we get an extension of the PTC, solar is the clear winner," said Davis. Solar projects can take advantage of the PTC until 2016.

That said, Main Street Power's Postal thinks that solar deals will certainly be more difficult to close in 2012. "I think, by the end of the year [2012], it will end up being less solar was done in '12 than was done this year [in 2011]," he explained.

The other key trend to watch in terms of renewable energy financing will be the price of solar panels. "High-quality Chinese panels are coming in south of a dollar or certainly in that range so people are doing forward pricing on that number for a year from now and you're looking at 80 cents [per watt] for panels, even 75 [cents per watt]," he said. Postal believes those low prices are a double-edged sword.

On the one hand, with prices that low, many markets are getting pretty close to grid parity, he said, which would mean more and more attractive deals in certain high solar markets. "On the other hand it's not U.S. companies [that are making the equipment], he said, something that angers many in the industry. An international trade dispute was recently filed against Chinese panelmakers, which could result in higher prices for crystalline silicon panels in the future.

Project developers benefit from low prices, however, and Postal was quick to add that once grid parity is achieved, U.S. companies still benefit. "It is U.S. project companies like ours [doing the projects] - it's just the equipment that is coming in from overseas," he said.

Renewable energy financiers agree that no matter what, 2012 will be a tough one for renewables. While the first half of the year may look better than the second half due to the completion of projects that began under the grant, the second half may turn out to be pretty bleak.

"I think '12 is going to be rough," concluded Postal. "I think you're going to see a lot of consolidation...in the finance space, the development space."

Postal said he expects that many of the "three- to five-person firms" that set up shop recently to try to ride the renewables wave will close in 2012. "I think a lot of them will decide 'this is too painful to stay in this industry,'" he said.

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