Renewable Energy Investors Are Cautiously Optimistic

Public policies in the form of incentives and procurement targets have historically provided the necessary base-level demand for clean energy. Acting on those signals, the private sector has brought clean energy close to the mainstream.

According to a report released by New Energy Finance (NEF) last month, renewables brought in more investment than fossil energy technologies in 2008 and represented 40% of global power capacity additions, making the industry a real player on the global stage.

But with the private sector in disarray, investments in clean energy have fallen considerably in 2009. Meanwhile, concerns over climate change continue to rise. In order to keep momentum strong, governments are stepping up and increasingly acting as investors — and the U.S. is the leading the trend.

President Obama's $67 billion stimulus package for renewable energy and energy efficiency made America one of the world's biggest backers of clean energy. Billions of dollars have been set aside for a grant program, loan guarantees and R&D. But will the government be nimble enough to deploy the funds efficiently?

If funds are spent too quickly or too slowly, it could further damage the health of the clean energy industry, said investors and business professionals at last week's Renewable Energy Finance Forum in New York City.

“We've had little experience with spending this kind of money in this short amount of time,” said Dan Reicher, Director of Climate Change and Energy Initiatives at Google.org in an interview at the conference. “It's critical that we strike the right balance between speed of spending and effectiveness of spending.”

As a former private-equity investor and Department of Energy official himself, Reicher knows about the pitfalls of such large government involvement. This is not the first time the U.S. has tried to invest in energy in such a big way.

In 1980, President Jimmy Carter created the Synfuels Corporation, a government investment bank responsible for deploying up to $88 billion to help develop new fuels from coal, oil shale and tar sands. By most estimates, the agency was a disaster — it was only able to issue one twentieth of the direct loans and loan guarantees that were promised within five years. By 1987, the program was abolished and labeled the bane of capitalism.

Many of today's criticisms about the role of the U.S. in the renewable energy sector echo those of the late 1980's after the Synfuels Corporation was shut down — mainly that the government shouldn't interfere with the free market. But supporters of increased government involvement worry that the real problem lies in how slowly agencies act to roll out the program and issue loan guarantees.

“The act of a loan guarantee is to take risk — to absorb risk. And the whole characteristic of government is to avoid any risk,” said Michael Eckhart, President of the American Council on Renewable Energy, speaking to the crowd.

One of the reasons that the SynFuels Corporation failed, Eckhart said, was because the government took the lead without enough cooperation from private companies.

“Wall street hung back and let Washington do its thing. Don't hang back...and work more actively with government to create mechanisms with which they can do this job. Because left alone, I believe they will never sign [a loan guarantee] — not for years,” he said.

There are other examples of slow action. This past March, the Department of Energy issued its first loan guarantee to the solar company Solyndra under a program created in 2005. This four-year wait has fueled concerns that loan-guarantees within the American Recovery and Reinvestment Act will not be issued fast enough to get the industry back on track.

Spending the money too quickly could have negative consequences as well. When investing tens of billions of dollars in one area within a couple of years, there are bound to be abuses.

“I worry about front page stories in the newspapers about how large amounts of stimulus money for energy have been wasted,” said Google's Reicher.

Too many reports about misallocation of funds could hurt the industry's credibility and further set back progress, he said.

The U.S. government is walking a very fine line. On one hand, it needs to deploy funds as quickly as possible to projects with long-lasting value. On the other hand, it needs to do it with unprecedented transparency and accountability while actively engaging firms in the private sector.

[Editor's note:  For more on transparency and the ARRA, check out RenewableEnergyWorld.com's recent REInsider, Clean Energy Stimulus Funding Aims for Clear Accountability & Transparency]

Guidelines for the grant and loan guarantee programs are expected sometime in July. After that, companies will have more clarity on how the process will work. Meanwhile, the U.S. renewable energy industry is in limbo.

According to NEF and the International Energy Agency, global clean energy investments could drop 38% in 2009 compared with 2008. NEF reported that investments in the first quarter of this year were down 44% from the fourth quarter of 2008. It looks like Q1 of this year was the bottom, said NEF CEO Michael Liebreich. Investments in Q2 have already climbed back up to 2007 levels. But the U.S. is slower in catching up.

“The U.S. is on a slightly different time frame because of a lot of waiting...for the stimulus funds, waiting for the guarantees. So the U.S. is probably lagging a little bit coming out of the really traumatic period,” said Liebreich in an interview.

Most U.S. companies today worry about too little capital; however, Liebreich worries about too much. If the U.S. market picks up before the stimulus package gets moving, supply chain bottlenecks may form rapidly, further driving up the installed cost of projects.

“It may be an unfashionable postion, but I would really caution the industry not to become too fixated on stimulus money,” said Liebreich. “We're likely to have a pro-cyclical experience when things bounce back, they will really bounce back and we could...have all of the bad things again.”

In some ways, the trauma caused by the collapse of financial markets has created new opportunities. A combination of low interest rates, thinning competition, declining construction costs and government support makes the market more attractive to well-positioned investors.

That doesn't mean the cost of financing projects has dropped though. The limited amount of capital in the space makes it more expensive, and therefore lengthens the return on investment.

“Finance is one area where costs have not come down,” said Liebreich. “So although we've seen these dramatic cuts in central bank rates, that has not fed back down the project finance space. So what you've seen is the spreads increase enormously...and now we're talking about spreads that are dramatically higher.”

Project finance costs will remain high until more capital frees up. That is especially the case in the U.S., where the tax equity market has fallen significantly from its high in the first half of 2008.

Under a tax credit-based incentive structure, investors must have the taxable income to take advantage of the production and investment tax credits. Today, there are not enough firms with the tax liabilities to do that.  

At the height of the tax equity market last year, there were 16 firms actively financing projects in the U.S. Today there are six. GE Energy Financial Services is one company that was sidelined last fall. Now the company is looking to the grant program — which can replace the tax credits with cash payments from the Treasury — as a way to stimulate investment and address the shortage of tax capacity. GE hopes to close some deals later this year that were left hanging when the market collapsed.

“We are all hands on deck to help the DOE,” said Tim Howell, Commercial Leader of Power and Renewable Energy at GE Energy Financial Services in an interview. “Unfortunately, we have not yet gotten guidance to be able to actually access the stimulus capital, and so no projects have gotten done now for four months...there is an eagerness to get going again.”

The general consensus from investors close to program administrators is that not many of the stimulus funds will be deployed in 2009. It will be 2010 and 2011 when money really starts moving and capital is formed.

The stimulus program is only the beginning of a long transformational process. Actually shifting the capital stock of the energy industry — the most capital intensive industry in the world — will take decades. So many people are already looking beyond the program and asking, “what next?”

The Obama Administration has said that this stimulus package is about laying the long-term foundation for Wall Street. But more will need to be done to create the long-term certainty that investors are looking for. That means a price on carbon, federal renewable energy targets and long-term incentives that don't expire based upon the political winds in Washington. Feed-in tariffs and tradable certificate programs have been proposed to succeed the tax-credit based system in place today.

“We need to find a way to transition to a role for the federal government that is different [than] in the past so we won't fall of this cliff and in fact we'll see...a more sustainable path,” said Reicher.

The American Clean Energy and Security Act, also known as the Waxman-Markey Bill, creates some of those elements that will help the long-term picture for investors. It sets up a carbon cap and trade program with the goal of reducing emissions 80% by 2050 and requires a federal renewable energy target of 15% by 2020. The bill passed the House last Friday by a narrow margin. Once it makes its way through the Senate, it could be signed into law by late summer or fall.

Many renewable energy advocates have criticized lawmakers for significantly lowering the RES and giving away too many permits for emitting carbon dioxide. But investors are happy to at least have some level of long-term certainty in the political environment.

While we need to be realistic about what's happening in the market today, said NEF's Leibreich, these proposed laws will usher in a era of public/private investment in which Wall Street takes the lead.

“Capitalism didn't break and it will sort this out...Competition will return and there will be innovation and creativity,” said Liebreich. “We're not going to stop needing energy, and we're not going to go back to just using coal fired power stations and saying we don't care about the consequences. So it's hard not to be optimistic in some ways.”