A popular documentary a year or so ago was “Who Killed the Electric Car?,” which sought to expose corporate misdeeds. Although perhaps not as big a box office draw, the topic “Who Saved the Renewables Industry?” would also be worth examining. After all, just a few months ago it wasn’t certain whether or not large segments of the industry would survive the double threats of economic recession and little or no access to capital markets. The story isn’t complete, but here’s a synopsis.
Over the past couple of months I interviewed many sources for the 2010 forecast article published elsewhere in this issue. I spoke with manufacturers, developers, financial experts and industry trade association leaders, among others. Those interviews covered policy, technology innovation, supply chain issues and finance.
As the interviews progressed it became clear the industry suffered a body blow when the economy collapsed. Also clear was the idea that massive intervention on the part of Congress and the administration staved off disaster. The old joke “I’m from Washington and I’m here to help” lost its punch line as Congress passed the American Recovery and Reinvestment Act last February and federal agencies began to deliver money.
As Tim Howell, managing director and commercial leader for power and renewable energy at GE Energy Financial Services, explained, the industry in the last 12 months faced many challenges.
For one thing, the recession drove into hiding many tax investors who otherwise would have invested in new developments. For another, liquidity dried up and the debt side of project finance was all but lost. In recent months the finance markets have begun to come back, but with higher prices, smaller deal sizes and even smaller appetites for risk.
For a third thing, the recession cut into overall electric power demand. Reserve margins grew and the idea of adding capacity of any type faded in importance. On top of it all, natural gas prices stayed low through much of 2009, making the economics of many power projects unattractive.
“There was a lot of headwind,” Howell said. But tailwinds blew, too. Chief among those are the 2008 revisions to the tax code, which offer developers flexibility to choose between a production tax credit, an investment tax credit or an outright grant. As part of the reform, utilities now may claim tax benefits from project development, a first. Congressional action late last year to extend and expand the tax credits proved prescient (or was it dumb luck?) given how important these sources have proven to be.
Equally effective has been the loan guarantee and grant programs. In the latter, the federal government pays up to 30 percent of a project’s cost, giving a positive boost to capital structures.
“The grant program is working well and has had an almost immediate impact to get financing going,” said Ed Feo, a partner in the law firm of Milbank, Tweed, Hadley & McCloy LLP and co-chair of the firm’s project finance and energy practice.
Rule-writing for grant and loan guarantee programs took time, but a variety of federal programs and incentives are now beginning to pour money into the sector. In some cases, federal money is replacing private sector finance leaving some to wonder what role the private sector will find to play as the industry recovers.
The industry teetered on a cliff-edge for a good chunk of 2009. That it has taken a step back can be credited in large part to timely, massive and focused help from Congress and the federal government.