Saving Private Renewables
by Roger Feldman --
Andrews Kurth, LLP
Private renewables have entered the same economic war zone as all other investments. They may be receiving superficial exaltation — the equivalent of green ribbon bow decals affixed to the windshields of hybrid cars, but the new American casbah of clean is rapidly turning into an orange zone of lurking uncertainty.
Energy project finance and energy technology finance have each regularly been victims of cyclical contractions tied to the strength of capital markets’ support. Renewables projects, like cogeneration, IPPs and energy tech before them, are vulnerable not only to the way in which market trends affect them but to the availability of leverage to keep their projected IRRs competitive with non-renewable energy alternatives. Recently, we have already heard, as the debt markets tighten, worn but telling words like “stricter project quality requirements” are dusted off. Players like hedge funds and some private equity investment funds are (as it is euphemistically put) “returning to basics”. A great deal of equity designated for renewables or cleantech has already been raised which remains to be put to work. However, investors taste for the renewable flavor of the month is more finicky than ever. The capital markets relatively recent turn against biofuels, while certainly related to commodity economics and some adverse regulatory developments, certainly illustrates this trend.
There are, however, some things proponents of renewable finance can do besides rail against the venality and short-sighted lack of vision of those who nurture its health. They fall in three basic categories:
(1) Preserve and foster the regulatory architecture on which renewables investment rests and whose improvement would enhance the perceived future quality of renewables investments;
(2) Examine and extend the ways in which public capital and public supported initiatives can be more effective in assisting private energy project development;
(3) Analyze the sectors of private capital support which will be sustaining and encourage public programs for their enlargement.
Here are some specifics on each:
(1) Regulatory Architecture. Renewables today still are still almost without exception dependent on tax incentives for financeability. Somehow, despite $100/barrel oil, Congress has allowed political machinations to jeopardize these incentives and the investment community’s expectation of their continuation. There have been repeated examples in the past of how, in the best of times, the clogging of the tax incentive spigot leaves renewable projects whirling down the drain. At a bare minimum, some continuation of tax incentives is required for vigorous industry development. Particularly in the short run it projected competitive technological edge is no adequate substitute.
Admittedly, a significant segment of renewable energy production is not directly about oil displacement: it is an alternative to domestic environmentally or domestic supply challenged fuels. To date, it has been about creating distributed electric generation substitute for capital intensive central production. The Congress and the regulators fought themselves to a fatigued standstill on power deregulation and have made only faint jabs at large scale infusion of renewables to meet clearly foreseen forthcoming load requirements. The battle over climate change regulation and its impact on these issues will not relieve and perhaps may even increase pressure on this situation.
Renewables need a core of supportive energy regulatory policies which assure not only their ready integration into the grid, but their facilitated development. The specific traditional areas where this is true, notably transmission and local level reward for utilities for cooperating with distributed generation remain unresolved. In addition, utilities and renewables developers also need some assurance that the Resource Performance Standards’ success and future proliferation will not be cut down by the way in which carbon reduction regulations are implemented.