As some of the most tempting government financial incentives begin to fade from the renewable energy space ahead of deadlines at the end of 2012, bankers and project developers specializing in renewable energy projects are reworking their models.
The 1603 program that gave cash grants in lieu of tax credits and the production tax credit that underpinned the wind industry are both on the sidelines as financiers review upcoming projects still in the pipeline. The pipeline of proposed projects is flush, but shifting priorities, transmission limitations and near-invisible overall power demand growth are weighing on a sector already struggling to compete with low natural gas prices.
Biofuels are one bright area for the renewables business, in part because current mandates are not linked to disappearing tax credits and in part because large corporations have become interested in providing direct financing. In biochemicals, partnerships with large balance sheet companies like Dow Chemical or oil firms are key, US Renewables Group Co-Founder Jonathan Koch said at the Wall Street Green Summit in New York this week.
“The crux of the matter is you’ve got to surround your project with good contracts,” Koch said at the conference, an annual gathering of bankers, hedge fund and private equity dealmakers alongside project developers, business school students and media.
Warping the entire sector’s financial outlook is deep-rooted uncertainty on tax policy, both as it applies to energy specifically and more generally. “The tax system is going to undergo fundamental change and restructuring over the next two to three years,” Thompson Hine Senior Counsel Michael Zimmer said at the conference.
That has left project developers dependent on more traditional tools of project finance than tax equity. Many face the infamous “valley of death” conundrum where they have all the basics of a project in place and attractive forecasted returns, but lack the balance sheet scale to access traditional debt markets.
Nontraditional players are taking positions in the more attractively placed projects, and many attendees at the conference cited the success of financing for the Warren Buffett-backed Topaz solar project.
Increased M&A Likely
Challenges to financing mean consolidation through mergers and acquisitions are likely to dominate dealmaking headlines in the coming two to three years. The poor performance of cleantech stocks in the past two years is preventing investment bankers from taking new renewable energy companies to the stock market for initial public offerings, partner Thomas Blum of boutique investment bank EC Anderson Partners said.
The failure of the US to join a global market for carbon emissions at the Kyoto Protocol talks in Copenhagen in 2009, lingering effects from the financial crisis, a collapse in power demand growth that “shredded” capital expenditure budgets and the low price of natural gas have limited opportunities in renewable energy, Blum said. His bank has considered cutting back its commitment to cleantech investing after the rough spate of the past few years, but has yet to reposition resources.
The irrepressible spirit of Wall Street was present in the conference proceedings despite individually gloomy sector outlooks, as bankers and project developers expressed enthusiasm about the overall sector and said that focusing on fundamentals and new markets, like state renewable portfolio standard fulfillment, distributed generation or international project development, were still growing.