| Reviving Renewables |
| Features | |
| Written by Matt Bolch | |
| Wednesday, 31 March 2010 | |
 Utilities turn to federal money and non-financial investors to fund clean-energy projects.  Twenty-eight states and the District of Columbia have adopted renewable portfolio standards (RPS) that set minimum goals and deadlines for producing renewable power. Five additional states have non-binding goals that do the same thing. And that’s not counting federal initiatives that could raise the stature of renewable and clean-energy projects even higher. A considerable amount of generation capacity needs to be funded in the next few years, which puts utilities in a quandary, juggling the reliability of traditional power sources with the more sporadic nature of many renewable sources. And in the case of regulated utilities, new projects must be approved by public utility commissions (PUC) that don’t want to put ratepayers on the hook for unproven technologies. The American Recovery and Reinvestment Act of 2009 provided $4 billion in appropriations to support up to $32 billion in loan guarantees for renewable energy projects, transmission projects, and leading-edge biofuels that begin construction before October 2011. That’s in addition to the more than $50 billion the US Department of Energy has committed to advance nuclear, clean coal, advanced renewables, and energy-efficiency technologies. Former funding goes dry Federal money has become increasingly important because traditional generation financing options have dried up amid recessionary fears, noted Tony Bohnert, a partner with KPMG’s transaction services. The use of tax equity was responsible for $5 billion in projects in 2007, a figure that plummeted to just $1 billion last year. Bohnert anticipates the total tax equity market for this year will be $2 billion. In a tax equity arrangement, a company flush with profits buys into a project for the tax benefits. Any grants or incentives generally go to the companies that are providing financing. However, financial institutions are the primary purchasers of tax equity, and their profits just about disappeared as the recession began to take hold. A recent ruling from the Federal Energy Regulatory Commission (FERC) in a case involving AES Corporation could significantly reduce the burden and risk on tax equity investors. FERC has said tax equity investments are passive under commission standards and do not create affiliate relationships for the purpose of market-based rate authorizations, according to analysis from the global law firm Mayer Brown. Federal incentives and funding options such as tax equity will both be necessary for utilities to meet not only state RPS mandates, but also a proposed national portfolio standard that is being considered. Most utilities do not have capital expenditure budgets to create their own renewable portfolios, which is why startup companies have flooded the market, Bohnert said. “The response to these mandates by the utilities has been, ‘Fine. I can sign long-term agreements with renewable companies all day long because it doesn’t cost me anything if the power doesn’t come online,’” Bohnert said. Not all renewables are created equal Interest rates on investment-grade debt increased during the last half of 2008 and most of 2009 before leveling off, but investors remain wary even of quality debt, said Scott Smith, US CleanTech leader at Deloitte. “We’ve seen an uptick in tax equity projects, but utilities will play an increasing role directly because they have the balance sheet,” said Smith. “For utility companies taking on debt now, however, it’s been almost reminiscent of IPO financing, which utilities haven’t encountered before.” Smith said he was surprised that utilities didn’t fund more renewable energy projects as the economy spiraled downward; he believes reticence among public utility commissions was one of the reasons. “PUCs exist to provide safe, reliable, cheap power,” said John Gimigliano, principal in charge of KPMG’s energy sustainability tax practice. “With solar, for example, is it cheap? Maybe. Is it reliable? Not so much.” Because wind power has become the top renewable, tax benefits, construction costs, and other project variables can be calculated with a high degree of precision, making an investment a better proposition than many others, including nuclear. Renewable projects have found success in the past because of tax equity and other financial arrangements. But new projects are in the pipeline thanks to the 2010 stimulus bill that converts tax credits into grants, attracting new investors who weren’t interested in credits. “Non-financial companies are becoming interested,” Gimigliano said. “These facilities throw off operating losses that can be written off.” Financing energy projects could get easier if Congress moves on a proposal to create a Clean Energy Deployment Administration (CEDA), said Todd Filsinger, who leads PA Consulting Group’s energy services team. “CEDA enjoys strong bipartisan support,” said Filsinger, who also serves as co-chair of the Coalition for the Green Bank. “The question is whether it gets attached to an energy bill, which has some momentum, or the jobs bill, which has more.” The Green Bank, a consortium of energy industry leaders, is advocating the idea of CEDA as an independent, tax-exempt, wholly owned US corporation to provide a comprehensive range of financing support for clean energy and energy efficiency projects across the country. The plan is to provide at least $75 billion in direct and indirect financing support, coupled with $75 billion in equity to produce $150 billion in new investment for clean-energy projects and related technologies. “China already does this, in a sense,” Filsinger said, of the CEDA plan. “The US, UK, and India have shown lots of interest.” Utilities would be able to borrow money from CEDA to fund renewable projects, which would mitigate rate-payer issues in the regulated space. Although some utilities are forging ahead with renewable projects on their own, others are hanging back to see how funding issues shake out. “These are exciting times,” Filsinger said. “The hope is that we can move forward with more energy-efficient projects to bring clean power to more people.” Matt Bolch, This e-mail address is being protected from spam bots, you need JavaScript enabled to view it , is a freelance writer based in Atlanta. |
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