The financial crisis has dealt a serious blow to utility-scale renewable energy project financing. Large-scale wind and solar assets have always been distinguished by their capital-intensiveness and lack of resource costs, but now that the world's financial resources have constricted, those factors define the assets. Financing a $500 million wind farm with a 20-year IRR of 11 percent may be an appealing proposition in boom times, but it appears less attractive when investors are on the brink of insolvency.
Although many of the newer financing options have now vanished, the financial crisis and ensuing changes to incentive structures have opened up some new windows for developers. Here's a brief analysis of some of the major trends in renewable energy project financing, pre- and post-crisis.
Prior to the Recession
Increasing availability of project-level debt: As large lenders became more comfortable with renewable technologies and standardized debt-financing structures, more developers were able to attain limited-recourse debt to develop projects. This generally produced the lower average LCOEs than pure equity projects, and enabled smaller developers to build larger projects.
Importance of tax appetites of project investors: Prior to the financial crisis and ensuing recession, many projects were built on the back of Tax Investors, who would reap the benefits of the federal Investment Tax Credit (ITC) and Production Tax Credit (PTC) for renewable energy facilities, in addition to retaining some equity stake in the project. Developers found Tax Investors critical sources of project capital, and as confidence in federal tax incentives increased, developers were able to secure financing from Tax Investors at lower rates. According to a 2007 report from the Lawrence Berkeley National Lab, in 2006 only five of the 13 leading wind developers in the U.S. had the tax appetite to retain ownership of their projects. The remaining eight partnered with tax investors, often large investment banks.
Increasing corporate financing: Over the past few years, many of the largest developers of wind and solar installations had begun to develop projects as sole owners, utilizing only internal equity financing. Large developers were growing in size as market consolidation proceeded, and the emerging corporations had increasing internal capital availability.
Since the Recession
Absence of project-level debt: The financial crisis has restricted the total capital available for large projects, and what capital remains is being channeled towards less risky projects. In addition, uncertainty regarding the future of renewable energy incentives makes potential lenders hesitant to part with their limited remaining funds. (Will there be a national Renewable Energy Standard? How much will a cap-and-trade program impact fossil-fuel electricity prices?) Developers now find it difficult to secure project-level debt, and many smaller developers that depended on such financing structures for their projects will struggle to stay afloat.
Institutional investors replacing Tax Investors: For a time, the financial crisis eliminated the value of the ITC and PTC. If former Tax Investors no longer earn enough to be seeking the value of tax credits, there is no value to the incentives. Luckily, the American Recovery and Reinvestment Act of 2009 (the stimulus package) allowed taxpayers who were eligible for the ITC or PTC to take a grant from the U.S. Treasury in lieu of the tax credits. This opens up the market to investors without heavy tax appetites, and we can expect to see more institutional investors, rather than tax investors. These may be some of the same entities that would have invested for tax purposes, but they are no longer constrained by the magnitude of their tax burden in order to take advantage of the ITC and PTC.
Increasing utility development: Even prior to the recession, utilities were increasingly considering development and ownership of renewable assets rather than purchasing the power and associated environmental attributes through Power Purchase Agreements (PPAs). Utilities could often receive lower prices for their energy through ownership, and integrated resource planning often made the ownership of renewable energy more inviting. Now, utilities will be forced to take a closer look at project ownership as the number of available independent projects decreases. In addition, utilities' rate-regulated status keeps them somewhat sheltered from the worst of the financial crisis, leaving them more room to develop and finance projects on their balance sheet.
It's a brave new world for renewable energy developers. The long-term future is bright, and financing will return as capital markets open up. But in the meantime, the name of the game is survival.