Blowing in the Wind
Much time was spent in energy circles discussion leading up to the election on how the outcome would affect the future of wind power in the U.S. The general consensus was that an Obama reelection would lead to an extension of the Production Tax Credit (PTC), and with his election the rescue of the wind industry in the U.S.
Current turbine orders for U.S. delivery in 2013 sit near (if not at) zero, as the lack of support from the PTC makes it extremely difficult to produce wind power at a cost low enough to compete with natural gas derived electricity due to continued weakness in natural gas pricing. (Read More: Perfect Storm Brewing for Troubled U.S. Solar Manufacturers)
But it’s premature to proclaim the industry saved — and here’s why.
Mike is a true clean energy entrepreneur, starting way back with a fuel cell start-up in the late 1990s, he’s run a venture capital firm, been an executive at a solar company and founded another solar company… and he’s voting for Mitt Romney.
Three Thoughts on the State of the Solar Market
There has been some upheaval upstream in the solar industry. If you follow the solar business for any reason you know that solar manufacturers are challenged by excess supply and dropping panel prices, just this week rumors that industry stalwart JA Solar was facing possible delisting by NASDAQ surfaced. There have obviously been some high-profile failures of solar manufacturing companies. None of this should have come as a surprise – industry consolidation was expected (or should have been). Consolidation occurs naturally when an industry or technology moves up the adoption curve – new participants, new approaches to technology, new manufacturing techniques, increased scale and competition all accelerate price declines, which inevitably leaves some early industry participants vulnerable because sunk investment forces higher per unit production costs. In the case of solar, a surprisingly rapid drop in prices for photovoltaic panels was further accelerated by significant Chinese government investment in panel manufacturing capacity. The pace of the price drop surprised much of the industry and overleveraged solar manufacturers were caught trying to meet price points that were economically unsustainable. (See more: Wind Tax Credits and the State of Solar: A Discussion With Admiral Dennis McGinn)
In a word – yes.
Last week the President issued an order requiring Ralls Corporation, which is owned by Chinese nationals (and is closely associated with the Chinese wind turbine manufacturer Sany), to cease development activities and divest its interest in four wind farms in Oregon. The order was issued based on recommendations from the Committee on Foreign Investment in the United States (CFIUS). CFIUS is responsible for reviewing foreign investments in the U.S. to ensure that foreign ownership of U.S. assets will not present a national security risk.
This is the first guest authored post for Banking Energy. I am most grateful to my friend Allison Asplin for writing this piece. Allison is currently a fellow with Bloomberg New Energy Finance, prior to a brief return for more education she was Development Manager and Director of Sustainability for one of the largest REITs in the country.
Allison had recently completed a substantial (and excellent) review of the challenges with deploying energy efficiency at scale. Having read that, I asked her to do a compressed version of that review for this column and she graciously agreed. All of this information comes from her real-world experience now rounded out by research and analysis in her current role. As always your comments and questions are encouraged.
How does the real estate industry make energy efficiency decisions? And what part of the process is holding back adoption? Five main ‘friction points’ can slow or stop the momentum for energy efficiency adoption by the real estate industry.
Figure: Real Estate Industry Interfaces and Energy Efficiency ‘Friction Points’
Recent analyses by Bloomberg New Energy Finance suggest that opportunity exists for energy efficiency investment of $11 billion per year in US commercial real estate and $3 billion per year in multifamily. Nevertheless, conflicting incentives among stakeholders hinder energy efficiency investment in these segments. These stakeholders fall into five broad categories: developers, owners, occupants, lenders, and managers. At each interface between categories, ‘friction points’ arise, diminishing the impetus for energy efficiency.
Most energy projects never get beyond the development process. There are many reasons for this, but failure to obtain financing has derailed an increasing number of projects over the past few years. The most common reason is the fundamental economics of the project do not provide confidence in an adequate return being paid to investors. There is effectively no hope for obtaining financing for any energy project if the project developer cannot demonstrate sound economic fundamentals to a potential investor.
Mike DellaGala and Jonathan McClelland’s recent article in AOL energy does a great job laying out the building blocks for financing a solar project. While some of the specifics of a solar development don’t apply universally (for example, solar trading credits and the solar resource are uniquely relevant to solar), the broad principles cover the key aspects of the basic economic story for an energy project.
More challenging to understand than failed economic fundamentals is why some projects do not get funded even where a developer can demonstrate solid financial fundamentals and the potential for returns that appear to reflect the investment risk. Over the past three years there has been consistent talk of how much “money is sitting on the sidelines” looking for good energy projects. Energy investors are commonly heard to say “if the project is really that good, it will get financed,” yet some projects that appear to be good, or even to be very good, don’t ever find financing.
Welcome to “Banking Energy”. This is a new column and in it I will be writing and facilitating articles and discussions about the uniquely challenging world of finance for energy projects and technologies. The column will cover the spectrum of energy types and technologies, with some special attention paid to the challenges of financing new energy technologies and new applications of old energy sources.
The column will include some review of established aspects of energy finance, but I will focus primarily on emerging issues and how energy finance affects things like market development, project development and adoption of emerging technologies.
I plan to have regular guest contributors and co-authors who can help add relevance, expertise and context. Additionally please don’t hesitate to make suggestions for future topics.
My background (at least the relevant bits) is a mix of finance, law and policy, primarily helping companies and investors find innovative and efficient ways to put energy deals together. I currently lead the clean energy practice at a large international law firm, have held a similar role for another law firm as well as one of the Big 4 accounting firms, and have also taught international energy policy at Georgetown University.
The focus here will be energy finance, but I expect to incorporate many aspects of energy law and energy policy, for the simple reason that energy finance, energy policy, and energy law are inextricably linked. Successfully navigating energy deals requires an understanding of the intersection and intricacies of finance, law, and policy. Direct government financial supports, from tax credits for solar power, to special deductions for oil drilling, exist in some form across virtually every energy source and technology. Indirect supports also influence the competitive landscape. Whether direct or indirect, fully realizing the value of government-based economic support is vital in making project economics work for energy projects. Similarly, legal and policy issues how energy can be sold, the regulation of prices, and, of course the environmental aspects of energy production overlay every part of the industry. How these regulatory programs operate, when they apply, and how they come into and out of existence can be vital to the financial viability of a project.