Posts tagged “energy finance”
Barclays Just Threw Gasoline on the Fire that is the Battle Between Utilities and the Solar Industry
This week Barclays downgraded the high-grade bond market for the entire electric utility sector because “we believe that a confluence of declining cost trends in distributed solar photovoltaic (PV) power generation and residential-scale power storage is likely to disrupt the status quo.” While this is not the first statement about vulnerability of electric utilities to competition from new technology it is the most important to date.
Electric Utilities vs. Solar
There has been growing tension between the electric utility industry and the solar industry – specifically the part of solar industry that is focused on distributed, or point of use, solar installations. This friction has really been a proxy for what is developing as a larger challenge to the utilities. New technologies are making generating, storing and managing electricity at the point of use much easier and much more economical. This technical evolution is occurring at the same time that overall electric demand growth has been stagnant for several years and rising infrastructure requirements are putting upward pressure on the price of delivered electricity. Those factors together mean that electric utilities are struggling with eroding demand and eroding profitability, and the best available option is to increase the price per unit of electricity, which only accelerates the economic competitiveness of the competing technology – and thus starting the “spiral”.
The solar industry has been very hot. Record amounts of new solar capacity have been installed over the past two years. The accelerating pace of adoption of solar panels for distributed generation (installed at the point of use, rather than sold into the power grid) and the downward trend of module prices have created exuberance over the industry’s future.
Solar has reached and eclipsed price parity with traditional fuel sources in some markets, and ultimately the potential market for solar PV is huge. A solar module costs approximately 1% of what it did 35 years ago and prices for solar pv panels have plummeted since 2010, with an average price per watt for panels falling from $1.81 in 2010 to less than $0.70 and today.
It is clear that the future is very bright for the industry. What is less clear is when growth will accelerate and how near-term challenges for the industry could create some rough patches for the industry before widespread adoption drives truly explosive industry growth.
From time to time I will start highlighting some groups that are finding new ways to solve some of the many energy financing challenges that we face. I will be looking at both groups that are finding ways to fill gaps as well as companies that are rethinking old approaches to energy finance.
I thought I would start this series with a look at Greentown Labs, which is actually in the midst of both building a platform to fill a gap in the energy finance marketplace and exploring the use of new financing techniques, namely crowd-funding, to try and take their vision to new heights.
Greentown Labs is a cleantech incubator based in Boston (though in the process of moving to new and expanded space in neighboring Somerville in September). The idea – started two years ago – was to provide early-stage companies a place to not just collaborate on ideas and share services, but to have space to actually build the energy hardware of tomorrow. The lab has all of the things you’d expect to find at an incubator – collaborative space, mentors, and inspiration, but what sets it apart are the work areas – more than a dozen projects were underway on the lab floor (which boasts a machine shop and an electronics shop to go with the more typical software platforms and office-like work space), ranging from systems that fit on a table top to 40 foot long welding projects. Rather than my experience with most incubators – something along the lines of coffee shop meets office meets collaborative space – Greentown looks 1 part incubator and 2 parts mad scientist workshop.
Supporters of coal have called the planned new rules from the EPA on CO2 emissions from coal-fired power generation a war on coal and have pledged to fight the rule-making process. It is true that there will almost certainly not be a new coal-fired electric generating station built in the U.S. for at least the next several years, but the hiatus won’t be caused by any specific rule. The real danger to the coal industry is uncertainty.
Investing in the electric business is about long stable returns. Electricity assets last a long time, are expensive to install, and are typically expected to provide long-term stable, if modest, returns. Since returns are spread over a long period and are stable, with limited upside (10x returns on energy infrastructure don’t exist) investors and lenders require a quantifiable and manageable amount of risk. Uncertainty in any form makes the quantification and valuation of risk in an electric generation investment much more difficult (or impossible) and severely limits investor interest.
An excellent illustration of the impact of uncertainty on electric generation investment is a recent history of the wind industry. Despite a pattern of consistent, and even retroactive extensions, the uncertainty created by the political fight over extending the Production Tax Credit for wind power has caused nearly complete cessation of new wind facilities being brought on line each time the credit wasn’t extended well in advance of expiration.
The impact of the PTC on the economic case for a wind project has been substantial and was (and still is for some projects) the difference between a profitable and an unprofitable project, so the uncertainty regarding the availability of the credit was a threshold requirement for an investor. An investor simply could not have certainty that it could earn the necessary return (or in most cases any return) without realizing value from the credit, so no investments were made. The result of this uncertainty in 1999, 2001 and 2003 is stark, as investment dropped precipitously from year to year, even though any project would have qualified for the credit because of retroactivity of the extensions.
Yesterday, I explained why Obama winning re-election is not necessarily an automatic savior for the wind power industry. Basically, an extension of the Production Tax Credit (PTC) is not a given (although I give it better than even odds), and the current extension being pushed by the American Wind Energy Association would act as little more than a band aid.
While an extension of the tax credits is vital to a robust wind industry in the U.S., developers must start to consider strategic options for financing projects in a world without the PTC. Even with financing innovations, successfully putting together wind deals will be very difficult, and without these financing strategies there will be a period of time where virtually no wind projects will be financed or built in the U.S. (Read More: 5 Reasons Why Good Energy Projects Don’t Get Financed)
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.
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.