Investors in renewable energy may be excused for feeling flustered these days, in the wake of some dramatic pullback by European lenders, along with continued debate in Congress whether to extend tax credits for wind farms and other alternative fuel sources.
The Obama administration, hoping to reinvigorate the sector, is planning a major meeting on March 13 to deliver a pitch to the country's largest companies about the benefits of tax-equity deals for renewable projects.
Allan Marks, partner at Milbank, Tweed Hadley & McCloy, says now might be a good time for a renewables reality check.
‘On the one hand,’ Marks says, ‘it's tempting to look beyond this year and say, 'Talk to me in 2013. Let's see how things shake out after the presidential election, and hopefully after global markets have settled in the wake of the European debt crisis, and perhaps with the U.S. economy driving more demand for renewables.'’
Still, there are some near-term bright spots.
Marks says more strategic investors and other sources of funding will commit to renewable projects in coming months. "You'll see substantial capital deployed by project developers and other investors in a rush to get ahead of the planned expiration of existing federal subsidies," he explains.
Although European banks continue to step back, Marks believes that American, Canadian, and Japanese banks and funds will be stepping up financing for renewable deals. "Insurance companies, pension funds and other institutional investors will also become more active, and there will be more capital markets activity in general, including private placements and other securities offerings such as project bonds," Marks says.
Marks agrees that tax-equity partnerships being pushed by the White House and U.S. Department of Energy could be a key factor in attracting new capital, thereby boosting the value of existing renewable tax credits, which otherwise could be squandered.
"Project sponsors receive tax credits, which can be monetized to finance qualifying projects," he explains. "The combination of immediate tax benefits and long-term equity upside should be very enticing to big corporate sponsors looking for a tax shield while enhancing their green energy profile."
He also expects more financing to come from industry vendors, especially equipment manufacturers with ample balance sheets looking to enhance their competitive share of a given market – say, solar panels. That lowers the cost of the project.
"Despite short-term uncertainty, the global market for renewable energy investment remains extremely strong," Marks says, pointing to still-expanding demand for power in China, Latin America, India and other parts of the developing world.
And Japan, which had previously put so much faith in nuclear, is now taking a more serious look at renewable energy sources in the wake of last year's Fukushima disaster, he says.
In the U.S., renewable energy demand will actually be a boon to the gas industry. Marks notes that as old-generation coal-fired plants are replaced, many utilities will turn to clean gas as well as renewable sources.
"Cheap gas makes it hard for renewable to compete – but in fact, solar and wind turbines need gas to supplement their power when the sun isn't shining or the wind isn't blowing," he says. "Gas plants are actually increasing because of renewables. In order to make intermittent energy sources economic, you need cheap gas for supplemental power."