Clean Energy Project Financing: What Lies Ahead?

The McCombs Sustainability Summit 2010 this week raised a very relevant issue for practitioners in sustainable businesses about the global recession and its impact on sustainability. Although the discussion was mostly focused on consumer products, a basic question to ask to sponsors of clean energy projects is simply: How do you plan to finance your project?

The economic feasibility of energy generating costs most commonly represented as the levelized cost of energy, which is the cost of generating energy (usually electricity) for a particular energy generating system including all the costs over its lifetime: initial investment, operation and maintenance, cost of fuel and cost of capital[1]. Technological advances in clean energy often do not make sense economically since they are competing with existing conventional energy and the threat of new technologies that could make their technology obsolete or less efficient. Furthermore, energy infrastructures have lifetime asset period of more than 20 years. Currently, a lot of renewable energy sources such as solar and wind are only competitive because of government incentives, among the most popular in the US are the 30% Investment Tax Credit (ITC) from the overall capital cost and an accelerated 5-years of depreciation.

The above mentioned risks and uncertainties are exactly what lenders and investors most likely to avoid. These issues are accentuated due to the recessionary environment and credit crunch. A report from PwC and the Climate Group (www.theclimategroup.org), an international non-profit organization promoting low-carbon economy, launched in Davos last week found that investment in clean energy fell 6.5% in 2009 compared to the previous year. On the bright side, during the same forum, five of the world’s leading global financial institutions with total assets of over US$ 5.5 trillion stressed their commitment to incorporate low-carbon economy in both project finance and retail banking[2].

Going back to May last year, financing the transition to a low-carbon economy was one of the key issues in the World Business Summit on Climate Change in Copenhagen. In order to tap sources of funding from private investors such as pension funds and venture capitalists, it is essential to understand the key drivers and barriers in private investment as well as recommending policies to scale up investments in a fast manner to keep up with technological advancements. A regulatory framework should be designed not only to provide incentives to project sponsors but also investors which are contemplating the risks and returns from investing in clean energy compared to other types of project.

The focus group recommended that policy makers work together with businesses to provide the following[3]:

  1. A robust and long term carbon pricing signals
  2. New financial products and strategies
  3. Private investments in early stages of technology
  4. Greater transparency and mandatory carbon disclosure
  5. Measures to increase rewards and decrease risks.

This off course is easier said than done, in particular because of the global scope of the industry. Any entrepreneurs interested in clean industry must understand the anxiety of investors in investing in such uncertain, highly capitalized and long term projects. This is the time when collaboration between technology, business and policy is crucial to provide a roadmap to low-carbon economy.


[1] http://en.wikipedia.org/wiki/Levelised_energy_cost

[2] http://www.ft.com/cms/s/0/0ab64e6c-0c42-11df-8b81-00144feabdc0,dwp_uuid=91d7b52e-0527-11df-a85e-00144feabdc0.html

[3] http://www.pwc.co.uk/pdf/Summary_report_for_policymakers.pdf

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2 Comments

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2 responses to “Clean Energy Project Financing: What Lies Ahead?

  1. Kyle McGaa

    Paraphrasing Energy Secretary Chu last October:

    Wind and Solar are $3.5 trillion dollar markets looking forward, but now China is the leader in High-Technology manufacturing. DOE and related agencies have helped establish a Financial Institutional Partnership Program, that is leveraging 4 billion of ARRA money to support 32 billion in guaranteed loans, and create 40 or 50 billion dollars in project investments. Much of this effort has focused on streamlining due diligence process of banks, and the money is paid up front once the renewable resources are up and running. Turnaround time from application submital to payment has been reported at 21 days.

    Green production tax credit history has had an on and off again history, which has not sent a strong signal to investors. Stimulus money has solidified a strong “on” signal for many years to come however, especially considering the monumental Energy-related Provisions in the Recovery Act that total roughly $100 billion. At the end of this comment is a list of Texas resources (plus a link to more federal funding links) that are assisting in helping this financing. Many Net-Positive-Savings exist throughout our energy market, especially in weatherization and efficiency efforts, and there are many examples of Austin Energy reaping these benefits as well (to be discussed later).

    Implementing the American Recovery and Reinvestment Act PPT
    James Spaeth Director of Commercialization and Project Management Golden Field Office
    Office of Energy Efficiency and Renewable Energy U. S. Department of Energy
    November 5, 2009

    Chu, Steven “Laying the Foundation for a Generation of Clean Energy Jobs” DOE Secretary Energy and Climate Stakeholders Briefing 10/07/2009

    [It’s too bad comments doesn’t allow embedded graphics- a picture’s worth a thousand words]

    DSIRE Database of State Incentives for Renewables and Efficiency

    PACE Financing
    • Local Option – Contractual Assessments for Energy Efficient Improvements
    Sales Tax Exemption
    • Memorial Day Weekend Sales Tax Holiday for Energy-Efficient Products
    State Loan Program
    • LoanSTAR Revolving Loan Program
    Utility Loan Program
    • Austin Energy – Residential Energy Efficiency Loan Program
    • Bryan Texas Utilities – Energy Efficiency Loan Program
    • Guadalupe Valley Electric Cooperative – Conservation Plan 7 Loan Program
    Utility Rebate Program
    • American Electric Power – Standard Offer Demand Response Program
    • Austin Energy – Commercial Energy Management Rebate Program
    • Austin Energy – Commercial New Construction Efficiency Rebates
    • Austin Energy – Energy Miser Vending Products Program
    • Austin Energy – Free Home Energy Improvements Program
    • Austin Energy – Multi-Family Energy Efficiency Rebate Program
    • Austin Energy – Residential Energy Efficiency Rebate Program
    • Austin Energy – Small Business Energy Efficiency Rebate Program
    • Bryan Texas Utilities – Commercial Lighting Program
    • CenterPoint Energy – Commercial and Industrial Standard Offer Program
    • CenterPoint Energy – Residential and Small Commercial Standard Offer Program
    • College Station Utilities – Residential Energy Back II Rebate Program
    • CPS Energy – Commercial Energy Efficiency Rebates
    • CPS Energy – Residential Energy Efficiency Rebate Program
    • Denton Municipal Electric – GreenSense Energy Efficiency Rebate Program
    • Denton Municipal Electric – Standard Offer Rebate Program
    • Entergy Texas – Energy Star Homes Program for Builders
    • Entergy Texas – Large Commercial and Industrial Standard Offer Program
    • Entergy Texas – Residential and Small Commercial Standard Offer Program
    • Farmers Electric Cooperative – Marathon Water Heater Rebate Program
    • Farmers Electric Cooperative – Residential/Agricultural Energy Efficiency Rebate Program
    • Garland Power & Light: Energy Efficiency Rebate Programs
    • Guadalupe Valley Electric Cooperative – Residential Energy Efficiency Rebate Programs
    • Magic Valley Electric Cooperative – Value Incentives Program (VIP)
    • New Braunfels Utilities – Energy Efficiency and Water Conservation Rebate Programs
    • Oncor Electric Delivery – Data Center Energy Management Pilot Program
    • Oncor Electric Delivery – Energy Star Homes Program
    • Oncor Electric Delivery – Home Energy Efficiency Rebate Program
    • Oncor Electric Delivery – Large Commercial and Industrial Rebate Program
    • Pedernales Electric Cooperative – Commercial Lighting Rebate Program
    • Pedernales Electric Cooperative – HVAC Rebate Program
    • Texas Gas Service – Commercial WashWise Energy Efficiency Rebate Program
    • Texas Gas Service – Commercial Water Heating Energy Efficiency Program
    • Texas Gas Service – Food Service Equipment Program
    • Texas Gas Service – Residential Energy Efficiency Rebate Program
    • Texas-New Mexico Power Company – Commercial and Industrial Energy Efficiency Standard Offer Program
    • Texas-New Mexico Power Company – Energy Star Homes Market Transformation Program
    • Texas-New Mexico Power Company – Residential and Small Commercial Energy Efficiency Standard Offer Program
    • Tri-County Electric Cooperative – Energy Efficient Water Heater Rebate Program
    • United Cooperative Services – Residential Energy Efficiency Rebate Program
    • Xcel Energy – Large Commercial and Industrial Standard Offer Program
    • Xcel Energy – Residential & Small Commercial and Hard-to-Reach Standard Offer Program

    http://www.dsireusa.org/incentives/index.cfm?re=0&ee=1&spv=0&st=0&srp=1&state=TX

  2. kentarosasamori

    I totally agree with the situation mentioned in the blog and the focus group’s recommendation. Financiers, especially lenders, require stable cash flow which comes from stable project income and stable policy. Until the recent credit crunch, “tax equity financing – selling the projected dollar value of tax credits at a discount to finance projects – has been a mainstay for the industry, and investment banks have been the main, pivotal players in this market. As bank losses have mounted, this vital source of project financing has dried up.”(*1)

    Under the condition above, new tax equity investors are anticipated: industrial companies and utilities. (*2) “The contraction of traditional tax equity investors and expected increase in IRR could open the door to new investors outside of financial firms for renewable energy projects.” Profitable companies can take direct advantage of the PTC and ITC under EESA through renewable energy projects. Utilities can be also possible tax equity investors due to their “sufficient profitability levels to directly use tax credit investments.” Increased utility involvement could simplify financing arrangements, replacing complex partnership. Utilities are able to sign long-term power purchase agreement (PPA) to secure financing with the advantage of PTC and/or no rising cost benefited from no fuels used.

    In addition to welcoming new investors to existing financial products mentioned above, there is a new financial product that may be able to expand renewable energy project finance market: carbon finance. This product was applied to the wind power project in Bulgaria by JBIC, Japanese export agency, and Mizuho Corporate Bank, one of the largest banks in Japan.(*3) Under this financing arrangements, cash flow from selling carbon credit enhanced credibility of the project and made it bankable. However, there have not been many applications of this financing scheme so far. So a robust and long term carbon pricing signals are necessary to expand this market.

    In conclusion, stable long-term policy is essential for establishing new financial products and strategy for the development of renewable energy projects as mentioned in the blog.

    *1 A. Burger, “Renewable Energy Project Finance: cause for Optimism Amidst Turmoil” (http://www.renewableenergyworld.com/rea//news/article/2009/02/renewable-energy-project-finance-cause-for-optimism-amidst-turmoil-54650)

    *2 Schwabe, Cory, and Newcomb, “Renewable Energy Project Financing: Impacts of the Financial Crisis and Federal Legislation”

    *3 Japan for Sustainability, “JBIC to Finance Wind Power Project in Bulgaria” (http://www.japanfs.org/en/pages/026740.html)

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