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Alternative Energy
Glory Days May Be Gone For Green Energy
Andy Stone, 06.09.09, 06:00 AM EDT
Big banks that invested in clean tech for tax breaks no longer have an incentive, and private equity and the government may not fill the void.
Proponents of renewable energy may come to savor memories of 2006-08, boom years when record investment flowed into green energy projects and wind and solar electric generating capacity grew exponentially. It's doubtful whether the rapid pace of development will be repeated soon, despite the best efforts of Congress to promote green projects via climate and energy legislation.
Why the pessimism? Banks such as Lehman Brothers ( LEHMQ - news - people ), that, in the run-up to the financial crisis, financed green projects in return for tax credits, either no longer exist or, if they do, labor on with billions of dollars of losses on their balance sheets. "It's a tax-equity issue," says John P. Gimigliano, head of KPMG's Sustainability Tax Practice in Washington and a former senior tax counsel for the House of Representatives' Ways and Means Committee.
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"Most banks have such massive loss carry forward that they may not pay taxes for 10 to 15 years," he says. "So it could be a long time before they're back into the tax-equity market, and green investment may not roar back."
During the boom years, investors received federal tax credits worth 30% of a green project's cost. Corporate investors that were flush with profits and hungry for a tax break fed a $7 billion annual appetite for tax-equity driven projects. "All of the bigger deals we saw were tax equity," says Gimigliano.
But tax-equity deals have largely vanished. Partly as a result, the American Wind Energy Association projects that there will be a 40% drop in new wind capacity built this year, just 5,000 megawatts.
President Barack Obama and Congress responded to the recession in February with the $787 billion American Recovery and Reinvestment Act, which offers upfront cash grants, also worth 30% of project cost, to appeal to investors no longer hungry for a tax break. The grant money will become available in July when the Department of Energy establishes rules for disbursement of the cash.
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The promise of such grants, however, may be stimulating the wind business in unexpected ways. "Big wind deals have not been happening much, but anecdotally we've seen smaller projects are going forward that were too small to interest the investment banks," says Gimigliano. "For little guys that can self-finance from their balance sheet or via a line of credit, they get an automatic 30% return on investment."
Congress is looking for a new way to get large wind and solar farms financed. Big projects will be crucial to meeting the renewable energy standard proposed in the House version of the energy bill, which would require that 20% of electricity come from renewable sources by 2021.
In May, Rep. Jay Inslee, D-Wash., and Sen. Jeff Bingaman, D-Wash., head of the Senate Energy Committee, introduced legislation that would create a Clean Energy Deployment Administration (CEDA), in essence a green bank that would provide low-interest direct government loans to developers as well as guarantees on loans made privately.
The guarantee on private loans would likely appeal to private equity and buyout firms. As currently envisioned, CEDA guarantees would allow investors to lever 20% equity at a low interest rate, giving them the power to do big projects.
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"The presumption is that there is a bank somewhere that will make the loans," says Gimigliano. If not, there will be direct federal loans, but the amount of direct federal money will be limited.
If all goes well, the program could prompt private equity and leveraged buyout firms to fill some of the void created when the investment bankers stopped funding green projects.
"There is a lot of money still out there waiting to find a good rate of return," says Kevin Book, partner in ClearView Energy Partners, a Washington energy finance firm. "The entire business model of private equity and leveraged buyout firms is about exploiting opportunities for levered return on equity, and CEDA would give them that foothold," says Book.
The big question: Will private equity and similar players on whole fill the void left by the banks and bring about 2007 redux?
"If the rest of the economy is still really soft, and they're able to get a 30% return immediately from the federal government, and they're getting pretty safe financing, you're going to see a pretty significant uptick," says Gimigliano.
"If, on the other hand, you see a rebound in the economy, it's unclear how good the rates of return are going to be on these renewable deals relative to the more traditional investments that they make."
In other words, a bad economy could be a good bet for the future of green energy development in the years to come.
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