Record Levels for New Investment Vehicles Transform Clean Energy Finance

Renewable energy investing could hit record highs this year with an insurgence in bonds coming to the market, experts say. A decreasing reliance on subsidies, fewer loans and competitive costs are driving investment activity.

The sale of green bonds could be as high as $25 billion this year, a total that more than doubles last year’s $11.4 billion assessment, reports Bloomberg.

Many of the largest banks – including JPMorgan Chase, Bank of America, HSBC Bank and Goldman Sachs – are active in issuing these bonds, which go to fund sustainable projects.

Meanwhile, the renewables industry is turning to various debt offerings to help drive growth as it breaks away from bank loans and diminishing government subsidies.

“We’re going to see a multiplier effect as we scale up use of these mechanisms,” Michael Eckhart, Citigroup’s head of environmental finance, told Bloomberg. “This is the beginning of a transition from bank loans and equity financings to refinancings in the capital markets for this industry. We talked about it three years ago. Now we’re doing the deals.”

Solar Asset Securitization

Barring any major breakthroughs to change the face of technology as we know it, industry experts consider new investment vehicles connecting companies to capital as an area ripe for innovation in clean energy today. SolarCity stands as an example with its move late last year to sell bonds backed by solar energy payments.

“Some of the biggest advances of renewable energy are not going to be technological – though there certainly will be some – but a lot of them are going to be financial,” says Stephen Viscovich, director of securitized products at Credit Suisse, the firm managing SolarCity’s offering. “What kind of innovation is going to be there? It’s going to be providing access to more efficient, more scalable capital to be able to finance truly hypogrowth industries that will change the securitization landscape.”

Without any change to the way clean energy is financed, experts believe the cost of capital will remain too high and the availability of funding too low for the industry to attain the mass market appeal it needs to survive, especially as government tax subsidies begin to run out.

Indeed, agrees Jimmy Chuang, SolarCity’s VP of structured financing, with the 30% federal investment tax credit (ITC) for solar expiring in 2016, the pressure is on for this industry to reduce costs and secure financing to support growth. And while Chuang advocates for an extension to the existing tax credit, his company’s recent moves in asset-backed securities indicate SolarCity isn’t satisfied to move forward with subsidies alone. The San Mateo, Calif.-based company made waves last November with its $54 million securitization deal backed by solar assets and packaged for institutional investors. It followed that with the Jan. 15 announcement of a web-based investment platform intended to offer securities to individuals and smaller organizations.

Distributed Solar’s Challenge – Customer Acquisition Cost

Part of the challenge for SolarCity and others like it is to achieve scale and efficiency in order to better align the business with potential investors. Nat Kreamer, president and CEO of Clean Power Finance, recently broke the challenge for distributed solar into three categories.

“If you look at the distributed solar space – it doesn’t matter what company you’re running – a couple things are true,” Kreamer explained at a recent cleantech conference. “One is that you need to sell a lot of customers to make money, so you’ve got to acquire them at a low customer acquisition cost. Two is you better have a great cost structure on transacting and installation. And three is you better have financing that actually is appropriate to the consumer.”

Clean Power Finance provides data and software connecting residential solar companies with investors, and manages about $500 million in project financing. Under Kreamer the company has quickly grown to become one of the largest finance companies in the solar market.

“What we did was divorce the classic roles of a developer in the power industry from equity in the industry and built it into a fee for service and risk management model,” he says. “What that allowed us to do was go out and bring new capital to market.”

Data and scale play a big role in facilitating the appropriate financing within the traditionally complex world of solar sales, Kreamer says. Having a large number of users running Clean Power Finance’s software essentially brings the deal flow for free.

Although Clean Power Finance and SolarCity have taken different paths to grow in the industry, both have succeeded by bringing consistency and predictability to distributed solar. This type of alignment could ultimately make all the difference for investors, who might otherwise be wary about diving headfirst into a relatively untested asset class.

“We effectively look for predictable, consistent cash flows to be able to pool those [assets] into a portfolio and then issue bonds off of those cash flows and assets,” Viscovich says. “A lot of what we rely on is historical data, so part of the challenge that you see in securitization is that there’s not that much historical data for renewable assets.”

SolarCity’s asset-backed securities and Clean Power Finance’s platform are two examples of financial innovation in clean energy. But those two companies aren’t alone in their efforts to solve the puzzle of bringing more – and cheaper – capital to the industry.

Here are some of the other avenues currently being explored.

Master Limited Partnerships

Although they aren’t currently available to renewable energy, a growing contingency sees the potential for Master Limited Partnerships (MLPs) to lower the cost of capital and open new investment opportunities in clean energy, says Amy Grace, North and South American wind analyst at Bloomberg New Energy Finance. However, it will take an act of congress to open up this vehicle to clean energy.

Senator Christopher Coons (D.-Del.) last year introduced the Master Limited Partnership Parity Act, which would open up these opportunities to the renewables sector. Some fear MLPs could take away tax subsidies from renewables, Grace says. However, a recent Brookings Institution opinion piece suggests MLPs could raise billions in capital for clean energy.

MLPs could connect an efficient, highly liquid capital market to renewables, while easing the dependence on Washington to achieve scale, Patrick Eilers, managing director at Madison Dearborn Partners, said at last year’s REFF-Wall Street. “It’s a pursuit of not only making it cheaper, but also making it much more available.”

Eilers drew a comparison between renewables fundraising and his own experiences working with Magellan Midstream Partners, which owns the country’s largest petroleum pipeline network. While he says the cost of project financing between an oil project and a renewables project isn’t too dissimilar, an MLP makes raising capital faster, cheaper and more efficient.

Real Estate Investment Trusts

Another investment vehicle that could have future applications to renewables are real estate investment trusts (REITs), with the thought being that the commoditization of a wind or solar farm’s production could provide a reliable source of revenue that is attractive to investors who might not otherwise invest in renewable assets. The trick to renewable REITs, however, is to get the IRS to change the rules.

“They basically have to say that the REITS, which are currently available for real estate, can expand to include wind and solar and some of these other assets,” Grace says.

So far, two clean energy REITs have gained IRS approval: Hannon Armstrong Sustainable Infrastructure Capital and Power REIT. Hannon Armstrong focuses on sustainable infrastructure debt and equity investments, while Power REIT holds solar land and railroad property.

Yield Cos.

Another avenue of pooling renewable assets into an attractive package for investors is what’s known as a yield company (yield co.). These are essentially companies built on pooled operating assets that represent a publicly traded vehicle in which to invest. Unlike REITs or MLPs, yield cos. are accessible now, Grace says, and are among the most accessible and interesting new vehicles in renewables at the moment.

Late last year, SunEdison and NextEra Energy both announced potential yield cos. that would spin off some existing plants into publicly traded vehicles that would raise money for new projects. NRG Energy raised $430 million through the initial public offering of its own yield co., NRG Yield, last June.

Citigroup’s Eckhart predicted five or 10 more of these companies in 2014.

Green Bonds

Another currently available and in-demand investment vehicle are so-called green bonds. These tax-exempt bonds created to fund sustainable projects have seen interest grow along with investors’ appetite for socially responsible investing. The World Bank issued the first floating-rate green bonds this month, worth $550 million, with Bank of America Merrill Lynch, Goldman Sachs International and SEB as lead managers. And the World Bank chief, Jim Yong Kim, recently called for creating a $50 billion green market by 2015 during the Davos World Economic Forum.

Responding to the growing popularity of these bonds, several investment banks published Green Bond Principles on Jan. 13, further defining these types of securities and their application toward climate and sustainability projects. Those voluntary guidelines detail the use of proceeds, processes for project evaluation and selection, management and reporting.


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