The solar industry’s Investment Tax Credit (ITC) and the wind industry’s Production Tax Credit (PTC) extension, both announced in December, are driving the development of new renewable energy projects, while also generating a renewed interest in clean energy by project financiers. That was one consensus among speakers at the American Council On Renewable Energy (ACORE)’s Renewable Energy Finance Forum-Wall Street (REFF-Wall Street), in late June.
One of the biggest factors driving investment is that clean energy prices continue to drop, making them cost competitive with fossil fuels, as noted by several panelists at the two-day event. Wind power prices have now fallen to 2.5 cents per kWh, a 60% drop since 2009, while solar has fallen 70% since 2009 to 5 cents per KWh, according to the U.S. Department of Energy.
In fact, 2015 was the largest year ever for renewable energy tax equity investments, with $13 billion of tax equity raised, up from $10.1 billion in 2014. That growth generated a good deal of excitement at REFF, and several speakers predicted that the figures for this year should at least equal 2015’s. Experts said they are seeing a good amount of deal flow so far this year. Bloomberg, meanwhile, predicts that tax equity investment is on track to grow by 13% to $14.8 billion for 2016.
Morgan Stanley managing director for clean tech financing Skip Grow’s enthusiasm for the sector was palpable. In the U.S., renewable energy penetration, ex-hydro, of total energy generation was 17 percent in the first quarter of this year, which he called a “great number.” Grow stated that prices are also dropping for the sector’s underlying components, including solar panels, wind turbines, batteries, and balance of system (BOS) components; these price drops, he said, are the “brightest spot in clean tech today.” He also expects renewable energy to reach grid parity in many parts of the U.S. before the ITC and PTC tax credits end in 2019.
John Eber, managing director of energy investments at JP Morgan, pointed out that, for the first time, solar surpassed wind tax equity investment last year. This was driven by an increasing amount of small distributed generation transactions, with 6.8 GW in solar and 6.4 GW in wind.
The increased level of distributed generation in the corporate, or Commercial & Industrial (C&I), space was a top theme at this year’s conference, and it was discussed with great excitement during almost every panel discussion. In fact, new corporate power purchase agreements (PPAs) drove a doubling of renewable energy in the corporate sector in 2015 to 3.4 GW, ACORE CEO Greg Wetstone said in his opening presentation
And there is a lot of debt available for “well-structured” renewable energy projects. This was echoed by several speakers from large financial institutions, who believe the sector’s supportive policy environment and risk/return attributes are attractive to investors.
“We see a fair amount of capital going into this space,” said Ray Wood, head of global power & renewables at Bank of America Merrill Lynch. “The returns are clearly attractive relative to risk position being first in the stack.”
There’s “no question that this industry has performed,” with solar PV and wind project returns having exceeded inflation with no losses, Marathon Capital CEO Ted Brandt said. Due to this strong performance, “the reality is that market is wide open.”
Panelists said they expect large amounts of renewables to be deployed over the next four years, as developers have until December 2019 to start construction to qualify for a 30% tax credit. Indeed, Bloomberg predicts the five year wind PTC and solar ITC extensions will add an additional 19 GW of new wind capacity and 18 GW of new solar capacity.
This new deployment of renewables will cause the U.S. grid to change more in the next 20 years than it did over the last 100, said Jeff Weiss, managing director at Distributed Sun, which develops commercial solar projects.
The U.S. remains the primary country of choice for investment by the large financial institutions represented on the REFF-Wall Street panels. Solar in India and Japan were frequently noted as the most attractive overseas markets.
The limited number of tax equity investors, currently at 30 firms, is a major challenge to industry growth in the U.S., panelists said. However, it’s expected that more financial institutions will enter the market, drawn in by the attractive returns and by the potential to reduce large tax obligations.
On the distributed generation side, the industry needs to create financing structures that allow for “repeatable transactions” to enable greater efficiencies, rather than being done on a “bespoke” basis, in order to attract more tax equity capital, Weiss said. He also pointed out that there’s a lot of investment interest in his distributed generation projects from family offices and private equity investors, who are drawn to its “above hurdle return.”
Pension funds are increasingly investing in renewable energy, as they are drastically increasing their investment allocation to the “real assets” sector and are attracted to those projects’ relatively high yields, Marathon’s Brandt said.
For example, the New York City Retirement System’s $160 billion pension fund plans to invest 20% of its $1.7 billion infrastructure portfolio into renewable energy, with an increasing amount being invested directly into projects, rather than through funds, that meet their “CPI + 4%” benchmark, according to head of infrastructure investments Petya Nikolova.
Insurance companies are also increasingly investing in the space, several speakers said. Robert Pottmann, head of renewable energy at MEAG MUNICH ERGO Asset Management, said his firm leverages its parent company Munich Re’s expertise in renewable energy to make direct debt and equity investment in the sector globally. Munich Re is active in providing insurance for renewable energy projects, and the two firms often collaborate on projects. Munich Re, which was carbon neutral last year, has focused heavily on mitigating climate change and also believes there’s money to be made in renewable energy, Pottmann said.
These long-term investors will ultimately be the major source of capital that gets the industry from the current $329 billion invested globally across clean energy, to the $1 trillion in annual investment needed to meet the climate goals set at COP21 in Paris, said Dan Reicher, executive director of the Steyer-Taylor Center for Energy Policy & Finance at Stanford University.
Financial innovation is another way to encourage “massive amounts of capital” to flow into the sector, said Marshal Salant, head of Citi’s Alternative Energy Finance group. These innovations include derivatives, securitization and reinsurance, he said.
Over the past two years, many banks have focused on creating new investment structures that pool renewable energy and energy efficiency assets, according to Salant. And banks are increasingly providing “warehouse financing,” which enable them to “pool things together using all the technologies that are out there,” he added.
Citibank is working on developing new investment products for this sector in response to requests from institutional clients, he said. These include collateralized loan obligations for distributed generation assets and, on the equity side, REITs and MLPs, Salant said.
The REFF-Wall Street conference also featured plenty of information about community solar and battery deployment.
Community Solar is Financeable
Community solar is becoming more and more interesting to financiers. According to several bankers who spoke at REFF-Wall Street, there’s been a marked increase in community solar project sponsors approaching them for financing.
Community-owned solar gardens enable participating utility customers, who can’t install solar panels at their sites, to receive a credit on their electricity bills for the energy generated from the plant.
Community solar is attractive from a risk standpoint, panelists said, because the projects have a lot of different subscriber types that are easily replaceable if one withdraws from the project.
U.S. Bank has already done two community solar projects, and is working on three others, said Adam Altenhofen, vice president for renewable energy investment originations at the firm.
Deutsche Bank has a “big conviction” on community solar and is currently working on at least two deals, said Vinod Mukani, DB’s head of infrastructure and energy financing.
“Community solar makes a whole lot of sense… You have utility scale installed costs and benefit from retail rates of electricity,” said Pooja Goyal, managing director and head of alternative energy investing at Goldman Sachs.
Battery Deployment: “Off the Charts”
Battery prices are “plummeting,” which is driving deployment and interest from project developers and financiers, according to REFF-Wall Street panelists.
In fact, 161 MWh of storage capacity was installed in the U.S. in 2015, up 243% over 2014, according to the Energy Storage Association. The majority of this deployment was on the grid, but behind-the-meter storage is expected to surpass grid battery deployment within 10 years, the ESA says.
“We think [batteries] are becoming a viable and important option,” said Brad Nordholm, senior managing director and co-head at private equity firm Starwood Energy Group.
“We’ve seen many proposals to co-join renewables and battery projects, making it into a firm, dispatchable source of power generation,” Nordholm said.
However, there are still key questions about how to value energy storage, as well as the right business model necessary for deployment, as several panelists noted.
Although batteries are increasingly being deployed with solar in the residential space, several panelists said they believe the highest value for batteries is at the electrical grid level, where they can be managed by grid operators to optimize a system rather than as an individual asset.
Regardless, batteries can help utilities think through how value is created, said Jim Rogers, former CEO of Duke Energy. “With all the renewables being added, the grid doesn’t go away — it becomes more important,” he said. “The business model moves from charging per kilowatt hour to how do you value the service of providing grid services to everyone 24/7?”
Energy storage will increasingly be integrated with solar at the utility level, which will deliver “far more value” to the customer and utility, according to solar photovoltaic (PV) manufacturer First Solar CEO James Hughes.
And utilities are being aggressive in experimenting with the value of storage on their systems, Rogers said. Duke Energy is a prime example, with 10 storage pilot programs going on today.
Solar policies are in place that are transforming the grid, said Susan Kennedy, founder and CEO of Advanced Microgrid Solutions. The trend towards deploying batteries is being driven by need and technological advances, as lithium ion batteries are now ready to become the technology that allows for the control of supply and demand to manage the integration of solar, she added.
Advanced Microgrid Solutions is developing a 10MW “hybrid electric building” project in Southern California which “harnesses load at load centers” using Tesla Powerpack batteries custom fitted in commercial office buildings.
“These are designed to harness one-third to one-half of the load of a Class A [commercial] building,” Kennedy said.
AMS uses batteries and its proprietary software system to aggregate and operate the buildings as a “fleet” that can be used as a grid resource, Kennedy said.
That collection of buildings then becomes a “peaker plant, creating a firm, dispatchable resource,” she added.
“We are able to balance load using demand of building in a way that is very different than any other traditional demand response project. We drop 10MW of load, the grid operator will see 10MW drop from the grid,” Kennedy explained. “The value of that to the utility is greatly increased because of the way we have designed the system…and made it available as much as 600 hours per year.
That capability allowed AMS to set up a 50MW long-term PPA with Southern California Edison in 2015. Their contract with the utility is what allowed them to finance the project, she said.
If storage is not providing a solution to the utility, “then you are going to stay a grid edge technology that has a difficult ROI, unless you are paired with solar, or have an ITC dedicated to advancing it,” she said.
Meanwhile, Starwood Energy is doing its first portfolio of battery storage with developers, Nordholm said.
Deutsche Bank and private equity firm Orion Energy Partners are currently financing the deployment of energy storage, and asset manager Investec noted its interest in financing energy storage.
Panelists pushed for a federal tax incentive for storage to help projects attract private investment. In fact, a bill was recently introduced in the U.S. Senate that would enable batteries to receive a federal tax credit, similar to solar and wind.