Cleantech and Sustainable Financing Trends for 2018: Day, Shah, Ehrenpreis & Sivaram

We surveyed some of the leading financiers, investors and other experts in the cleantech and sustainability space, seeking their thoughts on what trends we are likely to see in 2018 when it comes to sustainable financing. Here’s some of the broad range of what they had to say.

New financing models coming as securitization takes off

“The most important new financing models will likely be around the actual physical deployment of systems,” says Rob Day, general partner at Spring Lane Capital. “We’ve spent the past couple of decades commercializing innovations and getting them ‘ready for prime time,’ but we’ve also found that getting them to that point doesn’t go far enough to unlock traditional infrastructure capital. Which means either many of these early deployments have had to be funded via venture capital structures – risking up companies significantly, and leading directly to a lot of the mediocre results seen in cleantech venture capital – or simply not had funding at all, and thus not been deployed at scale.”

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Now, new financing models like Spring Lane’s own Integrated Deployment Capital allow for the deployment of “sub-utility scale assets at volume, and in ways where companies can achieve the momentum and operational track record needed to complete that ‘hand-off’ to traditional project capital,” Day says. He adds that he also expects to see “more work around new models for utility-scale early deployments as well.”

Varun Sivaram, fellow for science and technology at the Council on Foreign Relations, expects more securitization for solar projects. “I do predict that in the longer term, securitization will take off for distributed assets like solar,” he says. Securitization for solar assets has been “gaining momentum” in recent years, he writes in his forthcoming book, Taming the Sun, though factors like rising interest rates may dampen this momentum somewhat. The relatively small size of the U.S. solar marketplace also presents challenges to securitization, Sivaram writes: “Until smaller solar providers begin to pool their assets together and jointly securitize them, the market for these securities may remain small and illiquid, which is undesirable for prospective investors.”

2018, Building on a Strong 2017

Worldwide, investments in renewable energy and energy-smart technologies hit $334 billion in 2017, according to Bloomberg New Energy Finance (BNEF), up 3% from $325 billion a year earlier. Solar was the technology with the largest spend, attracting $161 billion, about 48% of the global total for all of clean energy investments and grew by 18% versus 2016.

As for types of funding, the dominant category was, as always, asset finance of utility-scale renewable energy projects of more than 1MW. This totaled $216 billion last year, according to BNEF data, up slightly from 2016. Small-scale projects of less than 1MW — small solar systems, basically — saw $49 billion, a 15% increase versus 2016 that is attributed largely to an installation rush in China.

Asset finance of energy-smart technologies, or distributed energy resources, saw just shy of $22 billion in investments last year, up 36% due to increased installation of smart meters and lithium-ion batteries, BNEF says. And corporate research and development into clean energy rose 11% to $22 billion.

More risk for more return

One key feature of cleantech investment this year and beyond is likely to be investors taking on more risk as they seek more return. “The general trend has been the same: the most low-risk investments in our space are the ones that were done first. We had a lot of that for the last five years,” says Jigar Shah, president and co-founder of Generate Capital. The industry is attracting investors “who are used to making 8 or 9 percent rather than 4 or 5 percent returns. So those people are on a mission to find deals where they can make higher returns.” In short, Shah says, “The big story in finance is how much smart money there is, chasing deals that can give them higher returns.”

That risk that leads to higher returns could take the form of misunderstood counterparties, technologies, or countries, Shah says; he notes that renewable energy projects are gaining ground in places like Egypt, Myanmar, and even Chernobyl.

In fact, Shah thinks the cleantech investment space will become increasingly international. “I think this is the year when people start talking about how we can have leadership coming from all around the world,” Shah says. “For a long time the real leaders were OECD, or even just Europe and the U.S. mostly. But now we recognize China, succeeding not just in its own market but around the world. Same with India – they’ve succeeded in their home market and are now going to Europe and the U.S.”

Indeed, BNEF data show that China accounted for almost $133 billion of clean energy technology investments in 2017, up 24% for the year and setting a new record. The country with the second-highest investment in clean energy last year was the U.S., which saw $57 billion, up a touch over 2016. India saw $11 billion in clean energy investments last year, down from $13.7 billion a year before, BNEF says, but these figures should grow strongly in coming years as investors work to meet the government’s ambitious targets for solar.

In fact, India’s solar market attracted major institutional investors in 2017 including Canada Pension Plan Investment Board(CPPIB), Caisse de dépôt et placement du Québec (CDPQ), and the Ontario Teacher’s Pension Plan (OTPP).  Other international investors that have already entered India’s solar sector include Dutch fund manager APGBrookfield Asset Management, the private equity arms of Goldman Sachs, JPMorgan, Morgan Stanley, and European utilities EDF, Engie and Enel. These new funding sources will help the country to meet its commitment to install 100GW of solar power capacity by 2022 it made at COP21.

Financing drives growth of renewable energy and storage

New financing models this year will “continue to drive the growth of renewable energy and storage,” says Ira Ehrenpreis of DBL Partners. He cites his company’s own portfolio companies, like Advanced Microgrid Solutions, whose software platform “supports load shaping at the building level, which enables utilities, renewable deployments, and end customers to come together to build greener and more resilient energy systems,” he says.

“Meanwhile, the spread of mobile payments in the developing world has created an opportunity for a new model to deliver affordable renewable energy to the 1.4 billion people who lack access to the electrical grid,” he goes on. Another DBL Partners portfolio company, Off-Grid Electric, “leverages low-cost solar, storage, and appliances, as well as mobile phone payment infrastructure and novel financing, to bring off-grid homes in Africa into the light.”

While cleantech investing has historically focused more on energy generation and delivery, investors are now taking a broader view. “Improving asset utilization and resource efficiency in industries with high energy consumption, like agriculture and transportation, can have an enormous impact,” Ehrenpreis says. DBL Partners portfolio company Apeel Sciences works to extend the shelf life of perishable products, which saves on inputs like energy and water, since the products are no wasted due to spoilage. “In addition, because its solution doesn’t rely on the traditional cold chain for transport, Apeel’s solution also mitigates the need for energy-intensive refrigeration.”

Asset project finance and green bonds to increase

In Day’s view, distributed asset project finance is the model that “seems the most poised to ramp up quickly, and also can provide some really compelling returns opportunities while (and because of) solving major ‘chicken and egg’ issues for companies and developers in the sector,” he says. “It’s why we’re bullish on this model.”

He adds: “Large-format infrastructure via fund managers does seem to be under threat right now, as yields are significantly compressed and big institutional investors who would be LPs instead seek to go more direct. But even there we continue to see smart managers riding this wave well.”

As for green bonds, their issuance soared in 2017 to a record to $163 billion, according to BNEF. Corporates were behind much of the increase, but asset-backed green bonds also took off, rising five-fold to $25 billion.

This growth will continue in 2018; S&P Global Ratings said this week that green bond issuance could hit $200 billion this year. Sivaram expects to see continued growth among both labeled and unlabeled green bonds, although “labeled ones will grow faster,” he says.

Interest from institutional investors

Institutional investors are showing continued and even increasing interest in renewable energy and other sustainability related projects. These big asset owners “are increasingly interested in renewable energy projects, especially through infrastructure fund structures such as permanent capital vehicles,” Sivaram says.

It’s important to realize, though, that there are nuances among different investors. “There is an emerging set of ‘impact investor’ players who are looking to be catalytic around new models, new technologies, etc.,” Day says. “This is an important role. But the major corpus of institutional investor capital is instead focused on long-term trends and market (or better) returns.”

Investors face frustration

Day also cautions that asset owners face a dilemma: they want to invest, but there’s been a lack of “robust” choices. “On the publicly-traded side, ESG tools and choices are growing but largely remain somewhat thin. On the private side there’s basically just been two choices: Large-format green infra, and venture capital.” Returns on green infrastructure projects have been driven down by investor inflows, while VC in the space remains relatively small.

The upshot: many long-term investors that are “trying to get in on 30-year economic megatrends are frustrated, and many therefore just sit on the sidelines,” Day says, “We need these new emerging models, especially around asset deployment, to start showing some good early results. You’ll be amazed at just how much capital is ready to flow in once someone demonstrates how to do it!”

The impact of federal tax cuts and tariffs

When the Trump administration put a 30% tariff on imported PV panels in mid-January, many solar financing experts were quick to note that the move was unlikely to have a huge long-lasting impact; forecasts ranged from it being a sort of speed bump, to having a “meaningful but not catastrophic effect” on the industry, as Day puts it.

The tax cuts that Congress passed late last year may similarly have a less-than-dramatic impact on cleantech finance, according to some experts.

“It seems like there will be a slight impact on the tax equity market but otherwise I don’t see a huge impact” from the tax cuts, Day says. “Overall, it’s just a bit more headwind for solar (and to a lesser extent, batteries), but it’s a great time to be more broadly investing across other areas of food, energy water and waste with fewer political whims at play.”

Similar words come from Marlene Motyka, U.S. and Global Renewable Energy Leader at Deloitte, in a report she published in mid-December, as the tax bill was working its way through Congress. “Lower tax rates could also reduce the supply of tax equity financing, on which many renewable developers have depended,” she wrote.

Still, overall, Motyka said: “The commercial sector appears to show long-term potential as energy managers across a variety of industries become more educated about solar opportunities and as more efficient financing structures emerge.”

Community solar poised for a big year

Community solar projects saw investor interest last year, and that should continue into 2018, according to Clean Energy Collective, a community solar developer. Demand for these projects this year will be driven by commercial and industrial customers, who “will take a larger share of capacity,” Clean Energy says in a report. That C&I interest will come as those groups look to reduce their energy costs as well as enhance their green credentials.

Financing has been a challenge in the community solar space. “Both purchase and subscription programs have been subject to relatively strict terms from finance partners, limiting flexibility in product strategy,” the report says. “We believe 2018 will be a turning point toward more adaptable financing as additional risk mitigations emerge and the finance market better understands the reduced risks inherent in community solar solutions.”

Clean Energy Collective expects to see “big capital” move into the market this year. “The underlying variables of community solar programming – like multiple customer profiles, unique technology requirements, and maintaining full subscribership – has been thorny for capital     markets. However, in 2017 we saw a slow but measured migration from boutique investors to the more mainstream financial community,” the report says.

Bigger investors are becoming more familiar, and comfortable, with community solar, the company thinks. This year, according to the report, “is the year large institutional investors will move in, positioning community solar as the next place to put low-risk capital at scale.

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