Financing the cleantech boom

June 29, 6:32 PMEnergy ExaminerJohn Guerrerio

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So now that the climate and energy bill seems to be growing some legs in Congress, talk within the investment community is growing about when and how the ‘real’ cleantech boom will be financed.  The answers are not simple ones, but signals are indicating that a major shift in energy production, consumption, and financing is already underway.

The American Recovery and Reinvestment Act essentially provided the clean energy industry with three options for government financing.  The government option became necessary as the predominant method for financing renewable energy projects dried up; the tax equity market ran into trouble during the financial crisis when many investment firms and insurance companies were experiencing shrinking or non-existent tax burdens due to the slowdown and widening recession at the time.  In addition, the cost of financing for renewable energy projects is significant higher that established natural gas or coal-fired power plants (pre- carbon market) because of unknown risks associated with the build out of new technologies.

Renewable power projects are typically more capital intensive than are fossil fuel ones because construction costs are high and operating costs are low.  The initial surge of capital necessary to build up the solar or wind or biofuel or geothermal to scale is large enough to create significant risk for those doing the lending.  The established fossil fuel industry is tried and true to its costs; it is and has been established; lenders know what to expect every step of the way...but throw in emission regulations and the scale of uncertainty begins to tilt in favor of renewable energy.

The government’s intervention into the financing arm of the energy industry is set to have reverberating effects across a multitude of spectrums.  The production tax credits (PTC), investment tax credits (ITC), and government grant matrices need professional interpretation in order to understand which kind of financing structure a given project manager should select.  The net result, however, is that the government is set to inject capital into the renewable energy markets in order to stimulate development in the industry past the point where risk is a limiting factor.  Combine financial commitments with policy and enormous sums of money on the investment sidelines, and the formula for a large influx of private capital into the renewable energy sector is present. 

Based upon the majority’s vote in the American political democratic system, the government is injecting tax dollars into a sector of the economy that has the potential to provide jobs and stability in our country for decades to come.  If America assumes the role of leader in clean energy for the world in the 21st century, we as a country are guaranteed economic growth in solar, wind, geothermal, biofuels, batteries, EVs, energy efficiency, and the like.  The analysis of the amount of U.S. money spent on securing oil reserves in Iraq, produced definitive results the opposite of what was intended.  Instead of cheap middle eastern oil, America learned that the trillions of dollars spent fighting in and securing the region, if injected into a domestic clean energy program could generate enough power to launch America into a new future, one that was not dependent upon countries the likes of Russia, Iran, Venezuela, and Saudi Arabia.

Too much government assistance, though, can stifle investment in renewables.  The government can only provide so much capital; in order for an industry to gain ground within the structure of our economy is through private backing.  The idea that the government is driving the clean energy vehicle forward need only be temporary.  Policy structures need to be put in place in order to entice private capital to enter the cleantech space.

New partnerships between public and private interest groups need to be formulated to smooth the transition from government aid designed to stimulate growth to an industry that has enough merit on its own to warrant private and public funds to enter.  Long-term, low risk pensions funds, still reeling from last year’s drop in value are looking for their way back to high returns for their clients.

Those returns might be slow throughout the rest of this year, but if more investors educate themselves to the moves within the financial community regarding clean energy financing and get off the sidelines and embrace America’s clean energy future, they can collectively create a take-off point for themselves and anyone else that seeks to marry societal, environmental, and financial commitments together.  That take-off point may very well be approaching us all swiftly.