Chris Cather's  Instablog

The PowerPoint slide said it all: Bank of America Merrill Lynch.

A dramatically transformed financial landscape was the setting for the late June Renewable Energy Finance Forum (REFF) – Wall Street in midtown Manhattan. This year’s REFF brought together renewable energy industry leaders and sent a message to Washington: give us guidance on the promised grants and loan guarantees to get capital flowing to finance deals in solar, wind and other cleantech sectors.

REFF echoed the current finance zeitgeist: Washington has replaced New York as the new global financial center. Hosted by the industry’s principal advocacy group, the American Council on Renewable Energy (ACORE) brought together investors, lenders and developers to partner with Wall Street in shaping policy in both the short and long term.

The end of tax equity?

Historically, solar and wind project finance has been driven by tax equity owing to government Investment and Production Tax Credits and lack of project cash flows required by lenders for debt coverage. As a result of the credit crisis, tax equity investors like Lehman Brothers and AIG have either disappeared or lost their tax appetite with no liability to offset. Responding accordingly, new products are being offered by DOE and Treasury converting the ITC/PTC into a grant and guaranteeing loans but with little guidance to date.

Neil Auerbach, Managing Partner of Hudson Clean Energy Partners was especially outspoken on the future of tax equity and the emergence of private equity. Some highlights:

• Transitional period in renewable energy financing with a shifting financial landscape
• $134b RE investment required to hit 10% target by 2012 will introduce new cap structure: 55% debt, 30% US Gov. grant, 15% equity
• Tax equity will not fund needed investment in RE
• Private equity will replace tax equity
• Tax equity increases cost of debt
  • Tax equity financed debt:10 – 15%
  • Typical project finance debt: 5 – 7%
  • Target cost of RE debt:  4.5 – 5%

• Every 100bp increase in cost of debt adds $2.00 - $5.00 per MWh to RE generation

The afternoon panel on New Equity Markets with JP Morgan (JPM), Goldman Sachs (GS), TD Bank (TD), GE Energy Financial Services (GE) reiterated earlier panelist comments on private equity funds as emerging players.

Goldman Sachs, one of the first banks to make a commitment to invest in renewable energy in 2005, prefers making private equity investments in existing tax equity client relationships such as SunEdison, the solar energy developer.

Both Goldman and JP Morgan made clear that they are still active tax equity investors and open for business.

Stricter investment criteria for developers

The equity financing environment won’t get any easier for developers The consensus on the Global Financial Markets panel with Morgan Stanley (MS), UBS (UBS), Citigroup (C)  Bank of America (BAC) – Merrill Lynch, Credit Suisse (CS), and Good Energies?

Increased selectivity about RE investments. What are the new investment criteria?

• Increased selectivity on what is and isn’t bankable including:
  • Long term offtake agreement/20 year PPA
  • Proven technology
  • Cash flow for 12 – 18 months
  • Competitive advantage

But not so fast.

Some conference participants weren’t buying the banking infomercial. Stephen Tracy works with boutique CPA firm Novogradac and specializes in advising clients on tax equity. His take: “The discussions were interesting but the Bankers appear to be talking too theoretically about the perfect loan and credit participants. I would like to hear more discussion about available debt financing for other than the largest and best capitalized market participants.”

While bankers may be too focused on bankable deals and limiting themselves to existing client relationships, other shops are more focused on project economics and the nuts and bolts of getting deals done with innovative financing techniques.

What happens next?

Each day was summarized nicely with takeaways and the conference ended with a Crystal Ball panel to look into the future. Some common themes emerged:

• 2009 will be flat with deal flow increasing in 2010
• Public/private financing collaboration critical

• Debt/equity mix of deals will change
• RE industry is waiting on grant/guarantee policy guidance and increased capital flows
• Pent up demand will increase deal flow once guidance issued
• Fewer players will remain in industry once smoke clears
• Developers should make every effort to mitigate risk
• No substitute for strong deal elements
• Innovative capital structures are the new reality: vendor/utility financing/partnerships combined with post-guidance DOE grants/guarantees

Significantly, the renewable energy industry and Wall Street are looking beyond the next several years and will partner with advocacy groups like ACORE to shape policy and structure renewable energy markets for the long-term.

It’s sure to be a bumpy ride for solar, wind and other renewables. But, it will be fun.

Disclosure: At the time of writing this article the author held no significant direct interest in the companies listed.