Ken Silverstein EnergyBiz Insider Editor-in-Chief

In the last year, lenders have become increasingly attracted to renewable energy ventures. To meet that need, a number of private equity firms sponsored by both large global investment banks and smaller regional firms have emerged. It's in large part a response to the Energy Policy Act of 2005, which provides numerous tax breaks to regulated and non-regulated entities alike to invest in sustainable energy forms.

And, it's also a byproduct of state incentives that include renewable portfolio standards that require utilities to supply a certain percentage of their generation mix in the form of clean energy. And other states such as Oregon provide a tax credit equal to 35 percent of an eligible project's capital cost, up to a maximum of $10 million. The net result of those incentives is that a properly structured deal can provide an attractive long-term return.

"Many resources are available for investors and renewable energy developers who are interested in learning more about renewable-based energy projects," says Tom Sidley, senior managing director of energy for Oregon-based Aequitas Capital Management, an investment bank firm managing $350 million in such projects. "Ultimately, developers who find a good lending partner will more readily accomplish their goals -- and that's good news for the U.S. in its ability to meet our increasing demands for energy with renewable and sustainable resources."

On the investor side, Sidley says that activity is unprecedented. Major players such as GE Energy, JP Morgan and CitiGroup have all built up their staffs. Newer investors are also entering, such as Wells Fargo and KeyBank. And, institutional investors such as CalPers are also beefing up their renewable holdings. The result is that smaller deals in the $15-$20 million range that used to be ignored are now getting financed.

Developers, meanwhile, are fully engaged. Wind developers with projects in place, for instance, are ordering equipment and turbines for deliveries in 2008. Despite the hurried pace, there's uncertainty as to whether the production tax credit that is scheduled to expire at the end of 2007 will be renewed. Any lapse in the 1.8 cents per kilowatt tax credit would hurt further development.

While the unregulated entities such as Goldman Sachs, Green Light Energy and Horizon Wind are the major renewable energy players in the market, there's a growing trend to where the regulated utilities such as PacifiCorp and MidAmerican are taking a greater role. Tax credits, renewable portfolio standards -- and a growing demand -- are the primary drivers.

"There is more experience, savvy and sophistication in the marketplace than ever before," says Sidley.

Greater Awareness

While investors were gun-shy following the 2001 recession, a renewed optimism now appears to exist. Markets for biofuels, photovoltaics, wind energy and fuel cells are poised to expand four-fold in the next decade, growing from $40 billion in global revenues in 2005 to $167 billion by 2015, according to a report released today by Clean Edge, a research and publishing firm. The outfit says that the solar technologies were responsible for the three largest initial public offerings in 2005.

The proof: CalPers, the nation's largest institutional investor, has said it would pump $200 million into clean energy technologies over the next several years. Meanwhile, PacifiCorp is set to add 1,100 megawatts of renewable generation to its overall portfolio over the next seven years -- all in an effort to build a diverse, low-cost and low-risk energy portfolio, it says.

"The trend toward renewables is real, necessary and financially compelling," says Matt Cheney, CEO of MMA Renewable Ventures in San Francisco. "For many different reasons, the U.S. economy will benefit from sourcing its energy from domestic resources."

While things are looking up, the coast is not exactly clear. To obtain financing for a renewable energy project today, developers must first obtain a long-term power purchase agreement. In other words, they must be able to demonstrate to lenders that they have locked-up most of the available capacity in advance of construction so that they can pay back the banks.

But, according to Steve Greenwald, partner at Davis Wright Tremaine in San Francisco, the trend now is toward shorter time periods of 10-15 years. That's because regulators remain fearful that energy prices will decline and therefore don't want to subject ratepayers to paying more for energy than current market rates. While there is a risk of that with long-term financing, there is also some peace of mind should prices rise.

Greenwald, however, says that such thinking is short-sighted. It means that developers require higher prices to meet their financing obligations. Lending institutions may be skeptical of those conditions, therefore deterring development. And a further build-out is essential if technologies are to evolve and prices are to decline further. Furthermore, the regulated utilities contracting with developers require them to post excessive credit, which increases their bids by 5-10 percent.

"Regulators need to have a greater awareness to all of this," says Greenwald. "I'm not advocating we cut down due process or public participation. But, we need to balance the need of developers with those of the process. While we have a renewable priority, there's too much that can hold us up."

Renewable energy is on the rise and odds are that trend will continue. While policymakers are providing key incentives to ensure that developers capitalize on that new demand, there appears to be some financial and regulatory obstacles standing in the way. The kinks, no doubt, have to be worked out. But, assuming the trend is real, political and economic interests will converge to ensure even more development.

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