Banking on Green Energy

Banking on Green Energy

October 31, 2007

Despite the mortgage lending mess, many commercial and investment banks are exploring good clean, conservative investments in the renewable energy realm. By doing so, they are not just wrapping themselves in the green mantle but they are also serving shareholders and making profitable loans.

Ken Silverstein
EnergyBiz Insider
Editor-in-Chief
Read Ken's Blog

Overall, the national trend is one of supporting the policies necessary to clean the environment and to take steps to battle climate change. As a result, federal and state policies are integral to the effort with the former offering production tax credits and the latter - in the case of about 26 jurisdictions -- mandating renewable portfolio standards. The net effect of pro-environmental policies is that a properly structured deal can provide attractive long-term returns.

"Banks consider renewable ventures to be well worth the upfront money," says Phil Spector, tax partner in Troutman Sanders' New York office. "They are able to invest in green assets and achieve some public heroism while they make smart investments."

Wells Fargo and HSH Nordbank, for example, are financing a solar enterprise by SunEdison. As the developer, SunEdison will deploy 20 megawatts of solar photovoltaic power at customer sites nationwide. The investment will help commercial companies avoid upfront capital costs while also permitting them to purchase solar power under long-term predictable rates that are equal to, or less than, traditional utility rates.

Wal-Mart and Walgreens are among the enterprises that are participating with SunEdison. According to Spector, the banks peg their risks to the creditworthiness of customers, which enter into purchasing agreements with developers. If the federal government should implement its own renewable portfolio standard that would require all utilities to produce "some" power from green sources then the value of those loans - and the underlying assets associated with them - will rise.

The days of easy money, though, are over. To obtain loans for renewable energy projects, developers must first get long-term power purchase agreements. 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.

Lending is big business. Major players such as Citigroup, Goldman Sachs and JPMorgan Chase have built up their staffs and committed to financing green ideas. Newer investors are also entering, such as Wells Fargo and KeyBank. The result is that smaller deals in the $15-$20 million range that used to be ignored are now getting loans.

"This investment is part of our broader strategy to finance business opportunities that help to mitigate climate change, increase energy and resource efficiency, and spur a transition towards a sustainable energy economy," says Barry Neal, director of environmental finance for Wells Fargo, with respect to SunEdison's projects.

Investment Wave

Renewable energy is a fraction of the overall generation mix, making up 2 percent of it and excluding hydro sources. But, federal and state policies are providing numerous tax breaks to regulated and non-regulated entities alike to motivate them to invest in sustainable energy forms.

As a result, the market for biofuels, photovoltaics, wind energy and fuel cells are poised to expand four-fold in the next decade. The projections are that global revenues from those technologies will grow from $40 billion in 2005 to $167 billion by 2015, according to Clean Edge, a research and publishing firm. Specifically, about $1 billion was invested in North America and Europe in the second quarter of 2007, with energy generation getting more than half of that, adds the Cleantech Network.

"As clean technology markets move from market creation to market adoption and acceleration, we are encouraged by the continued robust growth, as well as receptive public markets and continued strength in mergers and acquisition activity," says Nicholas Parker, chairman of the Cleantech Network.

In 2006, Goldman Sachs said it would allocate $1 billion of its own funds to clean technologies. But, the demand for green energies is rising and so the bank has exceeded that pledge by 50 percent. Wind, sun and bio-fuels are among the ventures to which it has committed its funds. It bought Horizon Wind Energy while it owns a stake in SunEdison. The investment bank also purchased a small piece in Iogen Corp., which is on the cutting edge of making ethanol from corn stalks and switchgrass. Meantime, Morgan Stanley says that it plans to invest about $3 billion in clean energy projects over the next five years.

Deutsche Bank also says that it sees both challenges and opportunities in making renewable energy loans. It published a white paper that looks into the viability of climate change-related investments and says that government regulation, carbon prices and new technologies are the underlying fundamentals. It concludes that there will be a "massive shift" away from a carbon-based economy and into cleaner fuels and technologies.

"Companies and investors are quickly realizing that climate change is not merely a social, political or moral issue, but an economic and business issue as well," says Mark Fulton, climate change strategist for Deutsche Bank. "This is translating into a wave of investment and innovation."

Clean technology investments are looking good right now. Demand is up and major banks and for-profit enterprises have sat up and taken notice. Despite the credit crunch, the financial resources are now available for renewable energy developers. Commercial and investment banks, in particular, are finding that loaning money or allocating funds to green enterprises are good, healthy forays.