Investors: Renewables Growth is Slower but Steady

Because the sluggish economy has made some renewables less competitive, there's a “flight to quality” in the space, according to investors at this year's Renewable Energy Finance Forum in New York City.

“The capital is there..but having a project that can be financed is difficult. I think the developers are struggling. So we have not been as busy as we've been in the past,” said Kevin Walsh, managing director of renewable energy at GE Energy Financial Services.

The combination of low fossil energy prices and lower demand for power has stymied growth in some sectors, particularly wind. In the U.S., wind installations are expected to fall by 40% this year. In Europe, installations will likely fall flat.

Solar PV will be the fastest growing industry, as it is less capital intensive, is faster to build out and does not face many of the same regulatory challenges as wind, geothermal and concentrating solar power. GE, which has been heavily involved in the wind space, is now looking to invest in large scale solar PV plants.

“We really like what we see in solar right now. That's going to be a greater focus for us as well,” said Walsh.

Over the last 18 months, companies like GE have changed up their investment strategies. In 2008, tax equity was the project financing option of choice. Those were the days when tax equity players owed enough money in taxes to take advantage of the credits. Then the financial crisis hit, reducing the tax appetite of investors. The problem was particularly bad in the wind industry. Today, because of the grant program created by the stimulus package, the tool of choice is debt.

Last year, over $5 billion was invested in wind energy projects in the U.S. Only $1.8 billion of that was in the form of tax equity.

Many developers are borrowing against the cash grant to raise money for construction, then handing the payment over to the construction lender when the project is completed. The program has already helped bring about 4,200 MW of projects online.

Unfortunately, fewer developers are now able to take advantage of the grant program because there is less demand for their energy. Even so, it's been a lifeline for the industry in the last 12 months.

Keith Martin, an attorney with Chadbourne and Parke, said that investors are very comfortable with the grant program. The big unknown is what will happen when the grant program expires at the end of this year. Most people in the industry are calling for an extension of the program until 2012, saying that the industry will shrink without it.

“The levers of public policy in Washington are broken. I just don't know if something will happen this year,” said Martin. “[investors] have to be savvy about this. You have to look at parts of the market that can stand on their own...without the support of public policy.”

That's pretty much every technology.

According to figures from the International Energy Agency released earlier this month, fossil energies got about $550 billion in subsidies in 2008, compared to $50 billion for renewables. With such heavy support for fossil energies, renewables will continue to be dependent on public policy.

Investors are watching the (seemingly always) uncertain policy debate in Washington, wondering how it will impact their current strategies. Without the grant program, a national target or a price on carbon, renewables may look less attractive to investors. The large shale gas finds in the U.S. – which will likely keep natural gas prices low for many years to come – are also going to impact the economics of renewable energy projects.

Michael Liebreich, CEO of Bloomberg New Energy Finance, said that these are all factors that the industry must deal with. They are creating the “New Normal,” where renewables grow at a more subdued and sustainable pace.

“We're neither in the depth of a trough, nor are we in an overheated stage. So this is a kind of normal year in the development of an industry,” Liebreich said.

For a comprehensive overview of the financial health of the industry, take a listen to this week's podcast, linked above. We've got interviews with Kevin Walsh of GE; Michael Liebreich of Bloomberg New Energy Finance; Fintan Whelan of Mainstream Renewable Power; Keith Martin of Chadbourne and Parke; and Ken Westrick of 3TIER.