New Ways to Generate Wind and Solar Energy Investment

The sustainability movement faces formidable obstacles to a needed transition to financial stability.

Until now, investment in renewable energy has depended on subsidies from the federal and state governments. But subsidies are not always available, and that makes business models that count on them unreliable for providing renewable energy, yet good for losing taxpayer and investor money. Meanwhile, treating renewable energy investment as a sale of goods to the utility companies - in effect, a commodity transaction - introduces unneeded risk and volatility.

Using a real estate investment trust to invest in renewable energy is a way to alleviate these risks and encourage the investment of a significant amount of money.

A REIT is a subcategory of a corporation whose sole purpose is to own real estate assets. The benefit is that REITs do not pay corporate taxes as long as they distribute 90 percent of their taxable income to their investors. REITs operate in a fashion similar to mutual funds. 

Mutual funds raise investment money and use it to purchase stocks, bonds and other securities, and then distribute the cash flow from those investments to their investors. REITs raise investment money and use it to purchase real estate assets, and then distribute the cash flow from those assets to their investors. The idea behind a REIT is to allow the public to invest in high-quality real estate assets. If used correctly, the renewable energy industry can capitalize on the proven REIT business model for the long-term ownership of high-quality assets together with having access to significant amounts of capital investment.

Traditionally, renewable energy developers and utilities transacted the sale of goods with a power purchase agreement. These long and complicated
agreements detail the sale of the power from a renewable energy generator to a utility. Power purchase agreements add several layers of risk for both parties because of performance contingencies and clauses.

Instead, the power industry should treat renewable energy transactions not as a sale of goods but as real estate transactions. A real estate transaction is either a lease or a loan. Using this strategy results in a fixed yearly payment from the utility for the right to occupy and operate the renewable energy asset. 

A REIT's core business activity is the investment and ownership of real estate. A utility's core business activity is the production and transportation of power. Treating a renewable energy transaction as a lease or loan allows both the REIT and the utility to benefit from the activity in a similar fashion to the way they benefit from their other core business activities.

Treating the transaction as a lease or loan also allows utilities to benefit from incentives intended to encourage the generation of renewable energy. REITs do not pay taxes; thus, they cannot benefit from federal or state subsidies, abatements, tax benefits or depreciation. This allows REIT investors to include such incentives in the transaction and let the utility benefit from the other incentives involving the production of clean power.

Other benefits of using REITs for renewable energy transactions include stabilizing cost, complying with renewable portfolio standards, taking advantage of the opportunity cost, protecting the bond rating by forgoing high capital expenditures, alleviating the need to hedge the volatile commodities' markets and forgoing the multilevel transaction cost associated with traditional power purchase agreements.

The renewable energy movement is at an inflection point. The use of REITs to invest in renewable energy will bring significantly more equity into the market, propelling the industry to a new level.

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