The current success of renewable (solar, wind, biomass, etc.) and clean electric power generation projects and technologies has been in large part due to public approval and governmental support. This support has come in a variety of forms that mandate use and subsidize cost: renewable fuels standards; renewable portfolio standards (“RPS” — percentage requirements for renewables as part of any total power supply) adopted in many states; grants and loan guarantees from, primarily, the US Department of Energy; and significant investment tax credits (ITC) and other indirect subsidization.
These supports, combined with an apparent steady reduction in the cost of basic project components (especially solar photovoltaic panels), have allowed renewable power projects to reduce costs bid to buyers to a point where only a small premium for clean energy is required. However, one wrinkle in this story has been the apparent high rate of project and product failure even with such supports. The California Public Utilities Commission has received information that between 30 percent and 40 percent of renewable projects that have executed power purchase agreements with state investor-owned utilities have failed.
In the immediate future, much of the current environment will change. Support for clean energy projects has waned in light of the prolonged nature of the Great Recession. DOE funding is apparently about to be a thing of the past. ITC is set to expire in the not too distant future and budget issues threaten its extension as occurred with the ITC for wind and other sources that evolved from the National Energy Acts of 1978. Finally, the Department of Commerce is pursuing anti-dumping actions against low cost Chinese solar panels that may halt the cost reductions in that major solar product that have been experienced in the last few years; which added future cost reductions have been imbedded in many recent bids by solar providers.
So — what will fund the continued development of clean energy projects? The clearest answer seems to be that private equity, venture capital and other sources of private funding will need to step into the void. Private companies have over a trillion dollars in cash on their balance sheets. Some of that money may find its way to tax credit equity deals and funding or acquiring renewable and clean energy projects and new technologies. It will take some time for new players to learn and invest in this market and attracting capital from this new source will require added market discipline to projects and products, and appropriate risk-sharing among investors, lenders and developers.
A constant complaint from all potential partners in such a relationship is that there seems to be no current easy way to match up money with worthy projects and products developers. The proponents need to have their project or product fully supported with understandable information for investors and lenders, and not just rely on having the next “good idea”. Investors, on their side, have to assume some level of risk in the early stages of any venture. The three branches of lending also must be part of any relationship — start up, development and construction. And, somehow, they need to meet at the early stage of any project or product development.
For future power supplies to be clean, lenders and investors have to step forward and be willing to aggressively support projects and cannot wait for governmental supports and final approvals before becoming involved. Developers must accept real market discipline and not just present a “hot but fuzzy” concept. This new relationship has already been developing — at least on paper and in a few newer projects and products — but with the removal of governmental supports, the relationship has to become far more robust than the current dance. Without this relationship, the market will be left with few if any funding options.
David Huard is Chair of the Energy, Environment & Natural Resources practice at Manatt, Phelps & Phillips, practicing in the Los Angeles and San Francisco offices. He is also the partner responsible for the firm’s Climate Change Solutions group and the Solar and Renewables Project Development team. Mr. Huard can be reached at (415) 291-7430 or firstname.lastname@example.org.
This column is part of a series of articles by law firm Manatt, Phelps & Phillips, LLP’s Energy, Environment & Natural Resources practice. The first column in the firm’s 2012 series discussed Renewable Energy Projects On Tribal Lands.