Wednesday, March 4, 2009

Renewable Energy Cos Look For Tax Equity Revival

Dow Jones Newswire/Cassandra Sweet/March 4, 2009

The financial crisis has opened a void in financing for renewable-energy projects as troubled investment banks have pulled back, potentially providing opportunities for smaller banks, investment funds and utilities as new government backing for clean energy starts to flow.

Some non-traditional firms are expected to step up their investment in renewable-energy projects, which had been dominated by big players like Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM) and Morgan Stanley (MS). But money hasn't come fast enough for many developers of wind, solar and other clean-energy projects, which are scrambling to secure funds, even as the U.S. government promises a flood of money in the hope of kick-starting investment in a sector seen key to rejeuvenating the economy and weaning the country off of fossil fuels.

Lending was fluid when the banks had large balance sheets and could make use of a 30% renewable energy investment tax credit. The banks would invest in clean-energy projects in exchange for the developing company's tax credit and a related tax write-off called accelerated depreciation, but as losses have mounted, the big investment banks still standing have cut back on their tax- equity financing.

This has hurt companies like OptiSolar and eSolar, privately held solar power developers in California that have had to sell their project development businesses due to a lack of financing.

Medium-size banks like U.S. Bankcorp (USB) and Mitsubishi UFJ Financial Group Inc. (8306.TO) unit Union Bank N.A. say they plan to expand their tax equity investments in renewable projects, and utilities like California's PG&E Corp. ( PCG) and Sempra Energy (SRE) have said they're interested in financing such projects for the first time. The firm has spoken to U.S. House Banking Committee Chairman Barney Franks about its proposal, in which the Treasury Department would provide investor-note financing to eligible corporations that have tax capacity, said Jack Casey, the firm's vice chairman in Washington.

Under the proposal, an investing company would sign a note with the Treasury Department at a 10-year note rate. The company wouldn't make any payments for the first five years, and would pay off the note in the second five years, during which the note would fully amortize, Casey said.

"We think this is the best way to do it," said Casey, whose firm has placed about $15 billion in tax credit equity financing over the last 28 years. "It's no handout, it's just timing and credit."

Several large companies have expressed interest in the plan, including PG&E, Sempra, Exelon Corp. (EXC) and non energy companies including Internet giant Google Inc. (GOOG) and pharmacy Walgreen Co. (WAG), Casey said. He added that his firm hopes to speak with Treasury Secretary Tim Geitner this month about the proposal, which would include tax credits for investments in low-income housing and historical restoration projects.

At the moment a big gap persists between what developers need and what money is available.

"There have been no unconventional additions to the tax-equity market," said Nick Allen, an equities analyst at Morgan Stanley (MS) in San Francisco. "No one has stepped in and provided funding yet. We hope something will change."

Tough Choices For Developers

The stress has started to show.

Privately held thin-film solar panel maker OptiSolar this week sold its entire portfolio of planned solar power plants, about 1,850 megawatts, to leading thin- film solar panel maker and developer First Solar Inc. (FSLR) for $400 million in stock. In a similar move, eSolar last month sold off its pipeline of solar- thermal power plants to independent power producer NRG Energy Inc. (NRG) for a $ 10 million equity investment and a promise by NRG to develop the plants. ESolar competitor Ausra, also privately held, said in late January it was abandoning plans to develop and own large-scale solar plants to focus instead on selling its technology to others.

The lack of tax equity financing could affect larger renewable power developers. U.S. utility holding company and power generator FPL Group Inc. ( FPL), said in late January it might have to scale back its wind farm development plans this year if the financing environment doesn't improve.

Filling The Void

In addition to companies outside the financial sector, renewable energy market participants see opportunities for regional banks, particularly those with experience in tax equity investments, to expand their renewable energy footprint.

"There's a lot of talk about who's going to fill the void," said Russ Landon, managing director of investment banking at Canaccord Adams in Boston, which helps put financing deals together and provides research on public companies. "I think you'll see some of the regional (banks) come in and do it if they have money."

U.S. Bancorp (USB) a Minneapolis-based bank with a market capitalization of about $22.45 billion, for one, has invested in about a dozen renewable energy projects over the last year by providing tax-equity financing, and the company said it will likely expand its investing in renewables, drawn in part by government incentives in the economic-stimulus bill passed last month.

The company is exploiting its experience with other forms of tax-equity financing, such as investment in affordable-housing tax credits and new-markets tax credits for developing retail and other commercial operations in low-income areas. Union Bank, which says it's the 25th-largest bank in the U.S., has 30 years of experience providing tax equity financing for power plants, low- income housing and in the last five years renewable energy projects, said Lance Markowitz, senior vice president. He added that Union Bank plans to accelerate its investment in renewable energy projects.

"Given the impetus from the government, there are a lot of people working on a lot of projects," Markowitz said. "We're hoping to do more."

Union Bank just closed on $20 million in project financing for SunEdison, a Beltsville, Md.-based solar-panel installer backed by Goldman Sachs, Allco and other investors. The financing will be used for a 1.7-megawatt solar array in Rifle, Colo., and another solar project. Union Bank, has invested in about 17 projects over the last five years, with about nine of those deals done in the last six months, including the SunEdison financing and an investment the bank recently closed for a large wind farm in Minnesota, Markowitz said.

In November, U.S. Bank provided up to $105 million in tax equity to San Francisco-based residential solar installer SunRun, to install solar systems in 2,000 homes. In December, the company provided tax equity financing to a unit of Hoku Scientific Inc. (HOKU) to install solar panels at airports across Hawaii.

"We're interested in growing our presence in that space, from the project finance side and the tax-equity side," said Zack Boyers, chairman and chief executive of U.S. Bancorp's Community Development Corporation in St. Louis, the unit that makes the investments. He added that the bank has received numerous inquiries from renewable energy developers in recent weeks.

The renewable energy tax credit market is worth about $6.5 billion to $9 billion a year, according to Meridian Investments Inc., a brokerage that puts together tax credit financing deals for renewables projects as well as low- income housing, historic rehabilitation and new market projects. Companies are eager to invest in these public-private partnerships, said Casey of Meridian. The company's investor-note financing proposal would boost the yield on such transactions from about 8% currently, to as much as 14%, Casey said.

"What you're effectively doing is saying to Fortune 500 companies, 'We're giving you a low cost of capital if you participate in a public-private partnership," Casey said. He added that his firm sees this model as the only viable way to replace the large banks, which used their low cost of capital to finance these types of investments.

Casey said large companies are seeking out these types of investments, to take part in fighting climate change and also as a hedge against expected higher taxes in coming years. These companies haven't invested in this area previously because the yields were not competitive with the yields in their own businesses, Casey said.

"Every utility in the U.S. has a statutory return of 10% to 12%, they can't invest in an energy deal that yields 8%, the shareholders will go crazy," Casey said.

Utilities in states that have state mandates to increase use of renewable power, such as PG&E's Pacific Gas & Electric and Sempra, are getting more involved in renewable-energy financing, in part to ensure that new projects they need to meet state rules get built.

PG&E and Sempra executives said this week their companies' utilities are looking at making direct investments in renewable energy companies or projects, rather than simply signing power purchase agreements for the output.

PG&E Corp. (PCG) unit Pacific Gas & Electric would like to provide financing to renewable-power developers to help them build new projects, said Chief Executive and President Peter Darbee. Such financing might include convertible debt, in which PG&E would make a loan with the option to convert the debt repayment into equity, Darbee said. "If there's a way for PG&E to participate...we foresee an opportunity to be a green knight to provide financing," Darbee said.

Sempra Energy (SRE), of San Diego, is aggressively investing in solar power at its unregulated Sempra Generation unit, but the company also wants to boost renewable energy investment at its regulated utility San Diego Gas & Electric.

Both utilities are required to use renewables for 20% of their retail power by 2010, with pending rules boosting that amount to 33% by 2020. The companies would need approval from state regulators to invest in renewable companies or projects.

As renewable energy market participants wait for the tax equity market to revive, it'll be up to the federal government to provide incentives for companies to invest.

"The devils are in the details," said Casey of Meridian Investments. "They're going to get it. They undrstand the math."

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