Financing the Cleantech Boom

Sonow that the climate and energy bill seems to be growing some legs inCongress, talk within the investment community is growing about whenand how the ‘real’ cleantech boom will be financed.  The answers arenot simple ones, but signals are indicating that a major shift inenergy production, consumption, and financing is already underway.

TheAmerican Recovery and Reinvestment Act essentially provided the cleanenergy industry with three options for government financing.  Thegovernment option became necessary as the predominant method forfinancing renewable energy projects dried up; the tax equity market raninto trouble during the financial crisis when many investment firms andinsurance companies were experiencing shrinking or non-existent taxburdens due to the slowdown and widening recession at the time.  Inaddition, the cost of financing for renewable energy projects issignificant higher that established natural gas or coal-fired powerplants (pre- carbon market) because of unknown risks associated withthe build out of new technologies.

Renewable power projects aretypically more capital intensive than are fossil fuel ones becauseconstruction costs are high and operating costs are low.  The initialsurge of capital necessary to build up the solar or wind or biofuel orgeothermal to scale is large enough to create significant risk forthose doing the lending.  The established fossil fuel industry is triedand true to its costs; it is and has been established; lenders knowwhat to expect every step of the way…but throw in emissionregulations and the scale of uncertainty begins to tilt in favor ofrenewable energy.

The government’s intervention into thefinancing arm of the energy industry is set to have reverberatingeffects across a multitude of spectrums.  The production tax credits(PTC), investment tax credits (ITC), and government grant matrices needprofessional interpretation in order to understand which kind offinancing structure a given project manager should select.  The netresult, however, is that the government is set to inject capital intothe renewable energy markets in order to stimulate development in theindustry past the point where risk is a limiting factor.  Combinefinancial commitments with policy and enormous sums of money on theinvestment sidelines, and the formula for a large influx of privatecapital into the renewable energy sector is present. 

Basedupon the majority’s vote in the American political democratic system,the government is injecting tax dollars into a sector of the economythat has the potential to provide jobs and stability in our country fordecades to come.  If America assumes the role of leader in clean energyfor the world in the 21st century, we as a country are guaranteedeconomic growth in solar, wind, geothermal, biofuels, batteries, EVs,energy efficiency, and the like.  The analysis of the amount of spent on securing oil reserves in Iraq, produced definitiveresults the opposite of what was intended.  Instead of cheap middleeastern oil, America learned that the trillions of dollars spentfighting in and securing the region, if injected into a domestic cleanenergy program could generate enough power to launch America into a newfuture, one that was not dependent upon countries the likes of Russia,Iran, Venezuela, and Saudi Arabia.

Too much governmentassistance, though, can stifle investment in renewables.  Thegovernment can only provide so much capital; in order for an industryto gain ground within the structure of our economy is through privatebacking.  The idea that the government is driving the clean energyvehicle forward need only be temporary.  Policy structures need to beput in place in order to entice private capital to enter the cleantechspace.

New partnerships between public and private interestgroups need to be formulated to smooth the transition from governmentaid designed to stimulate growth to an industry that has enough meriton its own to warrant private and public funds to enter.  Long-term,low risk pensions funds, still reeling from last year’s drop in valueare looking for their way back to high returns for their clients.

Thosereturns might be slow throughout the rest of this year, but if moreinvestors educate themselves to the moves within the financialcommunity regarding clean energy financing and get off the sidelinesand embrace America’s clean energy future, they can collectively createa take-off point for themselves and anyone else that seeks to marrysocietal, environmental, and financial commitments together.  Thattake-off point may very well be approaching us all swiftly.



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