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FT Investing in a Sustainable Future March 24, 2010, New York

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Renewable Energy Still Waiting for Brighter Days

By Richard M. Gittleman

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Energy and climate policy has dominated much of the political discourse of the past election year and the first 100 days of the new administration. Central to advancing a sustainable energy regime is the large-scale deployment of innovative, low-carbon technologies. However, investments in transformative clean energy technologies have lagged behind what will be necessary to meet the administration’s energy security and greenhouse gas reduction goals. The global economic crisis has posed a further serious challenge to the Obama administration’s vision for a “new energy future” rich with renewable fuels and electricity.

President Obama’s budget pledged $150 billion of government investment to support clean energy programs over the next decade. The first step in this agenda was the stimulus bill enacted in February, including $6 billion in loan guarantees for renewable energy projects through the Department of Energy (DOE) Loan Guarantee Program. However, the slow pace at which stimulus funds, programs and regulations have been released is hindering the financing of new renewable energy initiatives. As a result, the industry’s unfinanced projects remain under pressure.

President Obama's budget pledged $150 billion of government investment to support clean energy programs over the next decade.

A driver to the industry in the medium term is the increasing likelihood the 111th Congress will pass an energy and climate bill containing a federal renewable energy standard (RES) and greenhouse gas reduction targets. Such measures would certainly accelerate the deployment of low-carbon resources, as they would mandate increasing percentages of renewable energy nationwide and concurrently increase the price of higher-emitting traditional energy sources. In the context of a recession, the enacted bills will likely include cost-containment mechanisms, such as a percentage of free emission allowances for emitters and an RES “off ramp,” should the price of deploying renewables become prohibitively expensive.

Even in better economic times, innovative energy technologies face difficulty in securing sufficient financing to build projects, due to the risks lenders perceive in new and unfamiliar technologies. This results in higher interest rates than conventional energy projects and a prohibitively high need for equity financing. The credit crunch that began in 2008 has reduced bank financing and private backing of clean energy projects by nearly 50 percent. Today, even the lowest-cost projects with tested technology and a clear path to profitability cannot consistently borrow the capital needed from private sources.

To resolve this conundrum, I have advocated the establishment of an efficient quasi-governmental agency called the Renewable Energy Private Investment Corporation, or REPIC, to provide lending to good projects the private sector deems too risky to lend, modeled on the highly nimble and efficient Overseas Private Investment Corporation (OPIC). OPIC is a self-sustaining entity to facilitate U.S. private capital in developing countries using a portfolio investment strategy, providing capital where the private sector refuses to lend. OPIC looks at a project as a whole and bases its fees on quantified risk. Interest rates and fees are generally set to reflect the price of U.S. government-issued securities plus a premium based on OPIC’s assessment of the project’s commercial and political risks. This model provides for the policies and procedures identified by the Government Accountability Office (GAO) as critical success factors.

Support for a hybrid lending authority without the inefficiency and delays intrinsic to the DOE Loan Guarantee Program has gained traction on and off Capitol Hill. A bipartisan effort in the House and Senate is underway to create such an agency for lending to the clean energy sector. First, House Bill 1698 would establish what’s been referred to as the “green bank” with an initial capitalization of $10 billion through Treasury Department bonds to extend low-interest loans or guarantees to renewable energy developers. More so than House Bill 1698, a recently proposed Senate bill more clearly mirrors the fundamental design of OPIC, particularly in the arena of risk analysis and management.

Senate Bill 949 would establish a Clean Energy Deployment Administration (CEDA), staffed by those with strong financial expertise, with a specific purpose to create an attractive investment environment for the development and deployment of new clean energy technologies, including infrastructure and energy efficiency. Like OPIC, CEDA’s mandate would be to lend where commercial lending is ineffective.

Under the Senate proposal, CEDA would be initially capitalized at $10 billion, would offer a range of financing beyond the DOE’s traditional loan guarantee programs—including direct loans, letters of credit and insurance products such as technology risk insurance—and may participate as a co-lender or member of a lending syndication. The provision of technology risk insurance will decrease investment costs for project developers, spread risk, restore investor confidence and promote technologies with higher potential to address our climate and energy security needs.

Like OPIC, the CEDA is to use a portfolio investment approach in order to mitigate risk and diversify investments. CEDA is to try and become self-sustaining over the long term by balancing riskier investments with revenues from other services and less risky investments and by establishing a loan-loss reserve for investments in innovative technologies.

CEDA would receive strong guidance from, and aggressive goals for technology deployment set by, an independent advisory council of scientists better equipped to evaluate projects than the financial sector. Perhaps most attractive to project developers in this financial climate, CEDA legislatively is directed to achieve an accelerated review process for funding, whereby a decision on lending or a loan guarantee would be made within 180 days of complete application.

Reaction to proposals for such a lending authority has been predominantly favorable, both on the Hill and beyond. Todd Filsinger, co-chair of the Coalition for Green Bank, has pointed out that the proposal “could provide the kind of assistance needed to get renewable infrastructure projects built on a constant basis for a number of years.”
The proposal for a “green bank” comes amid great skepticism regarding the ability of the DOE to efficiently deploy renewable energy loan guarantees for project funding. The DOE has not yet released a solicitation or regulation for loan guarantees authorized under the stimulus bill. It is unclear whether the agency will meet its target of releasing stimulus funds by late summer; the agency’s history with the program suggests that some skepticism is warranted. The program was established in 2005, pursuant to the Energy Policy Act. A review of the 2005 loan program by the GAO, issued in late summer 2008, found the DOE lacked the management and internal control activities to effectively carry out the program. The agency first made available loan guarantees on its 2005 solicitation in spring 2009.

From a political point of view, the news for renewable energy producers is mostly good, with the new administration anxious to move forward its agenda addressing climate change and renewable energy. At the same time, however, the worldwide economic downturn and the resulting competition for funds at the federal, state and local levels presents risks. For an experienced project developer, the future looks bright, but there are still uncertainties in the near term.

Richard M. Gittleman is a partner and the head of the Renewable Energy Initiative at Akin Gump Strauss Hauer & Feld LLP, a global law firm.

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