By Michael Eckhart, President, American Council on Renewable Energy (ACORE)
The industry is experiencing the accelerated growth that the renewable energy community has been predicting, and hoping for, for three decades. Wind power is a global market surging ahead. Solar photovoltaic (PV) is a booming high tech industry coming off of 18 months of initial public offerings. Biofuels is the take-off industry this year with rapid expansion to the limits of the energy performance contracting industry to build the facilities and several major IPOs.
At the recent “Renewable Energy Finance Forum - Wall Street,” Dr. Shi Zhengrong, Founder & CEO of Suntech, gave a presentation on the status and direction of solar PV technology, showing that it will advance in efficiency and continue down the cost curve.
Scott Brown, CEO, New Energy Capital Corp., reviewed the roller-coaster ride of the ethanol market over the past year and provided insights on the critical questions most investors are asking: “Will we overbuild the ethanol market in the next two years? What is driving demand? Can the corn market support the booming demand from ethanol producers? Is there still room for new investors?” While things will settle down, he still sees some $13.7 billion being invested in ethanol between now and 2015.
The recent interest shown by the institutional investor community in the ethanol and biodiesel sectors was recognized by Courtney Tuttle, Senior Vice President Investment Banking, Jefferies & Co. She pointed out the recent increase in corporate growth and valuations with, for example, the acquisition of Aventine in 2003 for $75 million, and its current value at $640 million.
Indeed, market potential for biofuels is enormous, a fact indicated by Martin Tobias, CEO & Chairman, Imperium Renewables, in describing Imperium’s strategy for developing a biodiesel production facility and business. There are however, considerable risks to investors associated with both potential short-term overcapacity in the biofuels markets as well as the inherent commodity price mismatch between feedstocks (corn, soybeans, and so on) and finished products (ethanol, biodiesel, and so on).
Wind Power Finance
The wind power industry is maturing. Alec G. Dreyer, CEO of Horizon Wind Energy LLC, said that he sees typical projects in the 200 to 400 MW range and called on the industry to term these wind power plants-no longer wind farms. He sees the industry’s projections for 2015 as a floor, not a ceiling, on what can be done, and sees the potential for wind to contribute 20 percent of U.S. electricity supply.
Yet, Per Hornung Pedersen, CEO of Suzlon Energy, described the development of Suzlon, and noted that the industry is still struggling to find the right business model, securing the right product quality and less exposure to component shortage - the paradigm between in-sourcing and outsourcing still seems to be unsolved.
Nonetheless, the global potential of the wind industry is striking. David Giordano, Director of Babcock & Brown, spoke about the global size of the renewable energy business and how it is now fitting in as a major player in the energy finance world. He said the key this year is stabilizing performance - not having projects fail and not having project under-perform. This is the year to establish renewable energy as mainstream. The wind industry as global business, showing similarities and differences in financing trends between the European and the U.S. market, was underlined by Michaela Pulkert, Head of Power & Environment, Global Project and Structured Finance, HVB AG. For her, wind industry growth has been phenomenal - for example, the number of windpower financing deals has increased twofold in one year, and by eightfold in six years.
The need for consistent policy in the wind energy industry is critical. As Kevin Walsh, Managing Director of Renewable Energy, GE Energy Financial Services, points out, great opportunity exists for the U.S. wind industry in coming years, but it needs stable, longer-term policy support to eliminate past boom/bust cycles.
Project Finance
Project finance markets are crucial in driving the renewables industry. John Anderson, Head of Power Finance, John Hancock Financial Services, said a wide range of capital markets are open for renewable energy projects. In the last 12 months, there have been successful bond market and B-loan financing of hydro, geothermal, wind, solar and biomass projects.
Capital markets are aggressive with respect to leverage this year. Ethanol deals are 75 percent debt to capital, much of it based on B-loans. The smallest debt B-loan market is $80 to $90 million, and can be done on an unrated basis. Hedge funds have played an important role.
Yet for Brian Daly, Managing Director, Trust Company of the West (TCW), returns are simply too low. TCW has been out of the wind market for six years. The Standard & Poor’s 500 is above 10.5 percent over the last 10 years, and TCW is looking for returns over the S&P. Guy Cirincione, Deputy General Manager, Dexia Credit Local, said the availability of bank debt to support renewable energy is surprisingly deep. Ever-larger transactions are being successfully structured, underwritten and syndicated.
Since June, things have slowed considerably. Stock markets globally have experienced a correction, with average share prices down 30 to 35 percent from their highs in April-May 2006. There is a bit of a chill on ethanol facility financing as oil prices have come down in recent months. The U.S. wind power market is cooling off in late 2006 as Congress has not passed an extension to the Production Tax Credit, set to expire on December 31, 2007. And even the hot solar PV market is being constrained by a silicon supply shortage.
Overall, this is a very strong year for renewable energy financing in the U.S., especially strong in the first half of the year, with a cooling off in the second half.
Some of the ideas that 10 years ago seemed unrealistic now seem possible. One must be a bit cautious, however, not to overheat this growth phase into a bubble. The industry needs steady hands managing the growth in a financially responsible manner. Given that, the outlook is excellent.