When oil was $147 a barrel and money was sloshing through the financial system like water, renewable energy seemed like a slam dunk: wind and solar projects attracted bank loans and private-equity money, and the higher cost of generating electricity from green sources compared to fossil fuels seemed like it might soon be a thing of the past.
All that, of course, was back in the good old days. July.
A mere three months later, green-energy backers are “assessing the risks and opportunities in renewable energy in the new economic climate,” as a symposium I attended this morning put it. Organized by the law firm Chadbourne & Parke, the meeting began with a provocative panel on how the financial upheaval is affecting the development of renewable energy projects such as wind farms and solar installations. As former New York governor George Pataki, now of counsel at Chadbourne, put it with understatement, “A little bit has changed. But there is still tremendous opportunity in green energy going forward. I think we’re going to see increased government investment in renewables and efforts to require the transformation of our transportation and auto industry.” Translation: with a new administration, we’re not going to keep up the insanity of importing 10 million barrels of crude oil a day. As Obama said in this week’s debate, “we’ve got to stop sending $700 billion a year to countries that don’t . . . like us very much,” such as Venezuela and Saudi Arabia.
You think small business owners are having trouble getting bank credit to meet their payrolls, finance expansions and the like? Try pitching a wind farm to bankers these days. “There is some money” available to renewables projects, said Brian Goldstein, managing director of BNP Paribas Securities. “But the challenge is, as capital becomes available again [with the federal bailout], where will banks allocate it? . . . Smaller is better” for energy projects, since “we’re seeing a reluctance to underwrite” big projects.
Steve Cheng, managing director of Credit Suisse, said that “some institutions have liquidity and will do deals. But it’s different today than two years ago,” most starkly in what rate backers are demanding to lend money: since loans in the secondary market are treading at 65% to 70% of their face value, reflecting fear that the borrowers will not repay them, they have an effective yield of 16% to 18%. For a new loan for a new renewables project to be attractive to a banker or investor, the rate will clearly have to be high. “There are still people with liquidity, with money they need to put to work,” Cheng said. “They will definitely come into the market and make loans, but what borrowers will have to pay will be much higher.”
Paul Ho, a principal at Hudson Clean Energy Partners (a private equity firm that invests in green projects), didn’t sound like he intended to keep his wallet closed, in part because the $700 billion bailout bill extended tax credits for solar and wind power. “We were all pleasantly surprised that renewables got bundled into the [bailout] package,” he said, though in the short term he said he expects “a serious slowdown” in the financing of projects.
“There has been a whole repricing of risk,” added Rahul Advani, vice-president of Energy Capital Partners, another private equity firm that invests in renewable energy. “Lenders are now saying they need a premium” to make a loan attractive. “Maybe we’re now living in a 9%, 10% or 12% world.” (And you think your mortgage rate is high?) “But at the end of the day, good projects are going to get financed. Relative to a lot of assets in the energy sector, renewables are a good investment.” But not as good as they were at $147-a-barrel oil.