WALL STREET AND NEW ENERGY
Excitement about extension of the solar energy industry’s investment tax credit (ITC) and the wind power industry’s production tax credit (PTC) was compromised by the worsening of the financial crisis.
Kent Garber, energy writer, U.S. News & World Report: “It's clear that as banks tighten up on their lending, getting loans will be more difficult and expensive. Wind and solar developers will likely take a hit, since they need loans to help pay for equipment and construction costs.”
Example: Lehman Brothers was heavily involved in financing New Energy projects. It provided whatever was necessary to get the deals closed, from raising capital to taking ownership. Lehman Brothers is gone.
Does this mean trouble for New Energy?
Garber: “Yes and no.”
First, it is not clear WHAT is going on because extension of the tax credits was in doubt so long, negotiation over projects ceased.
Still, at least some projects previously on hold will surely move ahead.
Financing for big New Energy projects is “sophisticated and complicated” and, even though it involves the very institutions most impacted by the financial crisis, “specialized firms, investment banks, and the federal government,” it is not clear financing will be cut off.
Extension of the ITC and the PTC will allow continuation of many of the currently used though rather arcane and obscure applications of them.
Example: Banks and corporations still able to invest can continue to take advantage of the tax credits by buying majority ownership in New Energy projects. The developer gets the money to build the wind or solar project and the bank or corporation taking ownership applies the tax credits to offset its total profits.
The new problem: There are likely to be fewer banks and corporations still able to invest.
Randall Swisher, executive director, American Wind Energy Association (AWEA): "You'll see some potential investors sidelined…"
Result: Competition for financing goes up, the cost of doing business goes up.
What’s bad about that: Achieving grid parity for wind and solar (getting costs down to match the costs of already built coal and nuclear generation) will be tougher.
What’s good about that: NEW New Energy was already a superior investment to NEW coal and nuclear facilities and the constraints could make them EVEN BETTER deals. New Energy installations require smaller investments and return revenues much sooner.
One caveat: Residential and small business small solar system installations may have a very hard time finding financing.
But there is serious doubt that homeowners and small business owners are still thinking about such investments these days...
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What Do Wall Street’s Woes Mean for Renewable Energy? The credit crunch could slow wind and solar projects, but Congress’s bailout renews key tax credits
Kent Garber, October 3, 2008 (U.S. News & World Report)
Wall Street interests; Lehman Brothers; Eric Silverman, partner, Milbank, Tweed, Hadley and McCloy (New Energy finance specialists); Barclays
With the worsening of the financial crisis, there is growing concern its impact on New Energy development.
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- 2007: The biggest growth ever for New Energy.
- October 3: 2009 wind and solar projects were on hold until the tax credit extensions were passed as part of the financial rescue package.
European investment money was coming into energy until the financial crisis spread there.
- Tightening credit will impact wind and solar developers who require financing (loans) for equipment and construction costs.
- Costs for NEW nuclear and coal are much greater than NEW New Energy and take much longer to pay off.
- Financing through Lehman Brothers will need to be restructured. Barclays, which bought Lehman, may take on some of it.
- Garber: “And it's here—at this muddled intersection of government policy and private money—that the Wall Street financial crisis is playing out for much of the renewable energy world.”
- Eric Silverman, attorney, New Energy finance specialist: "The only kinds of people who could take advantage of these tax credits were the largest, most profitable corporations, like JP Morgan and Goldman Sachs, or other big players like General Electric…"
- Tryg Sarsland, director of project finance, wind developer National Wind LLC: "[Because of doubts about the tax-credits], [n]obody has really negotiated for three to four months…"