How exactly did the financial crisis impact on renewable energy financing, and what trends are we seeing? To answer these questions, we asked Virginia Sonntag-O’Brien, Executive Secretary of REN21, for her thoughts.
Since the financial debacle of 2008 and the subsequent economic crisis, the renewable energy industry has had to put up with a lot of knocks.
Though the year 2008 ended with a record total of US$155 billion investment in clean energy, with more renewable power capacity added in the EU and US than fossil fuels and nuclear combined, a downward spiral had already started in the last quarter.
By early 2009, investment in renewable energy (excluding government and corporate R&D) was down 50% from its peak a year earlier, according to Bloomberg New Energy Finance). The amount of capital available to finance projects shriveled to nearly nothing, as liquidity problems made banks either stop lending for infrastructure altogether or demand tougher terms, including shorter payback conditions.
Any money still left became very expensive, with financiers becoming more risk averse than usual. The amount of equity a project developer had to provide to secure a loan increased dramatically in comparison with the pre-crisis days, when projects could be financed with as much as 90% debt.
Stock markets plunged, closing off an important fund-raising channel. The recession was lowering the demand for power, natural gas prices dropped, interest rates rose. It was all looking as if these developments were going to make it harder for renewable energy to compete.
And finally, the year ended with no multi-national agreement being reached in Copenhagen on carbon reduction targets, which many considered necessary to boost investor confidence and drive clean energy technologies forward.
A significant impact of the credit crisis on renewable energy projects in the US was the loss of “tax equity” investors, who invest in renewable energy projects in exchange for federal tax credits. These were typically large banks or corporations with significant tax burden.
Many of them took major losses due to the financial crisis and were no longer able to commit to tax equity investments. This meant that wind energy project developers and owners could no longer ‘monetise’, i.e. make use of, the Production Tax Credit (PTC), which is the support instrument for wind energy projects at federal level in the US.
The PTC was renewed through 2012, but it became useless for most investors.In addition to project finance, investment in renewable energy technology companies also declined significantly in 2009. Investors were shying away from funding first-of-a-kind technologies because of the potential risk.
Late-stage technology companies, who were no longer able to raise capital via the collapsed stock market, got help for a while from equity funds. But in the course of the year, venture capital and private equity investment together dropped by 44% compared to 2008, mainly due to lower financing of solar and biofuels companies, especially in the US.
While investments in renewable energy were decreasing as a result of the economic crisis, so were the costs. Bloomberg New Energy Finance estimates that costs fell by an average of 10% across most sectors, including mature onshore wind, but especially solar photovoltaic (around 50%), where there was a significant oversupply in the market.
But these reductions were offset by higher financing costs. And at the same time, the crisis also brought down the costs of oil and gas, making renewables less attractive. Throughout most of 2009, it seemed that investment in renewable energy was going to be far lower than in the previous five years of meteoric growth.
By the end of the year, however, the sector had come back, and Bloomberg New Energy Finance reported US$145 billion in total investment in clean energy, only a 6.5% drop from the record year 2008 (see graph). The world’s wind industry defied the economic downturn and saw its annual market grow by 41.5% over 2008, and total global wind power capacity increased by 31.7% to 158 GW in 2009. More grid-connected solar PV capacity was added worldwide than in the boom year 2008.
The public sector comes to the rescue
One reason for the signs of upturn is the fact that the general economy is gradually improving. But a major driver of the new momentum in renewables is also the large number of government stimulus packages, many of which contain a “green” component.
In early 2009, the United Nations Environment Programme (UNEP) released a report recommending that one percent of global GDP (US$750 billion) be invested in green technologies over the next few years in order to revive the global economy and boost employment, while addressing the challenges of reducing greenhouse gas emissions and lifting people out of poverty.
Government leaders are using the ‘Global Green New Deal’ argument that massive spending in response to the financial crisis must also shift economies onto a low-carbon development path3). In his recent State of the Union speech President Barack Obama said, “The nation that leads the clean energy economy will be the nation that leads the global economy.”
Based on their government spending, three Asian countries, China, Korea, and Japan, are positioning themselves to take that lead. Definitions of “green” vary from country to country, as do estimates of the actual amount of global “green” spending.
Based on a total estimate of about US$500 billion promised by governments in the past two years, China takes the lead (US$218bn), followed the US (US$118bn), South Korea (US$60bn), and EU Community level plus Members States ($US55bn).
However, green stimulus to clean energy exclusively (energy efficiency, renewable, electricity grids, low-carbon cars) puts the US in first place with US$66bn (China US$47, EU US$31.1, Korea US$16)4). HSBC Holdings Plc predicts that global green stimulus spending on renewable energy and energy efficiency may triple in 2010.
The success of these stimulus programmes is difficult to measure, and analyses are currently being conducted on the role they are playing in reviving the world’s economy, and in particular, creating a green economy). But a recognized shortcoming is the speed at which the funds reach the projects in need.
Bloomberg New Energy Finance estimates that only 14% of the total government stimulus allocated for clean energy was actually deployed in 2009 (though it expects 30% to be spent in 2010). In the US the establishment of cash grants to replace tax equity credits has been helpful in partially filling the tax equity gap. More and more public-sector institutions have come to the rescue to provide finance and help drive investment, such as Germany’s KfW, the European Investment Bank, Asian Development Bank, and the BNDES in Brazil.
The European Investment Bank is now a major provider of project finance, underwriting loans for large-scale renewable energy projects, especially offshore wind. The debt is less expensive, since EIB can access capital at favourable terms and pass on its low interest rate.
China a driving force
Another factor behind the signs of recovery is China. The Chinese economy suffered badly in the recession, and to get it moving again, China committed the equivalent of three percent of its gross domestic product to stimulus spending.
The government’s many policies to promote renewable energy have made finance readily available. Bloomberg New Energy Finance reports “extraordinary investment activity” in China in the last quarter of 2009. China accounted for 72% of the US$4.7 billion raised through initial public offerings (IPOs) in the sector, for one third of the 31% increase in globally added wind capacity, and for about 30 percent of the global supply of solar panels.
China also benefits from lower cost manufacturing. Emerging trends With the exception of the stock markets, which still look bleak, especially for solar stocks, the financial situation for renewables seems to be easing.
Liquidity in debt markets is beginning to improve and commercial banks that had left the sector are now starting to return (with a nudge from their new public owners who bailed them out). But investors are now being very selective and are looking for quality and track record, a trend observed after the collapse of the IT bubble in the late 90s. That means small companies have a hard time securing finance, and consolidation will continue.
Small projects, on the other hand, may find it easier to raise funds than large ones, because of the lack of capital currently available. Small, distributed wind projects also look more attractive to developers having to cope with siting, permitting and transmission access challenges.
As long as developers can provide the increased amounts of equity required, they will be able to secure loans from local banks. A key development since the financial crisis is that lenders, who in pre-crisis times operated independently, are starting to work together on smaller deals. Big, multi-bank consortia are less popular, since banks now want to work with the ones they know and trust.
New lenders and new capital are coming into the sector. Large corporations are starting to partner with small start-ups, providing capital in exchange for innovation and ideas. Utilities are bringing their capital and access to credit to the renewables sector, helping to get more projects off the ground.
Offshore wind power is creating some of the largest infrastructure projects in the world and the scale of investment is so massive that institutional investors like pension funds and sovereign wealth funds will have to be brought on board.
Short-term action to ensure the long termIt is too early to draw conclusions on how the renewable energy sector has survived the financial crisis and economic recession. Indications are that long-term prospects for renewables are good, given that the drivers that propelled the sector for the past five years are still at work – climate change, long term carbon price exposure, fuel-price risk, energy security, fossil fuel depletion, and energy access.
Renewable energy is innovative, and innovation is a way out of a recession, because it drives economic growth. Short-term action, however, is necessary to break down barriers and mobilise the massive amounts of investment required to reach climate change and clean energy goals.
The amount required to effectively mitigate climate change as estimated in the IEA’s World Energy Outlook 2009 450 scenario is US$500 billion per annum by 2020, and US$270 billion per year until 2030 for the renewable power sector alone (including large hydro). Measures are needed that will push the industry to new levels of raising capital. Green stimulus and other public-backed funds as temporary measures used only to fill the gaps left by banks will not do the job.
Public finance must play a more catalytic role by prompting substantially larger flows of private capital into renewable energy development, demonstration, and deployment, and by supporting capital market solutions to help permanently secure the financing options available to the industry.
The long-term success of renewable energy depends on carefully designed, consistent policies and regulatory frameworks. In the 2010 Investor Statement on Catalyzing Investment in a Low-Carbon Economy), investors urged “policymakers” around the world to take rapid action at national, regional, and international levels” to enable the “necessary flows of private capital and allow us to fully assist in achieving a low-carbon and sustainable global economy.”