By Jenna Goodward 09/18/2013
The Renewable Energy Finance Forum (REFF-West) kicked off its first day with a lively debate about whether the West really is exceptional when it comes to the outlook for renewables. The panel of experts weighing in included Terry Grant of Marathon Capital, Barney Schauble of Nephila Advisors LLC, Nancy Pfund of DBL Investors, J. Radford Small of Goldman Sachs, Rob Sternthal of Reznick, and Tracey A. LeBeau of the Western Area Power Administration. Renewable energy technologies, mature or maturing, are generally situated in three contexts: the policy landscape, the surrounding physical grid they serve, and the financial markets.
The grid in the West is shifting, changing the space that renewables can fill with zero-carbon, sometimes-intermittent electrons. Climate change is already impacting hydro generation, changing requests for transmission that WAPA receives from its customers. Nuclear retirements like the San Onofre plant, and other retirements of once-through-cooled plants will leave a major gap in the supply picture. The bottom line is that with these retirements planned, CAISO has predicted a shortfall of 3,500 MW in 2017 or beyond. Clearly the California grid needs new generation from other resources. Will this prove an opportunity for renewables, or will they be eclipsed by cheap natural gas? Retail solar is coming on strong, but there were differing views as to how much of the shortfall solar can make up based on its average load curve and intermittency.
The action is not all in solar, however. Ms. LeBeau shared that WAPA is also running its Transmission Infrastructure Program with ambitious goals to bring much-needed transmission infrastructure to the West. WAPA will raise up to 3.25B dollars for this effort under a borrowing authority approved by Congress through the ARRA. It is a major PPP that will attract additional private investment and work at all stages of transmission planning and implementation project.
The California policy landscape was a bright spot in the discussion because the state recently had a banner week of legislation that promises to support further solar market growth. Whereas net metering was set to disappear in 2014, recent passage of AB 327 will maintain net metering and allow the CPUC to remove the cap limiting penetration of net metered solar to 5% of utilities’ load. Another banner policy, SB 43, recently passed the California Assembly. SB 43 creates a program to offers utility customers who can’t install solar the option to buy green energy. It will launch the Green Tariff Shared Renewables Program to source 600 MW in projects statewide to serve such customers.
The panel pointed to these bills as progress, but also cautioned that renewables still face major challenges on the national front when the ITC and PTC expire. Project developers nationwide would be heavily impacted by expiration, underscoring the need to develop strong financing alternatives to tax equity.
Capital markets and financial innovation are arguably the most important determinants of success in renewable energy, and the focus of REFF-West. The panel clearly believed that tax equity is a limited instrument. It is of little use if the federal tax credits expires, and it can hamstring projects with a high cost of capital. Instead, excitement about Master Limited Partnerships, Solar REITs, and securitization was palpable at REFF-West. Anxiously awaited by industry in the West and beyond, proponents of these financing mechanisms are working hard on policy and education hurdles to bring them to market.
Mr. Sternthal described the challenge of liquidity facing would-be issuers of solar asset backed securities. At first, they will still be a small, illiquid slice of a large asset class, whereas major institutional bondholders want to be able to trade such instruments easily. Mr. Dan Reicher shared that MLPs are being studied in Congress and have bipartisan support, but still need a legislative vehicle to ride off into the golden sunset.
While the industry works on these new mechanisms, perhaps the nearest term win would be to bring more corporate tax equity to market from large Fortune 500 companies who don’t currently look at renewables investments. Ms. Pfund described the recent Honda-Solar City deal where Honda agreed to help co-market solar and is financing its customers installations with its balance sheet. According to Mr. Sternthal, the West still needs the intellectual and real capital from Wall Street to flourish, and we should focus on bringing more strategic corporate tax equity into the fold.
Jenna Goodward is energy professional and an MBA Candidate at the UC Berkeley – Haas School of Business. She has broad experience in renewable energy which includes advising companies on energy procurement, crowd-funding for solar, and market entry strategies in emerging economies.