After an exciting day of keynotes and discussions, the opening panel of the second day of the Renewable Energy Finance Forum (REFF West) began with a focus on investment banking perspectives on solar project financing. Bringing together a selection of top energy bankers from leading institutions that are active in renewable energy financing, the panel discussed movements and trends in the present and near future term and how the financial landscape has changed over the last 12 months.
The panel was led by Michael Butler, the CEO of Cascadia Capital, and Don L. Weaver, Partner at Dentons US LLP. Panelists were Schuyler "Skip" Grow, Managing Director of the Clean Technology Group at Morgan Stanley, Andrew Redinger, Managing Director and Group Head at Keybanc Capital Markets, Christopher Radtke, Director, Energy Group, IBD, Credit Suisse, and Kyle Jones Baker, Principal at Greentech Capital Advisors.
Among the top issues on the minds of the panelists was the search for tax equity in the post-ITC world. The cash grant going away is a huge change, Mr. Grow remarked. Raising tax equity is challenging, and takes expertise in the investment area that may go away in a few years. He saw mostly banks, investment banks, and insurance companies being able to operate in this space. Transaction costs for tax equity backing were an issue, with Mr. Grow giving a range of 6-12% for cost of tax equity, for most companies this could be 8-10% assuming some kind of leverage such as 50% sponsor equity, 50% tax equity. With the movement toward YieldCo structures, investors are looking for 15-20% returns.
With regard to pure debt financing, Mr. Redinger commented that some European banks have exited financing renewable engineering projects, but “there has not been a back off”. He is seeing margins of 200 basis points with smaller deals at 250 basis points or higher. The lending profile is changing: loans used to expire before the PPA end, now they go to PPA end or may include a merchant tail. Mr. Redinger believes there is no shortage of capital, and the shift in loan tenor signals a higher confidence level. Demand from large institutions such as PIMCO or Blackrock essentially needs time and more education, as this class of investor prefers the long term presence of incentive structures.
With regard to hybrid financing deals between banks and insurance companies, Mr. Redinger felt there was an open question: can you put them together and have a cheaper deal than each could do on its own? Mr. Radtke saw the use of mezzanine debt and hybrid structures increasing, and not confined to one particular technology - solar, wind, biomass, could all be considered under various scenarios, with deal structure being less important than the search for higher yield. Establishing a clear capital plan is very important for employing these other forms of fundraising vehicles, Mr. Radtke said.
Other options such as venture capital funding may also be challenging to implement. Ms. Baker commented that the past 2-3 years have seen a shift where VCs are beginning to recognize that the traditional venture model may not suit certain aspects of cleantech. As the corporates are beginning to get more interested in participating in the markets in various ways, she sees many VCs have pulled back from capital intensive and long time horizon investments in cleantech companies or projects. She expected to see continued activity from institutions like Black Coral or other “family office” funds, which could be more stage agnostic and where some $2.5 billion in equity has been raised. Mr. Grow had similar concerns with regard to VC funding, citing the difficulty of recent IPOs in the ”solar neighborhood” such as Enphase, particularly ventures serving any upstream market segments such as cells, panels, or inverters. Mr. Redinger saw interest being highest in low capital intensity business models like internet, software, financial services where large investors like Siemen and Asia-based companies are also taking a “relatively steady” interest over the last few years. He expected to see more interest from Asia in downstream projects, especially if they have local EPC expertise.
Michael P. Stewart, Ph.D. is an MBA Candidate at UC Berkeley’s Haas School of Business. He is currently Senior Manager of Solar Technology and Process R&D at Applied Materials, and Director of Solar Development for the Earth, Air, and Space Educational Foundation. He has worked in the solar industry for seven years, in roles ranging from managing innovation for cell process technology to the design and development of a large scale BIPV solar array for a site in Silicon Valley.