Energy Finance Report

With Proper Policies, A $12.1 Trillion Investment Opportunity for Renewable Energy Can Be Realized

Posted by Van Hilderbrand on 2/19/16 1:20 PM

Solar_Investment.jpgCo-author Morgan M. Gerard

Despite the currently low prices of oil and natural gas, renewable electric power generation is poised for rapid growth. Based on a “business-as-usual” scenario, Bloomberg New Energy Finance’s New Energy Outlook, June 2015 predicted a $6.9 trillion investment in new renewable electric power generation over the next 25 years. A newly published report by Ceres, Bloomberg New Energy Finance, and Ken Locklin, Managing Director for Impax Asset Management LLC, predicts a much greater opportunity for private sector companies and commercial financiers to invest in new renewable energy.

Mapping the Gap- the Road from Paris

Mapping the Gap: The Road from Paris concludes that achieving a temperature change goal of 2ºC or below, as outlined in the recent climate accord reached in Paris at the United Nations Framework Convention on Climate Change’s (UNFCCC) twenty-first session of the Conference of the Parties (COP 21), is now a $12.1 trillion investment opportunity. (This is in addition to a predicted $20 trillion investment in legacy low-carbon electric power generating sources such as large-scale hydro and nuclear.) Thus, the current investment trajectory of $6.9 trillion in a “business-as-usual” scenario leaves a massive gap of $5.2 trillion needed to reach international goals. Financial markets have the capability to close this gap, especially given the dropping price of renewables, a maturing market offering lower-cost capital deployment, an expanding need for global energy, and the ability of this level of investment to drive local jobs and economic growth.

United Nations Policy Analyst and Global Strategy Advisor of the Citizens Climate Lobby, Sarabeth Brockley, agrees. According to Ms. Brockley, who witnessed first-hand the participation at the conference by the private sector, particularly large power purchasers such as Google and Facebook could provide the catalyst for energy investments in renewables and drive the future direction of the global energy economy. Ms. Brockley notes that with the accord in place and with an increased push to decarbonize, the private sector recognizes that energy investments in zero- and low-carbon emitting resources are the planet’s future while the unknowns surrounding the future of fossil fuels make them a riskier proposition.

New Policies Are Needed to Bridge the Investment Gap

Some investment opportunities are available today under existing policy frameworks and market conditions; however, new policies will need to be deployed to assist in this endeavor. “There is huge opportunity for expanded clean energy investments today. But to fully bridge the investment gap, policymakers worldwide need to provide stable, long-lasting policies that will unleash far bigger capital flows. The Paris agreement sent a powerful signal, creating tremendous momentum for policymakers and investors to take actions to accelerate renewable energy growth at the levels needed” says Sue Reid, Vice-President of Climate & Clean Energy at Ceres, a nonprofit organization promoting corporate responsibility and environmental stewardship.

This article explores which incentives, policies, and approaches may be on the horizon for U.S. energy market participants – both generators and consumers – as the global energy mix moves towards carbon consciousness.

Carbon Pricing

As the world looks ahead to the twenty-second Conference of the Parties (COP 22) in Marrakesh, Morocco, Ms. Brockley believes that carbon pricing will certainly be on the agenda. Pricing carbon emissions will help create incentives to develop new, cleaner energy technologies and to encourage demand reduction.

One way to price carbon is by placing a tax on harmful emissions. A carbon tax places a price on emissions and allows the market to determine the quantity of emission reductions. An alternative way to price carbon is through a cap-and-trade program. Here, the program sets the quantity of emissions reductions while giving market participants the opportunity to determine price and trade credits to meet overall emissions reduction goals which are lowered over time to reduce the amount of pollutants released.

Some countries are moving ahead with plans to implement carbon pricing. For example, in September 2015, President Xi Jinping of China made a landmark commitment to start a national program in 2017 that will limit and price greenhouse gas emissions in the country. Other countries are implementing similar measures based on discussions at COP 21. The United States, however, has a long road ahead. Congress came close to a greenhouse gas cap-and-trade system in 2010 with the Waxman-Markey Climate Bill; however, the legislature ultimately balked at passing the bill and discussions involving climate change on Capitol Hill have been somewhat toxic ever since.

Moreover, any type of binding international agreement on a price for carbon will be difficult to adopt given the aggressive opposition towards President Obama’s Clean Power Plan (CPP). The CPP is currently facing attack by Congressional Republicans and an omnibus litigation brought by twenty-seven states and an amalgam of private actors. The Supreme Court recently granted a delay for implementation of the CPP, leaving the policy strategy to lower carbon emissions in jeopardy.

Meanwhile, states and private companies in the U.S. are starting to act. California’s state-wide, expanded cap-and-trade program is off to the races and is being intently watched as a potential model that could be replicated in other states or regions. Amongst the private sector, Microsoft is leading the way by already accounting for the price of carbon internally, which industry leaders believe is both changing internal behaviors and saving the company more than $10 million annually. Additionally, many traditional fossil companies are pricing carbon. ExxonMobil is assuming a cost of $60 per metric ton by 2030, BP currently uses $40 per metric ton, and Royal Dutch Shell uses a price of $40 per ton.

Tax Incentives

Tax incentives use the U.S. tax code to subsidize the development of renewable energy. These incentives include accelerated depreciation for investment in renewable power-generating plants or manufacturing facilities and tax credits tied to a renewable power project’s output or overall capital expenditures. Conversely, there is increasing interest in phasing out traditional fossil fuel subsidies, long deployed in support of high carbon emitting resources.

The driving incentives behind renewable energy in the United States are the federal Production Tax Credit (PTC) and the Investment Tax Credit (ITC). The PTC has been the largest driver of the wind energy industry as it provides 2.3 cents per kilowatt-hour generated. The ITC, which has been the major driver of solar energy and also has served as a potential alternative credit for wind energy, provides a credit for 30% of the development costs of a renewable energy project. The credit is applied as a reduction to the income taxes for that person or company claiming the credit.

The ITC was originally slated to be cut from 30% to 10% for non-residential and third-party-owned residential systems, and to zero for host-owned residential systems by the end of 2016. However, Congress authorized the extension of both the PTC and ITC at the end of 2015. The ITC will now be in place for an additional five years, including three years at the current value followed by graduated step-downs. The impact of the tax incentives extensions are set to be significant, and will likely inject new life into abandoned projects, protect existing jobs, support additional job creation, and ensure that the renewables sector remains poised for an upward growth trajectory.

Renewable Energy Targets

Governments can set renewable energy targets to drive lower carbon emissions. Also known as Renewable Portfolio Standards (RPS), these targets generally requires local utilities to generate electricity through renewable energy sources or purchase Renewable Energy Credits (REC) that represent essentially the environmental benefit of the zero-carbon power system. Typically, these involve annual goals which increase over time.

In the aftermath of the defeat of the Waxman Markey Climate Bill, many renewable energy friendly states such as Massachusetts, New York, and California, enacted RPS frameworks. This approach has been successful in lowering carbon emissions, but remains a patchwork method that has no national systemization. There have been calls to create a national RPS, all of which have been soundly defeated in Congress to date.

Net Energy Metering

Net energy metering (NEM) programs allow renewable energy system owners, such as homeowners with photovoltaic solar systems, to sell their excess power back to the electric grid. NEM has been enacted domestically on the state level and is only available in certain jurisdictions, such as Maryland, California, Massachusetts and the District of Columbia. Although studies have found that NEM has greatly contributed to the adoption of rooftop solar generation, there are battles being waged around the country between utilities and distributed generation advocates about the future of the incentive.

For example, the Nevada Public Utilities Commission (NPUC) voted recently to cut net metering payments by half while simultaneously raising the fixed fees for solar customers to around 40% by 2020. Additionally, the NPUC is applying these changes retroactively, which distinguishes actions in Nevada from those in other states that have altered their net metering. This means that these new prices will apply not only to new solar customers, but to existing customers as well. The result has been that many prominent rooftop solar companies have exited the market, and some solar customers have joined a class action law suit against the NPUC and their local utility, NV Energy.

On the other hand, some jurisdictions like New York are seeking to incorporate more distributed generation into their electricity grid systems and reevaluating NEM as an efficient mode of compensation to the non-utility generator. New York is trying to create an interactive distributed generation marketplace where generators sell their power not only to the electric grid, but also to neighboring energy customers. New York is exploring whether or not a fixed NEM charge is the best way to handle marketplace transactions, or if determining the value of distributed generation to the electric grid is more efficacious. If successful, New York’s model could become the template for growth in other states.


Feed-in-tariffs (FIT) enable renewable power generators to sell their electricity at a premium above typical market rates. Historically, FITs have been utilized in Germany and the rest of Europe, where the government mandates that utilities enter into long-term contracts with renewable generators at specified rates; typically well above the retail price of electricity.

On the federal level in the United States, regulators have chosen to enable tax credits versus utilizing the FIT approach. However, there is a recent example of a FIT from 2013 in Virginia where Dominion Virginia Power allowed a voluntary FIT for residential and commercial solar photovoltaic (PV) generators. Participants received 15 cents/kilowatt-hour (kWh) for a contract term of five years for all PV-generated electricity provided to the electric grid, and will continue to pay the retail rate for all electricity that they consume. In 2012, the average retail electricity price was 10.5 cents/kWh for residential customers and 7.8 cents/kWh for commercial customers.


The United States is already experimenting with many of the above incentives and approaches, but more work will be required on the policy side to meet the investment target projected by the Ceres-BNEF report.

While the scale of this new investment opportunity is massive, the report finds that it is dwarfed by the capacity of global financial markets to unleash the needed investment capital. In the United States alone, consumers borrowed $542 billion over the past year to purchase cars, and assumed $1.4 trillion in new mortgage debt. Clearly, the financial markets have the capacity to absorb the financing “gap” between “business-as-usual” and the 2ºC goal outlined at COP 21. Thus, Ceres remains optimistic about the investment opportunities. “Renewable energy investment volume needs to more than double in the next five years,” noted Ms. Reid. “With the tailwind of the Paris Climate Agreement, buttressed by advancements around the world such as the US renewable energy tax extenders, there is tremendous opportunity ahead for clean energy investors.”

Although our markets have the capability of achieving the COP 21 pledge, those looking to capitalize on this unprecedented opportunity should understand the policies on the horizon that could promote safe returns on their investments.

Topics: Carbon Emissions, Biomass, Solar Energy, Renewable Energy, COP21, ITC, Energy Investment, Investment Tax Credit, renewable energy investment, PTC, carbon tax, Wind Energy, Climate change, Ceres, United Nations, UNFCCC, production tax credit, cap-and-trade, renewable portfolio standard, feed-in-tariff, COP22, carbon pricing

Anaerobic Biodigesters Give Universities Food for Thought

Posted by Merrill Kramer on 12/28/15 3:45 PM

Co-author Morgan M. Gerard

Food waste is a major problem in the US. Studies show that around 40% of all food produced in the US gets wasted at some point in the food chain. According to the EPA, food waste is the second largest category of municipal solid waste sent to landfills, accounting for 18% of their waste stream. Left to decompose in landfills, food waste creates methane gas, a lethal greenhouse gas that contributes to climate change and global warming. EPA has found that, pound for pound, the comparative impact of methane gas on climate change is more than 25 times greater than carbon dioxide.

University_Buffet.jpgUniversities are not immune from contributing to the organic waste problem. University meal programs serve buffet-style food to students and don’t want to run the risk of running out of food. The average college student generates 142 pounds of food waste a year, and campuses as a whole throw out a total of 22 million pounds of uneaten food annually. Universities thus are a major contributor of food waste to landfills. Tackling the food waste problem has become increasingly important to colleges. Food waste is one of the least recovered recyclable materials in the US. College programs such as composting, tray-less dining and the Food Recovery Network, where uneaten food is delivered to feed the needy, only begin to solve the problem. Universities are increasingly considering anaerobic digestion as a solution as they expand their green initiatives.

Anaerobic digester systems provide a means for schools to recycle campus waste while satisfying multiple goals of reducing their carbon footprint, lowering their energy costs, reducing use of fossil fuels, capturing an important source of renewable energy, and creating campus laboratories for educating students on socially responsible behavior.

What is Biodigestion?

A biodigester is basically a large, fully enclosed tank into which you collect organic waste. Anaerobic means the absence of oxygen. If you lock anaerobic microbial organisms in a sealed environment without oxygen, but with plenty of food and other organic waste, the microbes produce methane-rich gas through their digestive process. Essentially, it’s the natural process of decomposition technologically revved up to optimal speed and efficiency. The trapped methane gas is then cleaned and used to generate electricity and steam for heating and cooling via a combined heating and power (CHP) or cogeneration system. The biogas also can be directly used to produce steam in boilers for hot water and heating. Leftover organic solid waste can be used as fertilizer, a soil enhancer or be further composted.

Anaerobic digestion is seen as a holistic, albeit more technically complex solution to food waste than University recycling and composting programs. When properly structured, installing a biodigester can also be a money-maker for the University by reducing electric, heating, waste disposal and operating expenses.

Food for Thought

Food_Waste-1.jpgBiodigestion is not entirely new to campuses. A number of Universities have been at the vanguard of installing biodigestion systems as part of their sustainability missions.   In 2011, the University of Wisconsin Oshkosh built the first commercial anaerobic biogas system in the United States. The 370 KW facility converts 10,000 tons of organic waste per year to generate approximately 8 percent of the University’s electricity needs. Michigan State University has developed a $5.1 million biodigester that converts around 10,000 tons annually of organic waste through an approximately 350 KW system that powers ten campus buildings. University of California Davis entered into a third party off balance sheet project finance arrangement to build an $8.6 million biodigester that converts 18,000 tons of organic trash annually into 5.6 million kilowatt-hours to satisfy 4% of the campus’ electricity needs.

Project Financing for Biodigester Projects

Deciding to construct a biodigestion facility involves undertaking a variety of risks, including construction cost overruns, delays, performance risk, technology problems and operating cost overruns. Financial risk is a major consideration. Construction of infrastructure projects requires review and consideration of balance sheet and credit issues. Undertaking large capital expenditures can run afoul of bond indentures and also affect a University’s credit rating. Sustainability programs often find their proposed projects competing with other capital projects. This is frequently an uphill fight as, unlike student housing, library and classroom buildings, owning and operating energy projects is not a core business of the University.

One structuring option that can minimize risks and overcome these political issues is to develop the project through a third party owned, off balance sheet project financing arrangement. Under a project finance structure, the University signs a long term power purchase and waste disposal agreement, or enters into a lease arrangement, with a third party developer that will guarantee the university savings off its energy and waste disposal costs. In exchange, the project sponsor agrees to take on project risks including construction cost overruns, delay damages, under-performance of the facility, and operating and maintenance costs. These risks are not inconsiderable, as biodigester performance depends upon a consistent, stable quality of organic waste and bio-gas production. Importantly, a project finance structure allows a biodigester project to be built and financed off-balance sheet to the University. This allows the University to avoid incurring new debt obligations, using up its balance sheet, violating bond coverage ratios and otherwise running afoul of its bond indentures. It also allows the University to allocate project risks to a third party while guaranteeing savings to the University of energy, waste disposal, operating and maintenance expenses.

An additional benefit of a project finance structure is that it allows a private party to use depreciation and other tax benefits not available to not-for-profit Universities, thereby reducing the overall capital costs of the projects. The resulting savings can be used to fund other sustainability projects, provide scholarships, hire additional professors, or for other worthy undertakings.

Best Practices for Implementing a Biodigester Project

As discussed, a biodigester project can be a complex, risky and costly undertaking. To maximize the value of the project while minimizing its costs and risks, a University first should undertake a preliminary economic, design and engineering study to understand the financial and environmental feasibility of the project, and to ensure it is designed and built to optimize its value to the school. Consideration next should be given to funding and financing issues to understand the project’s budgetary and balance sheet impact on the school, and to justify not just its environmental value, but its economic value to the Administration. Grants and state and federal governmental funding are often available for sustainability and renewable energy projects. Where funding options are limited, or to ensure a project’s long-term benefits to the school, third party project financing structures should be considered either separately or in conjunction with grant money, that can limit both financial and project risks and utilize available tax benefits. Project financing often is the optimal vehicle for allocating risks to parties that are best able to manage those risks. In short, if properly structured to optimize its value and minimize its risks, a biodigester project can be both an economic and environmental proposition for a University.

Topics: Biomass, university renewable energy, university sustainability, Methane, biogas, waste disposal, Energy Project Finance, Green Energy, biodigestor, food waste, waste to energy, Green house gas, Project Finance, College campus, Trayless Dining, Composting, energy, Energy Project, biodigester, university energy, clean energy, Climate change, College

Renewable Tax Extenders Package Set To Emerge From Finance Committee

Posted by Merrill Kramer on 7/20/15 8:42 AM

PTC articleRenewable energy is back on the docket for the Senate Finance Committee, and Chairman Orrin Hatch (R-Utah) is likely to release the draft of his bill as early as this week. The Committee is considering a two-year extender for tax incentives for new wind, geothermal, biomass, landfill gas and ocean energy projects during a markup. Also being considered is the extension of second generation biofuel producer tax incentives for production of biodiesel and renewable diesel. The extenders package covers 52 items concerning a wide range of industries in addition to renewable energy, including mortgage lenders, education, and retail and restaurant improvements. The 30% investment tax credit for solar and fuel cell projects is not expected to be on the table. The Solar Energy Industries Association (SEIA) urges the solar community to advocate the investment tax credit, which is set to step-down in 2016 without an extension.

Senator Chuck Grassley (R-Iowa) is lending support to the Production Tax Credit (PTC) extension as its original author in 1992. The modern PTC that expired at the end of 2014 provided a rebate of $0.023/kWh for wind, geothermal, closed-loop biomass projects and $0.011/kWh for other eligible technologies. The PTC generally applies to the first 10 years of a project’s operation. The PTC expired at the end of 2014; however, the Internal Revenue Service provides “safe harbor” to projects that were under construction on the expiration date.

In the past it has proven difficult to finance new projects once the PTC expires. For example, when Congress failed to extend the PTC in 2013, the wind industry experienced a 92% drop in new installations and a $23 billion plummet in private investment according to the American Wind Energy Association. Similar cliffs occurred when the PTC expired in 2000, 2002 and 2004.

One hurdle for the Senate’s tax extenders bill is finding a legislative vehicle to put to vote before the full Congress. Congressman Paul Ryan, Chairman of the House Budget Committee, has suggested combining international tax reforms with a highway trust fund extenders’ bill that has already passed the full chamber. However, members of Chairman Ryan’s party have sought to eliminate the tax credit and have co-sponsored a bill introduced by Rep. Marchant (R) in the House aptly named the “PTC Elimination Act.” Wind energy could prove to be a wedge issue for Republicans since, among the Congressional districts, over 81 percent of all installed wind capacity is in Republican-held districts in the 112th Congress.

Topics: Biofuels, Biomass, Energy Policy, Structured Transactions & Tax, Energy Finance, Distributed Energy, Renewable Energy, Wind

Georgia: Renewable Energy on the Rise

Posted by Jim Wrathall on 4/22/15 12:35 PM

welcome to georgia-136566123Developers and investors are seeing increasing clean energy opportunities in Georgia. Below we discuss recent Georgia solar legislation, growth in biomass, and the major potential for wind power in the state, as well as related ancillary benefits in reduced energy-related water demands.

New Solar Legislation Approved

Solar markets in Georgia appear poised for major growth following recent legislative activity. On March 27, the Georgia legislature passed the Solar Power Free-Market Financing Act of 2015. The new law opens up third-party ownership of leased rooftop solar projects up to a maximum of 10 kW generation capacity. In addition, the bill permits third-party ownership of commercial solar energy installations, up to a limit of 125 percent of the customer’s actual or expected annual peak energy demand. Georgia Governor Nathan Deal is expected to sign the bill soon.

Despite lacking strong policy incentives such as a Renewable Portfolio Standard (RPS), Georgia ranked 7th among the U.S. states in 2013 in new solar installations, attracting $326.2 million in private investment in the solar energy sector, a 1,025 percent increase over 2012, the largest gain of any state in that year. In lieu of mandatory standards such as an RPS, Georgia has relied largely on voluntary clean energy programs, which are expected to bring nearly 900 MW in renewables online by the end of 2016.

The state’s largest utility, Southern Company subsidiary Georgia Power Co., has been recruiting private sector participants through its Advanced Solar Initiative. Additionally, the utility is working with the U.S. Army Energy Initiatives Task Force to build, own, and operate 90 MW of solar power across three Army bases, which will, when operational, cover an estimated 18% of the energy used by the Army in Georgia. Another potential opportunity is presented by power sales in out-of-state markets, with a study by Arizona State University finding Georgia to be one of the top three states that could benefit from cross-border sales.

All of this activity is translating into substantial job creation. According to one study, solar jobs in Georgia are expected to increase by nearly 40% from 2014 through the end of 2015.

Setting the Pace for Biomass Energy

According to data compiled by The Pew Charitable Trusts, 100.5 MW of biomass capacity was installed in Georgia in 2013, the most out of any renewable energy sector in the state. With its substantial forest resources, Georgia is set to become a beacon for biomass, aided by investments by Constellation, a subsidiary of Exelon Corp. For example, Constellation is set to build a $200 million cogeneration plant in Albany, Georgia, to provide electricity to Southern Company’s Georgia Power and steam to Proctor & Gamble (P&G). This commitment represents a major investment by P&G which plans to use the steam to dry its paper products, substantially reducing the carbon footprint of the energy intensive pulping process.

Major Potential for Wind

Georgia does not presently host large scale wind farms, but may soon be in for a wind makeover based on recent models demonstrating the potential for wind resources. The National Renewable Energy Laboratory’s (NREL) new wind resource potential maps, which bases its projections on the use of more advanced turbine designs on newly available land, show a gross capacity factor of at least 35%, indicating over 8 gigawatts of land-based wind potential in the state. NREL’s Jobs and Economic Development Index (JEDI) indicates that developing just one gigawatt of this wind power in Georgia would result in around 4,400 direct, indirect and induced jobs during construction and 130 ongoing operation jobs with a total annual payroll of $7 million.

The shoreline potential for wind power in Georgia is also bright. A recent report by the Southern Alliance for Clean Energy focuses on the role that Georgia’s nearshore and offshore development areas could play in replacing expensive peak generation providers to avoid summertime blackouts. Georgia Coastal and Marine Planning, in conjunction with Georgia Tech, Georgia Department of Natural Resources (DNR), and the National Oceanic and Atmospheric Administration, has created the Georgia Coastal and Marine Planner, which is a GIS data collection that will help determine ideal locations for offshore wind development. Additionally, Georgia Power recently announced that it has applied to deploy a site-specific wind data collection configuration off the coast of Tybee Island, Georgia.

Water Considerations

An added benefit of deploying wind and solar energy is the inherent reduction in water use, which is particularly vital in Georgia and other states that are prone to droughts. Georgia, which has also been entangled in “water wars” with neighboring states, stands to benefit greatly from the water-saving aspects of wind and solar. A recent NREL study estimates that an addition of 1000 MW of wind energy in Georgia would result in annual savings of 1.628 billion gallons of water, as well as related reductions in energy use for managing that water.

If you have any questions regarding renewable energy projects in Georgia, please contact our Energy Finance group.

Special thanks to Morgan Gerard and Emma Spath who assisted in the preparation of this post.


Topics: Utilities, Water, Biomass, Energy Policy, Solar Energy, Renewable Energy, Wind

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