Show Me The Money! Public Capital Vehicles Could Liberate More Renewable Energy

Wonk Alert: Via the good people over at NREL’s Renewable Energy Project Finance website, here’s an important article on a very important mechanisms that could liberate more renewable energy in the US:

Improving the availability of capital to renewable energy (RE) projects represents a critical component to lowering the overall cost and scaling the adoption of RE technologies. Public capital—investment raised in the financial markets through securitized instruments and pooled investment vehicles—is a potential means of achieving these goals. Public capital mechanisms offer RE projects—which are regarded as mid-high risk investments in the marketplace—numerous attributes that could be attractive to investors, including:

• Diversity of investment through pooled assets
• Liquidity (marketability) of the security once procured
• Transparency of the market price through public trading.

A recent NREL report, Financing U.S. Renewable Energy Projects Through Public Capital Vehicles: Qualitative and Quantitative Benefits, highlights the benefits and challenges of RE access to public capital through various investment mechanisms, such as asset-backed securities (ABS) (see Figure 1) and master limited partnerships (MLP). The report also quantifies the potential effect on the levelized cost of energy (LCOE) for wind and solar technologies with the application of public capital finance to the project or portfolio capital stack.

Figure 1. Hypothetical solar ABSs, one of the public capital vehicles potentially available to RE [1]

The report identifies two basic methods by which public capital could be applied to RE projects:

1. As part of the “initial capital stack,” representing an original source of capital funding. There are two ways to use this method and still take advantage of the tax benefits.
   1. Replace project debt (from commercial lenders) with public capital that has a lower capital cost. Project debt can be fairly inexpensive but is constrained by a smaller investment pool. Replacing public capital for project debt can confer the primary benefit of expanding the quantity of capital rather than meaningfully reducing its required yield.
   2. Replace equity (either sponsor or tax) after the tax benefits expire or diminish (post-2013 for wind and post-2016 for solar).
2. As “take-out financing,” which would procure the remaining interest of a tax equity investor once the tax benefits are fully utilized (and the project is allowed to be sold without recapture penalty by the IRS).

According to NREL’s analysis, increasing the use of public capital can lower a project’s LCOE associated with solar and wind deployment by roughly 8%–16% (and perhaps more), depending on the source of financing it replaces (e.g., debt or tax equity) and other assumptions.

Figure 2 represents the range of LCOEs calculated for residential- and utility-scale solar facilities under traditional, ABS, and MLP financing structures in 2017 when the investment tax credit reverts from 30% to its long-term rate of 10%.

Figure 2. Comparison of LCOE for residential- and utility-scale solar projects [1]

Similarly, LCOE for wind was reducible by roughly 10% with public capital investments (see Figure 3).

Reductions in the cost of capital and thus the cost of energy for RE would be a competitive boost for these technologies, opening more avenues for deployment without increasing policy support. The greatest benefits of successful access to capital markets might not be in reduced LCOE, however, but in the ability to expand the scale and increase the speed of solar deployment. These benefits were not estimated in the report.

Stay tuned on NREL’s Renewable Energy Project Finance website for more to come on public capital, securitization, and the potential for financial markets to get more steel in the ground.

[1] Mendelsohn, M.; Feldman, D. (2013) Financing U.S. Renewable Energy Projects Through Public Capital Vehicles: Qualitative and Quantitative Benefits. Golden, CO: National Renewable Energy Laboratory.