by Teresa Hansen, editor in chief
As in years past, the renewable energy market is still a favorite of investors in the United States and worldwide. Although the global economic crisis has caused renewable energy investment to shrink slightly in some countries, the sector still enjoys strong investor support. Renewable energy investment in the United States and much of Europe declined in late 2008 and early 2009 compared with earlier years. Parts of Asia and Latin America, however, have seen investment grow. This is according to United Nations Environment Programme research that shows renewable energy drew more investment than fossil-fueled energy technologies in 2008.
Market Weakens, But Only Slightly
According to the UN research, investment (domestic and international) in U.S. renewable energy was $30.1 billion in 2008, down 8 percent from 2007. The same research report says that clean energy investment worldwide in first quarter 2009 fell 53 percent to $13.3 billion compared with first quarter 2008.
The organization contributes this slowdown to the lack of financing available as a result of tight credit markets and because tax credit-driven markets are mostly ineffective in a downturn.
Spain’s Iberdrola is one of four foreign companies that in 2008 held 70 percent of the internationally owned U.S. renewable capacity. The others are Energia de Portugal through Horizon Wind Energy, Australia’s Babcock & Brown (purchased by Riverstone Holdings Inc. in June and renamed Pattern Energy) and Germany’s E.ON through the purchase of Airtricity North America.
Crayton Bell, a corporate mergers and acquisition lawyer who works with many utilities at New York firm Milbank, Tweed, Hadley & McCloy LLP, agrees.
“In this environment, tax credits are a less effective incentive for equity investors,” he said.
Investors must have taxable income to benefit from production and investment tax credits, and currently fewer firms have the tax liabilities to do so. That, combined with tight credit, makes loan guarantees and grants better incentives in today’s economic environment, Bell said.
Even with the slight decline in renewable investment, it still attracts more international investment than any other sector of the electric energy industry.
As measured by total operating capacity, international ownership of renewable energy projects more than doubled from 2007 to 2008 and saw a fourfold increase from 2006 to 2008, said Norm Richardson, associate director of SNL Financial’s Energy Group, Power Markets and Product Development. In 2008, four foreign companies held 70 percent of the internationally owned U.S. renewable capacity:
- Iberdrola (Spain)
- Energia de Portugal, through Horizon Wind Energy
- Babcock & Brown (Australia—purchased by Riverstone Holdings Inc. in June and renamed Pattern Energy)
- E.ON (Germany), through the purchase of Airtricity North America
These four companies and U.S. companies FPL/NextEra, Mid American/PacifiCorp. and Invenergy represent the seven largest owners of operating renewable energy projects in the United States, Richardson said.
In addition, Iberdrola, EDP/Horizon Wind and Pattern Energy plan to add a combined 10,000 MW of new U.S. renewable energy projects in the next five years, Richardson said. International oil companies BP and Shell also plan to expand in the United States from a combined 1,000 MW to nearly 6,000 MW during the same period, he said.
“With that commitment from existing international investors and continued incentives and requirements for renewable energy at both the state and federal level, it appears that renewable energy will remain a very attractive investment,” Richardson said.
Bell also said renewable energy will continue to be attractive to investors. The American Clean Energy and Security Act and other stimulus programs should keep companies interested in renewables, he said.
“With the ambitious requirements for the development of clean energy in the United States and such a low percentage of current clean energy generation, renewable energy will continue to attract investment,” Bell said.
Incentives Make Economics Viable
The current economic situation has resulted in a decline in electricity demand, causing most organizations, such as the Energy Information Administration, to lower predictions for future capacity requirements. In addition, many areas of the country have seen lower electricity prices as a result of lower fuel cost. Common wisdom would assume that lower demand would curb planned power plant construction, and lower prices would make investment in more expensive generating technologies such as renewables less attractive. Neither has had a marked affect on U.S. renewable energy development.
Cost of alternative power is not a driver for renewables, said Fadi Shadid, a senior SNL Energy analyst.
“The debate was never about economics or engineering, but about politics,” he said. “Because of mandatory RPS (renewable portfolio standards), electricity providers must purchase some power generated from renewable sources. The economics work for the owners because of the massive tax incentives.”
Falling electricity prices haven’t affected renewable profits, Richardson said.
“Most renewable projects are able to secure long-term power purchase agreements, so short-term electric prices have not had a significant impact on the profitability of these projects,” Richardson said.
Stronger Dollar’s Influence
Another factor that typically impacts foreign investment in any U.S. industry is the value of the dollar against foreign currency.
For several years the U.S. market attracted international firms because the stronger currencies outside the United States gave foreign investors more purchasing power.
While the stronger dollar has had some impact on foreign investment, Bell was surprised by the lack of foreign investment when the dollar was weak.
“I was always surprised that the weak dollar did not drive more foreign investment,” he said. “The stronger dollar can’t be helping foreign investment.”
U.S currency appreciated some 15 percent from the trough of last year against the Euro, and business fundamentals must make sense for foreign investors. Along with the dollar’s increase against foreign currencies, however, the value of most U.S. utilities declined last year, Shadid said.
“Public valuations of the sector, especially the merchant generators, have come down 70 percent in some cases over this same period,” he said, “yet you don’t see foreign interest in acquisitions. Uncertainty on environmental regulation and U.S. economic growth has not favored major U.S. investments.”
Government incentives are needed to keep investment dollars flowing into the renewable energy sector, Bell said. In the United States, government support of renewable energy has been intermittent.
Incentives have been put in place for limited periods, meaning lawmakers must re-examine them and decide whether or not to reinstate them frequently. This lack of long-term commitment has caused some investors to steer clear of the sector.
The American Clean Energy and Security Act 2009—commonly called the Waxman-Markey bill—which recently passed the House and is being debated in the Senate, provides longer targets for renewable incentives. It includes a federal renewable energy target of 15 percent by 2020.
“I don’t think the policies of the current administration have affected renewable energy investment yet, but they will,” Bell said. “A lot of policies currently being considered will have a positive effect. This administration is planning longer-term incentives than the previous administration.”
Richardson’s take on the current administration is similar.
“I would say that we have not seen a direct impact of the new administration on foreign investment yet, as the growth has already been significant in the last two years,” Richardson said. “If President Obama is able to pass an energy bill that requires additional investments in either renewables, nuclear or clean coal technology, then we may see even more foreign interest in the U.S. electric space.”
Nuclear Attracts International Interest
While renewable energy has been a significant focus for international investment in the U.S. electric energy sector, a few international companies also are investing in nuclear energy, Bell said.
“Many U.S. utilities need to get bigger to fund development and growth,” he said. “In many cases mergers may be the answer. The public markets are tight right now, and large utilities haven’t raised a lot of public capital in 2009. One option is to either merge domestically or join forces with foreign utilities.”
This is especially true for those interested in nuclear power because no U.S. utility has a balance sheet strong enough to build a $15 billion power plant on its own.
“The Constellation-EDF model might appeal to other utilities looking at building a nuclear power plant,” Bell said, “however, there’s more than just the financial model; it also includes sharing technology and experience.”
Shadid echoed Bell.
“Nuclear is likely to remain most interesting for major investments, especially from the French,” Shadid said, “not only in the generation part of the nuclear energy cycle, but the fuel as well.”
Shadid cited EDF as an example, along with its French sister company Areva, which is majority-owned by the French government.
“Areva is developing a new uranium enrichment plant in Idaho,” Shadid said. “It recently also announced a partnership with Duke Energy for a new nuclear generating plant in Ohio.”
Renewables Somewhat Insulated From Down Economy
Given the global economic crises, few are surprised that international investment in the U.S. electricity sector is down, Bell said.
“The global economic crisis has affected investment everywhere,” he said. “Some utilities are pruning investments and either reducing debt or consolidating cash.”
This trend likely will continue until true economic recovery occurs and financial markets open up. Renewable energy, however, is positioned to fare better than the rest of the sector. The push in the U.S. to add more renewable energy to the mix, the administration’s goal of stimulating the economy through creation of green jobs, along with the United States’ abundance of renewable resources will make the U.S. renewable energy industry attractive to international and domestic investors for many years, Bell said.
“In terms of renewables, money is available from private equity for both solar and wind development in the U.S. and abroad,” Bell said.