As recently discussed on ClimateIntel, the current financial crisis and freezing of capital for investment and lending pose significant obstacles for renewable energy developers to attract financing and implement projects. A Renewable Energy Private Investment Corporation (REPIC) would boost the renewable energy industry quickly and efficiently by unfreezing lending for projects that, under normal economic conditions, would receive financing.  More importantly, REPIC can be structured to not only provide lending or government guarantees, but also to insure projects utilizing new technologies.  

President-Elect Obama’s national energy priorities to reduce greenhouse gas emissions, establish a federal renewable portfolio standard and create five million green collar jobs will require rapid and sustainable growth in the renewable energy sector.  President-Elect Obama has supported an economic stimulus plan that includes significant climate-friendly incentives.  With over half the states having enacted renewable portfolio standards, and a growing number of states constraining carbon emissions, there would seem to be no shortage of demand for renewable energy.  The current financial crisis, however, impedes the implementation of new projects.  Measures to assist developers and entrepreneurs create new projects and technologies are critical to the success of the Obama plans.

Federal support to renewable energy largely has been in the form of tax credits, but those incentives benefit only investors with capital gains to offset.  In the current economic climate, financial institutions and insurers that have been the typical recipients of the preferential tax treatment have little or no tax liability to offset.  As a result, renewable energy trade groups, as well as investment fund managers, are asking Congress to modify renewable energy tax credits, so they deliver a benefit to investors that have no gains to offset.  Moreover, this proposal does not offer meaningful incentive to providers of tax equity on renewable deals, which have abandoned that business line or are out of business entirely.  Tax incentives that are inaccessible until energy is produced or capital is expended in the project do little to stabilize today the renewable industry or support its long term growth.  In fact, many electric utilities express privately great skepticism of the long-term value of the tax credits in that such credits create balance sheet uncertainty.

Private investors have been hesitant to lend to certain renewable energy developers even in good economic times due to a lack of technology insurance.  REPIC, however, could provide an immediate source of risk insurance related to the financing for emerging technologies. It is widely expected that once lending resumes, there will be a “flight to quality” favoring low-risk renewable technologies with established revenue streams. To proceed in lending for necessary emerging technologies, private investors may insist on unfavorable interest rates or collateral requirements.  REPIC could stimulate development of nascent renewable technologies that cannot receive funding for technology-risk reasons by favoring lending to the research and deployment of less-developed, but more promising, renewable energy sources.

REPIC can provide a stable source of financing support for complex renewable technologies that the financial sector finds risky, uncertain or difficult to evaluate.  Financial assistance can be in the form of direct loans, loan guarantees or technology insurance.  Such support will decrease investment costs for project developers, spread risk, stimulate American jobs and increase investor confidence generally.

Our next blog entry will examine the benefits that REPIC will provide from an administrative perspective.

For further information about this topic, please contact Akin Gump.