At RETECH 2010, the US Partnership for Renewable Energy Finance (US PREF), a program of the American Council on Renewable Energy (ACORE), outlined the interaction and feasibility of financing utility and commercial scale renewable energy sources as a response to federal policy and lending programs.
What is the Partnership for Renewable Energy Finance?
US PREF is a non-partisan association whose objective is to unlock financial capital for renewable energy by networking private capital and investment firms with utilities, various levels of government, and other major stakeholders. Designed as an educational program for finance training in policy decisions to maximize government efficiency and to develop sound legislation, PREF provides pro bono analysis of how policy decisions will affect the market, and makes recommendations on policy that will spur private sector involvement.
Clear and Predictable Policies are Critical to Unleash Capital for Renewable Energy
In PREF's view, sustained and increased private sector capital investments will develop as a result of clear, predictable, longstanding policy initiatives. In order for capital markets to accurately calculate risk associated with renewable investments, it must have a clear picture of the overall capitalization of the industry sector (including government financing) and be able to interpret the effect of policy on the financial success of any given project. This cannot be done if policy guidelines and levels of government spending are constantly shifting, causing long term risk assessment to be impossible and ultimately deterring investment. Through its analysis and networking capacities, PREF is working to solidify sound long term policy objectives that will lead to renewable energies being cost competitive with conventional fuels.
The Role of Government Subsidies to Grow the Renewable Energy Market
Currently with a 20% gap between the cost of renewable and conventional energy sources, government subsidy is imperative to make energy investment attractive to private firms. Further, there is a persistent equity gap in the industry sector that calls for federal funding programs in order to make renewable energy feasible and scalable. Venture capital for initial investment is available but there is a limited pool or "gap" of investors with the capital resources to take on the "scale up costs" of renewable energy development, given its incalculable risks and low rates of return.
The role of the government is to provide subsidy to fund projects that have become cost prohibitive to the private sector. While PREF is currently working towards extending existing tax credits (PTCs), Investment Tax Credits, and 1603 grants, it believes subsidies alone do not drive demand; they simply increase the feasibility of investment. PREF argues the implementation of broad scale policies like a National Renewable Electricity Standard or legislation like the Waxman-Markey Bill will promote demand by placing a premium on renewable energy, as well as provide a framework that clearly signals the government's policy and investment strategy for the long term.
Potential investment opportunities are limitless. To meet the 2050 carbon reductions target in the Waxman-Markey Climate Bill that passed the House, according to PREF's estimates, 91% of current utilities that are not able to adopt carbon sequestration technologies will need to be replaced with non carbon based sources. To meet the targets, a capital investment estimated to exceed $4 trillion will be needed. Currently there is great demand from projects to receive grants. But with NEPA and FICRA requirements and the permitting process taking almost 18 months, and the expiration of federal programs looming, these delays can effectively shut down development projects.
PREF Offers Some Solutions
PREF is working with policy makers to design a green bank or Clean Energy Deployment Act (CEDA) that will streamline the investment process and provide a direct channel for project developers to acquire federal funding assistance, as well as integrate a long term federal investment strategy that will scale back the role of the government in the sector as it emerges.The cost of these technologies will decline, as the market will have proven itself to be profitable and cost efficient alternative to fossil fuels, and private investment will be able to assume full risk of investment as well as the provide the upfront capital costs, rendering government programs obsolete. In the mean time however, PREF has provided a convincing argument for the necessity of government assistance to effectively launch this fledging industrial sector.