Regs not lenders, stand in way of lining up cash

John Downey

Triangle Business Journal

January 14, 2011

Financing renewable energy projects in North Carolina remains challenging, but some in the industry see those challenges coming less from banks than from the state regualtion. “Many of the solar businesses in North Carolina are on the verge of closing their doors,” says Simon Rich, founder and chief executive of Fuqua Rich Weeks, a private equity firm that focuses on energy and agriculture. “I think the bigger problem is a lack coherent state energy policy.”

Rich is a member of the N.C. Energy Policy Council, charged with developing legislative proposals for Gov. Bev Perdue to present to the General Assembly in January. One big problem, he says, is the way North Carolina treats state tax credits for renewable projects.

The state offers a 35 percent tac credit on renewable energy projects- recoverable generally over 5-7 years. They pair with federal tax incentives of 30 percent.  Renewable Energy developers are almost never in a position to take advantage of those credits.  So the consideration for a structured financing deal is always finding abuyer for those tax credits.  That can provide about 60 percent of the financing in a typical solar project, says Michael Byrnes, chief executive at power plant developer NxGen Power in Charlotte.

The problem is that North Carolina requires both tax credits to be sold to the same buyer.  That severely limits the number of potential buyers and makes projects harder to finance in North Carolina than other states that allow the credits to be sold separately.  John Morrison of Strata Solar in Chapel Hill explains that it is often difficult to find an institution that has enough federal and state liability to want both credits.  Bank of America Corp., for instance is very active in buying credits.  But it does not have nearly the appetite for N.C. credits as for federal.  A company with large state tax liability often does not need so much federal help. “if we werw able to sell separately, we would see a lot more funds become available,” says Morrison.

Bank lending in a typical structure finance deal will amount to 30 percent or so of the deal., Byrnes says. And more and more banks are realizing that these can be very secure loans.  Long term power purchase agreements are key, Byrnes says. “There is a steady, lon term revenue stream for the project.” Thos agreements typically extend for 20 to 30 years.

NxGen develops solar plants with a capacity of 1 to 10 megawatts. The large banks – Bakn of America, Wells Fargo & Co. – are only interested in the largest of projects.  So educating smaller banks on the advantage of renewable project lending is crucial to growth in the sector, Byrnes says. But energy projects have not been part of the traditional portfolio for local banks.  Byrnes says those banks are starting to see an opportunity, and they could foster renewable investment in the state.  A company such as NxGen, which is the developer, will generally put in 10 to 20 percent of the upfront money in the project.  Companies like his may see a limited return in the first several years of the project.  But once the tax credits have run thier course and the tax investor is out of the project, there are 15 years or so of strong returns for the developer.  So with more bansk getting on board, the biggest obstacles remain on the tax policy and regulatory side, Byrnes says.

Blair Kendall of Southern Energy Management in Morrisville cites another state issue-the relatively low renewable enrgy portfolio requirements in the state.  The problem there is the sale of the renewable energy credits- which make up part of the power purchase agreements. But Duke Energy Carolinas has all the solar credits it needs for the next four years, and Progress ENergy is also close to filling its quota. That makes it difficult for solar developers to find energy credit buyers for their projects unless, like SEM, they also develop projects outside of the state.

Rusty Jewett, cheif executive of the solar panel manufacturer Sencera, says the problem is getting government- at all levels- to follow through on its expressions of support for renewable energy.  “India,China,and Japan have their central governments making a national committment to being manufacturers of renewable energy products,”he says.  “Though we have heard a lot from our government, there is not a lot of meat to it.”