At last week’s Rio+20 conference in Brazil, a representative of Standard & Poor’s Latin American office told a panel on sustainable development that “banks and utilities are unlikeloy to provide financing of about $1 trillion per year for clean energy schemes.” She didn’t need to to mention that governments aren’t likely to pick up the whole tab either. Standard & Poor’s is a subsidiary of The McGraw-Hill Companies (NYSE: MHP).
The solution according to S&P’s Regina Nunes are capital markets, which to date are both too small and to illiquid to entice institutional investors. To prove her point, she noted an exception. Earlier this year, First Solar Inc. (NASDAQ: FSLR) sold its 550-megawatt solar plant to MidAmerican Energy Holdings Co., a subsidiary of Warren Buffett’s Berkshire Hathaway Inc. (NYSE: BRK-A) (NYSE: BRK-B). The total cost of the project is around $2.4 billion, and MidAmerican offered a 27.5-year, $850 million bond paying a coupon of about 5.75% that was oversubscribed by $400 million. That coupon rate was lower than the rate paid by two of the biggest US banks for 30-year bonds.
Nunes noted some of the problems with investing in clean energy:
Renewable energy projects have often been considered high-risk, owing to their reliance on government support and relative immaturity–a view accentuated by the difficulty in measuring their revenue streams compared with other investments.
Her solution: long-term renewable energy fixed-income debt securities, often called “green bonds.” The catch is that investors now seek higher-rated bonds. Says Nunes:
Investors are increasingly looking for fixed-income instruments that provide yield without going too far down the credit curve. In our view, it’s very much a trade-off between risk and yield.
Previously, investors may have looked for bonds rated ‘BBB’. Now, however, we believe that ‘A’ rated investments are becoming the new minimum standard.
Sometimes, private or public credit enhancement is needed to create project-backed bonds with an ‘A’ rating. That said, renewable energy projects can also achieve an ‘A’ rating from the outset if they are well-structured, with low leverage and strong support from key project counterparties.
In other words, First Solar probably shouldn’t expect ‘A’-rated debt, but Berkshire Hathaway or NRG Energy Inc. (NYSE: NRG), which purchased a 49% stake in First Solar’s $1.8 billion Agua Caliente solar project, are pretty good bets.
An even more daring plan suggested by another participant in the session was to allow utilities and banks to securitize their green energy loans and issue asset-backed securities. Another possibility is green-covered bonds that offer dual recourse, either to the issuing bank or to the pool of assets supporting the bond. Both are possible, but probably still some distance in the future.
Paul Ausick
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