Financial Challenges Impacting the Renewable Energy Industry

By Daren Gretz, Senior Vice President, Aon Global Power

Renewable energy continues to represent a growing source of power generation in the U.S. economy, and is supported by a strong lending environment. In 2017 alone, renewable energy provided a remarkable 18 percent of total U.S. power generation — doubling renewable power contributions in just 10 years.

This amazing growth was driven by many factors, most critically the production tax credits subsidies and the robust finance market. However, there are several financial challenges facing the renewable energy market, notably the Renewable Electricity Production Tax Credit (PTC) phase-down, Tax Cuts and Jobs Act (TCJA) and Section 201 Solar Tariffs, all of which are going to have an impact on the renewables industry.

One of the biggest financial challenges for renewable energy is the PTC and ITC extension with phase-down. The PTC and ITC have been the key financial drivers for wind and solar power project development and help sustain the supply, construction, management and operation of renewable power generation assets. The tax credits were extended through 2019, with a phasing down by 20 percent each year beginning in 2017.

To survive and thrive during this phase-out of tax credits, the renewable power industry needs to continue to compete with natural gas and fossil fuel energy resources specific to each regional market. Lower capital cost of wind turbines and solar PV panels, higher efficiencies in equipment name plate capacity, and optimizing operations are all helping renewable power stay competitive in the market. To compete with natural gas, developers of renewable projects may consider secure financing supported by Utility PPAs, Commercial & Industrial (C&I) PPAs, Energy Hedges and Proxy Revenue Swaps. Utility PPAs are rather scarce in certain markets and C&I PPAs, while increasingly prevalent, can take significant time to close. Depending on the power market, and taking into consideration the specific market risks, Energy Hedges and Proxy Revenue Swaps may make a project financeable. “We’ve selectively identified other contract alternatives to traditional utility PPAs and have found that sophisticated banks are able to finance against such alternative contracts”, said Steve Ryder, CFO for Invenergy LLC. Despite challenges with offtake agreements, coal plants continue to be retired, and renewables are in high gear to replace some of this capacity as the PTCs are phased out.

Another financial challenge for renewables is the uncertainty around the impact of the Tax Cuts and Jobs Act (TCJA). There is concern around the supply and cost of tax equity, though to-date the industry has not seen any material changes on this front. However, questions remain as the tax credit drops down and it is uncertain if stakeholders will lose their appetite for renewable projects. According to Saad Qais, CFO for Goldwind North America based in Chicago, “A few tax equity players are assessing the impact of BEAT (Base Erosion Anti-abuse Tax) on their tax capacity. It’s largely expected to be minimal; however, general liquidity in the tax equity market remains limited.” We just do not know the full impact yet, and we will need to watch the project deal flow.

The most recent financial challenge to the renewable industry is the U.S. Federal Government Section 201 Solar Tariffs, which took effect on Feb. 7, 2018. These tariffs impose a tariff level at 30 percent, with a five percent declining rate per year over the four-year term on Solar PV Cells. As this drives up the cost for U.S. solar projects, it will be interesting to see if the renewables industry is able to ensure the existing market continues to thrive while developing new technologies and enabling free markets. Adapting new technologies, such as new battery storage equipment and software application, will keep renewables competitively priced in this market.

The advocacy work with the International Trade Commission on Tariffs and lobbying efforts to defend federal and state tax incentives may continue with trade associations such as Solar Energy Industries Association, American Wind Energy Association and many others. Stakeholders in the renewable energy industry may consider pursuing public policies and private industry partnerships to keep existing, robust markets open, while opening new ones for continued growth. For example, a known industry priority is reforming electricity markets to enable renewables resource use at the highest values. Public and private industry is adding value by adopting innovative new technologies that help to improve, modernize and increase efficiency of the US energy grid, such as battery storage, smart grids, fuel cells, distributed generation and other innovations.

The renewable energy market continues to be a growing and successful industry, but is not without its share of financial challenges. According to the U.S. Department of Energy, total installed U.S. solar power capacity is expected to reach nearly 100 GW by the end of 2020 and total installed U.S. wind power capacity is projected to reach 113.43 GW by 2020. By any measure, renewables have seen great financial success. The financial challenges facing the renewables industry will be measured by how effectively the industry adapts and competes in the market without subsidies when compared to natural gas and fossil fuels.