"Investment Yield Vehicles" Gather Speed at BNEF Summit

Up on the main stage at the BNEF Summit, there was no buzzier term than “resilience”. But in the side sessions among finance professionals, another catch-phrase was making the rounds: “investment yield vehicles.”

For some time now, one of the conundrums for clean energy fundraising has been finding ways for large institutional investors, such as pension funds, and small retail investors (individuals) to put their money into clean energy projects. Certainly, opportunities exist to back individual companies trading on the stock exchanges that make solar modules or wind turbines. But the performance of these firms has been wildly erratic and hardly the kind of thing grandma would want to put her life savings into.

Meanwhile, actually investing in an operating wind, solar or geothermal project can represent a relatively low-risk opportunity with a decent yield, particularly compared to yields offered today on supposedly “risk-free” 10 year Treasury bills.

Enter the yield vehicle, an opportunity for an investor to put his or her money into a portfolio of operating projects with stable, reliable cash flows. Depending on how you ask, these kinds investment opportunities represent the true long-term opportunity for clean energy fund raising or merely the flavor of the month.

Recent weeks have seen a flurry of activity in this area with two yield cos. of different flavors getting floated on North American exchanges and Congress now considering a tweak in the law that could make yet a third kind of clean energy yield co. available to investors.

On Tuesday, Bloomberg reported that power generator AES and private equity firm Riverstone planned to float on the Toronto Stock Exchange a new vehicle known as Silver Ridge, a portfolio of projects that will eventually consist of 522MW when all its projects are online. Shareholders are being asked to put up $171m to own shares in the projects and will receive dividends from the cash flows they generate.

The key to a yield co. is, of course, to offer the investor the highest possible rate of return against the lowest level of risk. One way to raise return levels: lower the overall rate of tax paid on any profits these portfolios earn.

Along those lines, two other legal structures are on the table for clean energy: Real Estate Investment Trusts and Master Limited Partnerships (MLP’s). Both offer “single taxation” of profits meaning that whatever these entities earn they can pass straight to shareholders who pay tax on those dividends. The yield co. is not subject to the corporate tax a typical company must pay.

In February, investment firm Hannon Armstrong filed to IPO a clean energy REIT and now is now seeking $250m from investors to put into energy efficiency and renewable energy projects.

For their part, MLP’s have long been popular in the oil & gas industry where they have been used to bankroll pipelines and other infrastructure projects. But under US law, most renewables projects were not eligible to form MLP’s.

An effort is now afoot to change that and this week saw important developments toward that end at the Bloomberg New Energy Finance Summit. On Tuesday, Senator Lisa Murkowski, the ranking Republican on the Senate Energy & Natural Resources Committee, told Summit attendees that she supports legislation that would allow clean energy projects for the first time to use MLP’s for fundraising. Perhaps even more significantly, the next day American Petroleum Institute CEO Jack Gerard (pictured below left, with Bill Richardson and Bill Ritter) told attendees that the oil industry actually supports the idea. Such a move from the powerful oil lobby plus Murkowski’s support could provide the cover that oil state members of Congress need to support an extension of MLP’s to renewables.

Still, not all Summit attendees were buying that MLP’s could change the world by allowing many more projects to get built in the US. Michael Bernier of Ernst & Young told attendees at a panel on US tax equity financing that MLP’s are “not the panacea that I think some people make it out to be.” He noted that while these structures might make more equity available to certain projects, they would do little to expand the pool of “tax equity” needed by projects.

—Ethan Zindler 

(Photo: Peter Foley/Bloomberg)

Electrification of transport and the role of urban planning

In brief:


1. Electric Vehicles should be good for utilities and increase the kWh they can sell, but at a micro-level they are not set-up for it yet and  are scared about what happens to their infrastructure with growing load of EVs in grid. 

2. Government does not need to throw more money at EVs - there are no real technical barriers and the consumer economics will work themselves out. But government does need to become more friendly to adoption. And that means reducing bureaucratic complexity. There is only so much FERC can do while rules are made at PUC level.

3. The biggest thing government can do is simplify the process to get home and office charging stations installed as that is where most refueling occurs. Public charging stations are less critical, but they do provide public confidence.

4.The top two reasons people cite for buying EVs is the environment and to save money on gasoline.

 

— Seb Henbest

Panel: The Future of First-Generation Biofuels

Today’s session on the future of first-generation biofuels featured two traders from large food and marine fuel companies and the chairman of a major India-based equipment provider of technology. The discussion flipped from policy to economics and then back again. 

Policy in traditional markets are facing structural changes. The US has been the least confusing policy environment over the last several years, according to one panelist, but there are now four bills underway to upend the Renewable Fuels Standard.

On the economics side, the margins have been relatively stable, but not “bountiful”. Ethanol has the attractive feature of not only offering economic benefits (it’s competitive with gasoline) but also functional benefits (octane enhancements).

Overall, the big traditional markets - Brazil, EU, and US - are facing challenges. EU and the US have contracting fuel markets, so the pie is getting smaller… But this indirectly increases biofuel market share (biofuels volume remains intact under policy, while overall volume shrinks).

Other markets - eg, Thailand, Turkey, India, China - will be critical in the coming decade.

—Michel Dicapua

Clean Energy Industry’s Response to Local Content Requirements
One of the details that have come out of breakout sessions at this year’s summit is the clean energy industry’s response to local content requirements. This was also the subject of a workshop we held with the OECD.
 
There was general agreement at the summit that LCRs add costs and form barriers to market entry. Several participants in the solar sector said those kind of policies will ultimately delay the point at which photovoltaic power does not require any price support.
 
The level of the challenge of meeting such requirements also varies between markets. One project developer said they had a struggle finding local industry partners able to rise to the challenge.
 
However, many participants - ranging from equipment manufacturers and investors to policy makers - said they understood the rationale of LCRs. Putting local jobs on the table is a deal sweetener for rate payers, who foot the bill for clean energy incentives.

—Nico Tyabji
image (Photo: Peter Foley/Bloomberg)
Upping the Pace

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As an organization channeling the interests of 193 member states, the United Nations won’t be characterized as fast-moving. Yet its secretary general feels the need for alacrity on sustainability. Ban Ki Moon reminded an SRO Summit audience that sustainable development has been “adopted” as the UN’s number one priority. Having accomplished that, “there are several factors holding us back,” he noted, among them: insufficient investment, unreliable support for innovation, and pilot programs that fail to advance to full deployment.

The secretary general’s prescription? Engaging governments and the private sector, and prevailing on them to open their subsidy and R&D spigots, respectively.

"The longer we delay, the greater the cost."

—Stephen Munro

 

(Photo: Peter Foley/Bloomberg) 

Summit Panel: From Impact to Innovation

The “From Innovation to Impact” panel kicked off with Michael Wilshire looking at a few of the different types of innovation and what it meant. Led by five prominent panelists, the room sought to address the issues of how to move from interesting innovations to actually making an impact in the industry and the broader community.

Brad Pietras, a neuroscientist and a rocket scientist from Lockheed Martin, opened the discussion by pointing out that it is often not the brand new ideas but rather the old ideas that maybe were not able in the past, citing the example of ocean thermal.

Donn Tice, CEO of d.light design (a Bloomberg New Energy Pioneer and Zayed Future Energy Prize winner which sells distributed solar systems across the developing world) highlighted that we should not simply look at technological innovation but rather innovations in business models, such as distribution lines.

Dr. Nawal Al-Hosany, representing Masdar which  celebrated it’s seventh birthday today, argued that a holistic approach to the problem was the only way to really achieve change. Masdar’s cross-sector work, across multiple geographies added considerable weight to this.

Over the issue of inspiration versus perspiration, the panelists agreed that there was no silver bullet and those who were waiting for the “iPad moment” we’re likely to be sleek disappointed. Incremental change at was going to be key, and breakthroughs would inevitably happen along the way. Dr. Nawal raised the point that the first mover faced so many challenges and needed support and others to help develop a market. Rather than a silver bullet, the industry would see silver buckshot, with some innovations hitting their targets, while others flying past.

This led nicely on to how to tackle problems of scale and Lance Pierce, COO of Ceres, and Amy Davidsen from The Climate Group spoke convincingly on the value of partnerships and collaborations, drawing from their experience doing just that. Necessity drives innovation and new products or models would come from across the globe, from developing and the developed markets.

In terms of how to look to the future, the panel drew on the wisdom of two former leaders of the US and Great Britain: Eisenhower belief that it was not the plan but the planning that was important, a view shared by Churchill when he declared all Plans to be useless but planning to be essential.

The panel concluded with the comfort that based on the output over the last three days at the Bloomberg New Energy Finance Summit, the industry was in good hands and we would look back in years to come at countless innovations that we could previously never have 
children, who still struggled to comprehend that the Internet had not always existed.

What will be the impactful innovation to come… Who knows, and there will be many!

—Logan Goldiescot

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(Photo: Peter Foley/Bloomberg)

A long way (literally) to go
There’s a cutaway Chevy Spark EV on display in the lobby of the Summit’s venue hotel. As an avid car guy and and an urbanista, I find it more appealing than the gas-electric Volt because it’s smaller and less complex (the Volt, after all, uses a greatly miniaturized form of a railroad locomotive’s drivetrain). And the Spark’s efficiency, which GM announced today is 119 mpge (the “e“‘s for “equivalent”), gets attention.
 
GM puts the Spark’s range at under 100 miles. which means if Chevrolet were to offer a directly equivalent model with a gasoline engine, it would have a fuel tank that holds less than one gallon.
 
A deal killer? It depends on one’s comfort level driving in the city with the needle just above “E”. I have to confess that I do it often.
 
—Stephen Munro 
 
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BNEF Poll Question: If electric, hybrid, and gasoline powered vehicles were all the same price, which would you buy? 

BNEF Poll Question: If electric, hybrid, and gasoline powered vehicles were all the same price, which would you buy? 

Electric vehicles & successful consumer engagement

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Educating the population is critical to the development of the EV sector: to date it has been pedestrian, logical and uninspiring. Factor in that people are just fundamentally emotionally attached to SUVs. Now is the time to get people to really dive-in and learn to love these cars.

Early adopters and fast-moving consumers may still have a gap in their knowledge. Well-educated people still do not know nearly enough about the technology, if you are not in the energy industry or read automotive magazines then you will not know a great deal about these cars. It is hard to know where to start with the marketing appeal, simply because there are so many advantages for these types of vehicles.

In the space race, the “nattering naybobs of negativity” got pushed aside and the same will happen in the EV space. People buy cars for emotional reasons, nobody thinks when buying an SUV “what am I going to spend in a lifetime on fuel, which is the case with EVs?” Nevertheless it is still all about driving the cost of ownership down.

Ninety-nine percent of people do not know what is going on under the bonnet of their car: it is therefore about what consumers believe. Tesla is a perfect illustration of how really cool this vehicles are. It is time to help people believe there is something else – “range is not a problem, relax, and move on.”

The 1980s bought us CDs and bank-telling machines, for EVs we are getting close to similar inflection points. The tipping point will occur and there will be electric drive technology everywhere.

The EEI campaign is solid in terms of the use of the power.

The Governor in New York wants to move towards 40,000 vehicles in the fleet and 3000 charging stations: there are moves to incentivize these targets.

Would it have made more sense to immediately to concentrate on buses, commercial vehicles and heavy duty vehicles? People will then get comfortable with the technology and using it.  

—Harry Boyle

The opportunity costs of taking water for granted
Water is taken for granted in most parts of the world because it’s virtually free. For the broader energy and utility industry, water still falls off the radar because its artificially low pricing creates great uncertainty over the true cost of water risk. However, water is already hitting many, for example power utilities, from both the cost and revenue standpoint.
 
In Singapore, water is priced at its full cost and the impetus it creates for industry to recognise and manage water issues demonstrates that pricing is the root of the problem. With water being a key input to energy, and energy a key input to water processes, only a proper price tag on water can provide transparency on the opportunity cost of not balancing water with energy. While there are many substitutes for energy, there is no substitute for water. 
 
— Su Gao
 
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(Pictured, left to right: Margaret Catley-Carlson, Global Water Partnership; Chee Kiong Goh, Singapore Economic Development Board; Amit Pathare, GDF Suez; Dimitra Christakou, BNEF)