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Interesting Times

Utilities stay the course in a volatile market.

Fortnightly Magazine - October 2011

grants in lieu of tax credits also would help, but who knows how long that will last? If you’re looking to have a long-term presence in renewable energy development, then you need long-term power purchase agreements (PPA) and transmission commitments. In many states it’s quite difficult to get a PPA, and transmission is difficult to arrange. There’s still a lot of headroom in existing RPS requirements, but fewer purchasers are inclined to enter long-term contracts. Without those things, it’s very problematic.

It comes down to what the regulators want. If they want to facilitate the development of new, cleaner, more efficient energy projects, then there are ways of getting it done. Right now there’s extraordinary political and regulatory uncertainty.

Napolitano, RBC: If the federal balance sheet can no longer afford subsidies for renewables, then there may be a wave of consolidation coming. There are a large number of players in that space. If the incentives aren’t there, and PPAs aren’t there, then what’s left? We might see consolidation to achieve operational economies of scale.

Nastro, Morgan Stanley: We see a number of headwinds facing the renewable sector. On the wind side, the capital markets aren’t closed, but investors are very valuation-sensitive. Current public market trading levels suggest that spinning wind assets are trading below book value, and development projects only have value if they are in late stages, with attractive PPAs and return profiles.

If the window closes for renewables to access the public markets, then we’d expect to see increasing consolidation, which would favor companies with a lower cost of capital and a global value chain. Specifically, several Asian companies represent a new pool of capital looking to expand in U.S. markets, and are seeking to exploit their technological and cost advantages.

The solar market is different. We’ve seen an enormous increase in installed capacity. Solar projects are expected to reach 24 GW in 2013. Solar had been driven more by government and regulatory support, but declining prices and maturing technologies have made solar more bankable today. There’s still project financing available for high-quality projects located in stable regulatory environments with RPS requirements. At this point, there’s more support for solar than for wind, and that’s where many renewable energy investors are spending their time.