New Green Business Model for Sustainable Finance

By Peter C. Fusaro Emerging markets for environmental financial investment and trading continue to attract significant global investment interest from untraditional investment sources.  $8.99 billion was deployed for cleantech investment in global markets up 13 percent for 2011 according to the Cleantech Venture Network (www.cleantech.com). This sector’s underinvestment has been held up by regulatory uncertainty on the continuation of subsidies for renewable energy under the Production Tax Credit which expires at the end of this year. With all the focus on Washington D.C. programs on the end of the federal loan guarantee program (over $38 billion) and the end of federal grants at the end of 2011, the gloom and doomers don’t see the renaissance in renewable energy. Due to state level incentives, particularly the Renewable Portfolio Standards in 29 states, and a new push for solar thermal in California, financial capital is flowing in this sector from untraditional sources. Typically, large scale energy projects are financed by large investment banks and large utilities that won’t even touch deals worth less than $100 million. They would rather make big bonus-driven deals, but what is actually occurring is a new generation of small scale projects throughout the U.S. These projects have scaled due to the reduction in the cost curve in PV solar projects and the returns of 14 to 16 percent unlevered for 20 years. This is starting to move into solar thermal, small scale wind and biomass projects throughout the country depending the resource base. The funding is coming from pension funds, insurance funds and the no name private equity funds that don’t make financial headlines. But by banging away at multiple projects, a portfolio is born, and it has traction despite all the negative recent headlines on renewables from media such as the New York Times, Wall Street Journal and Fox News. Green investing is not dead, but rather is gaining traction. Last year more money was deployed in clean energy than conventional energy (oil, gas and coal) for electric power generation, and this has not been lost on foreign countries such as Germany and China that see a new market emerging in the U.S. The U.S. is a huge market that dwarfs the rest of the world when it comes to using electricity. The new funders see what I call “environmental alpha.” That is consistent sustainable returns for many years. The rub is that the sector is not followed by most analysts and certainly not by big investment houses who want multiple billion dollar deal flows to fill their coffers. As markets change, so do investment models. The new business model that has emerged for investment in alternative energy and clean technology is a hybrid business model of venture capital, hedge funds and private equity. Coupled with the project orientation of the investment, there is also a dimension of environmental credit trading for emissions, carbon and renewable energy included in this investment strategy. The blurring of the lines between hedge funds and venture capital is also being exacerbated by significant private equity participation in environmental finance. The New Market Drivers The three global market drivers — sustained higher energy prices, accelerated technology shift and increased environmental concerns — form the perfect storm for clean energy investment. Falling renewable energy costs are also increasing investment opportunities in this sector as are government mandates for renewable energy deployment in 29 states. To put this clean energy market in some perspective, we must look at its origin, what is driving it and where it is headed in the foreseeable future.

Table 1: Clean Energy Investment Today

2010                      Biofuels                            US$56.4 billion Wind                                 US$60.5 billion Solar PV                           US$71.2 billion Source: Clean Edge Trends 2011 The New Green Revenue Stream The ability to trade both emissions and renewable energy credits creates another revenue stream. We define the triple convergence of emissions reductions, renewable energy deployment and more energy efficient technology with this graphic. This triple convergence offers multiple risk arbitrage opportunities as well as many revenue streams. They are obviously interrelated as in using more efficient technology reduces the emissions footprint. Similarly using renewable energy can reduce the carbon footprint of power stations, for example. The low hanging fruit of climate change carbon reductions may be energy efficiency but there are many opportunities to invest across a wide spectrum of technologies. The energy value chain is now overlaid with an environmental value chain which is sustained by finance. The clean energy market is large, growing and global with higher rates of market acceptance than anyone anticipated. This trend is growing. Green continues to be the new gold and watch as it accelerates as an investment story! ------------------------------- Peter C. Fusaro is a recognized thought leader in clean energy, a New York Times best selling author of “What Went Wrong at Enron” and runs the 11^th annual Wall Street Green Summit in New York on March 19 and 20, 2012 (www.wsgts.com). image: Ole Houen via Flickr cc (some rights reserved)