Full Steam Ahead- Renewable Energy Gains Momentum, Despite Falling Oil Prices
By Gary Litvak
The effect of falling oil prices over the past year on the renewable energy industry clear. When oil prices are high, there is a willingness to invest in solar panels, energy efficient cars, businesses providing electric charging stations and energy delivery infrastructure.
The likes of Elon Musk dream up schemes to convert Death Valley and the Sahara desert into giant solar farms. Will record low fuel prices have an opposite effect? One would expect that as the price of oil drops, so will interest in renewable energy sources.
Why invest in solar panels or in a hybrid car when the cost of oil is lower than that of bottled water? Why should we be driving LEAFs and Prius hybrids when we could be driving large SUV’s and pickup trucks? The world is not full of idealists who are willing to pay more in order to leave a smaller carbon footprint.
However, the actual data seems to tell a different story. The U.S. Energy Information Administration predicts that in 2016, electric generating facilities will add more than 26 gigawatts of utility-scale generating capacity to the power grid, and for the first time, solar will account for 9.5 gigawatts or 36% of that amount, exceeding additions from any other source. Wind will add another 6.8 gigawatts of the additional capacity to the power grid.
To give you an idea of how much a gigawatt represents, Indian Point nuclear plant is a two gigawatt facility, providing electricity to 1.4 million homes. Despite the lower oil and gas prices, the solar power industry continues to move forward with increasing momentum. There are many reasons for this momentum.
They range from environmental concerns to geopolitical tactics. However, one of the biggest reasons for the continuous growth of the solar industry is the regulatory and political support offered by both Federal and state governments.
According to the Database of State Incentives for Renewable Energy (“DSRE”), there are 2,043 financial Federal and state incentives. Some of these incentives are geared towards corporations and others directed towards individuals. They include accelerated depreciation methods, loans, grants and tax credits.One of the most valuable tax incentives for individuals is the Residential Renewable Energy Tax Credit.
It covers residential solar, wind and geothermal systems placed in service after 2008. This incentive allows taxpayers to claim a credit for 30% of the cost of the system on their Federal income tax return for the current year or be carried forward to the succeeding taxable year.This program was scheduled to expire in 2015, but was extended for solar technologies systems until 2022, with a gradual reduction to 22%. Credits for other renewable energy technologies are to expire on December 31, 2016.
For the commercial and industrial solar and wind producers, the Federal government also offers an Energy Investment Tax Credit (“ITC”). This credit covers solar, wind and geothermal systems. Currently, the ITC for electricity or heat producing solar systems is 30%, which will be reduced to 10% by 2022.
While the Federal and state governments work on promoting renewable energy through the various incentive programs, the Department of Energy is working on making renewable energy more affordable. The DOE SunShot program aims to lower the solar energy cost to $1 per watt by 2020. Since its inception in 2011, the program is within 30% of the targeted goal.
In addition to the various Federal programs, every state in the Nation has multiple solar energy incentive programs. California, one of the original promoters of solar energy, has 58 incentive programs, followed by Colorado (28), Texas (28) and Maryland (23). States have been adopting their own renewable energy standards and 29 states, the District of Columbia, and three territories have adopted Renewable Portfolio Standards (“RPS”). Additionally, eight states and one territory have adopted voluntary renewable energy standards or targets.
These standards require utilities to generate electricity using renewable energy methods. Since every state’s program works differently, a system of Renewable Energy Certificates (“REC”) and Solar Renewable Energy Certificates (“SREC”) was created. The producer receives a certificate for each unit of renewable energy generated. Since energy supply companies are required to redeem certificates based on their obligation, a market exists where these credits can be bought or sold.
The growth of the renewable energy industry relies on lenders and investors to fuel their growth and development. Lending to renewable energy companies, especially to solar, has become a distinct and growing asset class.
The renewable energy industry in the United States has reached a critical mass and regardless of temporary setbacks resulting from low oil prices and its effect on the stock market, will continue to grow and evolve. Common sense tells us that the drop in oil prices is temporary, as is the case with any finite resource. Renewable energy is becoming increasingly affordable and the infrastructure to distribute and store it keeps getting better. A market that was historically supported by various government grants and loans, is increasingly able to obtain capital from the investors and lending institutions.
To be perfectly clear, as with any emerging industry, there are still many risks to the lenders.As noted above, the renewable energy industry still relies heavily on government incentives.As with any emerging industry, it is more prone to equipment and process obsolescence issues. However, some of the largest companies including Berkshire Hathaway, Walmart, Google, Amazon and Facebook are heavily committed to the renewables.
Asset based lenders should be thinking about how their existing clients in the fossil burning sector be affected by these changes and how they can benefit from the rapid growth of the renewable energy sector. There will certainly be a growing need to finance new projects, new equipment and infrastructure. This will also affect traditional energy companies as they will be required to become cleaner and more efficient.
Asset based lenders should be prepared to address issues that their existing borrowers in the energy and supporting sectors will face in the very near future and be prepared for the exciting opportunities that the ever increasing demand for electricity, combined with the brand new renewable energy sector will bring.