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Despite fears of retrenchment, renewable power projects may benefit from the deepening global credit crunch. Underpinned by a growing number of government supports and mandates--as well as long-term power purchase agreements from stable regulated electric utilities--wind, solar, and other renewable projects seem to be enjoying continuing access to capital even as it dries up for other industries. “There is a flight to quality in this sector,” said Jonathan Johns, Ernst & Young renewable energy head. Banks and investors see renewable power as a good investment with a guaranteed cash flow. In a December 13 report, Credit Crunch and Renewables: Renewable Energy Indices, which surveyed lenders, Ernst & Young found that 85 percent believe the credit crunch is unlikely to impede financing for “good” renewable energy projects. Fifteen percent responded that it actually would improve financing prospects for the industry. However, the report found that some technologies--like offshore wind, biomass, and geothermal--may have more difficulty than onshore wind and solar projects. Due to risk, the report noted that geothermal increasingly has turned to public markets to finance new exploration. Biomass remains vulnerable to concerns about feedstock price vulnerability. All is not well, however, particularly for alternative fuels. The credit crunch has hit the biofuels industry in a major way, according to Ernst & Young. Over the past couple quarters, increasingly unfavorable economics have forced the industry to scrub many expansion projects. Even wind and solar projects, while less risky, are unlikely to remain wholly unaffected by the tightening credit picture, said Johns in presenting the report. “There will be hesitation and the speed of deal conclusion will slow,” he predicted. Some companies are likely to hold off on projects altogether until the economic outlook improves. Renewable energy projects are beginning to hold debt for a longer period of time before selling it off in investment markets. Consequently, they are seeking to include more guards against financial risk in their lending practices to the industry. In addition, Ernst & Young found that the price of credit is likely to rise and that the volume of money available could tighten in the coming year. Another squeeze is that the cost of generating equipment, like wind turbines, may climb as more nations turn to renewable energy. U.S. companies that must by turbines and other equipment made abroad with the sinking dollar can expect rising costs. “What we see is countries competing for renewable resources,” said Johns, amid a scarcity of equipment manufacturing capacity. Australia, for instance, has ratified the Kyoto Protocol, bolstering demand for renewable energy. India has proposed $2.6 billion in renewable energy investments over the next five years. Europe is accelerating investment in renewable energy too, as is China. This worldwide view from Ernst & Young seems to hold true in California, where projects backed by well-established companies remain on track, though costs are rising and in isolated instances creditors have tightened the reins. “Lenders are all looking at their businesses in a more rigorous way,” said one renewable energy developer who spoke to Circuit only on the condition of anonymity. In the past three months, the source continued, lenders have backed away or had to be reassured to obtain equipment purchase financing. . Another observer who follows the utility contracting process said that while there has been no major fall out of financing, concerns are beginning to grow in some negotiations over how to allocate financial risk. Despite such experience, the wind industry in California has seen no real slowdown with the onset of the credit crunch, according to Nancy Rader, California Wind Energy Association executive director. The industry has seen substantial investment in the past couple years and seems to have a financial “cushion” as the year closes. Credit has not been an issue for “viable” projects, concurred V. John White, Center for Energy Efficiency and Renewable Technology executive director. “Cash flow is a positive factor, and the likelihood of climate and fuel price risk gives these projects lots of upside.” Yet, according to White, some of the projects that state utilities have contracted to provide renewable power are unlikely to obtain needed financing. “I think that has to do more with the experience and risk of the developers, rather than the tightness of credit markets.” One major concern for the industry is whether Congress will renew the wind production tax credit, which expires at the end of 2008, according to Michael Zimmer, a partner with Thompson Hine in the nation’s capital, who specializes in renewable and alternative energy law. He said a proposed four-year extension of the credit in energy legislation passed by the House would help stabilize the wind power market and encourage continuing project financing. However, it subsequently was defeated in the Senate, so its fate remains uncertain. Extending the credit also would encourage investment in turbine manufacturing capacity in the United States, said Marcel Hawiger, The Utility Reform Network staff attorney. Uncertainty about how long the credit will be in place has prevented companies from investing in turbine making plants in the U.S., he said, leaving project developers in the position of having to buy more expensive equipment from abroad. As a result, said Hawiger, California “ratepayers are paying more” for power. Extending federal solar tax credits is similarly important, the attorney added.

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