Can solar and wind take a page from oil and gas?

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While the solar and wind industries have grown dramatically over the past few decades, they are still not funded to the level that will be required to tackle the problem of Climate Change.

Specifically, while Bloomberg New Energy Finance estimates that $226 billion was invested globally in solar and wind in 2016, it will take twice that level of investment to keep displace enough fossil fuel generation to provide a path to keep global temperatures below 2 degrees Celsius.

The desperate need for finance to make up the difference is the subject of a new report by Columbia University’s Center on Global Energy Policy, which suggests that the oil and gas industry is a prime place to look for funding strategies.

Financing Solar and Wind Power: Lessons from Oil and Gas notes that despite recent financial innovations such as securitization solar and wind developers often struggle to obtain adequate financing on competitive terms, while the global oil and gas industry was investing around $900 billion annually at the top of the most recent commodity cycle in 2013.

The report particularly notes that institutional investors such as pension funds, endowments, insurance companies, sovereign wealth funds and foundations have been “largely missing from the mix”. Such investors manage $79 million in wealth, and yet pension funds have allocated only 0.1% of their assets to renewable energy infrastructure, and other groups are also vastly under-represented.

“Solar and wind industries would benefit from finding ways to tap into the deep financing resources of institutional investors,” notes the report. “To do this, these industries need to develop a broader array of financing tools that respond to the risk/return requirements of institutional investors.”

Columbia has no shortage of ideas for how to tap this wealth and focuses much of its work on the pre-construction stage, where it notes that the capital crunch is most acute. The report notes that oil and gas companies have built novel financing mechanisms to allow them to use resources – in this case, oil and gas reserves – as assets even before any steel goes into the ground.

The report suggests the potential for “renewable resource based finance”, which would be similar to the reserve-based finance used by the oil and gas industry for exploration and production. Along a similar vein, the report suggests the potential for “electricity production payments”, which are similar to volumetric production payments wherein a capital provider finances a project in exchange for the right to receive oil and gas, or proceeds from their sale, in the future.

Additionally, it suggests “capacity payment finance” – financing renewable energy projects upon future capacity payments, although the report notes that there are still issues with assessing capacity value of variable renewable energy sources such as wind and solar.

One key barrier identified by the report is the weakness of balance sheets for developers as compared to oil and gas.

“Solar and wind developers do not have the balance sheet capacity to take on large-scale projects around the world,” reads the report. “Consequently, solar and wind remain challenged by the reluctance of external capital providers to take project development risk.”

Columbia suggests that one way to tackle this is for established players in the power sector to get into renewable energy. Companies like NextEra, NRG and Southern Company are already paving the way here, and yet independent renewable energy developers still comprise much of the industry.

The report suggests that one way for these smaller players to maximize their power would be through developer partnerships to help spread the risk.

Policy remains a barrier as well. The report notes that while the oil and gas industry has made good use of Master Limited Partnerships (MLPs), they have also retained the sole right to use such structures. Efforts to give renewable energy the right to use MLPs for finance were stymied in Congress in 2013 and 2015. It also observes that while yieldcos provide some of the benefits of MLPs, that they do not offer as favorable of tax treatment.

Overall, Columbia notes that its approach is not to give final answers, but to open up a dialogue about new financing structures and also observes that there are still barriers to the recommendations that it makes.