These overviews give an overview of a key topic and will also be the default area for news articles/updates.
Investing in clean energy and low-carbon innovation sectors has been fraught with danger. While the broader market through the S&P 500 has rallied over 30% since 2010, most clean tech exchange traded funds have lost value (e.g. solar ETF TAN has lost 93% of its value since its debut; the diversified clean-tech ETF PBW has lost 73% of its value). As a caveat, names with decades-long presences in the low-carbon and clean-tech spaces (e.g. Johnson Controls, JCI) have been less volatile and performed relatively well.
In contrast, investing in projects as opposed to public equities offers a much better risk-return profile. For example, a solar Power Purchase Agreement is based on a long-term utility purchase agreement can deliver a reliable, steady stream of revenue as well as tax benefits. Case in point: Bloomberg: Solar 15% returns lure investments from Google to Buffett.
However, renewable (and energy efficiency) project financing is restricted to private equity and has so far been closed to retail investors – in short, anyone who does not have at least $1 M in net worth, $200,000 income if filing singly, or $300,000 income if filing jointly.* Moreover, many pension funds and other investment funds are restricted to public equity.
Several different mechanisms for opening up projects are beginning to get traction: Master Limited Partnership, Renewable Real Estate Energy Investment Trust (REIT) funds, and crowdfunding (not discussed here, see Solar Mosaic).
Creating a vehicle that could unlock public capital markets could solve several problems: 1) a “low carbon capital overhang”, referring to the inaccessibility of quality low carbon investment opportunities to investors and funds, 2) the need for capital among project developers because of the complexity and cost of ‘tax equity’ (see the 30% Federal Investment Tax Credit) and 3) increased liquidity through public markets and exchanges, which should bring down the cost of capital and attract more investors.
Richard Kaufman, senior adviser the the Secretary of U.S. DOE, think that retail investment would also deliver a number of peripheral benefits: 1) standardization of the contracting process, 2) force down project costs, 3) greater aggregation of small projects, and 4) faster scaling.
Others are doubtful of the immediate impact of REITs/MLPs. The investment tax credit still delivers 30% of a project’s value and it is unclear and most likely impossible for project developers under a REIT/MLP to claim that tax credit. However, as the market grows and the tax credit is phased out, REIT/MLPs will become increasingly important.
REITs are required to pay 90 percent of their taxable income to shareholders, and MLPs are similar. According to Bloomberg, the “common denominator” for all REITs is that all are tangible assets that generate steady income over a long period of time; PV/CSP solar power may satisfy this criteria, but this approval must come from the Department of Treasury. According to Bloomberg, NYSE REITs collectively paid out $22 B in dividends in 2011. As a comparison, Bloomberg New Energy Finance projects that U.S. solar developers will need $6.9 B to meet PV project development through 2020.
1/21/2013: Bloomberg: Solar Costs to Fall as REITs Emerge as Source of Funding : “Renewable Energy Trust Capital, Inc., led by a former Moody’s Investors Service CEO, has asked tax officials to classify solar farms as the type of “real property” that may be included in real estate investment trusts. A ruling is imminent…”
“On Dec. 12 , at least 26 members of Congress signed on to a letter to President Obama noting that ‘minor changes to the federal tax code could provide the renewable-energy industry access to large pools of low-cost capital’. ”
“However, ‘it’s going to be touch to compete against investors that are utilizing tax incentives…'”