On August 23, the Baker-Polito Administration awarded $455,000 in grants to seven early-stage researchers and companies developing clean energy technologies as part of the Massachusetts Clean Energy Center’s (MassCEC) Catalyst program.
This year is proving to be the year of investing in innovative energy technology. Mercom Capital Group reports that in the first half of 2017, over $1 billion in venture capital and private equity funding has been invested in battery storage, smart grid and energy efficiency companies worldwide, exceeding the first-half funding benchmarks in 2014, 2015, and 2016.
Mercom Capital Group, a global clean energy communications and consulting firm, surveyed the combined venture capital funding (including private equity and corporate venture capital) and mergers & acquisitions across 89 companies in three separate sectors – Battery Storage, Smart Grid, and Energy Efficiency. Total investments in these areas amounted to $1.03 billion across the first half of 2017, a marked 25% jump from $807 million in the first half of 2016.
This month’s Washington Update offers an extensive overview of the major legislation that has recently been introduced on Capitol Hill, as well as the big takeaways from this month’s congressional hearings related to energy policy. We also examine the ramifications of President Trump’s decision to withdraw the United States from the Paris Agreement, and highlight the Department of Energy’s latest funding announcements for three research and development projects.
On June 2nd, the New York State Energy Research and Development Authority (NYSERDA) and the New York Power Authority (NYPA) issued record requests for proposals from qualified developers to build renewable energy projects that will generate 2.5 million megawatt-hours (MWh) of electricity a year. The two requests combined total the largest renewable RFP issued in any state. Alliance for Clean Energy New York estimates that the solicitation “will drive between 600 and 1,600 megawatts of new capacity depending on the mix of technologies ultimately developed.”
Seed financing is critical to entrepreneurs and emerging growth stage companies looking to jumpstart their business, yet the initial investment a business needs can often be the hardest to find. Particularly for clean energy companies building new, industry-disrupting technologies, bringing in early financing can enable start-ups to develop and test their products and designs. On Thursday, February 16, our own Kristin Gerber, an attorney in Mintz Levin’s Corporate & Securities Practice, will host an event in Cambridge, MA entitled “Overview of Seed Stage Financing Structures.” Kristin will address many questions surrounding seed financing, including how entrepreneurs can exact the most mileage out of this category of finding and how this financing can be structured.
The Obama Administration recently announced new financing for renewable energy projects through several initiatives domestically and around the globe. From committing $125 million in Overseas Private Investment Corporation (OPIC) financing for renewable energy projects in El Salvador and India to announcing seven Innovation Challenges with a goal of reducing carbon emissions, the Administration hopes to continue the global transition to zero-and-low carbon energy sources. To learn more about these new initiatives, read on!
Passage of a tax package is another possible item on Congress’ list for the lame duck session, which is discussed in a recent ML Strategies alert. Three dozen tax provisions are scheduled to expire December 31, about half of which pertain to energy provisions. Congress approved last December a $1.1 trillion omnibus appropriations and $680 billion tax extenders package and adjourned for the first session of the 114th Congress. To learn more about the tax extenders package, read on!
Last week’s “Financing Renewable Energy” tax credit conference, by Novogradac and Company, affirmed some market trends that we have seen in recent project finance deals. Perhaps most striking was the slow expansion of small and mid-market tax equity investors, compared to their counterparts upmarket. The result is that developers of projects and project portfolios under $50 million may need to look harder to find the right partner to monetize their tax credits.
Looking back even a couple of years, we saw a tax equity market that was dominated by a small handful of large players, most of whom were focused on big investments investing large amounts of capital into utility-scale projects. Today, the number of investors has increased (JPMorgan Chase reports at least 20 wind investors and 28 solar investors in 2015), as has the amount of tax equity investment (up 14% between 2014 and 2015, according to JPMorgan Chase). Our anecdotal experience, affirmed by investors and developers we have spoken with, is that the bulk of that expansion has been among large banks, insurers and Fortune 500-sized corporate investors, which have grown increasingly comfortable with the risk profile of renewable energy projects and the diligence required to evaluate a prospective investment.
A similar trend has been lagging among smaller investors. Smaller tax equity investments are not necessarily simpler to diligence, negotiate or document than large deals, and renewable energy continues to be seen as a “new” industry to many banks, insurance companies and other potential investors. Despite this friction slowing the entry of new investors into the marketplace, there are some encouraging signs. First, we see evidence of increasing cross-over from investors in other tax credit-driven spaces (new market, low income housing, etc.). Second, when they do enter the market, smaller investors are often more nimble at the investment-stage and can be better at building ongoing relationships that can ease future investor interactions (e.g., when seeking consent to refinance project debt).
These trends suggest some actionable advice for mid-market project sponsors:
- Don’t be afraid to look outside the usual pool of energy tax credit investors. Cross-over investors have existing experience with some of the same structures used in Section 45 and Section 48 investments, but there is an educational process to help them become comfortable with the diligence process and risk profile for energy projects. A willingness to work through that learning curve may open the door to new investor relationships.
- Look for opportunities to build long-term relationship that can support multiple deals. It is an unfortunate reality that doing an $8 million tax equity deal is not one tenth as complicated and costly as doing an $80 million deal. Working with an investor that can be a longer-term partner creates potential economies of scale as the parties replicate and recycle investment terms, documents and diligence standards across multiple deals.
- Consider who will be a strong partner after closing. A typical tax equity investor will have consent rights over material events in a project’s life, such as a debt refinancing. Demands for hefty consent fees, lengthy diligence reviews and other requirements can strain the relationship between a project sponsor and the tax equity investor. If the parties have a relationship that extends beyond the immediate project (see #2 above), then motivations will be better aligned at these important milestones.
Earlier this year, Massachusetts passed legislation that will require the state’s distribution utilities to purchase carbon-free electricity from hydropower and on and offshore wind farms under long-term contracts for up to 30% of the state’s electricity supply. Despite opposition from incumbent generators and large consumers over concerns that the bill would interfere with market competition, Democratic legislators found common ground with Republican Governor Charlie Baker to enact historic “clean energy” legislation that will transform the fuels used to generate the state’s power while significantly reducing its carbon-footprint. To learn more, read on!
On September 13 the U.S. Department of Energy’s Advanced Research Projects Agency-Energy (ARPA-E) announced $37 million in funding for 16 new projects as part of its new program called Integration and Optimization of Novel Ion-Conducting Solids (IONICS). The projects that make up the IONICS program transform current technologies that overcome the limitations of current battery and fuel cell products. To learn more about IONICS, read on!