New Push to Securitize Renewable-Power Pacts

THE WALL STREET JOURNAL. The Obama administration and some on Wall Street are laying the groundwork for bundling renewable-power contracts into securities, part of an effort to make it cheaper to finance alternative energy.

The initiative aims to extend to renewable energy a financial tool already used in the mortgage and credit-card industries. The securities could be sold to pension funds or other investors, who would receive a return funded by payments from users of electricity where solar panels or other equipment is installed.

An early focus is the military, which is preparing to spend billions of dollars on electricity from solar, wind and other renewable sources during the next decade. The military services can enter into electricity-purchase agreements without new appropriations from Congress.

Administration officials say they are approaching the prospect with caution, aware that mortgage-backed securities played a key role in the 2008 financial crisis and the ensuing recession. But officials view the financing structure as a possible avenue to lower the cost of buying renewable energy.

“We are very aware of the benefits of securitization from a general standpoint. Obviously, that’s been shown in other industries,” said John Lushetsky, director of the U.S. Army’s Energy Initiatives Task Force.

Hurdles to securitizing renewable-power deals remain, both for government and private contracts. The idea of securitization is to spread risk across hundreds of contracts and ensure a steady return for investors. That is much easier to do with home mortgages than it is with solar- or wind-power contracts, due largely to the relative immaturity and small size of renewable-energy markets. Also, doing a deal with the government might be trickier given the possibility that future power shifts in Washington bring different priorities concerning military spending.
While officials said there are no immediate plans to securitize government contracts, the U.S. departments of Defense and Energy are exploring the idea and taking steps toward making it more attractive to investors, including standardizing the terms of power-purchase contracts.

The actions fit with a broader strategy by the Obama administration to use executive authority to advance policy goals. Congress soured on government help for renewable-energy projects after the 2011 bankruptcy of U.S.-backed Solyndra LLC, and big-ticket spending programs have expired.

The Army is preparing to buy up to $7 billion of energy from projects that private developers build and finance, part of a goal to add 1,000 megawatts of renewable-electricity capacity by 2025.

The Navy wants to add an equal amount of capacity. In October, it started buying power from its largest solar array so far—a 13.8-megawatt project near its air weapons station in China Lake, Calif. SunPower Corp. built the project, which is tied to a 20-year power-purchase agreement. The Navy expects the project will save money because the agreed-upon price for the solar power will rise more slowly than market electricity rates.

For the military, securitization potentially “expands the ability to raise more dollars to get more projects done sooner, which was really their goal,” said Jeffrey Holzschuh, who is chairman of the institutional securities business at Morgan Stanley, and has worked with the government on financing energy projects.

Tom Hicks, the Navy’s deputy assistant secretary for energy, said the Navy wants to “take the fear out” of doing a large-scale deal with the government. For instance, he said, contracts could be arranged to compensate investors if a future administration decides to close a naval base.

Solar- and wind-power developers generally raise money for new projects through private deals with banks, insurance companies or corporations. But they are eager to tap public markets, where the pool of investors would expand to include pension funds or individual investors.

Wall Street and Washington are looking at other ways to cut the cost of financing renewable energy. Some in Congress have proposed changes that would provide favorable tax treatment and the ability to sell ownership shares publicly. One option, a real-estate investment trust, could be available for renewable-energy projects if the Internal Revenue Service allows them to qualify. Another, a master limited partnership, won’t be available unless Congress passes new legislation.

Nat Kreamer, chief executive of solar financier Clean Power Finance, said access to large new pools of investment would drive down costs associated with raising capital, cut solar development costs and allow the U.S. solar market to expand faster. “Very capable” private institutions are pursuing securitization, he said. “It could happen this year.”

Andrew Davidson, president of a risk analytics firm, cautioned that securitization of new assets is likely to be greeted with skepticism after the troubles with mortgage-backed securities. “It’s a little harder to do these now,” he said.

Bankers say a renewable-energy security would have to be considered fairly low-risk in order to earn a high mark from ratings firms and attract large, conservative investors like pension funds. The terms of each of the contracts involved also would need to be relatively similar so that investors could make an educated guess about the group’s overall risk.