With major U.S. corporations holding tens of billions of dollars in cash on their balance sheets, a financing tool for renewable energy projects that lost its luster during the credit crunch at the end of 2008 is staging a comeback.
Specialized "tax equity" deals that had been a major source of financing for the wind and solar industries are getting a fresh look by companies outside the financial sector, such as Google.
Congress is expected to allow a critical Treasury grant program to expire at the end of this year. Cash-rich corporations could pick up some of that slack, analysts said, and in doing so could pry open financing opportunities for the renewable energy sector.
"There's nothing that really bars Caterpillar, Exxon or anyone else from making tax equity investments in clean energy," said Ethan Zindler, a policy analyst at Bloomberg New Energy Finance.
Under the tax equity structure, large lending institutions finance projects in exchange for partial ownership of the company and access to tax credits. Tax credits tied to profits and energy demand were seen as a drawback during the recession, and tax equity deals came screeching to a halt. On top of that, banks lost their appetites for the kind of risk that dampens prospects for mid-sized renewable energy projects that might not be supported by long-term contracts or are beset with the prospect of tight profit margins.
In June, Google invested $280 million in SolarCity Corp. to help fund the installation of rooftop solar systems. The company will collect fees for household energy use. That was Google's seventh green investment, bringing the total to nearly $700 million, and most of those investments were reportedly financed through tax-equity deals.
This spring, Google invested about $170 million in the construction of BrightSource Energy Inc.'s Ivanpah utility-scale solar project in the Mojave Desert. It also spent about $40 million to strengthen the financing for a couple of North Dakota wind farms owned by NextEra Energy Resources.
Google takes the lead
Beyond that, Google is sinking its resources into transmission lines that could enable offshore wind farms along the Atlantic Coast.
The technology giant has about $10 billion in cash on hand. It's roughly in the middle of the pack on a list of the top 50 corporations in the Standard & Poor's 500 with significant cash savings. This week, Google signaled that its biggest financial plays are likely to fit more squarely in the technology sector, rather than the energy sector.
Google has a mountain of cash on hand. On Monday, Google said it would buy the cellular telephone business Motorola Mobility Holdings for $40 a share in cash, or $12.5 billion.
Still, according to Zindler and media reports, Google executives now see tax-equity financing as a go-to tool for financing energy projects that further its goal of cutting carbon emissions.
Banks are still doing some deals. In a June report on the North American wind market, analysts at New Energy Finance concluded that "the tax equity and debt finance markets remain stable."
Tax equity financiers are seeing yields of about 8 percent, which is below the double-digit yields some financiers had seen in the past.
"Given the current expectations for the economy and the current low yields on Treasury bonds, if you can yield 6 or 9 percent for a wind project, that might just clear the hurdle," Zindler said.
The Bipartisan Policy Center (BPC), a Washington-based think tank, has suggested that financing for renewable energy projects is changing. In large part, that's because of the uncertainty around the cornerstone government stimulus program for financing renewable energy projects.
Wal-Mart and GE take the plunge
Under the Section 1603 program, project developers eligible for an investment tax credit can instead apply for a cash grant equal to a certain percentage of project costs. The purpose was to help companies overcome weakened interest among major financial institutions in cutting tax-equity deals pegged to uncertain profits during the recession.
"The recent recession exposed the limits of tax equity providers' capacity to provide sustained funding," BPC analysts said in a report in the spring.
Overall tax equity financing for renewable energy projects fell from $6.1 billion in 2007 to $3.4 billion in 2008 to $1.2 billion in 2009, according to the report.
"The investor pool for these types of projects has historically been relatively small," it continued. "Moreover, the recent recession has reduced this pool even further."
Corporate cash could scramble the way big energy projects are financed, and analysts said it's almost certain that the biggest clean energy investors will spend more in this area.
Wal-Mart Stores Inc., for example, has $9 billion in cash. The Bentonville, Ark.-based retail giant is fast becoming one of the biggest consumers of renewable energy.
General Electric Co. has $91 billion in cash. While most of that is spoken for as reserves tied to GE Capital, the conglomerate's corporate finance company, about $15 billion of it is actual rainy-day cash. GE could join other companies in repurchasing stocks to shore up its share price or for major acquisitions.
Others with cash hesitate
GE has spent a hefty sum on expanding gas and wind turbine manufacturing capacity as it has shed entertainment assets that aren't seen as core to its business.
"Since about this time last year, they've spent a healthy amount on acquisitions," said Daniel Holland, an equities analyst with Morningstar.
GE and other cash-rich companies might view this as a good opportunity to build factories in emerging markets where higher demand will yield financial returns, Holland said. But he also said GE is not signaling a desire to abandon significant projects in the United States.
GE has hired about 600 at a research center in Michigan and opened an advanced battery plant in New York. It also recently announced a $40 million investment in California-based company eSolar, which produces large-scale combined-cycle solar and natural gas plants.
Oil and gas companies are also keeping a lot of cash on hand, though that could go quickly as oil and gas prices fluctuate. Chevron has $13 billion, and Exxon Mobil Corp. has $8 billion.
Political turmoil about raising the debt ceiling in the United States and serious debt troubles in Europe are adding to a sense among some company executives that spending less and saving remains the smart thing. Careful acquisitions and some reticence to act will be the result, according to one analyst.
"Uncertainty is always bad," said Adam Sieminski, an energy economist at Deutsche Bank. "Generally, that tends to result in a delay in decisionmaking."