Navigant Research Blog

2013 Shapes Up as a Big Year for PACE Financing

— March 15, 2013

The last few years have been up and down for Property Assessed Clean Energy (PACE) financing, which allows building owners to finance energy efficiency and renewable energy projects through an assessment on their property taxes.  Immediately following its inception in 2008, many states allowed PACE financing and dozens of jurisdictions launched programs.  In 2010, however, the announcement that the Federal Housing Finance Agency (which administers Fannie Mae and Freddie Mac) that it would not back any mortgage where PACE financing with a priority lien was placed on the underlying property halted most residential PACE programs and dragged many commercial programs down with it.  Although the FHFA is seeking public comment on its new rules, the residential PACE market has not rebounded, and the commercial sector remains a trickle.

This may change in 2013, primarily thanks to new market entrants that are helping municipal governments offer PACE programs.  The market continues to be limited by the considerable up-front effort required on the part of municipalities.  In a time when city budgets are shrinking, the professional resources required to get a PACE financing program off the ground can be hard to come by.

Move Along Please

In the last few years, however, a number of companies dedicated to PACE financing have emerged that aim to facilitate PACE financing by removing the administrative red tape (as we discussed in Pike Research’s recent webinar, Financing Energy Efficiency, which can be replayed here).  For example, Ygrene Energy Fund recently launched Clean Energy Sacramento, a $100 million PACE financing program in Sacramento, and is in the process of launching similar programs in Georgia and FloridaFigtree Energy Financing, which is leading a similar project in San Diego, is eligible to administer similar programs in dozens of other jurisdictions throughout California.  And Renewable Funding administers commercial and residential PACE programs around the United States (as well as a similar program in Melbourne, Australia), including the high-profile GreenFinanceSF PACE program.  Although each of these firms has developed its own business model, they typically make money through a combination of per-building fees and through interest on the bonds issued by the PACE financier.

In addition to the reduced administrative burden on municipalities, “fully-funded” models such as Ygrene’s offer a number of other potential benefits.  One is the accelerated pace of Ygrene’s model, which allows the municipality to release funds on a rolling basis, rather than waiting to pool enough projects before issuing a public bond.

“Many PACE models require property owners to arrange their own funding – a complicated and time-consuming process,” said Stacey Lawson, CEO of Ygrene Energy Fund, when I spoke with her recently.  In addition, building owners face less risk in terms of interest rates under the fully-funded model, as the interest rates are known at the time that a PACE project is signed; in contrast, a building owner may not know the actual interest rate until months after agreeing to participate in a bond issuance, posing long-term risk.

Although the potential for PACE financing is easily in the billions of dollars per year, only about $100 million worth of projects was financed in 2012.  The backlog of projects at many PACE financing outfits suggests that PACE financing could easily hit $250 million in 2013, which would be a major increase over 2012.  Once the concept has been further tested and proven, expect to see a growing number of municipalities launching similar programs and relying on specialty PACE financiers to design and administer their programs.

 

With New Energy Fund, Obama Adds Fuel to Cleantech Engine

— March 15, 2013

Speaking today at Argonne National Laboratory, outside Chicago, President Obama laid out the details of his “Energy Security Trust,” a proposal to direct $2 billion in federal revenue from oil and gas leases to R&D for clean transportation technologies.  Following up on the pledge made in his State of the Union Address, to confront global climate change, the plan unveiled today should add momentum to a cleantech market surge that’s already underway.

In that sense, the new funding will mean that the federal government, under a Democratic administration, is catching up to broader social and economic shifts.

Eighty-four percent of Americans now understand that carbon emissions from human activity are “probably” or “definitely” causing global climate change, according to a February survey by Duke University.  Two-thirds support limitations on greenhouse gas emissions from power plants, factories and cars, and government-imposed requirements for utilities to generate more power from low-carbon sources.  The public has long since moved beyond denial on climate change and the future of the world’s energy system, and is well into acceptance that something – even if it involves raising taxes and putting a price, in some form, on carbon – must be done about it.

Obama’s plan is relatively modest – the congressional Budget Office estimates that proceeds from federal oil and gas leases on public lands will total $150 billion between 2012 and 2022, so the president is talking about shifting 1.3% of that money to advanced vehicles.  But the Energy Security Trust reflects a clearer understanding that market forces and public attitudes are quickly tipping the balance away from fossil fuels and toward renewable and other forms of low-carbon energy, including the natural gas boom that is helping to power an accelerating economy.

Boardroom Realization

Not everyone in Washington, of course, agrees.  But the market itself is moving ahead of policymakers.

  • Driven by falling turbine prices and the rush to take advantage of production tax credits (which were set to expire but were renewed by Congress in early January), wind energy was the fastest growing source of new electricity generation in the United States in 2012.  Nationwide wind generating capacity increased by 13.1 gigawatts last year – up 28 percent from 2011, according to the American Wind Energy Association.
  • The solar industry also enjoyed a record year, as new installations of solar photovoltaic systems grew 76% over 2011, to total 3.3 GW in 2012, with an estimated market value of $11.5 billion, according to the Solar Energy Industries Association.
  • According to our forthcoming Market Data report on microgrids, revenue from worldwide deployments of microgrids – many of them harnessing distributed renewable energy resources – will reach $8.3 billion in 2013, increasing to more than $40 billion annually by 2020. That is sharply higher than previous market forecasts.
  • The move away from coal and nuclear power continues to gain momentum, as power generators in the Midwest, like Dominion, shutter aging reactors and sell off coal plants.

Most of these trends will continue to unfold regardless of government intervention. Indeed, there are signals that the mental shift away from a carbon-based economy is happening even in the boardrooms of the oil majors.  In a new report from its Scenarios Group, Royal Dutch Shell – which exited the solar sector in 2009, saying it would focus on biopower instead – acknowledges that solar power could become the world’s biggest source of energy by the second half of the 21st century.

“These scenarios show how the choices made by governments, businesses and individuals in the next few years will have a major impact on the way the future unfolds,” commented Shell CEO Peter Voser in a statement on the new report.  What Obama’s new smart-transportation plan will do is add Washington’s imprimatur to a cleantech economy already poised for growth.

 

Fisker, Like Other EV Makers, Loses Its Founder

— March 14, 2013

Henrik Fisker, the co-founder of EV maker Fisker Automotive, has resigned his post as executive chairman.  The move is not uncommon, especially in the plug-in electric vehicle (PEV) industry.  Fisker joins Martin Eberhard of Tesla, Kevin Czinger of CODA, and Shai Agassi of Better Place as founders of next-generation automakers who are no longer part of the company they created.  The departure of the founder is often a necessary function of the company’s growth, as visionary perspectives of the market and the product must eventually give way to more market-driven and realistic outlooks.  Little information concerning the specific differences Henrik Fisker had with management is available; however, the circumstances that led to the split are well documented.

Fisker Automotive was founded in 2007 by Fisker and Bernhard Koehler in association with Quantum Technologies, which designed the plug-in hybrid (PHEV) drivetrain for the company’s first vehicle, the Karma.  The company’s goal was to bring the Karma to market by late 2009.  Fisker got a federal loan from the Advanced Technologies Vehicle Manufacturing (ATVM) loan program in 2009 to develop the company’s second vehicle, a lower-cost PHEV, the Atlantic.

The company’s product strategy and business model seemed sound.  Like Tesla, Fisker aimed to dilute the premium price of electric vehicles into the costs of a high class luxury vehicle.  The Karma developed a cult-like following, high profile investors, like Leonardo DiCaprio, and drivers, including Justin Bieber.  Where things went wrong for Fisker was the company’s inability to execute on its ambitious plans, plus a string of misfortune.

The company launched into the teeth of the financial crash and the ensuing recession.  After drawing $193 million on the ATVM loan, Fisker’s credit line froze after it failed to meet specific milestones set as conditions of the loan.  Nevertheless, Fisker powered through and began deliveries of the first Karmas to customers in July of 2011, missing its launch date by a 1.5 years.  Unfortunately the loan and the late start were not the end of the company’s problems.

Bad Karma

Fisker announced a recall at the end of 2011 because of problems concerning the vehicle’s battery pack supplied by A123.  Then, two Karmas mysteriously caught fire in mid-2012 – one while sitting in a garage, the other while parked in a grocery store parking lot.  The fires sparked the second recall to replace the low-temperature cooling fan that caused the fires.  Then the company lost over 300 vehicles to hurricane Sandy in November 2012, not long before its battery supplier, A123, declared bankruptcy.  Production of the Karma was halted indefinitely.

Unfortunately for Henrik Fisker, the company’s troubles are a reflection of the state of affairs in the PEV industry: it’s all about the battery.   Now, like A123, Fisker will most likely become a Chinese subsidiary.  The car and the business model aren’t likely to change; if anything the Karma and possibly the Atlantic could be in store for some much needed good news concerning production.  The luster and appeal of the vehicle, however, could fade along with the company’s founder and champion.

 

Garbage Looks For Its Green Moment

— March 14, 2013

Cheap, abundant, and replenishable – so long as societies continue to consume – garbage (or, as the industry refers to it, municipal solid waste, or MSW), is a rising star in the fast-emerging advanced biofuels landscape.  The MSW we toss into landfills by the hundreds of millions of tons each year is laced with carbon well-suited for conversion to power, heat, and fuels.

While generating power from trash is well-established in the European Union, in the United States and, increasingly, emerging markets like China and Brazil, conversion to liquid fuels is currently at the cusp of early commercialization.  Projects in development today aim to produce the spectrum of alternative fuels, but among them renewable jet fuel remains the biggest prize.  All told, Pike Research estimates the theoretical potential for biofuels production from global waste to be around 35 billion gallons per year today.  This would more than double current production of biofuels worldwide while extracting untapped value from nearly 1.5 billion tons of waste.

Despite this potential, just 12 named projects are in the pipeline today, worth an estimated 200 million gallons of new production capacity.  While high upfront capital costs and structural market barriers are partly to blame, the staggering complexity inherent in MSW-to-biofuel project development described by presenters at the Orlando conference was a revelation.

Anatomy of a Deal

Solena Fuels, a company developing the GreenSky London project with British Airways to turn trash into sustainable aviation fuel at Heathrow Airport in London, provides an illustrative example.  As the company’s President and CEO, Robert Do, outlined in his presentation at the MSW-to-Biofuels conference in Orlando the mash-up of diverse strategic interests on the deal meant creating an entirely new contract that amassed nearly $1 million in legal fees and took 1.5 years to finalize.

To reduce feedstock risk, Solena negotiated separate supply contracts with three waste processors, allowing it to hedge against price and supply continuity risk.  While Solena brings its proprietary plasma gasification platform to the 550,000 ton per year facility, it has partnered with three technology partners to provide everything from controls and instrumentation to expertise and equipment for Fischer-Tropsch synthesis of the syngas produced in Solena’s reactors.  On the back end, GE will provide equipment to produce 20 MW of power to run the plant while exporting an additional 20 MW to the U.K. grid.  Meanwhile, the project includes off-take contracts for 16 million gallons of jet fuel and diesel to British Airways as well as naphtha, composed of a mixture of hydrocarbons similar to high-octane gasoline.

Backed by three financing partners – principally British Airways and Barclays Capital – the project is expected to come online in 2015.  More than 10 separate companies are directly involved in the project.

If successful, the GreenSky London project could be a watershed moment for advanced biorefinery project development, providing a blueprint for galvanizing strategic interests and managing risk in order to capitalize on abundant waste feedstock opportunities worldwide.

 

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