Financing Large-Scale Projects

AuthorRobert Freedman, Monica Lamb, and Claire Melvin
Page 129
I. Introduction
e Deep Decarbonization Pathways Project has pro-
jected that the transformation of existing energy systems
required to achieve an 80% reduction of greenhouse
gas emissions in the United States (below 1990 levels)
by 2050 will cost about 0.8% of gross domestic product
(GDP) per year more than “business as usual ” going for-
ward (reaching $300 billion total per year in 2050). is
is only the median in a range of cost estimates, which
depend on assumptions about the level of consumption
of energy services, technology, and fossil fuel prices. e
range of projections stretches from, at the low end, a
potential savings of $90 billion per year (-0.02% of GDP)
up to, at the high end, a cost of $730 billion per year
(1.8% o f GDP).1
To put these numbers in context, based on the U.S. GDP
in 2016 of $18.62 trillion,2 the additional required capital
investment is approximately $15 billion per year. In 2015,
1. See J H. W  ., P  D D 
 U S, U.S. 2050 R, V 2: P I
 D D   U S 30 (Deep Decarbon-
ization Pathways Project & Energy and Environmental Economics, Inc.,
2015), available at
implications.pdf. Incremental energy costs included the cost of producing,
distributing, and consuming energy and assumed almost no technological
development. Estimates derive from a reference case system described in the
U.S. Department of Energy’s (DOE’s) Annual Energy Outlook. Costs depend
on assumptions about levels of consumption and prices of technology and
2. See e World Bank, Data: GDP (Current US$), https://data.worldbank.
org/indicator/NY.GDP.MKTP.CD?locations=US (last visited May 6, 2018).
Chapter 5
Financing Large-Scale Projects
by Robert Freedman, Monica Lamb, and Claire Melvin
Development and widespread implementation of carbon-reducing energy solutions at the level necessary to
signicantly reduce greenhouse gas emissions in the United States will require substantial capital investment.
However, certain obstacles continue to hold back investment in carbon-reducing energy systems at utility-
scale and consumer levels, including: (1)high up-front capital costs; (2)technology risk; (3)energy generation
variability and integration costs; (4)tax incentive limitations; (5)location restrictions for consumer investors;
(6)burdensome development and permitting time lines; and (7)inadequate transmission infrastructure. Policy
changes at the federal, state, and local levels can be used to attract increased investment to carbon-reducing
energy solutions and create a dynamic clean energy economy while reducing negative impacts on the climate
and environment. Some ways to overcome the challenges described above include: (1)tax incentives, carbon
pricing, and nancial innovation to reduce high up-front costs and attract a broader investor base; (2)nan-
cial protections to reduce risks associated with adopting new technology; (3)adaptable use of the electric grid
to address energy generation variability; (4)virtual net metering and community solar to tap into investment
from residential and commercial investors otherwise limited by the location and type of property they own or
rent; (5) streamlined permitting processes to reduce risks associated with lengthy development time lines; and
(6)investments in transmission infrastructure to best take advantage of low- or no-carbon energy resources.
is chapter provides an overview of the challenges to attracting capital to carbon-reducing energy projects
and the corresponding pathways to overcome such challenges. ese pathways will reduce investor risk and
increase investor returns, paving the way for increased investment in the carbon-reducing energy systems that
are essential to achieving the necessar y levels of decarbonization.
Page 130 Legal Pathways to Deep Decarbonization in the United States
the top 37 major private banks alone invested $111 bil-
lion in the fossil fuel industry g lobally,3 and, in the United
States, consumers borrowed $542 billion for automobile
purchases and $1.4 trillion in new mortgage debt. ese
examples illustrate that existing capital ma rkets are of a
magnitude sucient to source the needed nancing.4 But
in order to attract capital to the work of deep decarboniza-
tion, legal measures need to address t he unique issues that
have made carbon reduction projects, including renewable
energy and energy eciency, less attractive investments.
With respect to energy assets genera lly, capital markets5
have developed historically to serve cert ain types of assets
with relatively well-known risks using customary nanc-
ing structures. ese were assets based on mature tech-
nologies, t ypically with long-term, stable c ash ows.
Electric utilities largely own a nd nance their own
power-generating facilities. However, the enactment of the
Public Utility Regulatory Policies Act6 (PUR PA) in 1978
led to a signicant increase in project nancings for power
plants. PURPA was passed to address c oncerns about
natural resource shorta ges, promote the ecient use of
energy sources, and facilitate the development of alterna-
tive power generation. PURPA required electric utilities to
purchase power from “qualifying facilities,” which include
small, independent power production facilities and cogen-
eration facilities, at the cost to the utility to produce the
same amount of power, the “avoided cost.7 is require-
ment resulted in stable cash ows for independent power
producers in the market for long-term project nancing.
Access to capital led to an increa se in smaller, independent
power producers, which in turn led to the increase and
diversication of power purchasers beyond utilities, such
as private corporat ions.
PURPA attracted new investment to the power sector
and helped create a robust project nance market. is
resulted in sweeping changes to the U.S. energy industry.
Early nancing focused on the stability of long-term con-
tracted cash ow, but those early models have since evolved
as the U.S. energy sector has created robust merchant ma r-
kets to sell energy.
Until the 1990s, there was not an active capital market
for renewable energy projects. Independent power produc-
3. BT  ., B  C C: F F F-
 R C 2017, at 3 (2017), available at
4. E Z  K L, C  B N E
F, M  G: T R F P, F P 
 2-D F (2016).
5. roughout this chapter, references to the “capital markets” are intended
broadly, to include not only public equity and debt markets, but also bank
and institutional lenders.
6. Public Utility Regulatory Policies Act of 1978, Pub. L. No. 95-617, 92 Stat.
3117 (as codied in scattered sections of 7 U.S.C., 15 U.S.C., 16 U.S.C.,
42 U.S.C. & 43 U.S.C.).
7. 18 C.F.R. §§292.303-.304 (2006), issued pursuant to 16 U.S.C. §824a-3(a).
ers were busy developing electrical generation using com-
bined-cycle cogeneration technology for coal or natural
gas. Rooftop solar was ex tremely expensive, utility-scale
solar was not a signicant focus, and wind technology was
not yet viewed as commercial enough for nancing. W hile
leveraged leasing and subordinated debt tranche struc-
tures were being used by some investors, the transac tion
structures and nancial technology for modern tax equity
investors had not yet been developed.
e market that matured for fossil f uel technologies has
faced diculties in sh ifting to low-carbon alternatives. In
many cases, renewable energy invest ments did not meet
investor risk and return requirements because investors
(including banks, private equity and hedge f unds, insur-
ance companies, money managers, a nd pension plans)
prioritize opportunities that best t their risk a nd return
requirements. As explained in Section II, investments in
carbon-reducing energy projects by nancial organiza-
tions and, to some extent, residential and commercial
investors, historically, have not been prioritized for the
following reasons:
High up-front capital requirements of alternative
energy sou rces and energy eciency tec hnologies
require investors to think dierently about tradi-
tional credit metrics and have necessitated na n-
cial in novation.
New technologies are often perceived as too risk y.
e expected returns are insucient to compensate
investors for the risk of commercializing new tech-
nologies, and due diligence can be more expensive
and more time-consuming compared to more estab-
lished tec hnologies.
While less of an issue today, the variability of energy
generation from renewable sources means that energy
may not be generated at the same time it is needed.
is has required the development of innovations,
such as battery storage, to ensure that cash ows are
suciently stable to cover operating costs and pro-
vide investor returns.
Current tax credits and deductions (e.g., accelerated
depreciation) used to incentivize economic activity
in the renewable energy sector benet a limited pool
of potential equity investors, giving an advantage to
those investors with large tax liabilities.
With respect to distributed generation technolo-
gies, renewable energy projects are required to be on
the customer’s side of its electricity meter (known
as “behind the meter” insta llations, meaning that
the meter measures only net electricity use). us,
these projects may be smaller, less ecient, or more

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