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 sucient 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 eciency, 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 signicant increase in project nancings for power
plants. PURPA was passed to address c oncerns about
natural resource shorta ges, promote the ecient 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
diversication 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. BT ., B C C: F F F-
R C 2017, at 3 (2017), available at https://www.bank-
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 codied 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 signicant 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 diculties 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
• High up-front capital requirements of alternative
energy sou rces and energy eciency tec hnologies
require investors to think dierently 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 insucient 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
suciently 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 benet 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 ecient, or more