Finding the money: securing capital for energy innovation.

• Author: Barrett, Michael
• Position: Conference: US and Canadian Energy Relationship

Session Chair--Selma Lussenburg

Canadian Speaker--Michael Barrett

United States Speaker--Paul Durbin

INTRODUCTION

Selma Lussenburg

MS. LUSSENBURG: First of all, I would like to thank you for being here on a Saturday morning, and we know we are the last panel before the ultimate panel and the conclusion of this Conference, and we thought that what we would do is, we would take a slightly different format for the discussion today. Rather than having PowerPoint slides and someone standing at the podium giving a presentation, we thought it might be better to have a dialogue here and talk about some of the issues in the area of financing, renewable energy, and clean technology.

I am Selma Lussenburg. (1) To my left, is Michael Barrett. (2) Michael is a partner at Bennett Jones (3) law firm in Toronto. He specializes in private corporate transactions and energy development. He has a renewable power development practice and he has worked on a large number of renewable power projects. He is very familiar with the Canadian landscape on renewable power. To my right is Paul Durbin. (4) He is Senior Counsel with the law firm of Miller Canfield. (5) Interestingly, he seems to commute between Chicago and New York-not exactly a suburb-and he is also involved in financing capital projects, and he ventures in the renewable energy sector. He does a lot of public and private project finance work, and he has worked on a significant number of renewable energy projects throughout the United States.

I was also going to say a little something about the Ontario Capital Growth Corporation, (6) where I serve as chair of the organization. A number of people have asked what it does and it is relevant to what we are discussing today, which is providing financing, but it is very much niche financing. It is an Ontario deposit agency. It has a fund to funds. It has two million dollars and it partners with people like the Toronto Dominion Bank, (7) Manulife Financial, (8) and large public pension plans to put money into a fund. (9) That fund, in turn, invests in clean technology, renewable energy, and tries to build out the Ontario footprint, if you will, in terms of the economy. (10)

The organization has a second initiative, which is called the Ontario Emerging Technologies Fund. (11) We have $205 million and, in essence, what we provide is venture or seed capital to companies which are supporting innovation or have new innovative technologies in certain defined sectors of the Ontario economy. (12)

Again, these sectors are clean technology, digital media, and certain health technologies, and we provide the financing. We follow the market. We have a concept where we only co-invest with other private sector or venture capitalists, and we allow them to, in fact, validate the market or the opportunity, and then we follow along.

And if anyone has clients that are looking for funding in those sectors, please feel free to speak to me or contact me sometime by e-mail. I would be happy to put you in touch with the right people.

Our topic today is financing. I am going to ask each of our speakers to discuss the primary sources of investment capital for renewable energy, projects in their respective countries, and what the funding sources are for renewable power projects and for clean technology companies.

So perhaps I will start this time with Michael and then I will pass it over to Paul.

PANELIST DIALOGUE

Selma Lussenburg

Michael Barrett

Paul Durbin

MR. BARRETT: Thank you, Selma. Good morning, everybody.

On the renewable power side for funding purposes, you have a pretty traditional model where companies look to get twenty percent of their capital source through the equity markets and roughly eighty percent of their capital source through the debt markets. (13)

On the equity side, the sources there tend to be either strategic or financial players. On the strategic side, a lot of the power utilities themselves are becoming quite active in the renewable space for lots of reasons. (14) They see the returns. They also see the profile of those types of projects help in terms of the overall company profile. There is a very active set of equity investors in Canada. (15)

On the financial side, the federal government has set up through the tax structure a flow-through share model, which allows for high net worth individuals and institutions to invest through a corporation, giving them limited liability but allowing for certain types of expenses to flow directly back up to the investor. (16) So for certain financial types, it is a very attractive model.

On the debt side, notwithstanding the fact that the Schedule I Canadian banks are very healthy and have been the source of a lot of backslapping and praise in Canada in the last few years, particularly coming out of the recent economic troubles, they are not that involved in renewable financing in Canada. They do a little bit, but they are just not used to the model yet. Most of the debt financing in Canada is European Union (17) ("EU") sourced mostly because they are just used to doing it. The EU practiced in this market for a number of years, understands the risk profile of the projects, and tends to be the predominant source of the projects in Canada. (18)

The other significant source are the life insurance companies ("LIFCO") and some pension plans, and it makes sense to them in the sense that projects, and I am sure it is the same in Canada, tend to get twenty year power purchase agreements. So when you have a locked-in top revenue line for twenty years, that type of a project model fits very nicely with the LIFCO return investment that they are looking for. So they tend to also be fairly active participants in this space.

MS. LUSSENBURG: Paul, would you like to comment?

MR. DURBIN: We are primarily involved in solar and wind projects. One of the reasons I am in New York is that New Jersey is a hot bed now for solar development. I think there are eight thousand projects, that includes residential, but there is a lot of commercial development there. (19) These projects are heavily structured deals and project finance oriented.

Like Michael mentioned it is eighty-twenty. This typically is what you will see between debt and equity, but in the United States it is a little different. There is an investment tax credit here, the Section 1603 cash grant, (20) that can be taken instead of the tax credit, so the need for a tax investor is less urgent until the end of this year. Then you are going to have to find tax investors for these projects. The ones that we see are, again as Michael mentioned, utility driven projects fully owned by a utility.

They take advantage of the cash grant. They enter into long-term power purchase agreement ("PPA"). Typically, these are projects under two megawatts, but they do quite a few of them. We also have projects that are leveraged, and financing is pretty available now if you have a strong PPA with creditworthy off paper.

We have seen projects from Morgan Stanley (21) and J.P. Morgan. (22) We hear the Bank of China (23) is going to be active in the United States on these projects, and European banks as well, because it all began in Spain and Germany. Initially, that is where the wind and solar development was strong in the early 2000s, and now it is continuing in the financial institutions with the deals.

MS. LUSSENBURG: I am sorry. Maybe it is my ignorance, but you keep on talking about a PPA. Maybe I am the only one who does not know what that is.

MR. DURBIN: Sorry for that. PPA is a "Power Purchase Agreement." Essentially, it is a twenty year contract to buy all the power from a solar array. (24) These arrays tend to be sited on roof tops, land base, or, less commonly in New Jersey where I am pretty active, in California, but they are mostly land based facilities. The PPAs are with utilities.

In California, as opposed to New Jersey, the state has a feed-in tariff, and we will get into this a little bit later. In New Jersey, the state uses a solar renewable energy credit to finance, in part, these projects. (25)

MS. LUSSENBURG: I heard you comment a bit about China being a potential investor, but Michael has observed it seems to be largely Europeans that are coming into the Ontario and Canadian market. So is that the same comment, or is there more money, I will call it United States capital, which is being invested in this sector at the moment?

MR. DURBIN: Right now we see on the debt side and on the equity side, it is domestic. The Bank of China, the transaction I was thinking of, tends to work with Chinese companies that are building projects outside of China, so you may see them in the United States in years to come.

The European financial institutions are a little bit more active now. We are seeing them on solar projects. There are a lot of European developers that now have operations in the United States, and a lot of the manufacturers of renewable energy equipment from Europe and from Asia are building facilities in the United States. (26) As that occurs, you see their financial institutions migrating with them to finance these projects.

MS. LUSSENBURG: You were talking about financial institutions. You were talking about private equity, so it is sort of an interesting dichotomy that we do not have the financial institutions in the market in Canada, and yet, we have the financial institutions in the market in the United States, like a foreign financial institution, whereas we have got private equity in Canada. It would be interesting to know what causes that, whether it is risk or government policy. We will get to that.

MR. DURBIN: I will just mention in the United States you see private equity as well. So there are several different private equity firms that are very active in investing in renewable energy projects. (27)

MS. LUSSENBURG: So maybe we should talk a little bit about the different incentives and legislative frameworks in the two countries, and...