Solar Energy Becomes Banks' Bright Spot

Renewable projects have offered profitable opportunities for big U.S. banks like Bank of America, Wells Fargo and JPMorgan Chase.
By Lauren LaCapra ,

NEW YORK (

TheStreet

) -- Solar-power plants and other clean-tech projects have become a bright spot for large U.S. banks in an otherwise gloomy lending environment.

Yet heavy competition and an unclear outlook on U.S. energy policy has left big banks scrambling - albeit happily - to fund a handful of attractive deals.

Bank of America

(BAC) - Get Report

, the largest U.S. bank, earmarked $20 billion for environmentally friendly projects a few years ago. The funds were to be used for financing, investing and capital markets activities over a 10-year period that ends in 2017.

Bank of America is approaching halfway mark years ahead of schedule, having committed $8.4 billion to renewables so far. Recent projects include a $23.9 million lease to install solar systems on

Walmart

(WMT) - Get Report

stores in California, a $43.6 million tax-equity agreement to fund wind-power in North Dakota and advising a Spanish renewables company on its sale of a 34% stake in a solar-power plant.

"This business initiative is far more than doing good for its own sake -- it has proven to be a long-term, compelling business opportunity for our clients, our company and our shareholders," Bank of America CEO Brian Moynihan said recently.

The Charlotte, N.C.-based banking behemoth isn't alone: U.S. competitors, foreign rivals and an array of private investors are also racing to tap into a large growth market in an otherwise down economy.

"The amount of solar installed in the United States this year doubled from the previous year," says Puon Penn, a senior vice president at

Wells Fargo

(WFC) - Get Report

, who heads its national clean-tech group. "In all likelihood that will grow another 50% for 2011. That's astounding growth - solar is a very large business now. Wind is maybe five, 10 years ahead of solar, a much more mature market space. That's having a slowdown for a variety of reasons but it's still a very large sector compared to what it was a few years ago."

Since entering the renewable space in 2006, Wells Fargo has provided more than $2 billion in tax-equity financing alone, partnering on 30 wind projects, more than 190 commercial-scale solar projects and a utility-scale solar thermal project.

The San Francisco-based lender - whose home state is among the most generous in offering subsidies to homeowners for solar-panel installations - sees opportunity on the consumer front as well. The bank offers customers in certain states a $1,000 rebate for installing solar panels, if they use a Wells Fargo home-equity loan of at least $15,000 to do so.

JPMorgan Chase

(JPM) - Get Report

has also financed or raised capital for $5.6 billion worth of renewable projects in recent years, including a $60 million loan in October to SunEdison, a division of

MEMC Electronic Materials

(WFR)

, for solar projects.

Goldman Sachs

(GS) - Get Report

has invested more than $3 billion in renewable projects and helped raise more than $10 billion for alternative-energy clients in recent years.

Julie Blunden, an executive vice president at

SunPower

( SPWRA), a leading U.S. solar company, notes that the company has partnered with a variety of investors and financiers, introduced the concept of "solar bonds" and recently sold a 20-megawatt solar-power plant to

Macquarie

(MQGCD.AX)

, an Australian bank.

"What's happened in a very short period of time - particularly when you're not getting returns of any substantial level in the bond market and other relatively low-risk investments - I think the solar sector has ended up benefitting," says Blunden. "We certainly have had tremendous growth and interest...There's no doubt that the activity in the solar space has brought the financial community to the table."

But U.S. lenders and investment banks are coming up against heavy competition - not just from each other, but from overseas rivals and non-financial companies that are arguably further ahead.

GLOBAL COMPETITION

Penn touts Wells Fargo's experience in the renewables space, noting that the bank has been funding solar projects for five years - a lengthy time frame for U.S. lenders. He characterizes Wells's ability to assess the risk-rewards dynamics of various renewable projects as unique among its peers. Penn calls Wells "one of the largest, if not the largest" funder of solar plants in America.

But he acknowledges that the renewables industry is a complex one with plenty of moving parts - in public policy, in technological developments and in pure energy demand. Each deal requires extensive due diligence to determine whether a project is worth precious investment capital.

"Not a lot of folks out there have invested the time and money to understand how to do that appropriately," says Penn.

Clean energy is still something of a new-fangled concept in the U.S., both in terms of public policy and consumer awareness. Europe, by contrast, was providing subsidies for such projects long before a renewables-heavy $787 billion economic stimulus plan was a glimmer in President Obama's eye.

Much like other industries, renewables have a global circle of supply and demand on both the production and financing side. Materials and manufacturing tends to be in Asia, while the most mature markets for sales are in Europe. The U.S. falls somewhere in between, with growth potential down the line in emerging markets like China and Latin America.

European banks have been the primary lenders and partners on the biggest global projects to-date, which are concentrated in Germany, Italy, Spain, the U.K. and Canada. Yet the global supply chain, combined with U.S. banks' ingenuity, has led to many a cross-border deal. For instance, Wells Fargo recently entered a $100 million deal to fund solar power plants in the U.S. Its partner is a Chinese solar company that had entered a joint venture with another firm in California.

"There's definitely a global market for finance for solar systems," says Blunden. "We've seen North American financiers interested in European projects and European financiers interested in North American projects."

Still, European banks appear to be on top, in part because their home markets are offering the most attractive opportunities to expand.

For instance, SunPower recently entered a ¿195.2 million financing arrangement with

BNP Paribas

( BNP) and

Société Générale

(GLE)

for the final phase of a 72-megawatt solar park in Italy called Montalto di Castro. It also drew down ¿75 million from a revolving credit facility with SocGen for projects in Europe and received ¿44.5 million in funding from

Barclays

(BCS) - Get Report

for an earlier phase of Montalto di Castro in the spring.

"Barclays offered attractive debt terms early on in the bank selection process," said Tim Corfield, who heads project financing for a SunPower subsidiary. He added that Barclays "remained impressively professional and dedicated to the transaction" even as the European debt crisis began to take hold.

Besides traditional banks, the other big players in renewables financing are large corporations that can rely on their own balance sheets to fund research and development or new projects. For instance,

BP

(BP) - Get Report

,

Exxon

(XOM) - Get Report

and

Chevron

(CVX) - Get Report

are among the leading developers of renewable fuels. Similarly,

General Electric

(GE) - Get Report

is one of the top wind-turbine makers and has its own in-house bank.

Siemens

(SI) - Get Report

, another industrial conglomerate, just gained approval to open its own bank as well, with plans to fund $1 billion to $2 billion in renewable energy projects over the next few years.

On Thursday, GE announced that it had hit a target of $6 billion worth of renewable-energy investments by the end of 2010.

"We achieved this $6 billion milestone because of our competitive advantage as a GE business focused on one of GE's core domain strengths, renewable energy," said Alex Urquhart, president and CEO of GE Energy Financial Services.

SHAKY FUTURE

Uncertainty about long-term policy has been one of the most destabilizing elements for the renewables industry. This week's skirmish in Washington over tax cuts, of all things, made that clear.

Wrapped into the American Recovery and Reinvestment Act of 2009 - better known as the stimulus bill - was the so-called "1603 Program." That initiative allowed the Treasury Department to provide cash grants for clean-energy projects that didn't already receive tax credits.

The program, which expired on Oct. 1, has led to a groundswell in activity for large-scale renewable energy projects in the U.S. It has funneled billions of dollars into expanding wind, solar, smart-grids, renewable fuels and energy efficiency, among other things.

A lobbying effort came out in full force in recent weeks, using an economic-stimulus pitch to convince lawmakers to extend the deal along with tax cuts. In announcing its milestone last week, GE urged Congress to renew 1603, saying that the expiration of federal incentives in previous years led to a 76% to 90% drop in installed capacity.

"Consistent policy provides the certainty investors need to provide long-term capital, which drives new technology and creates jobs," said Kevin Walsh, another GE Energy Financial Services executive.

The renewables industry sometimes looks as though it would be unviable without government support. But experts say it's the consistency that Walsh mentions, rather than the level of support, which creates destabilization.

For instance, Germany's solar market is expected to slow substantially next year as a federal incentive expires. But the decline was part of a long-term subsidy plan announced in 2000, around which financial partners had structured their investments. Other European countries have similar "feed-in tariffs" (FiT) meant to gradually wean the market off government support, as technology develops and investors get more comfortable with risk-reward premiums.

Spain had been considering drastic cuts to its solar FiT during the summer as part of a plan to get its fiscal house in order. When plans were leaked to the press, it sent shock waves through the solar industry. Blunden says the government ultimately backtracked, knowing that sudden, unexpected changes could be "devastating" to investor confidence.

Penn points out that there's "more support for the fossil fuel industry than there is

for renewables by a factor of 5 or 10, depending on what you read."

"There certainly is some significant support at the federal, state and international level," he adds. "The issue is that it isn't as stable as the support for the nuclear and the natural gas and the coal-fired power plant industry."

FUND IT WHILE IT'S HOT

Nonetheless, U.S. lenders still see opportunity in renewables, as the world keeps pushing to get more "green."

For instance, Bank of America's $24 million solar lease is just a tiny slice of a much larger project: Walmart eventually wants all of its stores to rely 100% on renewable energy. The retail giant has inked deals with several large solar players as it moves toward that goal, including SunPower, SunEdison, BP Solar and SolarCity.

Spokesman Kory Lundberg says Walmart has so far installed solar on just 36 of its 8,747 stores, and "will be adding additional sites through the first part of next year."

And while the largest solar stations in operation today are abroad, the U.S. is in the process of one-upping them. Altogether, the U.S. has just 39 utility-scale solar projects in operation, but another 25 under construction and 140 under development, according to the Solar Energy Industries Association. Solar Trust of America LLC plans to build a 1,000-megawatt project in Southern California - far larger than any solar-power plant in operation today, anywhere in the world.

Just after regulators granted approval for the Blythe Solar Power Project in October, the Energy Department followed up with a loan guarantee that will enable Solar Trust to get financing. Solar Trust CFO John Clapp said the Department of Energy had been very "proactive" in getting the approvals through.

"We also anticipate that other government agencies involved in the Loan Guarantee program will move quickly to support fully permitted projects, such as Blythe," Clapp said. "The DOE's Loan Guarantee program, along with the Treasury Department's Cash Grant program, are both critical components of renewable energy financing for utility-scale solar projects in today's market environment."

-- Written by Lauren Tara LaCapra in New York

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