Oil and gas financing strategies – a good approach for solar and wind?
The University of Columbia has looked at different financing strategies used for oil and gas projects. A report recently published and related to this research suggests that these approaches might work for solar and wind as well.
Bloomberg New Energy Finance estimates that 226 billion USD were invested globally in wind and solar in 2016. However, in order to keep global warming below 2 degrees Celsius, twice as much is required, meaning that the remarkable growth that happened in the solar and wind sectors over the past years is not yet enough.
New funding strategies required
Columbia University’s Center on Global Energy Policy has made this issue the topic of a recent report, which suggests to look at oil and gas for new funding strategies that may eventually lead to a further growth of the solar and wind markets. The report explains that “solar and wind industries would benefit from finding ways to tap into the deep financing resources of institutional investors. To do this, these industries need to develop a broader array of financing tools that respond to the risk/return requirements of institutional investors.“
According to the report, titled “Financing Solar and Wind Power: Lessons from Oil and Gas“, institutional investors such as pension funds, endowments, insurance companies, sovereign wealth funds and foundations have been “largely missing from the mix“.
Report presents various possible approaches
Columbia’s report explains that oil and gas companies have developed new financing strategies where the resources are used as assets prior to the construction phase. It deducts that this pre-construction stage is essential, as at this point the capital crunch is most acute.
Based upon this deduction, the potential of “renewable resource based finance“ is highlighted, suggesting to follow the strategy of reserve-based finance used by oil and gas for exploration and production. Another possibility that is described is following the example of volumetric production payments. In this case, a project is financed by a capital provider who, in return, may use the produced oil and gas or receives proceeds from their sale. Columbia calls this “electricity production payments“. The last method presented is “capacity payment finance“. It involves financing renewable energy projects upon future capacity payments. The report concedes that there remain, however, some challenges with assessing the capacity value of such variable renewable energies as wind and solar.
Renewables’ main weakness are balance sheets
One barrier is policy, as renewables are not allowed to use Master Limited Partnerships (MLPs) for finance.
The main weakness Columbia’s report points out for renewables, however, are their balances sheets, as these are not as strong as those of oil and gas. Hence external capital providers often remain reluctant to take project development risk.
Some major companies, such as NextEra, NRG and Southern Company, are already paving the way by being an example and investing in renewables. If more follow in the near future, this obstacle might be removed and the road could be cleared for a stronger future for solar and wind.
Upon closing the report, Columbia points out that the mere purpose of the text is to encourage dialogue and new ways of thinking, but that it is not meant to present final solutions.
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