Financing Green Tech

Felix Salmon thinks William Wild’s proposal for commercial bank financing of renewable-energy projects has merit. I think it’s pretty much illogical.

Here is what Wild would do:

I suggest that there should be two requirements for renewable generation projects to receive capital subsidies. First, that at least 70% of the project’s commercial capital (excluding the subsidy) should be in the form of non-recourse commercial bank debt. Second, the rate of return to the project’s commercial capital should capped but with excess returns allowed to be reinvested as equity in expanding the existing project or in new, eligible, renewable generation projects.

Wild goes on to suggest that the non-recourse debt requirement will prevent projects that aren’t economically viable from qualifying for subsidies. In effect, the go/no go decision for the bureaucrats is made on their behalf by the lenders who either approve or disapprove a loan application.

Now 70% leverage is a pretty healthy number. One would think that any bank that planned on taking a flyer on a project with that sort of loan commitment would feel pretty good about the risks involved in the project. Basically, that the technology would work and the project would generate sufficient cash flow to amortize the loan as well as provide funding for the growth of the company.

If that is the case then that should represent the type of project which the private sector would be willing to step up to with equity. So why would you need subsidies from the government? Isn’t the presence of a subsidy prima facie evidence that a project is not commercially viable? Note, the fact that it may not be commercially viable does not mean it is not worthy of subsidy or development, just that it is probably too dicey for the private sector to take on.

Now Wild also suggests that these projects in addition to being funded by the bank debt and government subsidy will also have a slice of private equity. That equity would, however, be precluded from any gains above a certain return threshold. Again, I’m not sure why a project that qualified for fairly aggressive bank financing wouldn’t attract investors willing to satisfy the entire equity requirement. It seems that a government subsidy which limited returns would be a price that investors would find too steep.

As for Felix, I can only assume that he was channelling his inner Barney Frank when he wrote this:

The big potential problem is that such a rule would delay green-tech projects unnecessarily, and even prevent certain interesting projects from happening at all. Banks are by their nature very conservative when it comes to things like this, and Wild’s rule would essentially give them veto power over any and all new projects seeking government subsidy. I’m not sure we want that. But I do like the idea of dragging them into the sector. It’s surely a much better use of their funds, from both a financial and a societal perspective, than subprime housing loans were.

I’m sure that upon sober reflection Felix will remember that we once tried “dragging” a couple of housing GSEs into some loans on the pretext of satisfying “societal” needs.

About Tom Lindmark 401 Articles

I’m not sure that credentials mean much when it comes to writing about things but people seem to want to see them, so briefly here are mine. I have an undergraduate degree in economics from an undistinguished Midwestern university and masters in international business from an equally undistinguished Southwestern University. I spent a number of years working for large banks lending to lots of different industries. For the past few years, I’ve been engaged in real estate finance – primarily for commercial projects. Like a lot of other finance guys, I’m looking for a job at this point in time.

Given all of that, I suggest that you take what I write with the appropriate grain of salt. I try and figure out what’s behind the news but suspect that I’m often delusional. Nevertheless, I keep throwing things out there and occasionally it sticks. I do read the comments that readers leave and to the extent I can reply to them. I also reply to all emails so feel free to contact me if you want to discuss something at more length. Oh, I also have a very thick skin, so if you disagree feel free to say so.

Enjoy what I write and let me know when I’m off base – I probably won’t agree with you but don’t be shy.

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