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<p align="left"><font face="Arial"><strong><small>About The Author:<br>
<br>
</small></strong><span lang="X-NONE" style="color: black"><font size="2">
ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon
Markets Group has practiced law related to the finance of environmental and
energy projects and companies for 40 years. In particular, he has analyzed
and executed a wide variety and substantial value of project financings. He
chairs the American Bar Association’s Committee on Carbon Trading and
Finance, serves on the Board of the American Council for Renewable Energy,
and has been a senior official in the Federal Energy Administration. He is
a graduate of Brown University, Yale Law School and Harvard Business School.</font></span></font></p>
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<img src="../images/feldman.gif" alt="Washington Viewpoint by Roger Feldman" border="0" width="375" height="75"><p align="left"><b><u><br>
January</u></b><u><b> 2008</b></u></p>
<p align="center"><font size="6"><b>Saving Private Renewables</b></font></p>
<p><strong>by Roger Feldman --
</strong><b>Andrews Kurth, LLP</b><strong><br>
</strong><font face="Arial" size="2">(<em>originally published by PMA OnLine
Magazine: 2008/01/26</em>)<br>
</font><span style="font-size: 10.0pt; font-family: Palatino; color: black">
</span></p>
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<p align="left">Private renewables have entered the same economic war
zone as all other investments. They may be receiving superficial
exaltation — the equivalent of green ribbon bow decals affixed to the
windshields of hybrid cars, but the new American casbah of clean is
rapidly turning into an orange zone of lurking uncertainty. </p>
<p align="left">Energy project finance and energy technology finance
have each regularly been victims of cyclical contractions tied to the
strength of capital markets’ support. Renewables projects, like
cogeneration, IPPs and energy tech before them, are vulnerable not only
to the way in which market trends affect them but to the availability of
leverage to keep their projected IRRs competitive with non-renewable
energy alternatives. Recently, we have already heard, as the debt
markets tighten, worn but telling words like “stricter project quality
requirements” are dusted off. Players like hedge funds and some private
equity investment funds are (as it is euphemistically put) “returning to
basics”. A great deal of equity designated for renewables or cleantech
has already been raised which remains to be put to work. However,
investors taste for the renewable flavor of the month is more finicky
than ever. The capital markets relatively recent turn against biofuels,
while certainly related to commodity economics and some adverse
regulatory developments, certainly illustrates this trend. </p>
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<p align="left">There are, however, some things proponents of renewable
finance can do besides rail against the venality and short-sighted lack of
vision of those who nurture its health. They fall in three basic categories:
</p>
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<p align="left">(1) Preserve and foster the regulatory architecture on which
renewables investment rests and whose improvement would enhance the
perceived future quality of renewables investments; </p>
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<p align="left">(2) Examine and extend the ways in which public capital and
public supported initiatives can be more effective in assisting private
energy project development; </p>
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<p align="left">(3) Analyze the sectors of private capital support which
will be sustaining and encourage public programs for their enlargement. </p>
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<p align="left">Here are some specifics on each: </p>
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<p align="left">(1) <u>Regulatory Architecture</u>. Renewables today still
are still almost without exception dependent on tax incentives for
financeability. Somehow, despite $100/barrel oil, Congress has allowed
political machinations to jeopardize these incentives and the investment
community’s expectation of their continuation. There have been repeated
examples in the past of how, in the best of times, the clogging of the tax
incentive spigot leaves renewable projects whirling down the drain. At a
bare minimum, some continuation of tax incentives is required for vigorous
industry development. Particularly in the short run it projected competitive
technological edge is no adequate substitute. </p>
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<p align="left">Admittedly, a significant segment of renewable energy
production is not directly about oil displacement: it is an alternative to
domestic environmentally or domestic supply challenged fuels. To date, it
has been about creating distributed electric generation substitute for
capital intensive central production. The Congress and the regulators fought
themselves to a fatigued standstill on power deregulation and have made only
faint jabs at large scale infusion of renewables to meet clearly foreseen
forthcoming load requirements. The battle over climate change regulation and
its impact on these issues will not relieve and perhaps may even increase
pressure on this situation. </p>
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<p align="left">Renewables need a core of supportive energy regulatory
policies which assure not only their ready integration into the grid, but
their facilitated development. The specific traditional areas where this is
true, notably transmission and local level reward for utilities for
cooperating with distributed generation remain unresolved. In addition,
utilities and renewables developers also need some assurance that the
Resource Performance Standards’ success and future proliferation will not be
cut down by the way in which carbon reduction regulations are implemented.
</p>
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<p align="left">(2) <u>Coordination of State and Local Support</u>. In the
face of the wintry blasts from the economy and deficiencies in Federal
incentive and regulatory programs, it is more than ever up to the States to
act on recognition of the reality that renewables development can represent
a long term, expanding job source. At present, 28 states have one or more of
the following: Clean Energy Funds, RPS, Fuel Cells and Hydrogen Funds and
carbon trading arrangements. Several other states have governors who are
independently pursuing far ranging fuel independent, environmentally
substainable programs. Some State funds are direct in their application,
i.e., project development and investment; others are more geared to energy
as another form of traditional industry development. Some support R&D
programs. In addition, the interest in climate change has led several State
Treasurers and pension funds to focus on renewables - over $1.7 Billion to
date (a total which does not include various non-profit initiatives). This
diversity of programs, without coordination, does not serve the renewable
industry well today. In the current changed environment, the challenge for
the industry is to seek support as a united force – not a series of
independent sponsor benefit takers – and to encourage such coordination
among states and between state programs with different policy objectives.
</p>
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<p align="left">In particular, efforts to coordinate approaches for
renewables stimulation and climate change response are particularly
necessary. At a time when the Federal government is inclined to quick fix
“stimulus” packages where advances of public funds are intended to be
rapidly recycled back into the economy it is important that some long-term
perspectives be taken as well. Overall Private Renewables need to better
highlight to states the linkage of the near term job creation value which
they have to their longer term energy/environment benefits. </p>
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<p align="left">(3) <u>Facilitation of</u> <u>Private Credit Support</u>.
Whatever the public policy environment, there needs to be updated
recognition on the part of industry players as to which financial sectors
are more likely sources for them to turn for funding, and what public
policies should focus on to keep those particular windows open for
renewables. Consider two polar points on the renewables capital source
spectrum, which only collaterally compete in the same market: credit
companies on the one hand and privately placed securitization pools on the
other. </p>
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<p align="left">Credit companies are free to invest in various forms of debt
or equity, multiple alternative tiers of the capital structure. They are
oriented toward larger leveraged projects, entered into with strategic
partners to avoid debt consolidation. Their preference is to be lessors
rather than owner/operators. For many, but not all, their tax appetites are
substantial. For many, equity investment presents a less attractive option
than debt investment, because their income return pattern does not fit their
preferences. </p>
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<p align="left">By contrast, there exist a smaller member of investment
funds which are prepared to aggregate and securitize the cash flow from
multiple smaller projects. While tax benefits are not without value to such
funds, reliable credit support (public or private) to support cash flow
returns is the preeminent concern. Risk is reduced in these projects by
creating separately financed packages from multiple vendors and projects.
</p>
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<p align="left">Certainly in any market situation, but particularly in the
current tightening capital markets, it is critical that project sponsors
focus on the fit between the investment preferences of potential capital
sources on the one hand, e.g., related to threshold return risk, investment
remarketability and their own investment profile characteristics, e.g.
control; tax appetite; strategic contribution to business plan execution.
</p>
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<p align="left">But regardless of whether the financing is large or small,
it is important to focus on the extent to which public programs can serve to
fill in the gaps between active financier preferences and sponsor offerings.
That conclusion leads to a different perspective in recommendations for the
appropriate role for government (Federal or state) programs. In particular,
both for large project financings and small project securitizations, it
shifts the focus to risk management, i.e., governmental temporary or
contingent support for project debt or preferred debt in securitizations. It
leads to a policy focus not on raising the IRR for sponsors but enhancing
the probability of financing (and collaterally therefore lowering the cost
for debt). Energy and environmental security is a function of preserving
functioning capital markets available to renewables: not on governmental
technology selection, but on governmental facilitation of sound capital
structuring. </p>
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<p align="left">Support by industry members for a consistent program which
addresses all three of the factors described above could serve as a flare
which would enable Private Renewables to get through the fog of carbon smoke
and toxic economic news which otherwise threatens to reduce their mission to
the role of careful, lucky – and unfortunately much more occasional –
marksmanship. </p>
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<p class="MsoBodyText" align="left" style="margin-bottom:0in;margin-bottom:.0001pt;
text-align:left"><font face="Arial" size="2">
<span lang="X-NONE" style="color: black">ROGER FELDMAN, Co-Chair of Andrews
Kurth LLP Climate Change and Carbon Markets Group has practiced law related
to the finance of environmental and energy projects and companies for 40
years. In particular, he has analyzed and executed a wide variety and
substantial value of project financings. He chairs the American Bar
Association’s Committee on Carbon Trading and Finance, serves on the Board
of the American Council for Renewable Energy, and has been a senior official
in the Federal Energy Administration. He is a graduate of Brown University,
Yale Law School and Harvard Business School.</span></font></p>
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