Financing Renewables: SunEdison Burns Out – 4/13/16

In the first high profile collapse of a solar energy company since Solyndra’s bankruptcy in 2011, SunEdison Inc. is preparing to spin off what still viable parts it can before its Chapter 11 filing. The loss of such a large company is certainly a black eye to the industry though the failure seems mainly the result of internal control issues and an unfortunately timed collapse in fossil fuel prices. Many, with the benefit of 20/20 hindsight, say the one time industry leader flew too close to the sun with its aggressive expansion and financing.

It is easy to see how SunEdison’s situation is largely its own doing. In seeking quick growth, the company took on a debt load larger than it could handle. One consequence of SunEdison’s downfall is a reassessment of using “yieldcos” -holding companies that operate energy assets – as a means of raising cash to buy and run solar and wind farms. Yieldcos were heralded as an innovative way to finance projects; however, they now seem to be the cause of the accounting issues and other unneeded complexity cited as factors in SunEdison’s failure.

“It doesn’t change anything,” said Francesco Venturini, chief executive officer of Enel Green Power SpA, a competitor of SunEdison. “Everybody knew they were going down the wrong path. It was a great team underneath but badly managed up top.”

For other solar companies, the SunEdison incident will likely serve more as a warning not to pull an Icarus with financing than an actual hurdle to industry growth. Economies of scale have sent the cost of solar power plummeting to 1/150th of its level in the 1970’s in turn sending the amount of installed capacity skyrocketing. In addition, ongoing improvements in the solar panel technology and energy storage are helping the renewable energy compete with conventional power sources without the crutch of government subsidies. Those technological improvements mean permanent cost savings for generators and, since solar will never suffer from costly fuel price volatility, an annual cost reduction of 5% per year sets the stage for consistently explosive growth as seen in recent years.

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According to Jim Hughes, CEO of First Solar Inc., the biggest U.S. solar panel maker, “we certainly don’t believe we are close to the end of the cost reduction cycle,” and “everytime we reduce costs, we stimulate demand.”

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Two years of low oil, gas and coal prices has meant downsizing throughout the energy industry, but cuts have been far more prevalent for fossil fuel firms than those in renewables. Clean energy investment broke new records in 2015 with more twice as much investment as fossil fuels, especially coal which has seen investment shrivel in the wake of cleaner, cheaper alternatives. Lower prices may mean higher output demanded, but coal demand has fallen so quickly even the rock-bottom prices shutting down many US mines don’t seem low enough. Only developing countries are still adding coal, which could explain why Peabody Energy filed for its own Chapter 11 bankruptcy.

Meanwhile, the number of active oil rigs in the U.S. keeps falling as a mismatch of supply and demand, renewable energy expansion, and more efficient cars hit oil profits hard. Hundreds of shale drilling companies have found themselves in jeopardy because too much oil is being met with too little growth in oil demand. Natural gas is probably the only fossil fuel with a rosier future ahead of it since it burns cleaner than coal and cheaply available thanks to the fracking revolution, but even that could change if utility-scale batteries grow cheaper as rapidly as technological pioneers like Elon Musk would suggest.

“We’re in a low-cost-of-oil environment for the foreseeable future,” Michael Liebreich, chairman of the advisory board for Bloomberg New Energy Finance (BNEF), said at the BNEF Summit on Tuesday. “Did that stop renewable energy investment? Not at all.”


(source: BNEF, UNEP)

Businesses outside the energy industry also seem to be moving towards renewables. Besides the usual examples of stores like Wal-Mart putting solar panels on their rooftops to help offset electricity costs, banking companies are recognizing some merit in clean energy investment. Eight banks pledged $7 billion to join a Bank of America Corp’s initiative seeking to raise at least $10 billion for clean energy and sustainable development.

“Financial innovation and capital play a critical role in the transition to a low carbon economy,” the banks and investors said. The European Investment Bank, and IFC, a unit of the World Bank have also joined the project.

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