Clean energy plants are growing in number, output and contributions to the national electricity grid. And new operators as well as high-net-worth investors are embracing the potential for a world running less on the likes of polluting fossil fuels and more on the cleaner and “greener” likes of the sun and wind.
Turbocharging the transition from legacy fossil fuels—coal plants—to newfangled utilities is the Clean Power Plan, which has been put forward by the Obama Administration and the Environmental Protection Agency (EPA). The final version of the plan was announced in August 2015. It mandates that states cut the pollution emitted by their coal-fired power plants by 32% by 2030. The Supreme Court has stayed the effect of the plan until there is a lower court ruling on the issue of the EPA’s enforcement authority, which may never occur given President-elect Donald Trump’s denial of climate change and embrace of fossil fuels during his campaign.
But that isn’t stopping clean energy pioneers from hunting for opportunity because of three things: 1) power plants are largely regulated on the state level, and a majority of states are adopting renewables; 2) the price of renewable energy has dropped considerably, making the choice between coal and less-polluting energy sources a matter of economics, not politics; and 3) power plants are at base infrastructure investments embraced by both sides of the political aisle.
So where is the opportunity in clean, “green” energy? The Energy Information Administration (EIA) is projecting 60 gigawatts of coal power plant capacity will be retired by 2020. That’s enough electric-generating capacity to power about 27 million homes. Which means all that lost power must be derived from different sources. Renewables are a logical choice for replacements.
“People are already making a lot of money off of this,” says Jonathan Parfrey, executive director of the nonprofit organization Climate Resolve, and a former Los Angeles Department of Water and Power commissioner. “The price of solar keeps dropping, even without any subsidy, which makes it a very attractive economic alternative to coal … never mind the huge environmental benefits.”
Of course, the EPA plan doesn’t mean a unilateral shutdown of coal-fired plants. There are myriad options for states to accommodate new restrictions. Many states, for example, have already implemented clean power regulations to phase out coal.
For example, power plants can create efficiencies such as “heat rate” improvements to reduce the amount of CO2 they emit. Or they can mix energy sources by moving from coal to lower carbon emitting natural gas power plants. But the most savings will come from shifting to zero-emitting renewables. And this is where investors and operators are jumping in at full throttle. Here’s why:
According to the latest EIA data available, as of 2014 there were about 7,677 operational power plants in the U.S. Of these, 3,365 utilized coal, petroleum, natural gases or other gases as their primary source. Which means they were prime targets for replacements or retrofitting. Some 29 states have voluntarily adopted the Clean Power mandates, with eight more setting renewable goals. This puts plants in those states in play for retirement and/or replacement.
Sophisticated investors—those who are keen observers of trends and business sector upswings—are mapping out a path for profits from all the adaptation measures.
Take Greenbacker. The New York City-based renewable energy company is seizing the opportunity in the energy sector to offer a REIT-like fund to investors. Greenbacker is a publicly registered, nontraded limited liability company that expects to acquire a diversified portfolio of income-producing renewable energy power plants, energy efficiency projects and other sustainable investments.
David Sher, a Greenbacker director and its former chief executive, says there are a number of market drivers that are making renewable power plant investing attractive:
1. The growth of energy demand. Electricity demand is expected to rise by 25% by 2040 in developed countries, and the U.S. represents nearly 50% of that growth. Overall, global energy demand is expected to rise by 35% in the next 14 years.
2. The retirement of old power plants. Fifty-one percent of all U.S. power plants are at least 30 years old. Hence, many are obsolete and facing replacement.
3. The falling cost of renewable energy power plants. Over the past several years, the cost to build solar power plants has declined by nearly 40%, the cost for wind power plants by nearly 21%.
“Renewable energy power plants can help provide cheap and clean electricity to help power American business, create jobs and move the United States toward energy independence,” Greenbacker cheers on its website.
Sher notes that while changes in the national political landscape could impact clean power investment, the fact is that “there is not enough capital in the space to do all the deals that could be done.” Moreover, change is occurring at the state level because each state manages and regulates its own energy resources.
The Clean Power Plan, he says, really only serves to embolden states’ efforts.
Ceres, the Boston-based sustainable business and investor coalition, agrees. “States have a significant opportunity to invest in a low-carbon energy future and attract new businesses, investments and jobs.” Indeed, 365 businesses and investment organizations have signed on to a Ceres petition of governors to implement the Clean Power Plan, even before it’s required. (Final complete state plans must be submitted to the EPA no later than September 6, 2018, under the current model, which, as noted, is still awaiting court confirmation and possible dismantling by the Trump administration.)
As part of the state lobbying effort, New York City Comptroller Scott Stringer says, “By providing investors with more stable incentives, the president’s Clean Power Plan represents a once-in-a-generation opportunity to curtail greenhouse gas emissions and accelerate a just transition away from fossil fuels and toward a clean energy economy.”
Former EPA administrators are quick to note the health and environmental benefits—rather than just the financial benefits—that stem from clean power adaptation.
“We have always viewed the EPA first and foremost as a public health agency,” wrote former EPA administrators William Ruckelshaus and William Reilly in a New York Times editorial about the Clean Power Plan. They went on to discuss how the future costs associated with carbon emissions from coal plants would be “far in excess of addressing the challenge now” if the Clean Power Plan is not widely adopted.
Carbon pollution increases cases of lung disease and results in lost days of labor. Obviously this increases health-care costs, and business revenues shrink with lower productivity.
Energy efficiency programs at the state level can save consumers as much as $5 for every $1 invested, according to the World Resources Institute. Wisconsin is proof positive: Its efficiency program is projected to add nearly a billion dollars to its economy and create thousands of new jobs. Other states that have instituted energy efficiency programs are seeing similar results.
The evidence is a big selling tool and is helping to promulgate private sector participation in broad offerings of clean energy schemes.
There are, it should be noted, a slate of obstacles to clean power adaptation, from climate change deniers to fossil fuel lobbyists, aside from the stance of the Trump administration (see sidebar). Land and development cost is another one.
Resight, a Littleton, Colo.-based company that redevelops “impaired” properties, believes it has found a solution to that land development issue—landfills.
Mikk Anderson, Resight’s founder, says, “In our experience, solar works best when land values are least. Properly designed, a solar array on top of a landfill provides the economic value to pay for the long-term landfill maintenance. What is more, many of these sites are already embedded in the urban fabric, which allows access to the existing urban distribution infrastructure.”
This strategy could be a boon for distressed properties and offers multiple tax benefits. Solar and renewable energy receive numerous state and federal rebates and tax credits. When compared with coal, renewable subsidies amount to exponential tax benefits per kilowatt hour of distribution. (Because state incentives vary, an exact comparison cannot be measured, but in some cases it can be more than 500%.)
Because of the tax advantages, sector growth and exceeding demand, it should be no surprise that financiers are amping up deal structures and offerings.
But investors might also be haunted by clean tech’s downward spiral. Riding the back of the green zeitgeist from around 2005 to 2008, clean tech was pumped full of investment dollars until returns dithered and then flopped amid the infamous stock market crash, which sent the sector into a rout.
Sher says he still faces clean tech skepticism with institutional investors. His counter? Clean power is more about infrastructure.
Sure, technology comes into play with renewable sources to maximize loads, minimize storage losses and enable connectivity to the smart grid. But at the end of the day, power plants are an infrastructure play; they’re utilities.
“We’re dealing with real assets,” says Sher.
Green States Energy is another firm that has spotted the significant potential with clean power plants.
GSE is an independent power producer that develops, acquires, owns and operates clean energy generation facilities in the U.S. It’s a fast-growing company, having acquired over the past several years approximately 20 megawatts of capacity to serve a multitude of municipalities. It claims to have a project pipeline of more than 100 megawatts. That’s obviously a massive growth projection.
“Our strategy is to combine best-of-breed technologies and processes into solutions that can be effectively and responsibly deployed in individual locales,” says the company, which has offices in New Jersey, Connecticut, Florida and South Carolina.
Buoyed by a thriving renewable energy market, GSE’s strategy appears compelling—even as two dozen states, with support from the coal industry, are suing to stop the EPA’s Clean Power Plan. Their argument is that a reorganization of the country’s power grid will result in higher electricity costs. But numerous studies show the Clean Power Plan, or a plan like it, will lower homeowners’ utility bills.
Acceptance may be setting in. Forbes, which typically keeps a conservative agenda, even published a recent blog post stating, “The nation would no doubt be better off with the Clean Power Plan. … But, if U.S. EPA and environmental advocates lose and the court does strike down the Clean Power Plan, there is still hope. After all, when it comes to reducing emissions in the power sector, we’re already making meaningful progress toward clean power, Plan or not.”
The Clean Power Plan may be just as much an investment strategy as it is an environmental program—and there is big upside in any case. Clean power plants may be our municipal engines of tomorrow. They are worthy investments.
