Down payments on clean tech

GE's Kevin Walsh sees good reasons to invest in the winds of change and other ventures in alternative energy.

Martin LaMonica Former Staff writer, CNET News
Martin LaMonica is a senior writer covering green tech and cutting-edge technologies. He joined CNET in 2002 to cover enterprise IT and Web development and was previously executive editor of IT publication InfoWorld.
Martin LaMonica
8 min read
If you think buying solar panels for your home is expensive, imagine the price tag for building a wind farm.

With loud cries for energy independence and growing concerns over global warming, renewable energy is seeing an influx of entrepreneurial interest and capital.

Much of that money is being spent on large-scale, commercial projects that require millions of dollars of capital.

That's where General Electric's energy financing division comes in. Along with Wall Street and private capital funding, project financing firms like GE's play an integral part in making renewable energy commercially viable.

Last month, the American Council On Renewable Energy (ACORE) hosted the Renewable Energy Finance Forum in New York where ACORE President Michael Eckhart called on financiers to put their money to work for renewable energy. "You who have your hands on capital, you know you have the power to change things," he said in a keynote speech.

But amid the buoyant atmosphere for investing in renewable energy, some critics are concerned that some areas are attracting perhaps too much investor interest, notably in corn-based ethanol. And renewable energies--wind, solar, geothermal, biofuels, and biomass--rely on government policies, which historically have not stayed consistent over many years.

After the keynote speeches at the Renewable Energy Finance Forum, CNET News.com spoke to Kevin Walsh, the managing director for renewable energy at GE Energy Financial Services, about the investment climate and how financing complements technology.

Q: When I think of GE Energy Financial Services and renewables, I picture massive wind turbine farms. What's the full scope of your financing activities in renewable energy?
Walsh: There are three basic things we're doing right now. One is traditional project finance for wind, solar, biomass and geothermal--that's the bulk of money we're putting out the door.

In the area of biofuels--not to pat ourselves on the back--but we were concerned when we looked at corn-based ethanol.

Then we have a clean tech initiative--we're investing in a company rather than a project. We invested in a battery company A123Systems, a wave power company. We're chasing some deals in the solar space, the smart grid demand response arena--that's interesting. Then there's our carbon arena--(we have) a joint venture with AES to develop carbon offset projects in the U.S. and sell the offsets into the voluntary market in the U.S.

From a capital standpoint, (the carbon offsetting) is just getting started, but the other two areas are well energized and staffed. In fact, with the clean tech initiative, we've increased to $50 million per year that we're going to try to put out the door. That's based on small increments, but that's a space where we want to put more capital to work.

Hearing the speakers this morning, it's clear that there's some concern that the renewable area may be getting overheated, particularly in biofuels. What's your view?
Walsh: I don't think it's overheated. I think you need to be careful about where you put your money. I would certainly differentiate significantly between a wind project that has a power contract (with a utility) and a biofuels project around corn-based ethanol. There are very different risks you're trying to manage. We have people who understand those specific areas and decide whether to do an individual deal or not.

The bulk of what we're doing is wind--we understand it well. There's tremendous growth, and the pipeline for the next six months looks very full. But we also like what we're seeing in biomass. Biofuels, too--we're chasing that too.

In biomass, is that for combined heat and power plants?
Walsh: That or just burning wood waste in some form. We're working on a project that's in the Northeast that we'll hopefully announce soon that looks very promising. And then, of course, geothermal, we like what we see there. We've been doing it for years. We understand that it's about the resource, and we have to have confidence that the resource will be there to supply you for the next 15 or 20 years.

Solar we like. There are challenges getting the costs (of photovoltaic, or electric panels) down, but there are subsidies available to make them work today.

Is your solar involvement only for utility-scale projects?
Walsh: We lean more toward utility scale because we like to put big dollars to work in individual transactions. We are trying to find a way to play in the smaller commercial side, maybe teaming up with other parts of GE used to doing smaller scale projects.

We like what we see in solar thermal. From a cost of power standpoint, it competes very nicely--in the right market. It has to be in the desert market. We have an investment in one in the Mojave Desert that has been there since the late '80s.

Are there any areas that don't look too good to you?
Walsh: As I said, wind looks the best. In the area of biofuels--not to pat ourselves on the back--but we were concerned when we looked at corn-based ethanol. You've got on one side commodity risk with corn competing with food. You've got commodity risk on the other side competing with gasoline, and you definitely can get whipsawed by that. Some of these projects are going to get restructured.

We saw some deals that had some very short-term hedges available, but they were looking for financing in a time period that goes beyond the time of the hedge, so we stayed clear of that. But we still think there will be some smart plays with cellulosic (ethanol) and biodiesel, which has better fundamentals arguably. And maybe Brazilian sugar cane-based. Sugar cane is just a better feedstock--the energy balance is much better. Even though it is a food product, it has a better yield than corn.

Are you looking at financing sugar cane projects in Brazil or the U.S.?
Walsh: The U.S. can plant sugar cane. It's just that Brazil has such a head start. They have a lot of things going for them in Brazil--the climate (and) they've been doing it for years. What they don't have going for them in the U.S. is that they are subject to this import tariff. They can sell to other places in the world, even with the tariff they can compete pretty well, but that's something you have to navigate.

So there are two fundamental risks in biofuels in my mind: one is policy risk--whether you are going to have policies and tariffs to navigate. And the other is just basic commodity risk--feedstock risk and commodity risk on the supply side. And you have to be able to manage that.

It seems that policies are generally moving in the right direction for renewables. Do you see any policy changes that will increase risk?
Walsh: I think policy support for all these technologies will be there in some fashion. The devil is in the details. But let's face it, the environment is such that regardless of what political party you have, there is going to be policy support because of concern for energy security, because of concerns about the environment, or interest in supporting the farm sector, for example.

So the stars are aligned for policy support. We're trying to have a voice in that. From an investor, what you're looking for is predictable, reliable, stable, long-term policy--that's really what drives the cost down. Because if the policy is too short and too skittish, then investors will either not invest in the sector at all or the price will be higher because you'll price your capital higher for risk.

the environment is such that regardless of what political party you have, there is going to be policy support because of concern for energy security, because of concerns about the environment, or interest in supporting the farm sector.

If you think the risks are very stable across the project...the more certain those risks are. The more you lock them (the risk factors) down, the more you apply leverage to that project. The more leverage you apply, the lower the cost of capital. It's a pretty simple equation.

How much are you financing, and what's the growth compared with other energy financing activities?
Walsh: We created a dedicated renewables group (in early 2006) with $800 million that we had accumulated over the five-plus years prior. In little over a year's time, we've grown to a $2.3 billion portfolio. It's the fastest-growing part of the business. Our target is to over $4 billion by 2010, and nothing I can see should stop us from hitting that goal.

And the growth is being all driven by energy security and environmental concerns?
Walsh: Those are the fundamentals driving it--but also technology. Technology continues to improve. Supply chain constraints in some of these areas have actually driven up the cost of a wind project, for example, over the last couple of months. The cost of wind turbines has gone up (because) the basic commodities of steel and copper--some of the precious metals--have gone up tremendously. So the cost to build a wind plant has gone up, but the technology embedded in those wind turbines keeps getting better and better all the time. So you're getting a higher capacity factor from that wind plant, better reliability, and so on. The drivers as we think about it again are energy prices, climate change, energy security, technology improvement, and in some sectors, the interest and support for agriculture.

How is renewable energy finance investing different from traditional fossil fuel projects?
Walsh: Another twist on commodity prices--when looking at natural gas or oil, for example--is volatility. In a renewable plant, you wring out the fuel volatility part of the equation because there's no fuel cost. All the cost of a wind plant--there is an operating cost, you can't ignore that--but it's all capital costs, which are fixed. So you get fixed rate financing; you know what the wind is going to cost for the next "X" years. If you build a gas-fired plant, unless you get a fixed long-term gas contract, you don't know (the costs). It's very attractive for utilities--whether they build wind plants themselves or they buy (wind power)--to wring out some of the fossil fuel price volatility. So that's an attractive feature. Solar is the same, geothermal--there are no fuel costs.

What's your sense for the investors' appetite? Are people willing to spend on renewables, which was largely ignored by Wall Street for years?
Walsh: Oh yeah. We're seeing more competition. It is what it is, but people are starting to get comfortable (with renewable energy project finance). They see some success from people like ourselves.

Some of what we do is very traditional--it's hydro(power), geothermal, and biomass--they've been done for years. The newer stuff, people are starting to get more comfortable with. Wind, obviously, is getting more investors. Solar PV (photovoltaic), solar thermal--those are new to a lot of investors, so that will take some time to see some success or failure. In the biofuel space, you have an interesting dynamic. There are people who want to play but don't understand the commodity risk, or don't really pay attention to it. And then you have people who do understand it and are being pretty smart about how they manage it. There will be some issues in that space, I suspect.

Is the financing anything special, or are they pretty standard financial instruments?
Walsh: Well, no, they are special in some instances when they are very tax-driven, in the U.S. anyway...So you need to understand how to take advantage of those features.