Although the tax equity market has rebounded since its low after the financial crisis in 2008, there's still a limited number of players with the appetite to finance projects.
In order to open up the tight market, companies are luring new tax equity investors, securitizing their assets, and working to include renewables in vehicles like real estate investment trusts (REITs) and master limited partnerships (MLPs) that offer public investors attractive tax benefits.
Here's another brand new investment vehicle getting added to the mix: a registered non-traded LLC.
For the last two years, an eight-person team at the financial startup Greenbacker Group has been building a variation of a "yield co," called Greenbacker Renewable Energy Company, to connect project developers to the public markets. The firm believes it has created a "clean" way to finance projects and issue dividends to investors, without waiting for special rules opening up MLPs to the renewable energy industry.
According to David Sher, Greenbacker's co-founder and senior managing director, the offering is one of the first pure-play retail investment vehicles created for renewable energy.
"We saw a lot of good projects that weren't getting funded for a variety of reasons," said Sher in an interview. "We’re looking for project development opportunities in the small and mid-sized range that can provide a pipeline, as opposed to one-off deal."
Greenbacker will focus on projects in the $1 million to $100 million range -- an area that Sher said is underserved by private equity investors looking for very high returns or institutional infrastructure investors that want to bite off much bigger chunks.
According to its prospectus, Greenbacker Renewable Energy Corporation will look to acquire controlling equity stakes in projects, as well as finance construction through debt and equity. The company will focus on a wide range of infrastructure assets such as solar PV, wind farms, run-of-river hydro, geothermal and waste-to-energy facilities.
However, according to the prospectus, it plans to concentrate initially on solar projects due to "more predictable power generations characteristics, due to the relative predictability of sunlight over the course of time compared to other renewable energy classes."
In August, the Securities and Exchange Commission approved Greenbacker's initial public offering, allowing it to issue up to $1.5 billion in shares over three years. Greenbacker will need to break escrow in states that have approved the offering before it can invest in projects. It is currently looking to partner with developers in advance of that time so that it can build a pipeline of opportunities.
Class A shares will be priced at $10, Class C shares at $9.57 and Class I shares at $9.18.
Greenbacker is currently in a quiet period, so Sher was not able to discuss the dividend rate for investors.
It took a "painful two years" to fully register with the SEC and create this kind of a yield co, said Sher. But he believes the structure will give Greenbacker more flexibility in how it invests in projects. Rather than fund projects through tax equity and debt at the outset, the company will invest with 100 percent equity and bring in the tax portion later.
"We can offer them a structure that can handle a lot of the particular attributes of the deals. It’s very clean," said Sher.
As the paperwork and deals are standardized, Sher said Greenbacker wants to create a "factory-like approach" to financing renewable energy projects.
However, because the vehicle is so new, there's still a lot of risk.
The initial offering is a "blind pool" of assets, which means investors won't be able to evaluate projects before they're part of the portfolio.
In addition, the company explained in its prospectus that it currently has no assets or operating history, and that "no public market currently exists" for its shares. It's quite possible that the public won't actually buy them.
But if the model is successful, Greenbacker plans to branch out into other renewables, and possibly to provide loans for efficiency retrofits in the commercial space.
"We would consider a lot of new opportunities in that area," said Sher. "There are a lot of different types of efficiency projects [in which] we'd like to get involved."
For now, Greenbacker needs to transfer ownership of projects before it can start issuing shares. Once it has partnered with project developers, it then needs to figure out if there's a market for the product.
Greenbacker's model is yet another example of the growth of financial innovation in the clean energy space.
In April, Hannon Armstrong issued shares of its sustainable-energy REIT to the public, opening up opportunities to smaller investors. And this fall, SolarCity announced plans to securitize $54.4 million in residential solar projects, potentially tapping a major new source of capital for future projects. Banks are also providing more debt financing for solar loans.
In the efficiency space, Noesis Energy is using its online platform to connect financiers with smaller energy service professionals who have traditionally lacked the resources to fund projects. The model is similar to what Clean Power Finance has done for solar projects.
Another startup, EnergyRM, has created a "metered energy efficiency transaction structure" that looks like a traditional power purchase agreement for efficiency projects. Investors and energy professionals are hoping these structures can boost project pipelines, thus helping bring securitization to the efficiency sector.
The clean energy sector has traditionally been defined by technological breakthroughs. But now that technologies have matured to a level where investors feel comfortable, financial breakthroughs may just be the most important market driver.