What Do Wall Street's Woes Mean for Renewable Energy?

The credit crunch could slow wind and solar projects, but Congress's bailout renews key tax credits.

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Amid all the uncertainty on Wall Street because of the burgeoning financial crisis, there have been growing concerns about the potential fallout for emerging industries like renewable energy.

When Lehman Brothers sank two weeks ago, energy insiders watched with particular concern. Lehman had been heavily involved in financing renewable energy deals, from raising much-needed capital to buying ownership in projects. They were "a full-service player," as one observer put it. So with other large banks and institutions failing in recent weeks, has renewable energy fallen into serious trouble?

Yes and no.

It's clear that as banks tighten up on their lending, getting loans will be more difficult and expensive. Wind and solar developers will likely take a hit, since they need loans to help pay for equipment and construction costs.

But the boom in renewable energy that's been growing in this country for the past few years—wind power generation shot up 45 percent in 2007—hasn't come from basic loans alone. Much of the most important financing is more sophisticated and complicated, involving specialized firms, investment banks, and the federal government.

And it's here—at this muddled intersection of government policy and private money—that the Wall Street financial crisis is playing out for much of the renewable energy world.

Before the crisis, in fact, there was already trouble. The federal tax credits for wind and solar energy were set to expire in December. Until Friday afternoon, they had not been renewed. That changed with the passage of the $700 billion bailout bill by the House. That bill, like the successful Senate version, includes renewal of the tax credits. Dozens of large wind and solar projects, originally scheduled to be built in 2009, had been put on hold as developers waited for Washington to act. Now, once again, they may start to move forward.

Wall Street's problems, however, have delivered a second punch. "The only kinds of people who could take advantage of these tax credits were the largest, most profitable corporations, like JP Morgan and Goldman Sachs, or other big players like General Electric," says Eric Silverman, a partner at Milbank, Tweed, Hadley and McCloy, a law firm that specializes in renewable energy financing. In one widely used maneuver, for example, a bank or corporation cashes in on the tax credits by buying a majority stake in a developer's project. That gives developers enough money to move ahead with projects, and, because the bank is now the "owner" of a renewable energy project, it gets to use the credits.

But with capital drying up, the industry could lose some key players. "You'll see some potential investors sidelined," says Randall Swisher, executive director of the American Wind Energy Association. Fewer investors, Swisher says, means that developers will have to compete for the limited money that's still available, so the cost of doing business will likely go up.

For the wind industry, which has been working hard to narrow the cost gap that exists between it and more traditional forms of energy, that's not heartening news. On the other hand, the cost of business is going up for everyone. In fact, wind and solar might end up faring better in this climate than coal and nuclear projects, observers say, because the former get quicker paybacks on investment. In addition, heavy investment is still coming from European companies and banks, which appear to be weathering the current crisis slightly better.

A number of solar companies hoping to go public this year have been forced to put off their initial public offerings, citing bad credit conditions. Companies that had deals with Lehman Brothers might have to restructure them, although Barclays, which bought Lehman, will likely carry some of them forward. Meanwhile, average customers looking to install solar panels on their roofs—if they're still in the mood to spend—will struggle to find good loans, says Rob Powell, CEO of Verde Energy, a renewable-energy-services provider.