By Richard Stubbe, BloombergNEF. This article first appeared on the Bloomberg Terminal.
First the coronavirus disrupted the renewable energy supply chain, hitting directly at the key manufacturing hub of Wuhan, China. Now it’s hitting the demand side as the widespread lockdown hampers the U.S. economy, where solar projects are nearing completion and facing deadlines to qualify for tax incentives.
That combination has made it a busy time at Leyline Renewable Capital, which provides development stage funding and guidance for renewable energy development. Leyline has been in the business since 2006 and participated in more than 170 renewable-energy projects.
“It’s what we’re geared up for,” said Erik Lensch, Leyline’s chief executive officer. “We solve problems, and part of the way we solve problems is providing capital to developers who really need it at a time when there aren’t a lot of other options.”
Lensch said the company has outlined and prepared for three economic scenarios caused by the outbreak: a short-term slowdown and return to normal later this year; an 18-month recession followed by a rebound; and a deeper long-term credit crunch. He took questions from BloombergNEF in a phone interview last week.
Q: What does Leyline do?
A: We are a specialty lender during the development phase of renewable energy projects. We provide bridge lending and equity for developers and projects specifically, including solar and biogas and a little bit of landfill gas. We’ve typically provided capital for development expenses like engineering, permitting, legal, real estate, interconnection deposits with utilities, payments to secure offtake agreements — all the mix of different things that go into a project to make it ready.
Q: How has the coronavirus affected Leyline’s outlook?
A: It’s important to be careful and selective about how we deploy capital right now because the future is probably a little less certain than it was. But we’re in this for the long term. We feel very positive about the trends around renewable energy, and in some cases these projects have to be carried through the downturn. We’re really busier than we’ve ever been.
Q: Who’s going to be hurt by this outbreak?
A: The projects that were good to begin with will make it through and come out on the other side. But it will separate out a lot of the weaker players, the people who jumped in and weren’t committed to the space, didn’t have the team and the experience and the pipeline to get through this period. We haven’t seen any pullback in the projects that were well along the pipeline for 2020 and 2021.
Q: What are some of the sources of uncertainty for you?
A: There are still some questions. If the economy takes a pretty serious nose-dive for an extended period of time, does the tax equity dry up? Are we able to get extensions to the tax benefit? All of that’s obviously speculative. We have a short-term impact for sure — supply chain disruptions, equipment coming out of China.
Q: What are some of the medium-term possibilities?
A: We’ve put together a three-scenario plan for our business. The first one is that this is a short-term thing that we’re going to make our way out of, and things are back to some version of normal by the end of this year.
The second is that we go into a deeper recession, something like 18 months. That would be more painful and more disruptive to the industry. The third is a real credit crunch on a global basis that grinds everything to a halt.
We’re really preparing for the second case. Hopefully, it won’t be that bad. That means we may have to put more capital to work. We may have to come in and put some capital to work during construction. We are well-capitalized and well-funded, so we’re planning for what that might look like right now.
Q: A few months ago, the virus hit China and the supply side. Now it appears the disruption on the demand side may be great. How does it look to you?
A: The supply side is better; disruptions have slowed. Because of the tariff situation over the past few years, equipment suppliers shifted their manufacturing to other countries than China, so there was some built-in protection there.
There’s a lot of uncertainty around planning and zoning and permitting right now, especially in rural areas where they may not have the level of broadband and technology that an urban area might have. Out of 30 projects we have going on right now, all but three are in rural areas.
Q: What are the companies doing during the interim?
A: Most of them are heads down, pushing their projects through the development process. There’s a lot of capital out there. There doesn’t seem to be much of a slowdown concern for 2020. When you look beyond that, two or three years from now, it’s a pretty uncertain situation. Some projects will be delayed until there’s more certainty.
Q: What’s your view on the long-term situation?
A: There will be enough trickle-down benefits through the stimulus that make their way to the states. States like California and New York, with very strong mandates for renewables, are going to continue to be strong. Developers will find opportunities to put money to work in those places where they have strong goals. It will depend regionally.
Q: What other states are positioned to do well in renewables?
A: The one that jumps out at me is Virginia. They have been a big hole between a lot of positive policies in North Carolina and Maryland and the District of Columbia, and they have been a laggard. They passed some new law in early March that probably couldn’t have come at a better time. Nevada has just put in some storage requirements as well.
Q: What long-term concerns do you have that aren’t related to the coronavirus?
A: I wonder when interest rates will start to go up. In the current oil price environment, I wonder what some of the major oil companies will do with their commitments to renewables. BP and Shell and some of the integrated oil companies are pretty active in the space. Are they going to pivot to renewables so they’re less dependent on oil, or are they going to double down on their oil business?
The third wild card is what happens at the federal level. Will there be more stimulus? Will there be a bailout for the oil companies?
Q: Oil demand this year is probably going to be well below 2019 levels. Do you expect a return to 100 million barrels a day, or has demand peaked?
A: The oil industry is getting pressure from all fronts. There are more electric vehicles, more energy efficiency, and pressure to use less plastic. My guess is that long-term it’s not a great business to be in — the long-term trends are not in their favor and this is a major disruption.
Q: What other changes might come out of this?
A: I do think infrastructure will be viewed in a much less volatile way. I’m hopeful we’ll see a lot of infrastructure investments going forward. Rural communities need broadband, we all want to see more renewable energy, there are a lot of waste issues. The problems don’t go away because of Covid and an economic downturn. We still have long-term structural challenges and problems to deal with.