Although it may not be the obvious hero, Goldman Sachs — usually more Vampire Squid than White Knight — and its cohorts could be responsible for transitioning the renewables sector from a fragmented and esoteric industry to one of mainstream dominance. Goldman Sachs has facilitated the development of world-encompassing industries before and they will do it again.
In its 2014 Annual Report, Goldman compares the potential of the renewables market to that of the Internet: “Mass market adoption of any new, disruptive industry often takes a path of early enthusiasm followed by market rejection, volatility and ultimately, acceptance. This was true of the Internet, and evidence suggests a similar course when it comes to clean technology and renewable energy.”
The information revolution saw us move from only 1 percent of the world’s information communicated online in 1993 to 97 percent by 2007. In comparison, the U.S. Department of Energy’s goal to increase solar energy output from 1 percent to 10 percent by 2025 is modest, and yet would dramatically grow the renewables industry.
Behind this growth are Goldman Sachs, Citi, JPMorgan and the rest of the institutional investment industry, moving increasing volumes of capital into this market as it matures and sheds risk. The capital markets are one of the most powerful forces humanity has created, and while occasionally (OK, often) it can go rogue, harnessing its power is the only realistic way that renewable energy will receive the investment capital needed to scale and have the impact we need.
The “right things to do” make economic sense
Flying less, recycling more, and being better to the planet are things we should all do; affordable renewable energy solutions and high-tech innovations are things we all have. But it’s clear these aren’t enough to change the course on which we find ourselves. Large amounts of capital are needed to advance renewable energy from fringe to dominance, which only the financial industry can deploy. Thirty years of technological advances provided the kindling, but it’s capital market gasoline that will really get things going.
Right now there are (metaphorical) thick clouds of smoke billowing from the financial sector. Goldman Sachs is investing $40 billion in renewables by 2021. Citi has committed $100 billion to the facilitation of clean energy by 2025, and Berkshire Hathaway is investing $15 billion into solar and wind projects at Warren Buffet’s personal behest. Within investment banks, new groups have been created to focus on clean energy development and businesses, such as Morgan Stanley’s Institute for Sustainable Investing and JPMorgan’s Environmental and Social Risk Management division.
These decisions weren’t made because they are the right things to do (although they are), but because they make economic sense. Renewables must deliver strong returns first, and the double bottom line impact of benefiting the environment second. This may seem calculated, but tapping capital markets is absolutely crucial to the health of the planet. Investing in clean energy is a smart decision — not just a personal passion — and that’s what will allow renewables to achieve global scale.
To date, capital markets are igniting growth in renewables by reducing capital costs, investing in better ideas, and financial innovation.
Reducing capital costs
Third-party financing plays an important role in the capital markets, as one person’s loan is another person’s income. Providing affordable financing to cover any upfront clean energy adoption costs is one of the easiest ways to drive change at the consumer level. The P2P (peer-to-peer) lending space is booming with online alternative lenders, such as Lending Club, Prosper, and Fundera, and the model has taken off in the renewables sector.
SunFunder and SparkFund are tackling renewable energy financing issues in emerging-market solar and energy efficiency, respectively. Reducing capital costs for individuals and small businesses creates a virtuous cycle: cheap capital expands the customer pool, which increases product demand, and that allows manufacturers to offer cheaper and cheaper panels, expanding the customer pool even more.
The fuel of this virtuous cycle is capital, and the combination of flexible online solar lenders and institutional capital will amply provide for future growth.
Investing in good ideas
The renewables industry wouldn’t be as advanced as it is today if not for the billions of investment dollars poured into it. In 2014 global investment in clean energy reached $310 billion. Cleantech firms raised over $18.7 billion and venture capital and private equity investment in the industry reached $4.8 billion. Early investment in firms such as SolarCity, Enphase, and Clean Power Finance accelerated the growth of solar by at least five years, transforming it to be today’s compelling power source.
The energy industry is one of America’s oldest, and, as is happening in the fintech (financial technology) space, is being challenged by new market entrants who are using apps, the web, and SaaS (software as a service) products to make things faster, better, and smarter.
From better underwriting models to products that provide greater control over home efficiency, such as the Nest thermostat, funneling investor capital toward good ideas that are bringing renewables to scale is increasing the industry’s size, influence, and accessibility dramatically.
It used to be that only the largest of financial institutions could invest in renewables, but new products are providing access across nearly every asset class. Over the past few years the introduction of green bonds, YieldCos (companies that predominantly distribute cash flows from owned operating assets as dividends or other payments to investors), and clean energy index funds, while still early, show promising initial returns, indicating that the market has an appetite for “green-backed” financial products. This contradicts the false assumptions that investing in the environment and investing for returns cannot co-exist.
Today’s products are just the tip of the iceberg. Emerging solutions include more ways to repackage debt (such as renewable-backed securitized products or energy mezzanine financing) and financing constructs that generate revenue based on projected savings, such as social impact bonds.
As Michael Eckhart, managing director at Citi, said in an interview with Clean Energy Finance Forum, “I think we are 40 years into a 100-year transition to a clean finance economy. The momentum is going in our favor and we are succeeding.”
Like the tech industry, the renewables market has waxed and waned, but the constantly decreasing cost of technology drives both forward. As hardware costs continue to decrease and renewable equipment becomes more commonplace, software-based firms will build better mousetraps and bring new solutions to old problems.
Underlying all this will be an infrastructure of capital flowing from one entity to the next, responsible for thousands (probably millions) of jobs and billions in global economic growth.
If Internet-like growth is to be achieved, then we have reason to be optimistic about the future of our environment. Right now we may be at the stage with renewables of reading articles explaining what “www” means and why you can’t use a landline phone and the Internet at the same time.
But it also means that across the country you have the renewable energy versions of Bill Gates, Steve Jobs, and Larry Page working in garages, developing innovative products we didn’t know we needed until they change the world. However, this time, there is one key difference: As markets mature, investments are made, and returns are reaped, not only Goldman Sachs profits. We all do.