By Melusine Boon Falleur, a senior in the Huntsman Program at the University of Pennsylvania
Many of us Wharton undergraduates decide to work in finance during our summer internships and after graduation. Amongst the glut of prestigious financial service companies, most of us choose the path of investment banking while paying little attention to the underlying sector such as telecommunications or commodities. However, finance is a great tool that can profoundly change a sector. Through my summer internship working for a project finance company specialized in renewable energy projects worldwide, I discovered the extent to which finance is essential to find attainable environmental solutions. In this article, I will explain why students should consider going into the green sector if they want a finance challenge while making an impact.
One of the biggest impediments for the deployment of renewable energy is very high upfront capital cost. Unlike other sources of energy, renewable energy has almost no operations and maintenance costs, but requires huge capital expenditures at the start of the project. The challenge with green energy sources therefore lies in the cost of capital and not – as we often assume – in innovation and technology. Through my summer internship in project finance, I soon learned that there is a huge demand for creative financial instruments that reduce the cost of capital for renewable energy projects. Companies who have thrived in the green industry are the ones who secure cheap financing, not the ones with the best technology.
SunEdison, a very successful solar energy company, has achieved the scaling of solar projects by designing a pioneering financing scheme. Instead of directly selling solar equipment to customers, SunEdison owns the solar panels and sells the energy produced to its clients. This transfers the burden of the upfront investment from the customer to the energy company, who is more efficient in securing cheap capital for the construction than individual consumers. Consumers who were reluctant to invest a large amount of money for an energy installation now simply just needs to lease the solar panels or buy the electricity from SunEdison. This is just one of the many innovative financial structures deployed in the renewable energy sector.
In addition, local and national policies, such as subsidies and tax credits, also affect renewable energy companies and open opportunities to create profit-maximizing tools. SolarCity is an example of a company that successfully used tax credits to secure cheap capital. By selling its tax credits to large firms such as Google and Goldman Sachs, SolarCity created a way to borrow money without having to pay it back in cash. Today, the tax equity market in the United States offers very attractive returns for firms with large taxable income and helps renewable energy companies raise capital.
Throughout the summer, I have been exposed to many challenges that project finance companies faces in the renewable energy sector. Whether in the United States or abroad, renewable energy is a nascent field met by a lot of skepticism from investors. This is why, as a project finance company, we spend a lot of time finding ways to show our partners that our projects are indeed profitable investments. In order to achieve an attractive margin on our capacity deployment, we constantly need to find ways to reduce our cost of capital. We also need to ensure that our customers will be able to pay for the electricity that we sell them, especially when installing solar panels on commercial and industrial buildings. This implies finding ways of creating credit ratings for firms who sometime don’t publish any information. Because our projects are long-term (sometime as much as 30 years), we also need to find ways to secure payments through long period with Power Purchase Agreements. All these tools need to be carefully designed, and small improvements can have huge impacts on the profitability of a project.
Wharton Students who want to intern and work in the financial sector should consider the following: if you enjoy thinking creatively and using finance as a problem-solving tool, then the renewable energy sector (and the sustainability sector at large) is an amazing field to unlock your potential. There is a big demand for individuals who can think outside the box and find new models to reduce the cost of green energy. Not only will your work be interesting, but you will also have the fulfilling feeling of bringing positive change to the world.
Melusine Boon Falleur is a senior in the Huntsman Program at the University of Pennsylvania. She studies Environmental Policy and Management at the Wharton School.