Citigroup Sees Capital Markets Reviving Renewables

Renewable-energy companies will derive more of their funding from bond markets as banks curb lending to the industry, Citigroup Inc. (C)’s head of environmental finance said.

Green-bond sales and initial public offerings will expand after kicking off last year, Michael Eckhart said by telephone. Bonds backing clean-energy and environmental ventures may account for 10 percent to 20 percent of the $7 trillion-a-year market for the securities within a decade, he said.

Eckhart’s comments cast a positive light on an industry whose funding is threatened by cuts in support for renewables from governments in the U.S. and Europe. Money managers are seeking investments that highlight their green credentials while offering an alternative to more volatile equities.

“We’re going to see a multiplier effect as we scale up use of these mechanisms,” Eckhart said. “This is the beginning of a transition from bank loans and equity financings to refinancings in the capital markets for this industry. We talked about it three years ago. Now we’re doing the deals.”

Banks in Europe, the U.S. and Japan reduced lending to clean-energy projects as the economic crisis took hold. While they’ll retain a role in the industry as they can take on project risks that institutional investors can’t sustain, capital markets will increasingly provide finance, Eckhart said.

Share Sales

British fund Greencoat U.K. Wind Plc started a wave of IPOs last March, raising 260 million pounds ($429 million). NRG Yield Inc. followed with a $431 million offering in July, and Canada’s TransAlta Renewables completed a C$200 million ($181 million) share sale in August.

Those companies were dubbed “yieldcos” because they own plants with long-term power contracts that generate reliable cash flows.

“We’re going to see five or 10” such companies this year, Eckhart said.

Green bonds sold by development banks, projects and companies rose to a record of about $14 billion in 2013, according to researcher Bloomberg New Energy Finance. Citigroup is now working on the issue of two green bonds, Eckhart said, without giving details.

“We saw green bonds issued by the sovereigns and development finance institutions in 2013,” he said. “We’re going to see green bonds by corporate and municipals this year, and maybe 10 or 20 of them.”

Bond Forecast

Sales of such bonds will total about $25 billion this year, HSBC Bank Plc said today in a report, more than doubling its $11.4 billion assessment for 2013. Issuance has jumped since the first green bonds were sold in 2007, spurred by the funding needs of clean-energy projects and moves by institutional investors into climate finance, it said.

Citigroup, along with Bank of America Corp., JPMorgan Chase & Co. and Credit Agricole Corporate & Investment Bank helped publish a guide to bond financing for clean-energy and climate projects this month. Goldman Sachs Group Inc., Deutsche Bank AG and HSBC also support the Green Bond Principles, according to Citigroup.

The outlook for clean energy isn’t as positive elsewhere. Data from BNEF show investment in the industry fell for a second year to $254 billion in 2013. The European Union said Jan. 22 that a new renewables target for 2030 that extends and expands 2020 goals won’t be binding for individual member states, garnering criticism for a lack of ambition.

Emerging Markets

The decline in investment was in part a result of falling technology costs, according to Eckhart. Lower spending in the U.S. and Europe, where nations cut subsidies and other support programs, will be offset by emerging-market growth, he said.

Expansion in such markets will drive up investment in 2014 and other countries around the world will increase spending in the following two years, he said. The resurgence of wind-power developments in the U.S., where an industry tax credit has been extended, may add about $15 billion a year alone, while growth in India, Africa and the Middle East will also pick up, he said.

“Renewable energy is starting to capture significant market share and hurt the incumbent competition,” he said. “The serious game is on.”

To contact the reporter on this story: Sally Bakewell in London at sbakewell1@bloomberg.net

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