Banking crisis threatens Biden climate bill

Thousands of start-ups were given a historic leg-up by President Joe Biden’s Inflation Reduction Act last year, which promised to turn the US into a clean energy superpower. 

But renewable energy companies have been scrambling to identify their exposure to regional lenders since the collapse of Silicon Valley Bank and Signature Bank, followed by rescue talks for California-based lender First Republic Bank.

For one high-profile investor, high hopes that the IRA spending spree will turbocharge green growth have given way to fear that banking sector stress will curtail cleantech development.

Are these concerns justified or will the sector weather the storm? Let us know your thoughts at moralmoneyreply@ft.com. (Kenza Bryan)

Biden’s IRA rollout under threat from banking turmoil

Investors focused on American industries of the future breathed a sigh of relief when regulators saved many carbon capture and clean energy start-ups from collapse by guaranteeing their deposits at Silicon Valley Bank.

But the continuing ructions in global banking have sent renewable energy businesses and investors scrambling to identify their vulnerabilities. 

According to Afsaneh Beschloss, founder and chief executive of RockCreek, which manages $16bn of institutional investors’ money, the crisis has the potential to strain clean energy companies’ ability to access finance — which in turn could stymie the rapid rollout of the Inflation Reduction Act.

President Biden’s flagship clean investment package is made up of nearly $400bn worth of investment tax credits, loans and grants for utility, energy and tech companies as well as individuals. 

While some of the benefits will go to big groups such as Chevron, many of its targets are among the small businesses that account for nearly half of US economic activity. These smaller companies are more likely to access finance through regional lenders, who have fared much worse than bigger banks since the beginning of March. 

“The IRA, a large part of it, is [meant] to bring solar and wind and clean energy to low-income communities,” Beschloss, former chief investment officer at the World Bank, said.

“One of the biggest places that was supposed to happen was through local community banks . . . That is going to be hugely impacted.”

Beschloss’s fears about smaller corporate players buckling under pressure are echoed in a recent Morgan Stanley report, which focuses primarily on the solar sector. “We see significant risk that smaller developers of US rooftop solar projects will face financing challenges,” it said. “In the near term, we see sentiment shifting negative with respect to exposure to the US rooftop solar market.”

Larger solar companies are also facing investor fears. Sunrun, the largest residential solar installer in the US, has lost about 20 per cent of its market value since SVB collapsed. But investors may be overreacting. Morgan Stanley wrote that Sunrun could increase its market share at the expense of smaller rivals as a result of the banking troubles, in part because it had more cash at its disposal.

The IRA’s benefits for renewable energy companies are distinct from the financing that banks provide, Brett Castelli, an analyst at Morningstar who covers clean energy companies, told Moral Money. If anything, the value of IRA benefits for clean energy companies are stronger now that banks face trouble, he said.

“As we sit here today there is nothing I have seen that would support there has been a material shift in capital availability” for clean energy companies, he said. “At this point, people are assuming that the credit markets remain relatively healthy.”

Another key part of the IRA is aimed at individuals: tax credits of up to $7,500 for the purchase of new electric or hydrogen-powered vehicles as well as rebates for retrofitting homes to make them more energy efficient.

If fears of a full-blown recession, outlined by the FT’s deputy editor Patrick Jenkins, turn out to be true, the crisis could hamper access to consumer loans. For households, there is not much point accessing tax credits for a car or home if they cannot first get a mortgage or car finance from their local bank.

“If you’re living in rural America, how are you going to get the borrowing that you need to do to turn your house into a cleaner version of [itself]?” Beschloss asked.

One counterpoint from Richard Folland, head of policy at the think-tank Carbon Tracker, is that the IRA’s subsidies and tax credits have given the clean energy sector enough competitive edge to outweigh investor anxiety about capital availability.

“Despite the problems in the banking sector right now, the core driver of the IRA remains unchanged: its very powerful signal to corporates and to investors that the US government has put a long-term regulatory framework in place to support dramatic growth in the clean energy sector,” he told Moral Money.

The speed of the rollout could be what is at stake.

US Treasury secretary Janet Yellen signalled in a speech yesterday that government would provide further backing for deposits at smaller American banks if needed. “Our intervention was necessary to protect the broader US banking system,” she said. “And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.”

We followed up with Beschloss to get her thoughts on Yellen’s statement. Regional banks were still likely to “consolidate, and have less connectivity with local communities,” she wrote, which could lessen the benefits of the IRA for lower income and rural areas.

While the crisis was “caused by bankers not doing the basic job first and foremost”, regulators could be guilty of “just ticking boxes”, rather than doing “real risk management”, Beschloss said. Just as institutional investors asked probing, granular questions of RockCreek’s capital reserves and liquidity, so too should regulators ask these questions of small banks holding corporate cash, she said. (Kenza Bryan and Patrick Temple-West)

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