Governments borrowed and spent (Bail outs included) to deal with the financial crises in 2008 – 09. Naturally that level additional debt on states with debt level around 100% of GDP has resulted in a debt crisis. Now the Austerity is followed to manage. However with several million jobs and pension losses and with the austerity measures, economic growth expectations in the short term should obviously be minimal. If private consumption is not active and if the government follows austerity; growth will obviously be affected.
Natural disasters, sovereign credit rating actions and political developments have, however, presented us some interesting questions. How to facilitate investment opportunities, if they were to receive government support? With the Japanese sovereign debt outstanding is more than 200% of its GDP, how come they finance the nuclear exit and renewable energy (RES) expansion?  The government borrowing costs have just gone up with the rating down grade.
Even the Germans have decided to exit nuclear energy. Initially the German government decided to impose a tax on nuclear fuel, an indirect austerity measure and a very painful one for the utilities. They argued that such tax will help them finance the RES. Then decided to exit nuclear in the light of natural disasters in Japan. Unlike the German energy producers who have prospered with their expansion across EU, the Japanese power producers may not be ready to shoulder this sort of extra burden.
Both the nations need around 25% of installed capacity to be substituted. And renewable energy survives on government funding. One may argue that the decision to substitute RES for Nuclear will bring the costs of RES down considerably and minimize the required government support. However multiple solar panel makers have gone out of business because of the price fall.
Our mitigation strategy for the above conundrum is discussed in the following part:
We see that the nuclear exit and RES expansion means a sustainable investment opportunity in raw materials and renewable energy equipment makers, electrical equipment makers etc. We concur that markets must have already initiated attempts to tap this. We only suggest leveraging the credit derivatives and innovative financing of RES projects, taking advantage of popular public support for renewable energy.
Market for credit products is very healthy in Germany and Japan. Against a variety of collaterals there exists a liquid market for RMBS, CMBS, CDO, CLN etc. Financial institutions while making securitized credit derivatives mix debt obligations of various returns and default probabilities. Ratings of these credit derivatives are dependent on the macroeconomic health. Recent adverse conditions have forced the rating agencies to downgrade these credit products, even when the defaults were rare.
We suggest a discretionary approach in product creation. We illustrate with an example.
Consumers finance solar panels / wind mills through local financial institution and repay it from the gains based on feed-in tariffs ((consumption – generation) X feed-in tariff per KWh). By letting the financial institution have the first right on the gains based on feed-in tariff, or with sufficient caveats we can ensure that the repayment of debt is not in the hands of the consumer but is in the hands of the local utility, government and financial institution that financed the project. The feed-in tariffs are primarily set by the governments in a way to encourage investments in renewables. So the securitization of these debt instruments can be separated and pooled together.
The financial institutions can sell those obligations in global markets. In case of credit products based on home mortgages, the repayment is in the hands of home owner. The borrower’s financial constraints may force a default. The ripple effect is all too familiar to us. However with the debt instruments of energy projects, the feed-in tariff can be the game changer. The debt instrument repayment has to be structured long term enough that such NET gain thru feed-in tariff, can itself retire the debt. All the renewable energy technologies boast a long life span.
By tying the debt service with NET gains, we are only ensuring a regular payment but not a fixed amount. This is because the solar power / wind power generated in a given period is uncertain and so are the gains. That fluctuation can be a major attraction for credit derivative investors.
Financing of solar farms / wind parks can also be changed. In addition to purchasing power produced from renewable, citizens may also like to own some of the RES assets. However, everyone may not have the opportunity to own a solar panel or a wind mill. We suggest that the new projects issue shares in the installed capacity like the IPO and let the citizens invest (through loans / equity). Underwriting institutions can finance those investments. Those obligations can be securitized and sold to global investors. Again the certainty of the repayment and return (on and of the capital) is in the very framework of the power purchase agreements and compulsive nature of the product. The returns for the derivative investors are in the deviations of generated power from the standard estimates. This deviation alters the NET (taking also into account the operational costs of the project) gains to the consumers (in turn to the derivative investors). That means there is certain volatility. That volatility qualifies these investment instruments suitable for all the opportunities that new financial innovation offers.
There are of course many finer details need to be worked out in taking this approach forward.
The exotic versions of the new products can also have tranches of consumer finance obligations, debts by the product makers and services providers. To help the debt service, the government may provide subsidies to the equipment makers. Governments can also facilitate the ownership of renewable assets even when the resident is not owner of the property.