By mid-2017, American corporate issuers had already gone to market with approximately $18 billion of green bonds, while municipal issuers had issued about $18 billion as well, cumulatively. This number increased sharply from previous years, and we anticipate the final 2017 tally to be higher still. However, in the grand scheme of things, the U.S. still boasts a relatively small share of cumulative green bond issuances worldwide (about $221 billion outstanding as of summer 2017), and the U.S. total is dwarfed by the wider universe of domestic debt issuance. But, curiously, all this comes as the U.S. continues to see dramatic reductions in carbon emissions and while a mass transformation of the American generating grid continues.
- Despite significant interest in renewable energy in the U.S., the green bond market has remained relatively small.
- A lack of near-term clarity on regulatory policy may be contributing to this limited growth.
- However, longer term, we believe there are favorable trends that could signal the growth of the green bond market.
- To date, we have performed Green Evaluations for five issuances in the U.S., but not all are actually labeled green bonds.
Challenges in the U.S.
Despite substantial growth in the green bond market abroad, specifically in Europe and China, the market domestically has struggled to take form for a variety of reasons, but we note that some of these could change in years to come with new developments in the market.
First, whereas EU nations have long benefitted from a transparent and enduring carbon reduction framework, the U.S., at least on a federal level, has had its debate on climate change mitigation characterized by partisan disagreement. With political partisanship belying the scientific consensus on the cause of and dangers faced because of climate change, it has remained difficult to establish a cohesive set of principles for carbon mitigation and adaptation. The failure of the Waxman-Markey Bill in 2009 led to an increased politicization of climate change, which has ultimately slowed progress toward a successful resolution.
This has most recently manifested itself in the 2017 rollback of the Clean Power Plan, as well as the continued jeopardy facing the extension of the investment tax credit and production tax credit, which have long been critical to the development of the wind and solar industries in the U.S. Still, despite the urgency of the matter, we anticipate that a more strict federal policy on climate change is unlikely to develop during the next few years, which we consider to be critical to the decarbonization of the American and global economies. Climate change policy in the U.S., such as it is, remains highly fragmented and largely driven by state-level considerations.
In addition, several years ago, we expected that a growth vehicle for green bonds in the U.S. would be the then-burgeoning yieldco industry (see “Credit FAQ: Standard & Poor’s Takes A Look At The Emerging YieldCo Financing Vehicle,” published Sept. 8, 2014). By definition, these companies anticipated sharp growth in capacity and promised rapid distribution growth based on contracted renewable assets, which would be acquired or otherwise developed largely in a debt-funded fashion. To date, NRG Yield Inc., TerraForm Power Inc., and Pattern Energy Group Inc. have each issued green bonds. However, the industry faltered for more than 18 months due to a bevy of governance concerns and ill-advised acquisitions (and failed acquisitions) by large industry players, resulting in downgrades of existing issuers and a stalling of new entrants.
Two particularly high profile failures were those of the SunEdison-owned yieldcos, TerraForm Power and TerraForm Global. The two issued green bonds in 2014 and 2015, respectively, but have more recently had difficulty accessing the capital markets and expanding their portfolios in line with previous expectations due to the bankruptcy of their parent, SunEdison Inc. in April 2016, amid myriad governance and reporting issues, and the event, along with Atlantica Yield’s parent issues, cast a pall on the industry.
But more recently, TerraForm Power and TerraForm Global have been scheduled for acquisition by the more stable and conservatively managed Brookfield Renewable Energy. We expect growth to resume within the developer industry during the next few years, albeit at a more modest pace, and, with it, there could be an appetite for green bond financing. Already, Pattern Energy Group, a comparatively small wind-focused issuer, has gone to the market with a $350 million issuance. We recently assigned our ‘BB’ corporate credit rating to NextEra Energy Partners, a comparatively large yieldco with a broad array of assets. It hasn’t issued a green bond, but the new rating could signify a resurrection of the yieldco model in the U.S., which lends itself to green bond issuance.
A solution in the works?
Despite these historical limitations, we expect the green bond market in the U.S. to flourish in coming years.
Amid a mass rollback of federal environmental regulations on the heels of President Trump’s unexpected 2016 victory, capped by the announced exit of the U.S. from the Paris Climate Agreement, a groundswell of support for more proactiveness on carbon mitigation emerged at the state, municipal, and corporate levels. Consequently, we expect that state renewable portfolio standards will increase as more progressive states (notably, New York, Massachusetts, and California) seek to establish leadership in climate change, both in reducing their own emission levels and in helping to bolster the industries that support climate change efforts elsewhere; the jobs argument remains a very salient one.
As a result, these heightened renewable portfolio standards are likely to drive continued investment in new renewable energy projects, regardless of the continuation of federal tax incentives; a recent Department of Energy study attributes much of the decline in costs of renewables to research and development spurred at the state level. And if recent history is any indication, much of this investment will have to come from investor-owned utilities and public power entities that have to meet the standards.
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