Wind turbine maker and project developer Acciona North America completed back-to-back debt deals in 2009 with Prudential Capital Group, says chief financial officer Susan Nickey. This filled a gap left when European banks were forced to reduce lending or pull out of the market entirely due to the financial meltdown.
"When the bank markets were having their restructuring issues, we reached out to the institutional market and worked with Prudential," says Nickey.
For many years, insurers lent to the renewable energy industry, but became less active as European banks came to dominate the market in terms of pricing and deal structures.
Over the past year, insurers have come back in. Prudential provided $50 million for Acciona's $381 million, 180MW Tatanka project in North and South Dakota, and $65 million for the company's $252 million, 123MW Red Hills Wind Farm in Oklahoma. While banks have made a faster recovery than Nickey says she anticipated - re-emerging as potential main sources of capital - Acciona's relationship with the insurance firm helps put it ahead of the curve in the US's transforming wind financing environment.
Prior to the financial meltdown, most wind finance involved bringing in large investors able to use the $0.022/kWh federal production tax credit (PTC) to lower huge tax bills. For the most part, those tax-equity players were uncomfortable with long-term debt on projects because having lenders in the mix gave them less control. But the crisis slashed the number of major tax equity investors. US policy makers responded by allowing projects that start construction in 2009 or 2010 the option of getting a cash grant equivalent to 30% of eligible project costs instead of the PTC.
Project financing
The grant has prompted a return to what Nickey calls a more traditional project finance deal. This breaks down to 18- to 20-year debt providing about half of project capital, the government cash refund giving 30% and equity from the developer making up the final 20%. Lenders advance against the government cash to help fund construction.
The long-term nature of the debt financing is attractive to insurance companies. And if the US wind industry can permanently free itself of reliance on the tax code to drive investment, Nickey believes many insurance companies will also be part of a broader group ready to invest in wind by taking long-term ownership stakes in projects.
"There are large pools of (potential equity funding) that are untapped," she says, adding that these include pension funds and other institutional investors. "Some of the insurance companies also have equity pools that are targeted towards infrastructure and would like to invest in 20-year wind energy assets," she says.
The problem with relying on tax-motivated investors is that there are not enough of them out there to handle the kind of growth potential the industry has, says Nickey. "It never was sufficient. It is a limited pool of capital from financial investors and it is not enough to go from 2% wind in the US to 20%," she says, referring to the percentage of electricity met by wind.
Like most in the industry, Nickey wants to see Congress extend the cash payments to projects that start construction in 2011 and 2012. Without this extension, projects that start construction in 2011 or 2012 have the choice of either the PTC or an investment tax credit (ITC), which allows them to deduct 30% of the capital cost of the wind farm from tax bills in the year the project came into service.
To use the PTC or ITC, the developer must find an investor with tax appetite, says Nickey, and that market has not recovered to pre-crisis levels. "There's more (tax equity) available and there is some interest, but it continues to be constrained relative to the demand."
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