Sand Diego Gas & Electric (SDG&E) filed an application with the California Public Utilities Commission (CPUC) in July, asking for approval to make a tax-equity investment of up to $600 million in Naturener USA's 309MW Rim Rock project.
Tax equity has long been a vital part of financing US wind projects. The federal government offers a $0.22/kWh production tax credit (PTC) and accelerated depreciation benefits that most developers do not have the tax appetite to use, requiring them to find tax-motivated investors who do.
The credit crisis forced many of the traditional tax equity players out of the market or severely limited their capacity to make investments, leaving Naturener struggling to finance the project. As SDG&E had already signed a power purchase agreement (PPA) for the output of Rim Rock last year, the developer approached it about taking on the tax equity.
"We were basically trying to make sure we found a stable, reliable investor," says Alfredo Cahuas, chief executive officer at Naturener.
Setting precedent
Cahuas believes it is the first time a regulated utility has provided tax equity to a wind project, but he is convinced it will not be the last. "We believe it is going to be a precedent-setting arrangement," he says.
"When you look at a regulated utility like San Diego Gas & Electric, you see not only a strong balance sheet, but you also see very stable earnings and, because of that, a very significant and stable taxable income. It makes sense for them to make tax equity investments. We think we will see more of these coming up."
It is a possibility SDG&E also raises in its application, saying it believes there is a constructive role utilities can play in financing renewable energy projects. In fact, says SDG&E media spokesperson Jennifer Ramp, the utility is hoping CPUC approval of the Rim Rock deal will allow it to serve as a template for future investments. "The timing of this was such that this is the first application that we put before the commission," she says. "But we are also looking at two or three other renewable energy projects in California that we would like possibly to move forward with this sort of tax-equity structure as well."
Whether other utilities follow suit remains to be seen, says Tim Stephure, a senior analyst with Cambridge-based IHS Emerging Energy Research, which tracks utility involvement in the wind sector. "Traditionally, utilities are a very risk-averse group and tend to stick to their core businesses pretty tightly," he says. "Utilities are not used to being banks. They are used to signing PPAs and, in some cases, owning and operating wind farms."
According to Stephure, SDG&E stepped out of that comfort zone because it is under pressure to meet California's renewable energy mandates, which require it to meet 20% of demand from green sources of power this year and 33% by 2020. The utility only expects to reach 14% in 2010. "They are quite far behind in their compliance needs over the near term, and this a large wind farm that is a key project for them," Stephure says.
Utilities in most of the rest of the US do not have the same pressure. "The bulk, I think, of the US right now is not having problems securing enough renewables. In fact, it is very hard for developers to get PPAs right now," he says. "There are only a few markets where you could potentially see utilities up against the wall and needing the power for their state mandates. So I think that incentive is restricted to places like California and maybe some parts of the north-east."
At the same time, however, a successful investment here could act as a catalyst for others. "Depending on how the numbers work out and how comfortable utilities feel with it, it could take off," Stephure says.
He points out that electricity prices are down and utility earnings last year were less than stellar, so investment in wind could be a way to boost the bottom line. "This could be a good opportunity for them," Stephure says.
The Rim Rock deal also brings financial benefits to ratepayers. The investment will earn SDG&E's regulated rate of return, which is 7.36% after taxes, compared to the 8-9% return Cahuas says traditional tax-equity players want for their money.
"This saving is passed through directly to ratepayers," the application to CPUC says. "For every 100 basis points that SDG&E's cost of capital is below the market cost of capital, customers will save approximately $120 million over the life of the project."
The utility says it needs a decision from CPUC by March 2011 if it is to bring the project online by the end of 2012, when the PTC is currently scheduled to expire.
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