European investors in the US wind sector have been particularly skittish. "There was a point in the fall where people were virtually packing their bags and heading home," says Gary Barnum, a finance specialist for law firm Stoel Rives. Lack of confidence from the banking sector, which provides much of the capital for the wind industry, was a key concern. Now, says Barnum: "Some deals are getting done - just not as many as before."
The first round of federal cash grants (see table, page 60), awarded last month, were designed as an economic stimulus to temporarily replace the production tax credit (PTC), which pays $0.021/kWh for energy produced during the first ten years of a wind project's life.
Approved as part of this spring's American Recovery and Reinvestment Act, the grants provide owners and developers of wind projects with an investment tax credit (ITC), offsetting 30% of the installed capital cost of a wind project - roughly equal in value to the PTC over its ten-year life. A main attraction of the ITC is that it can be claimed in cash upon completion of a project rather than as a tax credit doled out year by year from the government. The US Treasury Department issued detailed guidance in July, which was broadly welcomed by the wind industry. "It was quite favourable and quite friendly, and I think pretty much the entire industry is moving forward around that," says Jeff Chester, a renewables specialist attorney for law firm Kaye Scholer. "It's certainly better than it was six months ago."
Barnum says that wind developers are optimistic but are carefully watching how the timing of grant payments affects how debt and equity then shape wind deal structures. "It's not like everyone's showing up with their cheque books open," he says. "Even though lots of people know each other, it's like you're on a first date because everyone is trying to see how this plays out. A lot of people that were burned before are tentative. But things are occurring, deals are now moving forward."
Financing trends
The Treasury Department, wary of funding speculative projects, does not pay out to approved projects until they are actually up and running, at which point project owners can use the payments to reduce their debt.
Before the global downturn, wind developers regularly partnered with companies with big tax bills that wanted to take advantage of both the PTC and so-called accelerated depreciation credits, which allow a wind plant owner to deduct up to 30% of its capital investment in turbines over the relatively short period of five years. The deep-pocketed partners, often big investment banks, have typically taken majority ownership in the projects.
Because wind farm owners and their big investment partners today have smaller tax bills during the economic malaise, they are relaxing their use of the PTC and the accelerated depreciation credit, extending their value over a longer time span on smaller yearly tax bills. Deals that are going ahead are doing so on a far smaller scale.
Either way, the federal grant has significantly reduced the need for tax equity, says Chester. Developers are taking on longer-term debt to pay for construction of projects and mostly using the grant to pay off debt. Yet wind deals in the US remain a complicated arrangement, says Chester: "The returns on these projects are highly engineered, all based on cash flow. So they're very sensitive to when cash or benefits come in."
Evidence
Recovery in the US wind market is especially evident in two areas of financing: the cash grant programme and new tax equity investments. The cash grants released last month for wind power totalled $499.9 million, spread across ten wind projects representing 894.9 MW of installed capacity (see table). This represents an average of $558,000 per installed megawatt, but the actual amount awarded to each project varies according to capital costs. The grant programme is available for all renewable energy technologies but, because it was designed for wind power in particular, wind projects took nearly all of the $502.6 million, averaging around $49 million per grant. Only $2.7 million was awarded to solar projects.
As the US wind market is dominated by foreign companies, it was no surprise they attracted the lion's share of first-round funding. Spain's Iberdrola was the biggest winner, receiving around 59%, or around $300 million, for 553 MW split between five wind farms.
Portugal's EDP Renovaveis, through its US development arm Horizon Energy, pulled in $47.7 million for its 96.6 MW Wheat Field wind farm in Oregon. The Pennsylvanian 62.5 MW Highland project took $42 million. It is owned by New York-based developer Everpower Wind Holdings, which was bought last month by UK private equity giant Terra Firma for a reported $350 million.
The only US-owned company so far to receive project grants from the stimulus package was Massachusetts-based First Wind, formerly UPC Wind. The company received around $115 million for 182 MW of wind, split between its 125 MW Cohocton plant in New York and its 57 MW Stetson plant in Maine.
More grants are expected as the Treasury Department processes applications and wind turbine construction is completed. Qualifying projects must go online this year or next, or begin construction in 2010 and be completed before 2013. The programme could stimulate the investment of as much as $10 billion into renewable energy projects, according to some estimates.
Still kicking
Some of wind's recovery is independent of the cash grant. Around $65 million in debt finance was secured through insurance company Prudential Capital Group, not a traditional lender to the industry. It's a sign of pent up demand for lending, says Acciona chief financial officer Susan Nickey, adding: "The US institutional markets are stepping up to fill a gap on the project finance debt side recently dominated by European lenders."
Meantime, although progress on tax equity deals remains sluggish, a number of wind projects have seen investments in the past months. JP Morgan Capital Corporation joined an affiliate of Union Bank NA in a $100 million tax equity investment in Acciona's 123 MW Red Hills wind farm in Oklahoma that went online in spring.
JP Morgan's equity investments in wind have flowed elsewhere, too. Last month the bank paid $101.9 million for a substantial ownership stake in Horizon Wind Energy's 100.5 MW Rail Splitter wind farm in Illinois, completed in June. In addition to giving JP Morgan access to depreciation tax credits, Horizon says the project is in the application process for the federal cash grant, which is likely to be disbursed in a future round of allocations.
Naturener USA, the subsidiary of Spanish-based Grupo Naturener SA, secured a $120 million tax equity investment by Morgan Stanley for Naturener's Glacier 2 wind farm outside Ethridge, Montana. Morgan Stanley also provided a $117.5 million construction loan for the project. Separately, a first phase of development in the same area, the 106.5 MW Glacier 1, received a $132 million loan for construction from Morgan Stanley and Lisbon-based Banco Espirito Santo.
Other tax equity deals are expected as more projects are built and companies decide what proportions of their projects either seek equity or pursue the cash grant as the primary incentive. The American Wind Energy Association reported in late July that the US wind energy industry installed 1.2 GW of new power-generating capacity in the second quarter, bringing the total added this year to just over 4 GW. More than 5 GW has been reported as under construction, due for completion this year or next. Many developers have said the cash grant, by reducing reliance on limited tax equity, is crucial.
Federal support for wind power
US Treasury Department cash grants awarded September 2009
Grant
Project Location Developer MW (dollars
millions)
Penascal Wind Sarita, TX Iberdrola 202.0 114.1
Farm
Locust Ridge II Shenandoah, PA Iberdrola 102.0 59.2
Canadaigua Power Cohocton, NY First Wind 95.0 52.4
Partners
Wheat Field Wind Arlington, OR Horizon Energy 96.6 47.7
Farm
Hay Canyon Wind Moro, OR Iberdrola 100.8 47.1
Farm
Pebble Springs Arlington, OR Iberdrola 99.0 46.5
Wind Farm
Highland Wind Salix, PA EverPower Wind 62.5 42.2
Farm Holdings*
Evergreen Wind Danforth, ME First Wind 57.0 40.4
Power V
Moraine II Wind Woodstock, MN Iberdrola 50.0 28.0
Farm
Canadaigua Power Cohocton, NY First Wind 30.0 22.3
Partners II
Total 894.9 499.9
* Acquired by UK private equity firm Terra Firma
Source: US Department of the Treasury
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