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National Wind Technology Center
Ian Baring-GouldPaul Schwabe
Sep 1, 2010
Wind Project Finance in the Current Economic Climate
Electricity Markets and Policy Group • Energy Analysis Department
IPP Ownership Remained Dominant, But Utility Ownership Gains Ground
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1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Cum
ulat
ive
Inst
alle
d C
apac
ity (
GW
)
Community
Publicly Owned Utility (POU)
Investor-Owned Utility (IOU)
Independent Power Producer (IPP)
Community:180 MW (2%)
IPP: 8,247 MW (83%)
IOU:1,057 MW
(11%)
POU:510 MW (5%)
2009 Capacity byOwner Type
National Renewable Energy Laboratory Innovation for Our Energy Future3
How Have Wind Projects Been Financed?
1)Single Developer / Investor (IOU,POU,COM)
2)Equity Partnership (Com, IPP)
3)Equity Partnership With Debt (IOU,IPP)
Power, RECs, Tax Ben.
Corporate Parent
Project Company
Developer
Project Company
Power, RECs, Tax Ben.
Tax Investor
Senior Lender
Developer
Project Company
Power, RECs, Tax Ben.
Tax Investor
National Renewable Energy Laboratory Innovation for Our Energy Future4
Current Wind Financing Mechanisms
• Renewable Portfolio Standards• Renewable Energy Certificates• Tax Incentives ~= 50% Project Value!
– 30% Production Tax Credit– Accelerated Depreciation
• Clean Renewable Energy Bonds• Energy Service Performance Contracts
National Renewable Energy Laboratory Innovation for Our Energy Future5
Wind Development and PTC Status
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1,000
2,000
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4,000
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8,000
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An
nu
al C
ap
ac
ity
(M
W)
0
5,000
10,000
15,000
20,000
25,000
30,000
Cu
mu
lati
ve
Ca
pa
cit
y (
MW
)
Annual U.S. Capacity
Cumulative U.S. Capacity
6/99 - PTC expires, not extended until 12/99
12/01 - PTC expires, not extended until 02/02
12/03 - PTC expires, not extended until 10/04
8/05 - first time PTC extended prior to expiration 12/06 - PTC
extended prior to expiration
Starting in 1997: State-level RPS policies gain support under electricity restructuring (effective 1999)Through 2008: 28 states, plus DC enact RPS policies
10/08 - PTC extended prior to expiration
Source: EIA Electric Power Monthly
National Renewable Energy Laboratory Innovation for Our Energy Future6
Renewable Exposure to Financial Crisis
• Use of federal tax credits to encourage RE development– Works if the economy is solid and tax equity appetite exists
• Debt availability for development and construction costs• Broad, systemic U.S. economic recession • Uncertainty of additional RE support from federal
government economic stimulus
National Renewable Energy Laboratory Innovation for Our Energy Future7
Financial Crisis: Mixed Impact on Wind Financing
• Tax equity capital market sizably smaller– Struggling/insolvent traditional investors– New investors possible, but only if project returns increase
• Debt financing market is tight; deleveraging– Interest rates said to be going up; though little debt happening
• Impact on renewable energy projects depends on timing– Most projects financed prior to Oct. 2008 are moving forward– Near-term RE development seems to be challenging– Long term RE financing outlook is positive
• Govt. economic stimulus could provide certainty for the market
National Renewable Energy Laboratory Innovation for Our Energy Future8
How Have Wind Projects Been Financed?
1)Single Developer / Investor
2)Equity Partnership
3)Equity Partnership With Debt
Power, RECs, Tax Ben.
Corporate Parent
Project Company
Developer
Project Company
Power, RECs, Tax Ben.
Tax Investor
Senior Lender
Developer
Project Company
Power, RECs, Tax Ben.
Tax InvestorX X
X
National Renewable Energy Laboratory Innovation for Our Energy Future9
The Tax Credit Equity Market
• Before: Large corp. with sizeable income tax liabilities looking for investment opportunities
– Concentrated in the financial industry
~ 18 investors last year
– Investor returns as low as 5-6%
• Crisis: Investor profitability down– Mergers/acquisitions (e.g. Wells Fargo, Wachovia)
– Banks retrenching; “flight to quality” investments
• Now: Survivors have their pick of investments ~ 4 Tax equity players – remaining tax appetite?
– Main competition is affordable housing, which does not have production risk (unlike wind PTC)
National Renewable Energy Laboratory Innovation for Our Energy Future10
Debt Financing Market
• Little wind project-level debt, prior to crisis– May be required going forward with tight equity market
• Appears that few are lending money (Dexia, Fortis)– Massive deleveraging right now– Banks retrenching; “flight to quality” investments
• Interest rates appear to be going up– Risk has been re-priced– Old Rates: LIBOR + 200 basis points – New Rates? LIBOR + 350 to 600 basis points
• No apparent relief from wind turbine manufacturers – However buyers market for turbine
National Renewable Energy Laboratory Innovation for Our Energy Future11
Electric Power Industry Fuel Costs, Jan 2007 - Oct 2008
Source: EIA Electric Power Monthly
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25Ja
n-07
Mar
-07
May
-07
Jul-0
7
Sep
-07
Nov
-07
Jan-
08
Mar
-08
May
-08
Jul-0
8
Sep
-08
$/M
MB
Tu
Coal Natural Gas Petroleum Liquids
National Renewable Energy Laboratory Innovation for Our Energy Future12
World Carbon Steel Transaction Prices Oct 2007 - Nov 2008
Source: Steelonthenet.com
400
600
800
1000
1200
1400
Oct-07 Dec-07 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08
US
$/to
nn
e
Rolled Steel Plate Rolled Steel Coil Steel Wire Rod
National Renewable Energy Laboratory Innovation for Our Energy Future13
Possible Economic Stimulus Package Revisions
• 3 Year PTC extension• Tax credit refundability through grants• 5 year tax credit carry back• Removal of tax credit double dipping restrictions
(“haircut”)• Removal on tax credits for small wind projects• Additional CREBs funding ($1.6 billion)• Additional loan guarantee funding
National Renewable Energy Laboratory Innovation for Our Energy Future1414National Renewable Energy Laboratory Innovation for Our Energy Future
E. Ian Baring-GouldNational Wind Technology Center & Deployment &
Industrial Partnerships Centers303-384-7021
1617 Cole Blvd.Golden, CO 80401-3393
Thank you for your attention!
14
National Renewable Energy Laboratory Innovation for Our Energy Future15
Current Wind Financing Drivers
Helpful:• Reduced commodity prices• Buyers market – turbine availability• Expected project cost decreases
Challenges:• Traditional generation price decreases• Tax equity market consolidated, expensive• Debt market illiquid, expensive
National Renewable Energy Laboratory Innovation for Our Energy Future16
Renewable Portfolio Standards (RPS)
National Renewable Energy Laboratory Innovation for Our Energy Future17
Renewable Energy Certificates (RECs)Renewable Energy Certificates (RECs)
• Commonly used for mandatory and voluntary markets•A REC represents the non-electrical attributes of 1 MWh of renewable energy generation•Has value separate from commodity electricity•RECs can be critical to getting projects financed
Renewable Energy Generation
Renewable Energy Attributes
Commodity Electricity
RECs
Voluntary $1-7/MWh
RPS $3-22/MWh
RPS (shortage) $48-56/MWh
Sources: Evolution Markets, NREL, Xcel, NJ Clean Energy Program
National Renewable Energy Laboratory Innovation for Our Energy Future18
Federal Incentives – CREBs, or Clean Renewable Energy Bonds
CREBs– Apply to the IRS for an allocation– Federal tax credit to bond owner in lieu of interest payment
from bond issuer– May be more attractive than tax-exempt municipal bonds
• Issuer only pays back bond principal (for most part)
Total allocation of $2.0 B– Up to 62.5% for public sector projects (rest: coops)– Round 1: X of 610 public sector wind projects– Round 2: Y262MM for public-sector wind projects– Additional funding with economic stimulus
bill
National Renewable Energy Laboratory Innovation for Our Energy Future19
Federal Tax Incentives
Production Tax Credit (PTC)– 30% credit for wind through 12/31/09
Modified Accelerated Cost Recovery System (MACRS)– Accelerated depreciation of assets over 5 years
Upfront tax credit for microturbines (10%)– $4,000 residential cap
Value of
Tax Breaks
~=
Value of
Power $ +RECs
National Renewable Energy Laboratory Innovation for Our Energy Future20
Reduced Tax Equity Implications
• 2009 wind projects reported in jeopardy– Another challenge: 2009 PTC expiration
May be possible to attract new investors– Companies in energy: Google, John Deere, oil companies– Companies with tax appetite: industrial companies, railroads,
hotel chains, and other “old” industry companies– Hard to quickly replicate experience of Goldman Sachs, Merrill
Lynch
• Required return on equity going up– From 5-6% up to 10-12%; 15% may be needed, ultimately– First project that gets structured will likely lead the way
