State of the Renewable Energy Finance Markets

Post-stimulus Financing: Will Renewable Growth Continue?

FULL CREDIT TO Renewable Energy World, Elisa Wood

Original News Source >

Will private lenders and investors pick up where government leaves off in a post-stimulus world?

LONDON – Money is flowing worldwide for many forms of renewable energy, as the industry presses forward with dramatic growth. CleanEdge reported US$188.1 billion in global revenue for biofuels, solar and wind energy in 2010, a 35.2% surge over 2009. Bloomberg New Energy Finance (BNEF) found that clean energy investment worldwide reached $243 billion in 2010, nearly double the sector investment just four years earlier. And venture capital investment for clean technology in the US rose 54% in the first quarter of 2011 compared with the same period one year earlier, in a trend led by solar energy companies, according to Ernst & Young.

What has buoyed the market? Many in the renewable energy sector thank stimulus funds infused into the industry by governments throughout the world. But will the growth continue as stimulus funding winds down? Will private lenders and investors pick up where government leaves off in a post-stimulus world?

Several deal makers describe the state of today’s finance markets and provide their outlook into 2012 and beyond, including how hard – or easy – it is to attract private tax equity, project finance, venture capital and other types of loans and investments. Even as the world economy continues to struggle, renewable energy fares far better than many sectors.

REVIVAL OF U.S. TAX EQUITY?
Jonathon Gross, a principal with US accounting firm Reznick Group and head of the firm’s alternative energy practice in North Carolina, helps match renewable energy project developers with investors. He specialises in tax equity investments, where the investor, in effect, buys a project’s tax benefits to offset tax liability. Goldman Sachs was one of the more notable tax equity investors before the financial collapse. But when profits dropped after the crash, so did tax liabilities. As a result, tax credits had little value and investors fled.

In response, the US government created a cash grant to help renewable energy projects during this phase. The grant differed from a traditional tax credit in that developers received money up front, rather than after the project was built or operating. This helped renewable energy developers secure project financing when tax equity investors vanished. The grant, however, is being phased out beginning in 2012.

Fortunately, tax investors are returning to the market, said Gross. But, he added, “I don’t know if it will be fast enough for the developers who are getting the grant.” Gross predicts a dip in US project development in early 2012 when the federal cash grant expires for projects that do not meet certain predevelopment requirements.

Meanwhile, a player known as the tax equity syndicator is increasingly moving into energy. Syndicators, such as Stonehenge Capital Company and Red Stone, connect private equity investors with developers. They more commonly work in low-income housing investment, but syndicators lately have been attracted to state renewable energy credits, Gross said.

Flat Water Wind Farm, a 60-MW Nebraska project, was a recent beneficiary of a tax equity deal. Completed in April 2011, the deal was arranged between U.S. Bancorp (USB), Gestamp Wind North America, Spanish Banco Santander and other lenders. USB has committed more than $400 million of renewable energy tax equity to finance over $800 million of renewable energy projects in the US, primarily in the solar and wind energy markets.

INNOVATIONS, CREDITS AND PROJECT FINANCING
In Europe, it’s unclear where the renewable energy sector will find the capital to build enough projects to meet 2020 renewable energy targets. Assuming it will cost about €350 billion to achieve the goals, each of Europe’s 40 banks that are active in the sector would need to loan €750 million annually for the next 10 years, according to Ernst & Young’s paper, Funding Renewable Energy in a Capital-Constrained World.

What will those sources be? European utilities might fill in some of the gap, but renewable energy will still need alternative pools of equity and debt to finance projects. One source might be industrials, especially those that act as supply chain co-sponsors in the project development phase, said Ernst & Young.

In the US, renewable energy credits are gaining importance in helping developers secure financing. Banks are apt to take an applicant more seriously if it has a long-term contract to sell its RECs to a utility or other credit-worthy buyer (as opposed to selling RECs on the spot market or under short-term deals).

Solar renewable energy credits (SRECs), only available in certain states, are created by solar energy projects. One MWh generated by a solar installation equals one SREC. Utilities and retail suppliers buy the credits from projects and use them to meet state government requirements that a certain amount of the electricity they sell comes from solar.

But there was much talk in Spring 2011 about the collapse of the famed New Jersey SREC market. New Jersey is a crucial market for solar developers in the US, the second largest to California, with an exceptionally mature SREC market, according to the Solar Energy Industries Association’s US Solar Market Insight: First Quarter 2011.

New Jersey’s SREC was a victim of its own success. The state’s high SREC prices attracted so much solar development that the market became oversupplied with SRECS and trading prices plummeted for the credits. SEIA predicts an end to New Jersey’s market growth in late 2011/early 2012 as a result of the overheated SREC market.

However, Kent Rowey, head of Freshfields’ Americas Energy and Infrastructure practice, says that stories are overblown about the death of New Jersey’s SREC market. “Smart traders think that the market has mispriced the SREC, that the forward curve is incorrect,” he said.

Why? Too often analysts forecast SREC supply based on the project applications that are before regulatory bodies, and not on the actual projects being built, according to Rowey. This creates an overly high forecast for solar development. In reality, a good number of the projects that are proposed will never be built. Rather than counting applications, savvy financiers conduct their due diligence “the old-fashioned way” – they count rooftops from helicopters to determine what’s really being installed. What they are finding is that fewer projects are being built than expected, and therefore fewer SRECs will be available in the future than is now believed. Therefore, the New Jersey SREC market may not be as overheated as some believe.

Beyond SRECs, Rowey sees the overall debt market for renewable energy as buoyant. “If there is any kind of limiting factor, it is probably that there is an inverse relationship between the size of the deal and the work that goes into it,” he said. Big banks prefer large loans because it takes just as much work to administer a large loan as a small loan, but the returns are lower.

German commercial banks are leaders in providing debt capital for project finance. Rowey also sees more US banks eyeing renewable energy projects; some are teaming up with pension funds.
“There still is liquidity in the debt market for renewable projects. It is one of the sectors in the infrastructure market that hasn’t really been hit as hard,” he said. Even though underwriting standards are more stringent since the market crash of 2008, “for the right project and right sponsor, renewable energy is a space where traditional financing is available.”

WHAT FINANCIERS LIKE
Michael Lorusso, managing director and group head for US-based CIT Energy, which focuses on project and structured finance, shares this view. He says that if the developer offers a financeable project, the lender will be there. “It is incumbent on the developers to do something that is financeable and not push the market to the point where they are stuck with a project that cannot be financed,” Lorusso said.

CIT Energy evaluates projects much the way large banks do. The financing and advisory firm prefers proven technologies and shies away from technology risk. Projects should have equipment contracts with established manufacturers, and a solid construction contract, Lorusso said. Applicants for finance also should produce a power purchase agreement with a solid buyer, like a utility or industrial customer, which minimises the project’s price risk in the eyes of the investor. Or the project may use a short-term contract that relies on commodity price hedges with third parties, like Goldman Sachs or Morgan Stanley. All government permits must be in place.

Lorusso likes wind, solar and geothermal energy, as well as hydroelectricity, although he noted that less hydroelectricity is in development than the other three resources. He is skeptical about biomass because he sees its fuel source as less reliable, or at least harder to quantify through statistical analysis than wind, solar and geothermal. He receives many inquiries for new technologies that use fuel cells, wave energy, biofuels and gasification, but says often they are unproven, unreliable or uneconomic, and therefore not yet good candidates for financing.

Even though wind energy is high on his list of strong investments, Lorusso sees that market slowing. The sentiment is that “the best sites have been taken, the low hanging fruit has been picked,” so it’s becoming more difficult to develop wind farms, he said. In addition, utilities are less apt to enter into lucrative long-term power sales agreements with wind farms, given today’s low natural gas prices and depressed demand for electricity. Solar energy, on the other hand, appears to be more quickly moving toward grid parity. It also offers the promise of adaptable consumer applications as it becomes integrated into shingles, windows and signs, he said.

Not all solar, however, is created equal when it comes to financing. The industry seems to be developing under what Lorusso described as a bifurcated “barbell effect.” On one side of the barbell is the proliferation of small rooftop solar installations, almost “real estate plays,” he said, that are increasingly aggregated to make them more appealing to financers. On the other side of the barbell are fewer, but massive, utility-scale projects with well-structured deals that attract financial backing. One example is the 392-MW Ivanpah Solar Energy Generating System, being built in California’s Mojave Desert with the help of a $1.6 billion loan guarantee from the US Department of Energy.

While small and large deals make it onto the barbell, mid-sized solar projects often find it hard to secure traditional financing. These $2-3 million installations on commercial roofs lack the economies of scale to attract large banks. As far as the banks are concerned, he said, conducting due diligence on these projects takes too much time for the size of the transaction. Therefore this mid-range solar project often must rely on all equity deals, aggregation, or in some cases small regional banks.
A solar company needs roughly a $20-$50 million pipeline of projects just to catch financiers’ attention, said Scott Wiater, president of Standard Solar, the highest ranking renewable energy company on Inc. magazine’s top 500 fastest growing American companies for 2010. “It’s all about scale, you have to have scale,” he said.

Having a signed power purchase agreement is crucial, Wiater added. “The people that offer tax equity and debt – their mindset is we don’t want to take any pre-development risk.” With a power purchase agreement in hand, a solar company can secure debt financing relatively easily now; tax equity financing less so, he said. “You can find tax equity, but it is expensive.”

Meanwhile, Standard Solar has seen an uptick in the number of commercial enterprises that install solar panels to hedge against future energy rate hikes. Some of these deals are all cash and others operate under power purchase agreements. ‘We are seeing just normal commercial customers installing fairly large systems,’ he said, adding, “If natural gas pricing wasn’t as low as it is, we would have much more business. But with that said, we can still be competitive even with the currently depressed energy prices.”

COMMUNITY BANKS FOR SMALL PROJECTS
For the truly small renewable project, conventional financing can be extremely hard to find. But small specialised or community banks are increasingly filling this niche by lending to ventures that have a hard time accessing conventional capital. Many of these banks function as non-profit institutions that do not have to answer to shareholders, so focus on investments with social impact, such as day care centers or schools. For such projects, “there are a world of government programmes that aren’t going to go anywhere, that are not in danger of being zeroed. We have been looking for how to take those tools and put capital in the green economy,” said Melissa Malkin-Weber, green initiatives manager for Self-Help Credit Union, nonprofit community development lender, real estate developer, and credit union with offices in California, North Carolina, and Washington, D.C.

For example, in the US small renewable energy projects can take advantage of the new markets tax credit, set up in 2000 for real estate construction and renovation in low-income areas. “Renewable energy looks a lot like commercial real estate from an underwriting perspective,” she said.
Renewable energy developers, such as solar installers, can use such credits to attract private capital. The developer can parlay the credit into a below-market interest rate and more flexible loan term. Loans can be as small as $5000, although the sweet spot tends to be $75,000 to $10 million, she said.

YOUNG AND UNSUBSIDISED
New technologies, those just getting off the ground, typically seek out a different kind of investor than those already accepted by commercial markets. Still unproven, and not ready for full-scale commercial deployment, these technologies often look to angel investors, venture capitalists and government funding.

The good news is that an increasing amount of VC money has been flowing to renewables. In the US, investors in new technologies look to renewable energy as the “next major economic transformation frontier,” according to Venture Capital’s Role in the US Renewable Energy Sector, a white paper by the US Partnership for Renewable Energy Finance. Before 2005, renewable energy accounted for two percent of VC investment in the US; by 2010 it had reached 15 percent.
China, too, with its growing appetite for clean energy, can be a rich launching point for new renewable energy technology, according to Stephen Edkins, partner in Diverso, a Shanghai-based venture capitalist firm that specialises in connecting technology innovators with opportunity in China. Diverso’s clients included Ilika, a clean-tech materials company that works in energy storage, and TMO Renewables, the developer of a new process for converting biomass into fuel ethanol. Both are based in the UK.

Direct subsidy is difficult to come by in China, and that’s just fine with Diverso. Much like other VCs, Diverso looks for technology that can stand on its own.

“Technological innovation is about allowing renewable energy to be competitive in the absence of subsidy,” said Edkins. While direct subsidies may be hard to come by in China, the government backs renewable energy in other ways, particularly through favourable terms from its state-owned banks, which “act as a lever,” Edkins said.

Opportunity is great for new technology in China’s hungry energy market, but also daunting. The language barrier alone can stymie outside businesses, according to Diverso.

Brian Kinane, managing director at Yorkville Advisors, also works with junior energy companies, but in Europe, where the challenges are different. “Equity markets are difficult to access for companies at present. Many investors are concerned that there is correction coming in the market. There is a feeling that the market has had quite a high run-up and now there is a greater sense of volatility,” he said.
This slowdown is being spurred by government austerity measures throughout Europe, as well as talk that China’s economy is cooling. The correction is expected to be temporary, with a positive economic trend reasserting itself, but investors “don’t want to be caught up in that correction,” he said.
Longer term, Europe’s renewable energy finance sector is likely to benefit from Germany’s decision to close down its nuclear power stations, he added.

HELP FROM EXPORT BANKS
Meanwhile, government export credit agencies, such as the US’ Export-Import Bank (Ex-Im Bank), Export Development Canada and Germany’s Hermes Cover, have been filling in the financing gaps for equipment suppliers. Export banks are especially well suited for small transactions that hold little interest to conventional lenders.

For example, Ex-Im Bank offers a streamlined application process known as Renewable Express. Solyndra saw its financing processed in just 41 days. The manufacturer used the programme to finance its sale of solar panels to an international supermarket chain in Belgium. The June 2011 deal offered Solynda not only a favourable interest rate, but also a long financing term. The US export bank guaranteed an 18-year €7.7 million loan ($10.3 million) to finance panels for the 3 MW project.

NOT A BUBBLE
Kathleen Marshall, managing director at Green Solar Finance, says that stimulus funding did what it set out to do. Financing is again available for renewable energy. “What we are seeing is tremendous movement on almost all fronts,’ she said. “We’re seeing many more financial entrants coming in – philanthropic investors, insurance and bank lenders.” She credits much of the movement to the cash grant offered in lieu of a tax credit. “It provided a strong initial catalyst to start moving things. I think what it really did is it created scale. It created tremendous scale and success in getting projects done.”
Ultimately, though, for a financing deal to work it takes “tremendous collaboration,” she said. If a subsidy goes away, parties must be willing to be flexible and realistic about yields. And then “a deal will get done,” she said. In any case, whether stimulus money stays or goes, what’s clear to renewable energy investors now is that this industry is “not a bubble – the horses are out of the gate and they are running,” Marshall said.

Studying Potential Loss of 1603 Cash Grant, 1705 Loan Guarantee, ITC and PTC

What Happens When the Incentives Expire?
By Bruce Hamilton, Director of Energy, Navigant Consulting, Inc.,
Reproduced from RenewableEnergyWorld.com

May 17, 2011

Sacramento, CA, USA -- Wind projects, along with other renewable energy technologies, have benefitted in a variety of ways from federal incentive programs. The Section 1603 cash grant program, the Department of Energy Section 1705 Loan Guarantee program and the Bonus Depreciation schedule are among the federal programs that are scheduled to expire by the end of 2012. The Production Tax Credit (PTC) and Investment Tax Credit (ITC) are also scheduled to expire for wind projects at the end of 2012. In today's budget-cutting environment, it's possible that none of these incentives will be renewed.
The Section 1603 cash grant has been a popular and successful program and is generally credited for keeping the U.S. wind industry healthy during the 2009-2010 recession1. Since the program was initiated in 2009 through the first quarter of 2011, $5.6 billion in cash grants has been awarded for wind projects, representing more than 80 percent of all Section 1603 funding to date.
The DOE Section 1705 loan guarantee program has a current allocation of $2.5 billion that can support up to $30 billion of loan guarantees. As of April 2011, three wind plants have received commitments for loan guarantees totaling $1.5 billion, including $1.3 billion for Caithness's 845 MW Shepherd's Flat project.

Under the federal Modified Accelerated Cost-Recovery System (MACRS), wind and other renewable energy properties are classified as five-year property for depreciation purposes. Eligible property placed in service after Sept. 8, 2010 and before Jan. 1, 2012 qualifies for 100 percent first-year bonus depreciation, meaning that 100 percent of the project cost can be expensed in the first year. For 2012, a 50 percent bonus depreciation is still available. After Dec. 31, 2012, the allowable deduction reverts to the original five-year MACRS recovery. The value of the 100 percent bonus is estimated to be 40 percent of the value of the Section 1603 cash grant.

To determine the impact of the pending expiration of these programs, Navigant calculated the Levelized Cost of Energy (LCOE) for a 100 MW wind plant in various time frames with the following project finance structures:

•Case 1. Circa 2008, using the PTC, equity from the project sponsor (20 percent), and a tax equity partnership flip (80 percent).2

•Case 2. Circa 2011, using the cash grant (30 percent), equity from the project sponsor (20 percent), a DOE loan guarantee (40 percent) and a private loan (10 percent). 3

•Case 3. Circa 2013, using the PTC, equity from the project sponsor (20 percent) and a tax equity partnership flip (80 percent), assuming that the PTC will be renewed.4

•Case 4. Circa 2013, using the project sponsor's equity (70 percent) and a private loan (30 percent), assuming that the PTC is not renewed.5

Navigant also calculated the range of LCOE prices from natural gas fired power plants during these same time periods.6 The results of the four cases are shown in the graph.

The case studies show that wind plants are competitive with gas plants in Cases 1 and 2, which is consistent with the fact that many utilities have installed wind plants well in excess of their Renewable Portfolio Standard (RPS) requirements. In comparing Cases 1 and 2, the combined effect of the cash grant and the DOE loan guarantee cuts the cost of a wind farm nearly in half. In comparing Cases 1 and 3, increased return requirements from tax equity investors are a significant factor in driving wind LCOEs higher. In comparing the wind plant LCOEs of Cases 3 and 4 with their corresponding gas plant LCOEs, wind will not be competitive with gas in 2013, either with or without the PTC. Plenty of wind plants will still be built, but with the current cost structures in place and unless federal incentives are renewed or replaced, post-2012 U.S. wind markets will be driven primarily by RPS requirements rather than competing head-to-head with gas projects.

Bruce Hamilton (left) is Director of Energy at Navigant Consulting, Inc.
--------------------------------------------------------------------------------

Footnotes
1. According to the DOE's Preliminary Evaluation of the Impact of the Section 1603 Treasury Grant Program on Renewable Energy Deployment in 2009 (Bolinger, Wiser, and Darghouth, April 2010), the grant program may have helped directly motivate as much as 2,400 MW of wind capacity to be built that would not otherwise have come online in 2009.
2. Case 1 assumes a 6% annual return for tax equity investors, which was typical in 2008 when there were plenty of investors compared to the number of quality projects. The wind plant capital cost is assumed to be $2,000/kW for all cases.
3. Case 2 assumes a 2011 cost of debt of 4%/year plus a 2.5% up-front fee. The cost of tax equity is currently 9%/year, plus a 3% premium for projects with debt. Only Case 2 assumes bonus depreciation.
4. Case 3 assumes a 9% annual return for tax equity investors in 2013. If the number of tax equity investors does not significantly increase and new structures do not appear, the cost of tax equity will remain at the elevated 2011 levels.
5. Case 4 assumes that the cost of project debt in 2013 will follow inflation and return to 2008 levels of 6%/year plus a 2.5% up-front fee.
6. Natural gas prices are assumed to be $3.48 to $4.91/MMBtu in 2011 and $4.14 to $5.75/MMBtu in 2013.

Clean Energy Spared The Budget Axe - For Now. An Update from Politico

Alternative energy runs into headwind

By DARREN SAMUELSOHN, POLITICO.COM
Clean energy technology champions are scrambling to secure the tax breaks.  Photo by AP Photo

For the renewable energy sector, it’s a wonder either wind or solar power is still standing.

Austere budgets and small government have become Capitol Hill credos, and clean energy technology champions are scrambling to secure the tax breaks and loan guarantees they’ve depended on over the past decade to drive investments.

Cheap natural gas is beating renewables as the lowest-cost option for meeting the nation’s thirst for new electricity.

Scathing media reports have also raised questions about whether the Obama administration favored its green-tinted campaign contributors with federal stimulus dollars and wound up sending upward of three-quarters of the subsidies to companies that are now based overseas.

And when the industry does show signs of life, wildlife advocates and environmentalists have been making it difficult by blocking transmission lines to get the clean energy to urban centers.

Moderating an Import-Export Bank conference panel earlier last month alongside several top energy industry executives, Carol Browner, President Barack Obama’s former top energy adviser, bemoaned the lack of a long-term market signal to help renewables. Without private entrepreneurs, she said, the already small U.S. market could be swamped by foreign competitors.

“This is an industry evolving rapidly, whether it be on the supply or demand side,” Browner said. “From my perspective, on the public policy side, we need to do more to ensure there is demand for the technology. We are in danger of not being at the forefront of the industry. It’s because of people like this we’re at least able to hold on.”

John Denniston, a partner at venture capital firm Kleiner Perkins, sounded off on the disparity, too, ticking through the top 20 renewable energy companies in the world and noting that just four are American.

Exactly what the federal government can do is a question.

Obama promised to put solar panels on the White House roof last year and has continued to talk up renewable energy. During a visit earlier this month to a wind turbine manufacturer in suburban Philadelphia, Obama pledged to keep up the fight to make the renewable industry’s tax credits permanent — rather than leave them exposed to the often last-minute dash for renewal.

“I want to kick-start this industry,” the president said. “I want to make sure it’s got good customers, and I want to make sure the financing is there to meet that demand.”

But several market experts doubt Obama can live up to his promises. While the solar tax credits are secure through 2016, wind will see some of its most cherished benefits expire at the end of 2012, just after the presidential campaign.

“We’ve seen this movie a number of times,” said Rob Gramlich, senior vice president for public policy at the American Wind Energy Association.

Some of the long-term options are also no longer looked at so kindly on Capitol Hill, either.

Former Senate Energy and Natural Resources Committee Chairman Pete Domenici had once floated the idea of establishing a “green bank” that would put financial experts in place in the evaluation of clean energy projects. A similar idea is now a centerpiece of the Democrats’ energy plan, which makes it more likely to fall to partisan sniping.

“The Republicans are calling it a Fannie and Freddie for clean energy, but they don’t mean it in a nice way,” said Kevin Book, managing director of the Washington research firm ClearView Energy Partners.

Renewable advocates insist they long ago gave up on the idea of pricing carbon emissions as a way to get a toehold against their coal, natural gas and nuclear rivals. Now, they’ve put their eggs in another basket: the “clean” energy standard that Obama mentioned in January’s State of the Union speech.

But even here, their preferred policy approach appears to be stuck in congressional low gear.

“I think the door is cracked open and therefore worth pursuing,” Gramlich said.

House Energy and Commerce Committee Chairman Fred Upton may be the biggest barrier to a “clean” energy standard. He opposes federal mandates and has shown no interest in responding to the issue, even if the Senate somehow were to come up with 60 votes on legislation.

In an interview, the Michigan Republican insisted that he wants to expand the nation’s renewable portfolio. But he quickly ticked through a number of the industry’s downsides.

“Solar would be dead without the extension of the tax credits about a year and a half ago,” he said. “So they continue to push out.”

Upton also took issue with local activists and environmentalists who have made it more difficult to get wind energy into the transmission system by challenging various transmission projects.

“That’s the dilemma,” he said. “You’ve got different groups challenging the building to improve the grid. It’s a problem.”

Despite the hurdles, industry officials see themselves in a strong light.

Wind produces about 2 percent of the nation’s electricity. That’s up from less than 1 percent in 2005, with turbines now churning out more than 40,000 megawatts of power — enough to supply electricity to more than 10 million homes.

Solar power is in its own camp. It still hovers below 1 percent of the nation’s energy pie. Its small size makes its growth look even bigger. Investments jumped from $3.6 billion to $6 billion last year. As of 2010, there’s more than 1,000 megawatts of installed capacity, up from 320 megawatts in 2008.

“We’re the fastest-growing industry in the United States, period,” said Rhone Resch, president of the Solar Energy Industry Association.

Indeed, both wind and solar can point to some useful figures as they try to sway political doubters. In 2010, 14 wind manufacturing plants opened, giving the industry 20,000 jobs stretched across 42 states. Fifty-eight new solar panel factories have opened in the past 18 months. Solar officials tout a similar number of jobs spread across 47 states.

Industry observers say wind and solar, while in different camps in terms of recent growth, can at least take heart in the policies they have been able to latch onto.

“It could have been worse,” Book said. “It could have been the case there was no stimulus to spend. It could have been the case that there was no grant program. It could have been the case there was no production tax credit.”

Chadborne & Parke LLP's Project Finance NewsWire January 2011

Click here for Chadborne & Parke's latest Project Finance Newswire, which we consider to be required reading for clean energy project finance participants.

IN THIS ISSUE

1 More Subsidies for US EnergybProjects
8 DOE Loan Guarantee Update
12 California Cap-and-Trade Program Takes Shape
15 California Settlement Settles Old Scores and Charts New Paths for Generators
18 Master Financing Facilities for Solar Projects
29 Turkey Moves to Boost Renewable Energy
31 Cellulosic Biofuels: The Future Is When?
38 PPPs in the Middle East
42 Environmental Update

Update on the Cash Grant and More - Chadbourne & Parke's April Newswire

Chadbourne & Park's April 2010 Newswire is available here.

Again, Chadbourne has provided excellent up-to-date information on matters relating to the clean energy project finance market.


In This Issue
1 Strategies for Starting Construction
5 Germany Cuts Solar Subsidy
8 Update: Tax Equity Market
20 Swap Gets Wholesale Generator Into Trouble
22 Tax Credits for Green Manufacturers: Who Will Use Them and How
27 Court Orders Lender to Continue Funding Defaulted Loan
28 Shedding Assets Quickly in Bankruptcy
34 Environmental Update 

Strategies for Starting Construction
by Keith Martin and John Marciano in Washington, and Eli Katz in New York

FULL CREDIT TO CHADBOURNE & PARKE

The race is on to get renewable energy projects in the United States under construction by year end to qualify for cash grants from the US Treasury. Developers are pursuing different strategies. It is not enough merely to have made a large down payment toward turbines, modules or other equipment for the project by year end. A senior Treasury source said the government is looking for economic activity during 2010. A developer must show work at the site or at the factory on equipment for the project during 2010. The grants are 30% of the project cost and are paid on new wind, solar, geothermal, biomass, landfill gas, waste-to-energy, ocean energy and fuel cell projects that are completed in 2009 or 2010 or that start construction in 2009 or 2010. Grants of up to 10% of project cost are also paid on small cogeneration facilities of up to 50 megawatts in size. Projects that merely start construction in 2010 must be completed by a deadline. The deadline is 2012 for wind farms, 2016 for solar, small cogeneration and fuel cell projects and 2013 for other types of projects.

Congress may ultimately give companies more time. A bill in the House would give developers another two years through December 2012 to start construction without changing the deadlines to complete projects. However, the odds of such an extension at this point are probably a little better than 50%. Most developers are taking steps to start construction in case there is no extension.

Two Ways 


The Treasury Department explained what it means to start construction in written guidance on March 15. The guidance left many unanswered questions. The Treasury answered some of the questions since then in private meetings and in public statements at industry conferences.There are two ways to show construction started. One is to show there was “physical work of a significant nature” on the project during 2010. The Treasury said that “the beginning of excavation of the foundation, the setting of anchor bolts into the ground or the pouring of concrete pads of the foundation” at the site count as such work. It also counts if physical assembly of major components starts off site at a factory. However, the developer must have a “binding” contract in place before such work starts in order to count work done by an equipment supplier or other contractor. To be “binding,” the contract must be more than an option to choose equipment later. The Treasury said “the amount and design specification of the property to be purchased” must be clear from the contract. The contract should not limit damages if the developer walks away to less than 5% of the contract price. Any conditions to performance by a party must be outside the control of the parties. Thus, for example, if the developer must give a notice to proceed before the contractor will start work, the notice should be given before year end. It is not clear whether a contract between related parties can be “binding.” It is best to assume not. There is a risk that amending the contract after work starts could lead to loss of grandfather rights. The guidance suggests that it does, but the Treasury may still be thinking about this issue. The guidance said that any amendment must be “insubstantial.” Minor modifications in design are not a problem; an example is the later addition of a “cold weather package for wind turbines.” The IRS used a similar standard in 1986 after the investment tax credit was repealed. Projects that were under binding contract before the repeal to be built still qualified for an investment credit provided there was no “substantial modification” of the contract later. An amendment that increased the contract cost by more than 10% was considered substantial.


Ellen Neubauer, the cash grant program manager, said at a wind industry finance conference
in New York in early April that it is the start of physical work of a significant nature to construct roads on the project site. The roads must be used to transport equipment rather than solely to provide access for people working at the site. She said it is also the start of physical work for the developer
to lay three concrete pads for a wind farm that will consist of 65 turbines or for the turbine vendor to commence physical assembly of at least one turbine for the project at the factory under a binding turbine supply agreement signed before physical assembly starts.


It is not clear whether it matters if work starts in 2010 but then nothing is done for another year at the site or at the factory on the turbine order. Some senior Treasury staff are not bothered by such a delay; they stress that the Treasury guidance said all that is required in 2010 is the “beginning” of construction or else they view the deadline to complete the project as a check on how long a delay is possible. However, there may be a risk if the facts show with hindsight that construction did not truly get underway.  Developers who plan to rely on physical work to start construction plan to work steadily once construction starts, although possibly at a slower pace than normal. For example, a
wind farm that might normally take six months to construct might take 12 to 18 months under an elongated construction schedule.

There is an assumption in each of these cases that the developer will choose to treat all the turbines or solar arrays as a single “property” so that the work done in 2010 counts as the start of work on the entire project. The Treasury treats each turbine or solar array that can operate independently as a
separate property. Therefore, work must start independently on each. However, a developer can choose to treat multiple turbines or solar arrays that are owned by the same company and are on the same site as a single project.

5% Test

The other way to show that construction started is to “incur” more than 5% of the total project cost by December 2010. A developer does not have to satisfy both the physical work test and the 5% test; either is enough. Costs are considered “incurred” when the developer pays them, but only if he expects the equipment or services for which payment was made to be delivered within 3 1/2 months
after payment. Otherwise, he must wait until delivery to count the costs. Thus, for example, a payment made on December 31, 2010 counts in 2010 as long as the equipment is reasonably expected to be delivered by April 15, 2011. Otherwise, the payment is treated as spending in 2011 after delivery in 2011. Delivery may include transfer of title to equipment that has been manufactured, but that the manufacturer is holding in storage at the site.

The developer can look through any “binding” contracts with equipment suppliers or other contractors that are signed before manufacture of the equipment or other work starts and count spending by the contractor using the same principles. Thus, for example, the developer can count spending by a turbine vendor on components or services, but the spending counts at time of payment only if it is reasonable to expect delivery of the components or services to the turbine vendor within 3 1/2 months of payment. Otherwise, costs are incurred only as equipment or services are delivered to the vendor. This will require getting equipment suppliers to certify how much they spent toward manufacture by year end this year. To show how this works, suppose a developer signs a binding turbine supply agreement in mid-2010 for turbines to be delivered in late 2011 and makes a 20% down payment. The turbine vendor then spend 15% on components for the turbines. The developer cannot count the 20% down payment in 2010, but can count the 15% spent by the turbine manufacturer provided the manufacturer expects delivery of the components within 3 1/2 months of payment. The manufacturer would also have to link the components to the turbines ordered under the contract. Two large wind turbine manufacturers told the Treasury at a meeting in early April that it is impossible to certify that components ordered this year are for particular turbines that will be manufactured next year or the year after. One said that components are ordered well in advance of use based on expected orders. Ninety-five percent of the components in a turbine are interchangeable across turbine types. The manufacturer said components are not assigned to a particular turbine until roughly a week before manufacture starts. Actual manufacture of the turbine takes five days. This has caused wind developers to take a harder look at starting physical work at the site or else requiring manufacturers to manufacture at least one turbine for each project in 2010 in order to commence construction under the physical work test.

The developer must incur more than 5% of the actual project cost, not the expected cost in 2010. A developer would be wise to incur more to leave a margin for error. However, it may be possible if project costs spiral to fix the problem by choosing not to include one or more turbines or solar arrays as part of the project on which a cash grant is taken. For example, the developer has the option in a 65-turbine wind farm of treating 63 turbines as one project and two turbines as a separate project.

Other Issues

The Treasury is still thinking about several issues. They may be addressed in questions and answered posted to the Treasury website. Any such answers are unlikely to be posted before June. The Treasury has not sorted out how to deal with frame or master agreements that larger wind companies use to buy turbines for multiple projects. The agreement is usually signed by a parent company. Closer to the time turbines are manufactured, “daughter” contracts are signed with project companies
essentially designating turbines for use in particular projects and copying over the terms from the master agreement into each standalone contract. Among the issues are whether spending by the parent company carries over to the subsidiary and by when turbines must be designated for use in particular projects.

The Treasury is looking for a way that it can confirm to developers that they started construction. A developer can apply for a grant after starting construction, but before the project is completed. The Treasury said last year that it planned to respond in such cases whether it agrees the project is under
construction. However, it has not sent any such confirmations to date despite receiving more than 100 applications. In all the cases to date, the agency concluded that the projects would be completed by December 2010 so it was a moot issue when construction started. Whether it is able to send such confirmations in the future is a resource issue. It is looking into what is possible.

Developers should ask equipment suppliers to certify to spending or the start of physical assembly as soon after the threshold for starting construction is reached in 2010, and then the developer should apply to Treasury for a grant. This may leave time to fix any problems before year end if the Treasury responds promptly. Even if the response is not received until early 2011, at least the issue whether construction started in time can be taken off the table. Geothermal companies that started drilling before 2009 for power plants that will not be completed until after 2010 received some relief in March. The Treasury said that it is not the start of physical work on a project to do “test drilling of a geothermal project.” It also said that a developer “may treat physical work of a significant nature as not having begun until more than 5 percent of the total cost of the property has been paid or incurred.”

Senior Treasury staff told Chadbourne at the same time that it is the start of physical work on a geothermal power plant to drill a fully-functioning production well whose output will be dedicated to the power plant. An example of such a well is one drilled to production depth and diameter and for
which permanent casing, a tree or other above-ground equipment and flow controls have been installed and tested. 

Chadborne & Parke Project Finance Feb 2010 NewsWire

Chadborne & Parke Project Finance NewsWire contains great up-to-date information on the word of clean energy project finance.

Click here to link to the Newswire in PDF form


Table of Contents
1 The Year Ahead: What to Expect from Washington
11 DOE Moves on Loan Guarantees
17 Treasury Cash Grant Update
22 Update: M&A Market
28 Update: Tax Equity and Debt Markets
35 Islamic Project Finance: Structures and Challenges
40 Cross-Border Renewables — Baja to California
43 Finding Development Capital
48 A New Transmission Superhighway Takes Shape in the West
54 Environmental Update

Sempra Acquires Maui Wind Project

Sempra buys Hawaii wind energy, battery storage project from Shell

Sempra Energy’s generation unit has acquired Auwahi Wind Energy, a company developing a 22-megawatt wind energy and battery storage project in Maui, Hawaii, from Shell WindEnergy, a subsidiary of Royal Dutch Shell.

Related Stories

• Hawaiian utility buys power from rivals to avert bidding war
• Hawaii puts rivals to work in new wind arrangement
• Hawaii's Hoku Scientific’s loss widens

Terms of the agreement were not disclosed.

The proposed Auwahi Wind Energy project could begin construction in 2011 and commence commercial operations in 2012 on the Ulapalakua Ranch in the remote southeastern region of Maui.

The battery could store as much as 28 megawatt-hours of wind energy generated by the project's windmills during the typically windy morning and night hours.

The battery power could be stored until late afternoon, when electricity consumption typically reaches its peak, or could be utilized to regulate and smooth intermittent wind power, providing a valuable source of grid stability for Maui Electric.


Sempra Generation recently submitted a proposal to the US Energy Department to co-fund costs associated with an expansion of the battery energy storage facility to 72 MW hours.

Sempra officials say the integrated wind and battery energy storage project could serve as a prototype to help maximize the energy output of other wind power projects in Hawaii and worldwide.

The project would help Maui attain its goal of achieving 95% of its electricity from renewable sources by 2020.

"Consistent with our growing renewable presence in the southwestern United States, this project further expands Sempra Generation's footprint in one of the fastest growing renewable energy markets while further advancing the sustainability goals of Maui and the state of Hawaii," says Michael W. Allman, chief executive of Sempra Generation.

Dick Williams, president of Shell WindEnergy, notes the sale does not signify a retrenchment by the company with clean energy projects.

"Shell WindEnergy has re-assessed its wind development efforts in Hawaii and will concentrate on projects on the US mainland and Canada that are more aligned with our strategic direction," he says.
Williams says that Shell’s portfolio consists of eight wind farms in the US with total generation capacity of almost 900MW. The company’s strategy remains to diversify its energy mix by developing energy sources that have low carbon emissions.

In 2008, Hawaii and DOE set goals associated with the state's Clean Energy Initiative, which aims to accelerate indigenous renewable energy development on the island chain. Hawaii now depends 99% on imported fuel oil for power generation.

For its part, Sempra, based in San Diego, California, is working to broaden its participation in green energy development.

It has a 50-50 investment with BP Wind in the second phase of the Fowler Ridge Wind Farm, the Midwest's largest wind power project in Benton County, Indiana.

Another Sempra Generation wind project slated for completion in 2012 is Energia Sierra Juarez in Baja California, Mexico.

In 2008, Sempra Generation completed the construction of North America's largest thin-film solar power plant, the 10MW El Dorado Solar near Las Vegas, Nevada.

Source:  www.rechargenews.com

DOE Announces Loan Guarantee Program for Commercial Projects - FIPP

Energy Department Announces New Private Sector
Partnership to Accelerate Renewable Energy Projects

10/16 Add:  Link to Milbank Article Describing the Program

New Financial Institutional Partnership Program will accelerate deployment of billions
in lending under Recovery Act

Source:  Department of Energy Website

NEWS MEDIA CONTACT: (202) 586-4940

FOR IMMEDIATE RELEASE: Wednesday, October 7, 2009

Washington DC --- U.S. Energy Secretary Steven Chu today announced the Department of Energy (DOE) will provide up to $750 million in funding from the American Recovery and Reinvestment Act to help accelerate the development of conventional renewable energy generation projects. This funding will cover the
cost of loan guarantees which could support as much as $4 to 8 billion in lending to eligible projects, and the Department will invite private sector participation to accelerate the financing of these renewable energy projects. To this end, the Department announced the creation of its new Financial Institution Partnership Program (FIPP), a streamlined set of standards designed to expedite DOE’s loan guarantee underwriting process and leverage private sector expertise and capital for the efficient and prudent funding of eligible projects. 

“A renewable energy economy is a true opportunity to create new jobs, reinvigorate America’s competitiveness and support the president’s goal of doubling renewable energy in the United States,” said Secretary Chu. “American innovation can be the catalyst that jumps starts a new clean energy Industrial Revolution.” The Recovery Act created a new Section 1705 under Title XVII of the Energy Policy Act of 2005 (Title XVII) for the rapid deployment of renewable energy projects and related manufacturing facilities, electric power transmission projects and leading edge biofuels projects that commence construction before September 30, 2011.

This first solicitation under the new program will seek loan guarantee applications for conventional renewable energy generation projects, such as wind, solar, biomass, geothermal and hydropower. Past solicitations for
renewable energy generation projects have focused on loan guarantee applications using new or innovative technologies not in general use in the marketplace.

The goal of FIPP is to leverage the human and financial capital of private sector financial institutions by accelerating the loan application process while balancing risk between DOE and private sector partners participating in the program. Under this first FIPP solicitation, proposed borrowers and project sponsors do
not apply directly to DOE but instead work with financial institutions satisfying the qualifications of an eligible lender which may apply directly to DOE to access a loan guarantee. The solicitation invites applications from eligible lenders for partial, risk-sharing loan guarantees from DOE. The guarantee percentage will be no more than 80% of the maximum aggregate principal and interest during a loan term, and the project debt must obtain a credit rating of at least ‘BB’ or an equivalent with a nationally recognized credit rating agency.
This solicitation marks the eighth round of solicitations issued by the Department’s Loan Guarantee Program since its inception.

Read more information on this solicitation and the Department’s Loan Guarantee Program at www.lgprogram.energy.gov.

Treasury Awards Second Round of Recovery Act Grants; +$1 Billion Out Since August

Clean-Energy Grants: Iberdrola Wins Big, Again

By Keith Johnson September 22, 2009, 12:50 PM ET

When it comes to clean-energy grants from the U.S. government, it’s déjà vu all over again.
That is, Spain’s Iberdrola was again the big winner in the second round of government grants for wind farms: Iberdrola scooped up $251 million of the $550 million awarded today. The grants cover three Iberdrola wind farms in Iowa, Texas, and Missouri.
The cash-in-hand grants are an alternative way for the government to subsidize clean energy after the implosion of the tax-equity market last year. Iberdrola was also the biggest winner in the first round of the grants, announced earlier this month. So far, Iberdrola’s U.S. wind farms have snared $545 million in grants.
Germany’s E.On took home the biggest single prize, a $121 million grant for the Pyron Wind Farm in Texas, underscoring the role that European wind developers have in the U.S. wind-power market.
But do the grants amount to a bailout of foreign energy companies? Duke University figures the growth of wind power in the U.S., even if spearheaded by Europeans, will in fact help restore manufacturing jobs for U.S. companies. (Here’s the study.)
That’s because much of the value chain in wind power is suited to U.S. firms. The Duke study found that every 100 megawatts of wind power that are installed–a pretty typical-sized wind farm–creates 387 total jobs, including 310 in manufacturing.
“Every time a wind power project is installed it creates jobs, not only in the manufacturing sector, but also for structural engineers, surveyors, mechanics, sheet metal workers, machinists, truck drivers, construction equipment operators and wind turbine operators,” said Duke professor and study co-author Gary Gereffi.

• « Previous
  At the Summit: Obama, Hu Lay Out Climate Visions at UN
• 
  

Environmental Capital HOME PAGE

FROM THE DOE: The following is a chart of the 25 projects that qualified for awards as part of today's announcement.

STATE	PROJECT/SUBSIDIARY	LOCATION	AMOUNT
CA	Bob's Big Boy LLC	Burbank, CA	$53,648
CA	Ameresco Half Moon Bay LLC	Half Moon Bay, CA	$6,641,747
CA	Ameresco Keller Canyon LLC	Pittsburgh, CA	$2,796,377
CA	BioFuel Oasis Cooperative, Inc	Berkely, CA	$16,858
CO	5135 Company	Denver, CO	$23,130
FL	Conditioned Air Corporation of Naples	Naples, FL	$50,250
HI	Two Daughters	Kihei, HI	$15,150
IA	Barton Wind Farm	Kinsett, IA	$93,419,883
MN	BI	Minneapolis, MN	$25,649
MN	Spruce Tree Centre	St. Paul, MN	$107,764
MO	Farmers City Wind Farm	Tarkio, MO	$84,959,857
MO	Ameresco Jefferson City LLC	Jefferson City, MO	$2,300,244
NC	Solar Billboard Property	Bolivia, NC	$5,850
NJ	Meadowlands Exposition Center	Secaucus, NJ	$767,937
NJ	EHT Leasing LLC	Egg Harbor Township	$118,560
NJ	OC Kearny	Kearny, NJ	$992,006
NV	Enel Salt Wells, LLC	Fallon, NV	$21,196,478
NV	Enel Stillwater, LLC	Fallon, NV	$40,324,394
NY	OP 110 E. 59th St. CHP	New York, NY	$415,774
SD	Impervious Energy Systems, LLC	Whitewood, SD	$31,511
TX	Barton Chapel Wind Farm	Jacksboro, TX	$72,573,627
TX	Rio Grande Valley Sugar Growers, Inc.	Santa Rosa, TX	$10,232,261
TX	Bull Creek Wind LLC	O'Donnell, TX	$91,390,497
TX	Pyron Wind Farm, LLC	Roscoe, TX	$121,903,306
VT	Wheeler Brook Apartments	Warren, VT	$19,155
			$550,381,913

Wind Farm Finance Picks Up

Wind Farms Set Wall Street Aflutter

By RUSSELL GOLD

Associated Press

A new program offering cash rebates on renewable energy investments is sparking interest in wind farms. A worker atop a windmill in Maine.

After nearly a six-month lull, Wall Street is getting back into the business of financing new wind farms.

Morgan Stanley and Citigroup Inc. have invested $100 million each to finance separate wind farms this month, taking advantage of a brand-new federal program that is paying substantial cash grants to help cover the cost of renewable energy investments.

Bankers say this is the beginning of an active pipeline of new wind-farm financing, as well as investment in large solar installations and geothermal facilities. Project developers and Wall Street appear to be viewing the federal cash grant program as such a good deal, industry experts say, it may grow much larger than its Washington creators expected.

"The money is coming back," says Ethan Zindler, head of North American research at consultant New Energy Finance Ltd.

Under the program, the government will give a cash rebate for 30% of the cost of building a renewable-energy facility, awarded 60 days after an application is approved. Investors are also given valuable accelerated depreciation deductions, which help offset taxes.

The Energy and Treasury departments have said they expect to spend $3 billion on the program, which started July 31 and runs through the end of 2010, and was part of the stimulus bill. But a government spokesman says requests for $800 million in grants were submitted during the first four weeks.

Some Wall Street bankers say they expect applications to grow to $10 billion, based on projected wind-power installations.

"We see opportunities and we are pursuing them pretty actively," says Kevin Walsh, managing director of General Electric Co.'s GE Energy Financial Services division, which was a major financier of wind deals in the past.

The strong interest echoes the $3 billion cash-for-clunkers program that provided incentives to trade in older, lower-gas mileage cars, and which was quickly overwhelmed by demand. "We are concerned that this may evolve into a cash-for-clunkers version 2.0," says a spokesman for Rep. Darrell Issa, a California Republican.

But unlike the popular cash-for-clunkers programs, there is no spending cap on the renewable energy grants, and the government has committed to spending as much as is needed to keep renewable-energy investments flowing.

Under an earlier renewable energy program, the government gave companies tax credits over 10 years, which were attractive as long as financial firms believed they would be generating taxable profits for years to come. When Wall Street imploded last year, profits turned to losses and appetite for these investments disappeared quickly. Some of the companies most active in these deals -- including Lehman Brothers Holdings Inc. and American International Group Inc. -- were hobbled or destroyed by the turmoil.

But the new cash grants are offering the potential for attractive returns. Several bankers interviewed said they expected deals to provide an annual return of anywhere from 9% to 15%.

Most of the investments are expected to go to wind projects, because the industry is more mature and in a better position to capture limited funds. "I would not be surprised if the program is ridiculously successful and spurs a huge amount of development," says Liz Salerno, director of industry analysis for the American Wind Energy Association.

More

• Duke Energy Makes More Investments in Wind Farms

Even capital-constrained financial giant Citigroup has been drawn to wind power. In August, it made a $120 million investment in a large wind farm under construction in the rolling hills of northern Pennsylvania. The project, called Armenia Mountain by developer AES Corp., will deliver about 100.5 megawatts of power-generation capacity from 67 turbines, each the size of a 20-story building.

The quick returns provided by the cash grant "made it an attractive investment option," said Sandip Sen, Citi's global head of alternative energy.

It's not just Wall Street banks that are attracted. Iberdrola SA, a Spanish company that is the world leader in renewable energy by capacity installed, said in July that it expects to tap $500 million in cash grants for U.S. wind projects. "We've been in contact with the Treasury Department and we think the $3 billion is a minimum-type number," said Ralph Curry, chief executive of Iberdrola's U.S. business unit.

The Treasury Department didn't return calls seeking comment.

Additional financing from the grants would potentially benefit major wind-farm developers such as Florida utility FPL Group Inc. and large-scale solar developer Edison International. It could also give a boost to manufacturers who make the turbine blades and solar panels, such as Vestas Wind Systems A/S and First Solar Inc.

Morgan Stanley recently made a $120 million investment in a Montana-based wind farm developed by Grupo Naturener SA. "The cash grants are a good deal for both developers and financial backers," says Martin Torres, a Morgan Stanley vice president who worked on the deal.

"If we have a quick recovery and we're going like gangbusters again, you could easily get to $10 billion in two years," says Kevin Book, managing director of ClearView Energy Partners LLC, a Washington consultant.

Write to Russell Gold at russell.gold@wsj.com

Big Wind in San Diego

Wind-farm project set for Campo reservation

160 megawatts to power 104,000 homes at peak

By Onell R. Soto

Union-Tribune Staff Writer

Subcontractor Keith Phillips walked out of a giant turbine tower on the Campo Indian Reservation. (2006 file photo / Union-Tribune) -

An Indian tribe, an energy company and San Diego Gas & Electric Co. are announcing today that they are partnering to build California's second-largest wind-power project in the mountains east of San Diego.

When completed in two years, the 160-megawatt wind farm on the Campo Indian Reservation would produce more than three times the power generated by a similar project on the same reservation 60 miles east of San Diego.

That 25-turbine project, visible to motorists on Interstate 8 since its completion in 2005, is the only wind farm on an Indian reservation in the country, although more are in the works.

The location of as many as 100 new windmills on the reservation depends on the results of tests involving meteorological towers and an environmental review.

Chicago-based Invenergy will build and run the $300 million project and SDG&E will buy the power, enough for 104,000 homes at peak production. Energy production will depend on how often and how hard the wind blows.

The tribe will have an equity stake and hopes to eventually own the project, tribal Chairwoman Monique La Chappa said.

SDG&E's participation beyond buying the power is undetermined.

“We're still negotiating the final details of the terms,” spokesman Brian Brokowski said.

The project will provide revenue for the tribal government at a time when the economic slump has hit its Golden Acorn Casino & Travel Center, La Chappa said.

“I'm just thankful we have the opportunity to expand and to utilize the environment to provide a service to not only our community, but also to the outside community and the state of California,” she said.

Invenergy will help the tribe build two turbines to power the casino, La Chappa said. Other projects on the reservation have been delayed, including a hotel and a landfill.

Because the energy project is on a reservation, it will require approval from federal and tribal governments, but not state officials.

“We anticipate a very thorough permitting process where the public will be able to comment on the project,” La Chappa said. “We look forward to a dialogue with the community.”

Experts say the county could produce 1,000 to 2,000 megawatts from wind, but many of the windiest areas have not been developed for energy production because they are protected as parks, forests or wilderness, or because the transmission lines don't exist.

Wind developers are now looking to put turbines on ridge tops — primarily on federal or tribal land — to capture steady breezes and cash in on a movement toward green energy production.

“Development in the region will be on tribal land first,” said Scott Debenham, a Lakeside businessman whose company develops wind projects. On reservations, miles of ridges are under the same ownership and the permit process is more streamlined.

Federal land, including vast tracts owned by the Bureau of Land Management, will be next, Debenham said.

The Obama administration is supporting wind projects on reservations and is holding Campo up as an example.

“Indian country offers some of the premier wind-energy sites in the United States,” Interior Secretary Ken Salazar told Indian leaders in March, when he announced that his department has identified 77 reservations that could support “wind-based economies.”

Activists in East County's backcountry have warned that big wind projects threaten to industrialize a rural and sparsely populated part of the county.

Donna Tisdale, who heads a local planning advisory group, has complained that the wind turbines are ugly and noisy, and could cause fires. She has long worried about an expansion on the Campo reservation.

“It would be pretty devastating to property values,” Tisdale said in an interview a few months ago. She couldn't be reached for comment last night.

Tisdale's fear is that the area would replicate the landscape in Riverside County's San Gorgonio Pass, where developers have built electric windmills that stretch seemingly to the horizon.

That and two other regions — the Tehachapi Pass north of Los Angeles and the Altamont Pass east of San Francisco — dominate the state's wind production, which totals 2.6 gigawatts. Texas and Iowa produce more power from wind.

The largest wind project in California is in Solano County.

Invenergy Vice President Mick Baird said the effects of wind turbines have to be looked at in context.

“It's in the eye of the beholder,” he said when told that some people find windmills ugly.

The company will work with tribal and federal officials to place the windmills where they will affect the fewest people and limit the possibilities of fires and injuries to wildlife, Baird said.

He said an increase in wind energy will mean less electricity produced from burning natural gas or coal — helping SDG&E meet its goal of providing more than one-third of its power from renewable sources by 2020.

State law requires investor-owned utilities to get 20 percent of their power from non-fossil-fuel plants. SDG&E won't meet that goal, but it said yesterday that it has contracts to get 26 percent of its power from renewable sources by 2012 and is seeking more.

Right now, it buys the production from the 50-megawatt Kumeyaay wind farm on the Campo reservation. It also gets power from two projects in Los Angeles and Riverside counties that total 88 megawatts of capacity, according to the American Wind Energy Association.

SDG&E says it plans to seek more power from wind in East County. A sister company, Sempra Generation, is building a 150- to 200-megawatt wind farm just across the border in Mexico that it says will be the first phase of up to 1,000 megawatts from the wind there.

Onell Soto: (619) 293-1280;

Union-Tribune

In the Union-Tribune on Page A1

Wind Stimulus - Update

March 30, 2009

Wobbly wind sector sets sights on stimulus

By COLIN SULLIVAN, Greenwire

SAN FRANCISCO -- Wind power developers have long relied on complex tax-equity financing to bring most of their projects to market, but that system, once hailed as innovative, has collapsed over the last year, leaving the wind sector flailing for the cash it needs to make generation projects a reality.

This is how it worked: Large financial institutions like AIG, Wachovia, J.P. Morgan, Wells Fargo, Lehman Brothers and others would buy federal tax benefits from renewable energy startups that did not have enough taxable income to use the credits on their own.

In other words, big financial firms traded financing to offset tax liability. So-called tax-equity investors would bankroll a solar or wind project in exchange for a tax shelter, which was effectively pinned to profits. The system worked as long as Congress renewed the federal investment and production tax credits that granted developers a range of incentives, and it was widely viewed as a essential avenue within the renewable energy development community.

No more. The system, like other schemes crafted by insiders, has crumbled as AIG, Lehman and others have collapsed. The big boys no longer have cash to bankroll projects or the means to pull the profits to get credits, so the tax-equity space has turned into a financial dead zone.

According to figures from Hudson Clean Energy Partners, about 25 of the largest financial firms were active in tax equity for alternative energy in 2007. But at least 16 of them left the field last year (Greenwire, March 20).

That means an industry that had consolidated behind a handful of major players was left vulnerable to their demise. Wind in particular had banked on tax equity, financing 95 percent of its projects through this system in 2007 and following the same track in 2008 until the crash, according to numbers from J.P. Morgan.

So what now? Experts at a cleantech conference last week offered a simple fix: Figure out how to tap the American Reinvestment and Recovery Act, the economic stimulus law.

Adding finance options

Like their solar counterparts, wind companies sense opportunity in a stimulus provision that provides cash grants in lieu of tax credits for renewable energy. The program has solar companies breathing a sigh of relief, a feeling that appears to have spread to wind developers (Greenwire, March 26).

Under the previous investment tax credit, renewable energy developers could apply a 30 percent credit only to profits as a deduction. But the stimulus, for a period of two years, has made it possible to get back the 30 percent as cash, under a grant program to be administered by the Treasury Department.

Wind power is now eligible for the grant program, the plans for which are still being finalized by Treasury's understaffed tax department. Once the program gets going, one analyst said, the system should thaw frozen credit markets over the next few months -- a little bit at a time.

"It adds a number of options for how to finance a project," said Tyler Tringas, a wind energy analyst at New Energy Finance. "It gives [the developers] a new sort of very large decision tree to finance a wind project."

Standing to benefit, Tringas explained, are smaller projects that were often ignored by large tax-equity investors who were inclined to back bigger installations. Before the meltdown, a small community developer "would be very hard pressed to get an elite group of tax-equity investors," he said.

"You're going to be able to access a much broader base of capital at a lower rate," Tringas said. "This is going to be pretty good for a lot of those marginal projects."

And the policy may have come along just in time. Warren Byrne, founder and CEO of Foresight Wind Energy, and Tom Carbone, CEO of Nordic Windpower, both said the previous system had set up a top-heavy dynamic that may ultimately have hurt the fledgling sector.

"You could count on two hands the companies responsible for financing," Carbone said. "That was a dangerous landscape to have."

Temporary fix?

But others took issue with this maze of tax incentives, so-called partnership swaps and cash grants.

To Yaron Brook, president and executive director of the Ayn Rand Institute, the stimulus is the latest example of government meddling in free markets to subsidize uncompetitive energy sources.

Brook said the government, in setting up the grants, would distort energy markets by favoring wind, solar and other renewable sources. He compared the policy shift under the Obama administration to lawmakers' subsidizing of mortgages, which led to "enormous unintended consequences."

"We should learn from the financial crisis," Brook said. "Using tax policy to get us all into a home was probably not a good idea."

The same could be said of renewable energy, in Brook's view, because the tax policies could divert public dollars away from scalable power plants that do not rely on intermittent energy. "It is going to be disruptive, and it is going to ultimately be destructive -- particularly to entrepreneurs," he said.

Tringas countered that he regards the stimulus as a temporary solution until Congress passes a national renewable portfolio standard, which would send much simpler signals to the market, or a cap-and-trade system to regulate carbon emissions from power plants. He added that he does not believe in government meddling, but he does think lawmakers need to account somehow for the cost of carbon.

"This is enough to keep the wind industry moving forward," Tringas said of the stimulus. "It's enough to prevent the catastrophic collapse that might have happened."

He added, "There was a big problem with the primary source of capital essentially evaporating."

That is just fine for Brook, who said he doubts the science behind climate change and views carbon policy as a giant waste of money.

"I don't believe there's an externality cost to CO2," he told Tringas.

'Dead as hell'

So how badly is the sector hurting? Oil tycoon turned wind speculator T. Boone Pickens recently described the wind market as "dead as hell" to the Wall Street Journal. Richard Saunders, director of project development at GreenHunter Renewable Power, said Pickens was not far off.

Saunders estimates that in 2009, about 4,000 megawatts in new wind capacity will come online. That would be down significantly from the 8,400 MW built last year. And much of the new capacity is "really just things that are carrying over" from permits already issued in 2008.

"They've slowed down their activities tremendously," Saunders said. "They can't get the money."

While Saunders is optimistic that activity will pick up by the end of the year, Geoff Sharples, principal of renewable energy at Google Inc., is not so sure.

"The stimulus is intended to make 2009 not a terrible year," Sharples told attendees at the cleantech conference. "But it's pretty hard to tell how many banks are looking at this and thinking, 'How are we going to come in and make this play?'"

Gregory Jenner, a former tax specialist at Treasury and a partner at Stoel Rives LLP, said Treasury staff members are writing rules for the cash grant program as fast as they can. Jenner said he has talked to staff and expects "something coming out of Treasury very very quickly."

"The bad news is they've never done anything like this before," Jenner added, in a note of warning. "They're trying to figure out how it works."

Copyright 2009 E&E Publishing. All Rights Reserved.

For more news on energy and the environment, visit www.greenwire.com.