The unlikelihood of a loan is a blow to the project's image, even though the DOE's decision was nothing to do with the project's viability. It also highlights two years of complaints from offshore developers that the DOE's loan programme was ill-designed to accommodate offshore projects because of their size and longer lead time.
In February, senator John Kerry and ten other lawmakers from Massachusetts urged the DOE to approve Cape Wind's loan guarantee quickly, saying it would lower the cost of electricity from the project.
"[A loan guarantee] would have allowed cheaper financing," says Adam Umanoff, a partner at law firm Akin Gump Strauss Hauer & Feld who helped handle the DOE loan guarantee for the $2.2 billion Shepherds Flat project in Oregon.
He said that without it, Cape Wind Associates will have to seek more traditional forms of finance. "They presumably had a backup capital plan, and they will have to dust it off." Without a loan guarantee, Cape Wind Associates will face an interest rate 1.5% to 2.5% higher, and a loan would probably be shorter-term.
Mark Rodgers, the developer's spokesman, would not comment on how large a loan guarantee Cape Wind had sought. Other major projects, such as Shepherds Flat, have clinched one for 80% of their debt. Nor would Rodgers or the DOE comment on the accuracy of reports that EMI is seeking to finance 80% of Cape Wind with government loans under the DOE Section 1703 financing programme for innovative technologies. The project will use Siemens 3.6MW turbines. The DOE rules are strict on what is "innovative".
The conventional wisdom is that a wind project costing more than $1 billion needs a "super-agency loan"
- such as from the DOE - or even the public markets to cover part of the capital costs, says Jim Tynion, a project finance expert at legal firm Foley and Lardner.
Barclays Capital, Cape Wind's primary financial adviser, is seeking an equity partner. According to an unconfirmed report in the Wall Street Journal, Cape Wind Associates is seeking $400 million in equity. It may also tap the bond market, confirmed Rodgers.
Tynion is optimistic about the bond prospect: "There's pent-up demand of wealthy individuals and corporate treasuries who want to invest funds in renewable-energy ventures."
Given the use of Siemens turbines, it could seek construction financing from European export credit agencies, or even vendor financing, suggests Tynion.
Cape Wind has only sold half of its expected output under a long-term power purchase agreement to National Grid. This does make the project more risky, according to Umanoff. Rodgers says the fate of the remaining 50% of power produced will have to be settled to get the project financing in place. Reducing the size of the project is an option, he says. "[But] it is not our preference and it is not our plan."