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Opening the gates to a big new market -- Exercising the PTC

A new financing structure is being deployed in the American wind power market that could open the gates to a vast group of small utilities -- representing nearly 15% of electric power sales in the US -- that have largely been shut out of wind plant ownership because of their tax exempt status.

Only investors with tax bills to offset can make use of wind's federal production tax credit (PTC), putting publicly owned utilities, such as municipalities and public power districts, along with electric cooperatives, out of play as wind farm owners. As a result, they have no access to wind power at the prices owners can achieve. That could be about to change with a commercial wind plant in Washington, the 205 MW White Creek facility in Klickitat County, showing the way.

White Creek, which came online last month, was developed by four small Public Utility Districts (PUDs). After initial pre-development, the PUDs took out a loan with Germany's HSH Nordbank AG, an established financier of wind projects in America, to cover wind turbine purchases and wind plant construction.

The PUDs then sold the entire project to equity investors Prudential Capital Group, Lehman Brothers and Summit Power under a "power pre-pay" financing structure that at the same time allowed the PUDs to buy all of White Creek's output for 20 years. The PUDs paid for the power from the sale of the project and were also able to repay their HSH debt in full from the same pool of cash. The price paid for the 20 years of wind power for their customers was far lower than could be achieved on the open market. Meantime, the equity investors gained access to a tax credit allowing them to offset $0.02 against their tax bill for every kilowatt hour the wind plant generates. And the PUDs have an option to take over the wind farm once the PTC is past itws ten year shelf life.

Very efficient

"The pre-pay structure allowed us to put together a very efficient capital structure which got them very good value for the tax incentives that are there and a lower cost of power relative to what they would have done on a more traditional structure," says Tim McDonald with Meridian Clean Fuels LLC, the principal advisor on the structure. Other public utilities in other parts of the country are now considering the approach.

"That's the big picture here," says Brett Wilcox with Summit Power, contracted by the PUDs as the lead developer of White Creek and a minor equity partner. "Municipalities, because they are tax exempt, generally could not play in the wind development area because it's driven by tax benefits. This gives them a way to play in the wind area."

The federal government's Competitive Renewable Energy Bonds (CREBs) offers one option for tax-exempt entities to fund wind development on their own (Windpower Monthly, January 2007). But CREBs are not a practical option, says Wilcox. "It's a program that's been authorised but there isn't enough funding to be meaningful. When last year they did CREB financing, the largest you could finance for any one project was between two and three million."

Wilcox says the power pre-pay financing concept is a big deal because of the potentially large number of small utilities in the US that could harness it, particularly along the West Coast where there are many PUDs. In the West Coast states, most of the PUDs are required to meet mandates for the renewable energy content of their power supplies.

According to the US Energy Information Administration, public utilities represent about 63% of the total number of electric utilities in the US and supply approximately 10% of generation. Cooperative electric utilities represent about 29% of US electric utilities and around 4% of generation.

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