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United States

Stimulus package provides bright new financing tools -- Much depends on speed at which capital markets adapt to new options in the United States

The US government's massive $787 billion stimulus package provides a major expansion of federal funding for wind energy development, with a series of provisions the industry says are critical to sustaining its momentum in the face of tough economic times. The package, signed into law by President Barack Obama on February 17, contains the longest extension of wind power's federal production tax credit (PTC) in history, a temporary grant program to help overcome investment roadblocks over the short term, targeted incentives for transmission network upgrades, loan guarantees for renewable energy and transmission projects, and manufacturing inducements.

The provisions are going to be a major help, says Eric Blank of Iberdrola USA, the American division of the world's largest owner of wind farm assets. "There is just a lot more you can do with this stimulus package in place and the optionality it creates."

But while the measures are expected to help get the industry moving again, they will not alleviate all of the financial concerns facing developers trying to bring new wind projects online in the midst of an economic downturn. "I think it is very healthy for the industry, but it is not a magic wand. It doesn't solve the broader capital and energy price problems," Blank said last month, talking to participants at Infocast's Wind Power Finance and Investment conference, who met in San Diego as Congress finalised the legislation.

Positive step

A key provision in the bill is a three-year extension of the PTC, which had been set to expire at the end of this year. The credit, worth $0.021/kWh in reduced taxes, pays about 33% of the capital cost of a typical wind farm and has been the mainstay of the US wind market's rapid growth -- when it has been in place. The expiry of the credit every other year has also meant an American market characterised by risk and uncertainty. A PTC in place to the end of 2012 is a "major positive development in the US market," says Peter C Brun from Denmark's Vestas Wind Systems, which is significantly ramping up its manufacturing capacity in the US.

The PTC, however, has also been at the heart of some of the market's most recent financial challenges (Windpower Monthly, November 2008). Most wind project developers do not have tax liabilities large enough to make use of the sizable credit the PTC represents, forcing them to go out and find equity investors who have. But the bottom fell out of that market in the fall as the global financial crisis took hold, trimming the number of tax-motivated investors active in the US wind sector from as many as 18 to only four or five.

The stimulus package contains measures to deal with the lack of investors interested in using the PTC. Companies can opt to take an investment tax credit instead, which allows them to deduct 30% of the capital cost of the wind farm from their tax liability in the year the project comes into service. In this way, the investment tax credit (ITC) provides an immediate benefit, in contrast to the PTC, which is paid out on the energy produced over a ten year period. As an extra incitement to invest in wind plant operation, for projects that start construction in 2009 or 2010 and are completed before 2013, developers will be able to take a cash grant equivalent to the value of the ITC and avoid the problem of finding tax equity investors to use it in the current depressed market.

The details of how the grant program will work have yet to be worked out, but like Blank, Peter Duprey of Acciona Energy North America sees value in having more options. "The key point is we now have extra tools in the toolbox to make these projects work in a difficult financial environment," he said at the Infocast event. "I think the issue we're all struggling with now is how quickly is it going to change things. You've got to know what the rules are and somebody has got to create them. And how quickly will the capital markets digest all these changes?"

Disappointed

Some players are concerned about shifting from an incentive that rewards the most efficient production of green electricity to one that benefits the initial capital investor, even if projects do not perform well. "I am very disappointed in the stimulus package. It will definitely help, but what it will help is the low capacity factor projects. They have gotten a huge shot in the arm through the ITC arrangement," says Mike Storch of Enel North America, another major investor which, like Iberdrola, is owned by a European utility.

"But if the objective is to truly provide an incentive for development and double or triple renewable energy in the US in the next three years, it is not going to be the 25 % capacity factor projects that make the difference. Most of the people in this room who are developers are focussing on projects that have significantly higher capacity factors because that is generally what makes economic sense. And those projects will take an economic hit to accept the ITC refundability provision," says Storch.

John Eber of JP Morgan Capital, a major player in the wind tax equity market, says developers will have to run the numbers to see whether taking the PTC or taking the cash grant makes more sense. Because a high percentage will opt for the grant, he says, there is a better chance that those who decide to stick with the PTC will find the tax equity investors they need. "The demand that will be there isn't going to require as much tax shelter as what we are used to seeing because of the existence of the grant," he says.

Tim Howell of GE Energy Financial Services, another of the largest investors on the tax equity side, agrees. "I think there will be a lot less tax equity done so supply and demand will be more in balance," he says.

One of the questions still facing the industry is how to deal with a second federal tax benefit that is provided to wind energy projects. Accelerated depreciation, which allows owners to deduct most of the cost of wind farm over five years, is worth about 30% of the capital cost of a typical wind farm. As with the PTC, most developers don't have enough taxable income to use it and need to pass it on to tax equity investors as well. But some question whether those investors will be interested in pursuing that smaller slice of the market. Eber expects they will. "Tax equity investors like us and GE and others will shift over and adjust and help fund this business going forward."

The enforced shake-up represented by the arrival of the ITC and cash grant options could open the door to new deal structures and bring in new investors who "never really got comfortable" with the kind of complex partnerships required to effectively utilise the PTC, says Jack Cargas of Bank of America Leasing. Tristan Grimbert of EnXco is of like mind. "The stimulus package will reshuffle the cards. You are going to see new structures and we are going to be exploring new ground."

Frozen credit

Another area of concern is that debt markets are still so frozen they may keep projects from moving forward, even with the stimulus provisions in place. "I think we are going to see a big shift from tax equity investor dollars to bank dollars," says Jim Murphy of Invenergy LLC. "So then the question becomes the banks. Who's lending, who's not lending? Who says they're lending and is not lending? It is going to be interesting and we're not going to know for a while."

Industry players are hopeful a new $6 billion US Department of Energy (DOE) loan guarantee program included in the stimulus package could help loosen up some bank financing, but lenders caution it will do little to change how much capital banks actually have to lend. "I don't think the guarantees address the liquidity issue and that is the biggest issue facing a lot of us," says Chip Carstensen of Nord LB Financial Services.

The package also includes $11 billion in transmission investments that prioritise renewable energy and "smart grid" upgrades for dynamic balancing of supply and demand, as well as a $1.6 billion increase in the clean renewable energy bonds program used by tax-exempt utilities such as rural cooperatives that have no use for the PTC. The package also has $2.3 billion in tax credits for US-based manufacturing of the equipment associated with renewables and other green technologies.

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