The 203.5 MW Milford Wind Corridor project developed by First Wind had originally expected to sell its power to LADWP many months ago and be well into construction by now. But the developer ran into the same financing trouble many US wind developers have found themselves in: few prospects for finding a tax-motivated partner to take a majority stake in the project. In the past, these so-called tax equity partners bought into wind projects partly to use wind energy tax credits to reduce their tax bills.
LADWP's Randy Howard says the Milford project was progressing well when suddenly it looked doubtful that First Wind would find a tax equity partner upon completion and construction financing became difficult. "So our board made the conscious decision that it was a good project for us and if we had to own it, we would be fine with that strategy," says Howard. "We provided a backstop guarantee. We said if the developer is unable to receive takeout financing, if there are no tax equity investors upon completion, we would guarantee to purchase it." The deal was legally structured as a power purchase agreement (PPA) with an option to own.
With LADWP behind the project, banks became comfortable lending the project construction money and it has since received $376 million from a consortium of banks led by The Royal Bank of Scotland. It now has full notice to proceed and "construction is fully engaged," says Howard. The project will use 58 Clipper 2.5 MW units and 39 GE 1.5 MW units and should be online by the end of the year.
Savings for ratepayers
Since LADWP is a publicly owned municipal utility, it has no use for federal tax credits, which makes owning the project relatively expensive, says Howard. For this reason, the future entrance of a tax-equity partner is the preferred option; a full use of tax credits can offset over 50% of a wind plant's installed cost. An owner accessing tax credit benefits means that LADWP can reap these for its customers in the form of a cheaper power purchase contract. At the same time, LADWP gets more wind generation into its portfolio.
Being in California is an advantage, says Andrew Redinger of KeyBanc Capital Markets, a senior level lender among eight banks providing the construction financing. Few municipalities outside California and its high power prices could afford to run the risk of developing, owning and operating a wind plant without the financial help that comes in the form of tax credits available to the private market. He confirms the project would likely not have found construction financing without LADWP's influence.
Redinger calls the backstop strategy "a very creative approach." He also believes a contract with this structure has not been done before. "I would expect other people will mimic this," he says. Finding new strategies that get wind plants built in today's tough market is important, adds Howard. The cities of Burbank and Pasadena also have minor PPAs with Milford of 10 MW and 5 MW following LADWP's roughly 185 MW majority.
It is not the only wind purchase by LADWP. It signs traditional long-term power contracts for wind power and engages in direct ownership, as with its Pine Tree project, coming fully online this month, which it developed, owns and operates. The 80 GE 1.5 MW turbines were wrapping up final electrical testing and commissioning last month north of Los Angeles, near Mojave, in Kern County.
"It's really to diversify some of the risk and experience," says Howard. "The benefit of owning the Pine Tree project is that we went and bought most of the land and we own most of the transmission there so it will be an asset the city will own and operate for many years to come." A second 150 MW phase in the same area called Pine Canyon is under environmental review and will take advantage of existing LADWP-owned transmission and a nearby substation.