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United States

A price guarantee for future revenues

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Uncertainty over the long term value of green power credits is undermining their ability to drive markets for renewable energy. With no security that future revenues from credit sales will be enough to pay off loans, drumming up finance for a wind project is none too easy, Britain being a prime example. Now a trail-blazing fix for the problem is being tried on the other side of the Atlantic, in the state of Massachusetts

A Washington administration that appears increasingly disorganised. State legislatures that reach into renewable energy trust funds to pay general bills. Special interest groups intent on opposing the spread of wind energy in the United States. Fluctuating oil and gas prices, that show no tendency to stabilise and that give energy investors a serious case of the jitters. How is a harried wind project developer supposed to put together a financing package under such circumstances?

It is particularly difficult in New England. The sage advice offered by more than one developer is: "Never site a wind project in a town with a Starbucks coffee outlet." Developers could do worse, however, than seek a meeting with Robert Pratt of the Massachusetts Renewable Energy Trust. He has come up with some creative financial help that could make all the difference to the problem.

When Massachusetts deregulated its electricity generation and distribution, it included a provision that was intended to spur renewable energy -- green power credits, with a ceiling value potentially as high as five cents a kilowatt hour. Income from sales of credits will top up the sales price achieved for the physical electricity from renewable sources.


Demand for credits is being driven by a requirement on sellers of electricity to buy them. From the beginning of 2003, they must demonstrate, through the ownership of credits, that they have met the requirement to obtain an incrementally increasing amount of electricity from new renewable resources. Those that fail to comply with this minimum standard for the proportion of renewables in their supply portfolios must pay $50 for every megawatt by which they fail to meet the requirement. The money is to go into a state fund to help build new renewable energy generation.

The intention behind the legislation is to make development of renewable energy plant a secure investment. But it is showing no signs of working as intended.

Banks and other lending institutions do not have a great deal of faith in the long term intentions of Massachusetts' politicians. Considering the recent performance of Republican governor Mitt Romney, who allowed millions of dollars to be removed from the state's energy trust fund to pay for general government expenses and who opposes the development of the proposed Cape Cod offshore wind farm -- it is not surprising that even risk-oriented lenders have doubts about how long the Massachusetts renewable energy credit (REC) system will actually function.

"An investor will simply not accept this political risk," says Dale Osborn, a long time wind plant developer and now head of Disgen, a company specialising in distributed electricity generation.

The problem is not with jump-starting the REC program. Sellers are not having trouble finding buyers interesting in signing contracts to buy credits over the next few years. A few sellers have even managed to wrangle contracts for five years into the future. But companies do not want to tie themselves up with REC contracts for much longer. That means lending institutions are unwilling to accept RECs as part of a project's long term revenue stream, blocking the way to project finance.

A solution

Pratt has stepped in with a creative instrument that solves the chicken-and-egg problem. The state's renewable energy trust is guaranteeing a certain minimum level of revenue for RECs by signing their own long term contracts with qualified renewable energy entrepreneurs. Not only does the trust guarantee to buy future RECs at a price of roughly $0.02-0.025/kWh, but it then puts the money to pay for those RECs into an escrow account -- one that cannot be robbed for another purpose. This means that whichever way the American political winds blow, the funding is there.

"We have a great REC program," Pratt says. "But no one is able to value it, because it's so new. If I'm a developer, I need to be able to show my bank that this REC is worth something. I need to be able to determine its value."

Pratt says he realised the importance of this kind of financial security because of his own experience in building energy projects in Central America. "Lenders are tough. We not only have to show that we had long term contracts, but that they were really solid." That kind of anchorage is difficult, if not nearly impossible, to obtain in a deregulated world. "This way, we hope to get the flywheel going so the REC program can become self-sustaining," he says. "We can't fund everything. We only get $25 million a year."

Pratt calls his solution "very elegant," and stresses that the escrow accounts, while playing a "financing function," are "not grants." The hope is that by providing a floor of several cents a kilowatt hour, the price actually paid for RECs in the trading marketplace will hover somewhere between that floor and the five cent ceiling. If that's the case, then the money in escrow need never be paid out by the state at all.

Bruce McLeish of Constellation NewEnergy says he thinks the program is a real step forward in resolving the long term financing of an energy project. McLeish buys wholesale electric power for client corporations and is one of the companies required to buy a certain percentage of green power each year.

"The price for RECs is quite high in the short term because of the shortage of renewable power," says McLeish. But long term, I have no idea what the price is going to be. So I'm reluctant to buy renewable energy certificates ten years from now when I have no customers signed up to buy these things that far down the road."

Pratt's program, he says, has helped surmount that problem. McLeish's company has signed a long term REC commitment with a green power company, based on a commitment from the state's renewable energy trust to place money in escrow that will help out Constellation NewEnergy if the REC market falls apart.

Long term cash flow

Two western Massachusetts wind projects slated for construction in 2004 have been helped substantially by this program. Osborn hopes to build a 13.5 MW, nine turbine project on Brodie Mountain. Berkshire Wind Power LLC has been in the planning stages for not quite ten years, says Osborn. When Pratt began working for the trust, he met with Osborn and asked him what his largest hurdles were.

"My answer was that the REC is a political instrument," Osborn says. "We needed some certainty in long term cash flow," he continues. "Now we have a 20 year power purchase agreement in final form for the physical energy at a certain price, a five-year REC sale to a commercial entity, and then beginning in year six, we will sell the credits to the trust."

The trust has put $8.7 million into an escrow account, slated for the purchase of all the Brodie Mountain project's REC production in years six through 15. Without that commitment, says Osborn, "We would have walked away from Massachusetts. There just wasn't any hope of a commercial entity agreeing to purchase these over a long period of time." He adds: "Without the activity of the trust and the commitment to extend the purchase price out the 15 years, there would be no commercial wind development in Massachusetts." Osborn says he expects the wind turbines to be turning on Brodie Mountain by the end of 2004, unless the federal government fails to reinstate wind's production tax credit.

A second planned wind power plant, the 28.8 MW Hoosac Wind Project, also slated for construction this year, will benefit from the same program. The trust has committed just over $17 million to an escrow account that will allow project builder, Enxco, to sell RECs to the trust if they are unable to find another buyer from years six through 15 of the project's operation.

"It's basically a price floor that we can rely on if the market pricing in years six through 15 isn't at that level," says EnXco's Todd Presson. "We are working with retail energy suppliers to establish market transactions but having that price floor from the trust is helpful because it allows the financing to work in this new market."

A fix for uncertainty

Presson says that one of the uncertainties in doing business in Massachusetts these days is the effect of deregulation over the next several decades. The uncertainty has meant, among other things, that power is sold increasingly on the spot market. "Most of the power deals are short," he says. "It remains to be seen how deregulation will play out over the coming years, particularly from a price-stability point-of-view."

Importantly, projects that are helped by Pratt's program need not be physically located in the state of Massachusetts, nor does the developer need to be based in the state. The Public Service Company of New Hampshire is developing a wood power generating facility in Portsmouth, just north of the Massachusetts border.

The innovative project will convert a 47 MW coal burning plant to one fuelled by wood chips and other wood materials. The Massachusetts trust has set aside $2.7 million to buy 10% of that project's RECs for several years. All that is necessary, say officials with the Massachusetts Renewable Energy Trust, is that the renewable energy project meet certain standards, which include participating in the New England grid system. In addition, renewable project developers must be willing to commit their RECs to Massachusetts.

"This is a very important program that has gotten off to a slow start," says Pratt, referring to the renewable energy certificates. "And this new financial tool is one of the favourite programs of our board right now. They love the leverage provided by the trust's money. Ours is a very different approach from a state like New York, which is just providing grants."

Seizing the future

The trust is in the process of soliciting for another round of program participants, who must have projects ready to complete by 2006.

Although the Massachusetts Renewable Energy Trust fund initially failed to attract much interest, in recent months it has begun to win praise from both renewable energy developers and the public at large. The organisation has also begun a $4 million community wind initiative designed to help communities evaluate their wind resources and to build small-scale projects of 4.5 MW and less. Several towns have already taken advantage of the financial help and others are planning on erecting wind monitors during 2004. "People are starting to seize their energy future," says Pratt.

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