Just about everybody is feeling some pain in the American wind power market as money becomes a commodity in short supply. Small and mid-size independent project developers are especially vulnerable, with a number pulling back on wind farm plans and looking for buyers of distressed assets. But a silver lining is forming. Tight turbine supplies are freeing up in the wake of delayed mega projects seeking new financial partners. As turbines ordered in bulk for delayed projects are put out to bid on a resale market, their prices are dropping to earlier levels, making marginal projects viable once more. Smaller wind developments are perhaps coming back into fashion while the big projects find their financial feet once more.
"Part of the problem with assessing where we're at, and where we're going to go, is that this is the most serious disruption we've seen in the financial markets and in the economy since the wind industry has really come into its own," says Ed Einowski of Stoel Rives, a law company based in Oregon. "The current economic difficulties would seem to have a bigger impact on the smaller developers. They tend to be not very well capitalised and their ability to withstand the current turmoil is more limited."
Economics specific to the capital-intensive wind industry are further complicated by a two- to four-year development process, which requires spending considerable amounts of cash while no new money comes in. Larger companies tend to have access to their own capital or they can borrow at lower rates, which allows them to carry their projects through rough times. Smaller businesses are usually not so lucky. Many are struggling under the radar, while the plight of others has been very public, such as Noble Environmental Power, a mid-sized developer based in Connecticut with an ambitious agenda throughout the Northeast and Midwest.
Last spring, amid a two-year spree that still included bringing more than 1000 MW online through the end of this year in New York alone, the company announced an Initial Public Offering (IPO) on the NASDAQ stock exchange. By October, Noble stopped work on two wind plants and sold a third, mostly built, project.
No failed businesses
Last month, Noble closed its Vermont branch office while linking its ongoing problems to the titanic failure of Lehman Brothers, a main financial backer. Its IPO ambitions are now largely considered a placeholder for better economic times. That is also considered the case for mid-sized developer First Wind (formerly UPC Wind), which announced IPO plans last spring, although it has not shown any signs, at least in public, of a slowdown.
No companies have yet toppled, but that could change. "One of the consequences of any economic downturn is a number of companies go out of business," Einowski says. "That's the truth no matter what industry you're talking about, so I would expect that there will be some failures in wind. How visible it will be I don't know, because the more vulnerable companies are the smaller ones, and they tend to be less visible anyway. So when they disappear, you might not notice it."
Even so, Einowski notes few who spend several years developing their projects willingly abandon them simply because bad times come calling. "That would be foolish," he says. "So they try their best to maintain them and find various strategies for getting over the current hump."
Money still available
One strategy for Walt Hornaday of Cielo, a small independent developer in Austin, Texas, is to focus on projects in the mid-size 100 MW or less range. Cielo has brought 1100 MW of wind plant online in the past eight years. "But on the side of financing, it's just going back to business plans that are similar to what we were doing through the post-Enron finance meltdown in 2002 and 2003," Hornaday says. "Solid projects will get funded, but speculative or very, very large ones won't. Projects in the $200 million range are more practical."
Ken Valley, president of Minneapolis-based Midwest Wind Finance, sees a similar trend. "Actually it's not too bad, because most of the financial firms out there that were doing the bigger projects are now stating publicly that smaller is better. It spreads out their risk a little bit more," he says. Valley founded Midwest Wind Finance in 2004 to help provide budding independent wind power producers with access to capital and wind turbines. He is working with more than 500 MW of projects, most in the 10-40 MW range, at different stages of advancement.
"And the other part is that when it comes to financing projects, there is still plenty of money available as long as the project clearly can show that it is a safe investment. We've always had to operate that way. We've always had to make sure projects have everything in place before we go get financing for them. So there has been no change in that market. To some degree it has, but it is not substantial. Really there have been more positives than negatives because people are now interested in doing smaller."
Paul White of Minnesota-based Project Resources Corporation (PRC), who specialises in putting together projects with equity provided by members of the local community in which the turbines will be located, feels fortunate that wind power is grounded in long term operating assets without fuel costs. PRC has roughly 30 MW online, is adding 50 MW this year and has a modest pipeline beyond. White believes smaller projects remain attractive to small and medium-sized investors, who see wind as a relatively safe investment and mostly immune to politics. While he has heard rumblings of a few companies that are overextended and on the edge of collapse, PRC has been able to move forward.
Belt tightening mode
"The leading challenges are shifting around and it seems like almost every month we have a different reason why projects are challenging," White says. "But we're something of a lean and mean, efficient, ma-and-pa shop. Both my wife and I have been in this business for quite a while and we operate out of a home office. We keep our overhead low and we have a small staff of half a dozen people. If things slow down for a few months, we're able to work it out."
But that does not mean PRC considers itself immune to the severity of the current climate. "I think it's fair to say that we're hoping, if we're going to be in business in 2010, that financing of wind projects is going to have to bounce back," White says. "Because we can't keep going forever the way things are."
Wes Slaymaker of Ecoenergy, an Illinois-based developer that pursues a business model of prepping medium-size projects for sale, has more than 2000 MW in its pipeline and brought a 100 MW Illinois project online last year. "Basically, what we're doing is developing the projects and then finding long term owners that worry about financing, getting tax equity and all that other stuff," Slaymaker says. "We are affected, because suddenly we're going to find that if we're trying to sell something, nobody's going to want to buy it at the moment."
That puts Ecoenergy among those in a belt-tightening mode, forced in large part to work with expensive short term loans or money that is already in the bank. "So we should just try to improve the value of what we've got," Slaymaker suggests. "Nobody knows how long this current depression, or whatever you want to call it, is going to last."
But while many potential owners are taking a wait-and-see attitude, Slaymaker envisions utilities as strong potential partners, somewhat immune to the economy. "A lot of Midwestern utilities want to own projects," he says. "I could point to Enxco, because they do plenty of that in the Midwest -- develop projects and then sell them to Xcel or MidAmerican or something. A company like ours can do the same." Enxco, a veteran anchor of the US independent wind power development industry, is owned by French national utility Electricité de France.
Cielo's Hornaday believes that the trend for consolidation in the form of US utilities and foreign wind companies buying up smaller domestic developers could likely continue as a point of entry into the US wind sector. He also regards the reducing the life of wind power's federal production tax credit (PTC) to one- or two-year extensions at a time as a limiting factor, especially for foreign entities. "I could see that being stressful for European investors during periods when the PTC is not extended," Hornaday says. "But it's still a good way to enter into the US market today, as it was two years ago."
Hornaday, however, does not expect Cielo to be among those scooped up by bigger players, mainly because the firm is focused regionally on the Texas market. "That might have limited interest for folks other than those in the region where we work," he says. "But I don't think we're eliminating any options as far as how we'd look at the most competitive way to capitalise a project."
A positive aspect of the slowdown in the US wind development boom is that suddenly virtually any brand of turbine is available for those who manage to find financing -- an ironic reverse of a three-year trend that featured relatively easy money and a machinery drought. An active resale market for turbines has arisen as developers who ordered turbines under large framework deals find they are not be able to use them. And the easing of the backlog for manufacturers means orders can be placed now for delivery this year.
"Let's just say there is a lot of availability of turbines, either directly or through companies that already made a down payment and now are either having financial problems or their projects are being delayed," says Valley. "It's great, because really what has happened is, with less competition it starts driving down the prices. Now the prices actually are at a little bit more manageable level. Let's just say it feels so far like a 15% drop in the last four months."
In many ways, the challenges have always been there says Glenn Ikemoto, a California developer bringing nearly 90 MW online with a handful of projects in Idaho and Oregon. He has been in the industry for two decades. "Developers always have some major hurdles that have to be overcome. That's why they're developers. Otherwise they would just be office workers."
The key, he says, is to know when a deal is ripe for finalising. "When conditions are close enough, even if they're not perfect, that's the time to pull the trigger," Ikemoto says. "I've seen so many developers say they're just going to wait for better this or better that. Well, then the turbine prices run away from them. Or the permit blows up. Or there's a change of policy. "The golden rule is that gold rules," says Ikemoto. "And the golden rule for developers is close when you can close."