The company, based in Connecticut, is the energy finance arm of global giant GE and invests about $3 billion a year in energy projects around the world. It put $250 million into renewable energy in 2005, boosting its portfolio of wind, geothermal, solar, hydro and biomass projects to $900 million worth of debt and equity investments. Overall, renewables make up nearly 10% of its total $10 billion portfolio.
"We had a good year last year investing in renewable energy projects," says Urquhart. "If you take where conventional energy prices are, concerns over the environment, and improvements in technology, that has really driven an increase in activity."
This year, EFS plans to form a dedicated team that will focus exclusively on renewables. Chasing wind deals, says Urquhart, will be a big part of the team's work. "What excites us about wind is the technology. It is improving constantly. More efficient machines, bigger machines, better productivity on capital costs."
Equity and debt
Wind already has a $350 million share of its portfolio and last year accounted for three-quarters of the renewables investments made. Of the $190 million spent on wind in 2005, $40 million went on project debt and $150 million to buy EFS equity stakes in 166 MW of German wind power, the 50 MW Kumeyaay plant in California, in which it invested $51 million, while another $10 million went to a project under development in the US.
The Kumeyaay plant is made up of 25 Gamesa 2 MW turbines and is the largest wind farm on US Indian lands. EFS is partnered with the project's sponsor, Babcock and Brown, a global wind investor that will retain an undisclosed but "substantial equity interest" in Kumeyaay and manage the facility.
Kumeyaay is EFS's first US wind equity deal since the late 1990s, when the company made investments of $48 million in Minnesota's 107 MW Lake Benton project and $58 million in the 80 MW Storm Lake wind farm in Iowa. Urquhart says of the investment pause since then that it is only now that EFS feels it is the "right time" to invest again. "When natural gas prices were low, renewable energy was not as attractive as conventional power. Even when gas prices began to rise, the PTC was not in place, making wind less attractive. When all those conditions improved, we resumed our wind investing," he says, with reference to wind's federal production tax credit (PTC).
In a hot US market heading for a record 3500 MW of new wind in 2006, the PTC, combined with state mandates for renewables, have helped create "a sweet spot for wind" right now, says Tim Howell, a managing director at the company. "We have an appetite to make significant investment in the US if we can find the projects." With what some have described as too much money chasing too few deals in the US, finding the right projects could be a challenge. But EFS is willing to come in at the early pre-construction development phases of a project, when smaller developers have historically had difficulty raising capital because of the perceived risk. One of the equity investments EFS made in 2005 was $10 million in a US wind project in the late stages of development. "We will do any development deal if it meets our set of criteria," says Urquhart.
"What it comes down to is risk and return. You take one of these projects and you look at all the factors and you decide whether the return it provides given the risks is appropriate. And where it is, we want to play."
Despite its appetite for US deals, EFS has no plans to confine itself to that market. It has a team in Europe that put together the German purchases. "We don't have a preference, one over the other," says Urquhart. "We'd like to be out sourcing every deal in Europe to see if fits our risk-return hurdles, just as we would like to do in the US."
Urquhart says he expects EFS to increase its overall energy investments, including the money it puts into renewables, by about 20% a year for the foreseeable future. Eventually, he says, EFS would like to become the largest, most profitable owner of wind assets in the world. "Why not? It fits well with the fact that we want to be the largest, most profitable energy investor in the world. Renewables are big piece of that and wind is a big piece of that."