United States

United States

Tax exempt utilities build project for sale -- Financing innovation

A group of small, publicly owned utilities in the US Northwest continues to demonstrate an innovative approach to keeping the wind business going in times of tight money supply. Last year the 205 MW White Creek wind farm in Washington state became the first project in which Public Utility Districts (PUDs) found a way of indirectly benefiting from the federal production tax credit (PTC) for wind power generation, which tax exempt utilities have no direct access to. Now the same four PUDs are to build a second 100 MW phase, Harvest Wind, using the same strategy.

In what is termed a "power pre-pay" arrangement, the PUDs will eventually sell the completed project to financial investors and plan to use the proceeds from the sale to buy all of the output from the wind plant for 20 years at below market prices. In the case of White Creek, the price discount was about 13%. The equity investors, meantime, gain access to the PTC, which allows them to reduce their tax bill by $0.02 for every kilowatt- hour of wind power sold.

In the current financial climate, equity investors looking for such tax shelters are in short supply, but the four PUDs, Cowlitz Public Utility District, Peninsula Light, Lakeview Power and Light and the Eugene Water & Electric Board, plan to own and operate Harvest Wind until the tax equity market returns -- at which point they will sell it. The position of the PUDs as first owners offering up a project without debt will help them negotiate a good deal, they believe.

The four are currently seeking a buyer and expect the partner to take advantage of a cash grant equivalent to the ten year value of the PTC, an up front capital subsidy for wind projects that has been promised as part of President Barack Obama's broad measures to stimulate the American economy.

The pre-pay model is catching on, says Brett Wilcox of Summit Power, which is co-developing the Harvest Wind project along with the sponsoring utilities that bankrolled construction and turbines. "It's not just happening in the Northwest. There are other public utilities who are basically buying a project to turn around and resell the project to tax equity investors when the market is better," he says. Utilities are well positioned in today's cash-strapped market to invest in wind plant because of strong credit, consistent income from consumers and, often, an ability to raise money with low interest bonds.

Construction of Harvest Wind is underway now. The project, near White Creek in the Columbia River Gorge in Klickitat County, Washington, is using Siemens 2.3 MW turbines. Driving the investment by the PUDs is a state law requiring public utilities to source a rising proportion of their supply portfolios from renewables.

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