The $0.018/kWh wind production tax credit is a necessary driver in US project development, but the challenge has always been to find equity investors with enough tax appetite to use it. So far, a few key companies in the utility sector have dominated the market. But, says John Boc of Massachusetts-based Meridian Investments, that could change. "We are dying to be able to get some wind energy deals in front of our clients," Boc told delegates at last month's American Wind Energy Association conference.
"We have tested the marketplace and we have at least 15 or 20 corporations that want to have a look at what you are doing. The fact that you are green really helps in this environment where corporations are trying to say they are doing good things even as they shelter."
Since 1981, Meridian has raised more than $8 billion in equity funding commitments for tax-motivated investments from institutional investors representing more than 100 companies. Much of its work has been in the low-income housing sector, where tax credit programs have fostered a $6 billion annual market. Boc estimates that for wind, the tax-motivated investment opportunities range between $1-2.5 billion a year.
There are several reasons, beyond its green value, why investors are waking up to wind's potential, says Boc. One is that some other markets for the transfer of tax benefits are drying up due to factors like declining interest rates and tougher government oversight. "There is still a huge tax capacity out there that needs to be sheltered and there is very little opportunity for them to be able to do that," he says. "You guys are probably the best opportunity to fill the void."
In the post-Enron era, Boc adds, the Bush administration is moving to shut down many of the tax shelter schemes companies have used in the past. "That works for you because your tax benefits are mandated. The government knows what it is doing and it wants to incent investment," he says.
Wind power is also looking more attractive to debt lenders these days, especially when compared to the rest of the power industry. As a result, North American banks, which have not been particularly active in the sector, are starting to show some interest. RBC Capital Investments, a division of the Royal Bank of Canada, created a wind team about 18 months ago. Although the bank was relatively unaffected by the financial fallout in the thermal generation sector, says RBC's Patrick Holland, it does see wind as an "antidote to spark spread economics." The spark spread is the difference between the cost of electricity and the cost of converting natural gas to electricity. "There is no fuel cost, therefore, there is no potential for a reduced or negative spread."
Long term bonds
Holland says there is also strong demand from Canadian institutional investors in the market for long term project bonds. Income trusts, an increasingly popular way to finance power generation projects in Canada, are another avenue. "There is one fund that I'm aware of, and a couple of others, that are looking at putting US wind projects into their portfolios."
Despite the growing interest, however, the wind industry has some barriers to overcome. The problems the industry experienced during the 1980s is still in the minds of investors and lenders, and rapid advances in technology in recent years lead to concerns about how well relatively untested turbines will perform. "The thing you are going to have to do real soon is establish some form of track record," says Boc. "You are going to have to prove your technology has improved to the point where the track record can be maintained and it is a manageable product."
Attention to detail in performing technical due diligence on projects should help alleviate at least some of the concerns the financial community may have, says consultant Andrew Garrad of Garrad Hassan America. "You shouldn't be approaching any investor or lender, any debt or equity, unless you have got a bulletproof project."
Lack of knowledge among investors is another issue, says Boc. "It is very difficult to ask a tax manager or somebody in another business to understand your business. They don't understand, and that is your biggest hurdle." Because the industry still depends on political support in most countries, says Holland, stable and consistent policy is key. "The gap is closing, but the gap hasn't been closed yet. So where there is a lack of support or heel dragging by governments, it has a serious impact on the ability to finance."