A combination of complex rules and the resurgence of debt markets is keeping US wind developers from seeking federal loan guarantees for projects under a programme many hoped would aid project financing.
The loan guarantee programme, part of President Barack Obama's $787 billion stimulus package signed into law in February 2009, is designed to give federal financial backing to several categories of projects. The part of the programme that offers guarantees for transmission projects and facilities using innovative renewable energy technologies has been oversubscribed, but the part targeting projects using commercially proven technologies, which most wind projects do, is not going to plan. By mid-February this year, the US Department of Energy (DOE) had received just eight applications - and only four of those were for wind energy projects.
"There has not been an overall embracing of the programme," Julia Pettit, an associate at law firm Stoel Rives, told delegates at a recent conference on wind power finance and investment in San Diego, California.
Part of the problem is the additional regulatory requirements that come with the guarantee. Projects must go through a federal environmental review, which can mean months of delay and uncertainty. "It always takes a while to work through the process, and that element of uncertainty unsettles a lot of people," said Edward Einowski, a partner with Stoel Rives.
John Calaway, director of wind development at California-based Pattern Energy, agreed. His company is considering applying for a loan guarantee for a 138MW project in Nevada, but it is located on federal land and will have to go through the National Environmental Policy Act (Nepa) process anyway. "To introduce the Nepa requirements on projects that don't already have to go through it is absolutely out of the question in my mind," he said.
Projects receiving federal loan guarantees also have to comply with the Davis-Bacon Wage Act, which requires that contractors pay the bulk of wages in the region where the construction is taking place. Most contractors already do that, said Einowski. But the real challenge is the record keeping required to prove that they are compliant, he says, which can add as much as 10% to the cost of the base contract for building a wind farm.
The programme is not designed to make projects easier to finance. To qualify, projects have to already have a credit rating at least equivalent to BB from Standard & Poor's or a Ba2 from Moody's, and have passed the lender's credit test without the guarantee being factored in. "The reality is once you get it, more than likely you probably didn't need it," said Hunter Armistead, executive director of Pattern Energy.
Changes in the bank loan market since the stimulus package was introduced at the height of the global financial crisis have also lessened the need for developers and their lenders to take on the task of seeking federal assistance.
"The commercial banks are coming around so quickly, I think they are going to overtake the DOE programme," said Ciaran O'Brien, chief financial officer of St. Louis-based Wind Capital Group.
Kerri Fox, head of structured finance in North America for Spanish bank BBVA, agrees. "I don't think the programme is doing what people thought it was going to be doing," she said. "I think, when it was announced last February, the purpose behind it was to add liquidity into the market and provide capital where banks were not lending.
"Now you have a very different environment. You've got a situation where you can get a wind deal financed using the banks."
One advantage the loan guarantee programme does offer over the banks, however, is cheaper money. Fox estimated that developers who have the financial might of the federal government backstopping them can shave 150-200 basis points off the interest rate they will pay on the 80% of total project debt the guarantee covers.
Savings versus risk
"For every sponsor it's a cost-benefit analysis," she said. "What is the actual cost saving, particularly in an environment where bank interest rates are continuing to fall? And is that cost saving worth it when you compare it to the execution risk, the additional time, the transaction costs and the uncertainty of whether you are going to get your project done when you intended?"
The transaction fees alone may be enough to deter applications, said Morten Lund, a partner with Stoel Rives. There is an application fee of $50,000, an upfront facility fee of 0.5% of the guaranteed amount and an annual maintenance fee of $10,000-$25,000. "You'd have to shave more than a few points off the rate to make it worth your time," he added.
Ultimately, experts predict that it will be the very large projects, such as Caithness Energy's planned 845MW Shepherds Flat project in Oregon, that stand to gain from the programme.
Fox agreed: "It makes sense that a deal of that size would be running though the loan guarantee programme because the amount of debt that's needed is such that you are not going to be able to put on long-tenor debt at attractive pricing. For a deal that is 100 or 200MW, the programme doesn't make sense."
And although the bank market is coming back, said Chip Carstensen, managing director at Nord/LB New York, it still does not have the lending capacity to cover projects as large as Shepherds Flat. But a DOE loan guarantee would allow individual banks to put more into a deal without any additional risk. "You have the benefit of increased liquidity," added Matthew Ptak, vice-president at German bank BayernLB. "In our case we generally take positions of $25-75 million in renewable energy transactions. We think we can scale that up by a factor of four for DOE-supported transactions."
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