The Institutional Investor Guide to Modern Energy - (Page 15) Co-Published by Vestas The Cost Complications from the Credit Crunch ind-friendly bankers are hopeful that a recovery of the global credit system and forthcoming U.S. laws requiring utilities to use greater renewable energy and provide more varied long-term tax benefits, will give a needed financial boost to the world’s largest market for wind energy. The seemingly unstoppable wind energy sector in the United States has suffered double blows over the past year as commercial bankers have clung to their lending dollars and shrinking corporate profits have limited the use of tax credits that have been critical for wind developers. “There are still a number of wind investment players in the market, and some are on the sidelines, but a pool of tax equity does remain. People are watching to see what happens with the recovery package,” says Gianluca Signorelli, director of public policy at MMA Renewable Ventures in San Francisco. “There may be fewer players now than there were, and some have less tax appetite than they did, but substantial appetite remains, and prospects are set to improve with the recovery plan,” he predicts. Total private investment in wind tallied $52.9 billion in 2008, down slightly from the $53.7 billion recorded for 2007, according to New Energy Finance. Analysts agree investments will be more subdued during the first half of 2009, while growth in the final six months will hinge on whether banks restart lending and governments make clean energy a substantial part of their recovery efforts. Tax Credits Lose Attraction Some analysts say the retraction of the market for production tax credits is the single factor which has most severely hurt the financing of costly wind farm ventures. “There’s been a drying up of tax equity money,” says Chadbourne & Parke partner and attorney Edward Zaelke, in Los Angeles, adding that the pool of investors has dropped from about 18 to four since the financial crisis began last fall. “You can do straight project financing. But 60 percent of the cost of these wind farms is paid for through these tax subsidies.” But because wind developers don’t usually generate enough profits to make tax subsidies viable for their own balance sheets, the rights to these tax subsidies are bartered off to tax equity partners — usually institutional investors — in return for capital. “Today’s This Special Report was prepared by the Special Projects Department of Institutional Investor. W market dilemma is that the majority of players that provided tax equity funding are having financial difficulties so they cannot utilize tax credits,’ says Marshal Salant, managing director in Citi’s global structured solutions group in New York. “And all wind developers rely on tax credit equity funding for domestic projects.” Some tax equity partners, such as Lehman Brothers, are simply out of business. Others, including American International Group, Wachovia, Morgan Stanley, GE Finance and New York Life, are no longer in the market or pulled back their participation. “The market is not completely dead in the water. But these projects are taking quite a bit longer to get past the credit committees and come to agreement on the terms,” says William Young, a wind energy analyst at London-based New Energy Finance. “Fewer active tax investors aand reduced tax appetite is being reflected in higher yields, which impacts project economics and could imperil marginal projects,” Signorelli says. Feed-In Tariffs Complement Subsidies In many European countries, the wind energy sector benefits economically from a so-called feed-in tariff, in which the government pays a utility an agreed upon subsidy when buying the more expensive wind power. And in China, the world’s fastest growing market for wind, stateowned enterprises are behind many of the wind ventures, says Lars A. Andersen, chief executive officer of Vestas China in Beijing. “Investments in wind projects appear to continue in China despite the global financial situation,” adds Andersen. But the use of feed-in tariffs in the United States, or other direct subsidies, may take a while to materialize. “It’s too politically difficult,” says Carl Weatherley-White, co-head of the energy structured finance group at Barclays Capital in New York. “The United States market also needs the legislation to make the benefits of the production tax credit more flexible.” “If the United States is really serious about wind energy, it has to produce more reliable incentives,” says Reiner Boehning, co-head of project finance at Credit-Suisse in New York. “The tax credit is fraught with issues. It doesn’t have to be so complicated.” n March 2009 • Institutional Investor Guide to Modern Energy • 15
For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.