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Fragile Foundation

The capital markets have recovered … or have they?

Fortnightly Magazine - October 2009

taxable income anymore, and therefore they stopped investing or decreased it dramatically. Second, power prices have fallen by 20 percent in the past year. So even with all the incentives we have, you need to charge more for the power than where it’s trading today. It’s difficult to get these projects to work.

The projects that are getting financed are owned by the logical owners—deep-pocketed players, generally utilities, who can digest the tax equity themselves. It’s harder for independent developers, because they have to go out and get an above-market power purchase agreement (PPA) and find someone to buy discounted tax equity. Even with the cash grants provided in recent legislation, small developers have a difficult time because they’re stuck with the depreciation benefits, which they can’t discount and therefore can’t sell.

Wood: Wind developers have persevered through a difficult stretch. Many were caught off guard when market conditions deteriorated. Like the developers of gas-fired generation in the 1990s, wind developers have been caught with large turbine deposits for equipment to be delivered through 2011. Not only are some developers facing declining returns on their projects, but the financing landscape has changed. Banks remain interested in renewable projects, but on terms that are much different from what they were before June 2008. Bank deals now come with shorter durations, higher sponsor-equity contributions and wider spreads. Tax equity is available, but at prices that are materially wider than they were a year ago.

The move from the PTC [production tax credit] structure toward the grant structure has reduced tax-investor risk.

The industry is anticipating the DOE loan-guarantee program. The federal stimulus has been much discussed but slow to materialize. On a positive note, improving credit markets bode well for future utility-scale renewable projects. The bond market rally in 2009 makes this market competitive with the bank market. Amortizing project bonds can be issued in the 7 percent area, down from 9 percent six months ago. For the larger issuers who can bundle projects and use the tax attributes, the bond market looks like the superior option.

 

Fortnightly: Is the trend toward utility ownership of renewable plants sustainable?

Redinger: If you assume they’ll be able to put these investments into their rate base, then absolutely I’d expect this trend to continue. The issue is whether they’ll be allowed to rate-base the investment. If not, it won’t go as well, even if it does make all the sense in the world for utilities to be the owners of these projects because they can digest the tax benefits themselves.

As time goes on, and as utilities have to start meeting RPS [renewable portfolio standards] requirements, they’ll become more incented to be the owners of renewable generation.

Nastro: There is significant uncertainty about policies coming out of Washington, D.C., on carbon legislation and clean energy. President Obama needs to take something to Copenhagen [for the U.N. Conference on Climate Change]. The legislation out of the House might be slimmed down to a bill with renewables as the primary focus. If that happens, a number of