New technologies are opening the utility domain to innovation and competition. Traditional utilities will shrink as outsourcing providers and competitors grow. Survival in this new market requires...
The New Green Finance
The best way to tap into renewable project funding.
Renewable generation resources have become the rallying cry for policymakers and developers alike as the movement grows to generate electricity in a more climate-friendly manner. Pending federal legislation creating a carbon cap-and-trade market and a national renewable portfolio standard (RPS), together with existing state requirements, is spurring utilities that lack renewable generation to acquire some—no matter the federal legislative outcome—and causing utilities with sizeable renewable generation to expand their existing portfolios. The economic downturn also has lowered the cost of certain renewable projects, making them more affordable: Cambridge Energy Research Associates reports that project costs for wind projects have declined by 11 percent in the first six months of 2009.
As utilities seek more renewables, they are identifying cost-effective projects through the time-honored method of requests for proposals (RFP). Although many utilities have deep experience with RFPs, in the current economic and regulatory environment an RFP for renewable resources merits special consideration. Some utilities that lack experience with particular renewable technologies have entered joint ventures with experienced developers to spread risk, optimize capital, and benefit from the developers’ superior expertise. Joint ventures, however, raise a host of issues that utilities would not encounter in traditional build-transfer or offtaker arrangements. Also, recent financing trends and new governmental incentives in the form of loan guarantees and tax benefits affect the most cost-effective ownership and contractual structure that utilities should adopt for their renewable projects. Further, in the movement for more renewable resources, many exciting and innovative technologies are under development, but utilities need to understand the technologies’ chances of successful implementation. Utilities should take these factors into account when structuring RFPs for renewable resources in order to attract more potential developers and stronger proposals.
When issuing RFPs, utilities can request that developers propose a joint-venture structure that will be the most cost-effective, allowing developers to be creative with their structures in the hope of identifying superior proposals. But a utility should consider setting parameters around certain variables—ownership of project assets and performance security—to ensure that the joint venture appropriately balances costs, regulatory requirements, and the relative risk profiles and goals of the utility and developers.
Developers and utilities typically own their assets through different structures. Developers usually form a project company (also referred to as a special-purpose entity) that owns only the project assets. Such ownership prevents any liabilities or costs associated with the project assets from adversely affecting the developers’ other projects and also facilitates project financing, in which lenders have limited or no recourse beyond the assets held by the project company. Utilities, in contrast, generally are impelled to own project assets directly without any intermediary legal entities if they are to be permitted to recover the project costs from ratepayers. Utilities could acquire equity interests in project companies through their unregulated generation subsidiaries, but federal and