Senators were voting on legislation to extend the renewable production tax credit (PTC) as this issue of Fortnightly went to press. But with federal tax support for windpower in a perennial state of limbo, is the current rate of growth sustainable?
To find out, Fortnightly spoke with Andrew Redinger, managing director and head of the utility and alternative energy group at KeyBanc Capital Markets.
Fortnightly: What’s KeyBanc’s role in financing windpower?
Redinger: We want to be a first mover in among domestic U.S. banks, and help educate the rest of the domestic bank marketplace and bring them along. The European banks are great, but the domestic banks are missing a great opportunity.
We’re a tax equity player in three Babcock & Brown wind projects. We got involved with them a couple of years ago. It was our foray into the wind space, and the reason we formed a group.
We’ll underwrite deals, but the Key strategy is to do turbine loans, construction loans and permanent financing, including debt and equity. Key will hold some of the debt, but we look to syndicate. No single bank can finance the whole sector, and the European banks tend not to like turbine loans, which are shorter-term in nature. They view them as riskier than the construction loan. So we’ll form clubs of banks to provide the turbine loan, which will give them first shot at the construction and permanent financing.
Fortnightly: Why are turbine loans considered more risky?
Redinger: Because many times the project is at a stage where permitting and zoning aren’t finalized, interconnection agreements are still being negotiated … a lot of things that will make it a project aren’t complete. So there’s a risk we’re just financing a bunch of turbines that might not have a home. KeyBanc has gotten comfortable with this because there’s such a shortage of turbines in the market, and the developers frequently have other projects these turbines could fit into.
Also, unlike European banks, U.S. banks generally like putting money into shorter-term loans.
Fortnightly: What trends are you seeing in windpower financing?
Redinger: Even in the short time we’ve been investing, we’ve seen financing costs increase significantly, both in terms of cost of capital and also turbine prices. In addition to the cost of inputs, such as steel and labor, demand outstrips supply, so turbine manufacturers rule the roost. They can demand payments today on turbines that won’t be delivered until the latter half of 2010, plus cash collateral or a letter of credit that covers the remaining payments for the next two years. All of that increases the cost of these projects, and smaller developers are getting squeezed. Overall the trend points toward greater consolidation in the sector, because of sheer amount of capital required for these projects.
Fortnightly: What kinds of equity sponsors do you see getting into windpower?
Redinger: Everybody is looking at this as an opportunity. Of course you see investment banks like Lehman, Morgan Stanley and Goldman Sachs, but the current trend is more strategic investors, including utility companies. Some are looking to acquire, and others to joint venture.
This is the typical trend. In any new industry you get the private equity guys first, then the likes of Lehman and Goldman, and then the strategic guys follow.
Fortnightly: Are utilities following FPL’s example?
Redinger: Absolutely they all look at FPL, and also Xcel Energy, but not necessarily as examples. FPL’s strategy is to be a wind developer, but utilities’ strategies run the gamut. Some are investing for political reasons, to show they are trying to reduce their carbon footprint. They don’t necessarily want to be a developer, but they want to have enough wind to show they’re being a good corporate citizen. And they see it as a hedge, with carbon regulation coming down the pike. Interest in windpower is definitely moving in parallel with talk about climate-change legislation.
Fortnightly: Does windpower’s current growth rate depend completely on production tax credits (PTC) being extended by Congress?
Redinger: In the near term, for the wind industry to continue its torrid pace, the PTC is very important. But look at the renewable portfolio standards (RPS) that are now in place. Recently Standard & Poor’s said if you add up what’s required between now and 2015 under the existing RPS in 29 states—24 of them mandatory—then 6,000 MW of new renewable energy capacity has to come online each year. Last year was a record year for wind, and it was just over 5,000 MW. So absolutely, unless the laws change, this industry will continue growing fast, and there will be a large amount of capital to be spent on windpower.
In the short term it’s important to get the PTC renewed. But in the longer term I have a different view. The wind industry needs to stand on its own. Given where power prices are going in this country, I don’t think the PTC will be necessary further down the road. There isn’t a lot of baseload power construction going on, so I see an energy shortage coming. Between now and 2015, we’ll see a fairly hefty increase in power prices. Eventually these projects will be profitable without the PTC.
Fortnightly: Would the windpower industry be better off without the PTC, than it is in the current on-again, off-again situation?
Redinger: Yes, absolutely the industry will be better off without the PTC—but only if it is able to finance itself without it. The reality is that’s not the case today. But what’s interesting is the money is coming from somewhere. Either we’re paying the higher price through our tax dollars, or we’re paying higher power prices. The PTC is just camouflage. It’s not free.
Fortnightly: Windpower advocates would argue fossil power has enjoyed even more deeply camouflaged subsidies for decades. Do we need to eliminate those subsidies before we can have a truly level playing field?
Redinger: That’ll happen when climate-change legislation gets enacted, and we figure out how much we’re paying for emitting carbon into the air. Once those costs are put onto traditional coal-fired generation, the playing field will get much more level. When that happens, will wind need the PTC anymore? Maybe not.