Legal & Regulatory

Renewables Face Chills and Thrills in Project Financing

The extension of a major federal subsidy, the Section 1603 grant program (the program provides cash in lieu of investment tax credits), as part of the comprehensive tax-cut package late last year has been about the only positive development for many renewable energy developers in recent months. One person who attended the recent Projects & Money conference in New Orleans commented that attendance was down from the year before, but it would have been down further absent the extension of the subsidy program that puts real cash in the hands of project developers.

Renewable energy project developers should not take the simple extension of the existing subsidies as a victory. The law firm of Chadbourne & Parke, in its Project Finance NewsWire publication, warned earlier this year: "Developers should not assume that the cash grant program will be extended again by Congress. Republicans are now in control in the House and have more seats in the Senate. The Republican counsels to the House and Senate tax committees said at a wind industry forum in late November that their party is opposed to extending the program. They see it as part of the Obama stimulus measures against which the party voted en masse."

Wind Is Wavering

The collapse of the billowing wind energy business in 2010 compared to 2009 is well known. Instead of the 10 GW of new capacity the industry saw in 2009, activity was down by as much as 45% last year. Many analyses of the industry point to low demand due to a depressed economy, a long run of low natural gas prices, and the lack of a federal renewable energy requirement for electric utilities’ generating portfolios as explanations for the lackluster performance.

Mortenson Construction, a Minnesota company that has renewable energy projects in several states, surveyed 30 project owners and developers from across the country to get their perspective on the market for renewable generating projects. The companies, said the report—"Facing the Wind"—"all shared a common role as key decision-maker on major wind projects during this shifting environment."

Problem area No. 1 for the developers in the survey related to difficulty in getting power purchase agreements with distribution utilities, a common theme at the New Orleans conference as well. The Mortenson report said, "According to owners and developers, the current economy and abundance of cheap energy—such as natural gas—has created an unfavorable pricing environment that makes the successful negotiation of purchase contracts difficult. Therefore, it is difficult to secure the long-term revenue streams needed to fund new investments."

Based on the discussions at New Orleans, many renewable project developers are looking for long-term fixed price contracts to backstop the financing of their projects. They aren’t finding them.

Second on the list of hurdles, according to the developers, was a lack of a national renewable standard, another common complaint. "Without strong federal standards," said Mortenson, "wind owners and developers have no clear assurance there will be a viable and growing market for wind energy in the future." That is a perception widely shared among project developers.

Mortenson’s survey raised a lack of transmission infrastructure as a third obstacle. The report found, "Robust regional planning and effective transmission policies are urgently needed to address the significant transmission investments required to support new generation projects."

Gas is on the mind of renewable energy developers, as it is on the minds of many in the energy business. Is gas a "killer app" for renewables? Few see it that way, based on the Mortenson survey. Only 9% rated gas as having a "significant negative impact" on renewables, while 21% said gas won’t pose a risk, and 70% said gas will "diminish the growth and interest in renewable somewhat."

Gas could also be an important factor in the success of intermittent resources such as wind and solar. The lack of enough backup power than can start up quickly, either from spinning reserve or from scratch, ultimately limits the penetration of wind and solar. According to some experts, one reason Texas is a preferred location for wind projects, in addition to its windy conditions, is its plethora of gas generation, including lots of combined-cycle plants, often in merchant and cogeneration service. Texas several years ago faced the possibility of a statewide system collapse when wind died unexpectedly. The gas-fired non-utility generators pulled the system back to stability.

Texas is clearly the sweet spot for wind projects, according to the Mortenson survey. Of those surveyed, 44% said Texas has the "best environment" for wind. It shows. The Lone Star State now has some 10 GW of installed wind capacity. The Mortenson report notes, "A remarkable 10,000 Texans now have jobs in the wind industry in manufacturing, headquarters, construction or maintenance and support positions."

Trailing Texas, by quite a bit, in the popularity list of wind-centric locales: Iowa and Minnesota, both with 17% support in the survey. Iowa now has the highest percentage of electricity from wind power (14%) in the U.S., according to Mortenson.

Solar Looks Brighter

Wind is currently becalmed, but solar seems to have somewhat brighter prospects. In late December, the Department of Energy (DOE) in Washington closed a deal with Abound Solar Inc. of Loveland, Colo., for a $400 million 1603 loan issued by the Treasury Department’s Federal Financing Bank. That will support a major expansion of the company’s production of thin-film photovoltaic (PV) panels. It wasn’t an easy stroll for the company, but a long slog. Abound, which markets its panels to small installations of 200 kW to 2 MW, began the loan guarantee process in February 2009.

Soon after Abound nailed down the DOE loan, the company got $110 million in new equity capital, mostly from existing investors, part of the requirement for the loan from the DOE. Abound has raised about $260 million in equity since its 2007 founding.

The cash inflow will allow Abound to build new manufacturing capacity, lowering the cost of its cadmium telluride PV modules to less than $1/watt. Falling PV prices worldwide are keeping the solar electric market perking, as the technology becomes ever-more competitive. But there’s a downside for U.S. companies. The Chinese are in the PV market in a big way, and their technology is up to U.S. standards, which is not always the case with Chinese wind turbines. For a host of reasons ranging from labor costs to government support, to currency values, China can significantly underprice U.S. PV makers.

The woes of U.S. manufacturers in the face of Chinese competition got highlighted earlier in the year, when Evergreen Solar said it will end production of PV panels in the U.S. by the end of March and move production to China. The company will lay off 800 workers in Massachusetts and take a charge against earnings of over $350 million. The company had been the largest PV maker in the U.S. Evergreen Solar’s business is likely to thrive, but it won’t be creating as many of what some hoped would be "green" U.S. jobs.

"While the United States and other western industrial economies are beneficiaries of rapidly declining installation costs of solar energy," said Evergreen Solar CEO Michael El-Hillow, "we expect the United States will continue to be at a disadvantage from a manufacturing standpoint."

—Kennedy Maize is MANAGING POWER’s executive editor.

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