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OCTOBER 2004 Financing Wind Projects Through the Voluntary
Green Power Market
Investors are concerned with a wide array of risks, such as the quality of the wind data, changing regulatory and political environments, the creditworthiness of the offtaker, relevant transmission issues, and the technology, among other things. As American Council on Renewable Energy (ACORE) president Michael Eckhart observed, different financiers have different needs: banks that offer debt financing are probably most concerned with assured cash flow and the security of their investment. Equity investors are principally concerned with a good risk/return balance. Eckhart observed that institutional investors are more interested than shorter-term investors in the fundamental sustainability of the market. Earlier in the year, the California Public Employees' Retirement System (CalPERS) and the California State Teachers' Retirement System (CalSTRS) committed a combined $500 million in private equity investments, venture capital, and project financing to develop "clean" technologies that can provide the pension funds with positive, long-term returns, and that can create jobs and economic growth in California in the years ahead. Publicly financed funds, such as those managed by the New York State Energy Research and Development Authority, the California Energy Commission, the Massachusetts Renewable Energy Trust, and other clean energy funds, are primarily looking for the most cost-effective ways of leveraging private funding to maximize benefits to taxpayers. Twelve states now have public funds devoted to the development of clean energy projects in the state. More information on them is available at http://www.cleanenergystates.org. The one thing that all investors have in common is the need to make sure the future cash flows are sufficient and predictable. Brent Beerley of Community Energy, Inc., and Nils Bolgen of the Massachusetts Technology Collaborative presented examples of how the voluntary market could be the missing link between the energy sales price and the price that a renewable energy plant must realize to make a project feasible. Community Energy, Inc., has successfully marketed renewable energy certificates to large electricity users, such as universities and municipal governments, and these sales have allowed the construction of over 200 MW of new wind projects in the MidAtlantic region and New York. According to Beerley, energy is selling for something in the range of 3.5¢-4¢/kWh in the MidAtlantic region. In order to make a mid-Atlantic wind project financeable (with the wind energy production tax credit), a developer needs to receive a price of about 4.2-5¢/kWh. The difference of .2-1.5¢/kWh has to be made up with the sale of renewable energy certificates (RECs), which sell at an average price of 1.5-2¢/kWh. In the case of the mid-Atlantic wind farms, the utility Exelon stepped forward to offer long-term power purchase agreements to a number of mid-Atlantic wind farms so that the projects could initially be financed. Exelon then contracted with Community Energy, Inc., to market the renewable energy certificates. Community Energy has had success finding large buyers of RECs, such as the University of Pennsylvania. Last year, Penn doubled its commitment from a five-year contract for 20 million kWh/year to a 10-year purchase of 40 million kWh/year, equivalent to the output from 15 MW of a new wind farm. This commitment is directly supporting the construction of the new 20-MW Bear Creek wind farm in Pennsylvania in 2005. More of Community Energy's customers can be seen at http://www.newwindenergy.com. One element that remains difficult, however, is the lack of long-term large contracts for RECs. For the most part, there are still few creditworthy large purchasers in the market for RECs, and they tend to not want to make commitments longer than five years. To address this problem, the Massachusetts Technology Collaborative (MTC) has undertaken a program to provide REC revenue certainty through long-term contracts for either the straight purchase of RECs in the future or the option to sell RECs to MTC at a specified price on a future date. MTC's initial funds for the program are from the state's systems benefits charge established under the 1997 Massachusetts electricity restructuring law. MTC has concluded its first round of contracts to renewable energy projects in 2003. In addition to two small wind, one photovoltaic, two liquefied natural gas, two landfill gas, one biomass, and two hydroelectric projects, the MTC awarded REC price support to two large wind power projects, including the 15-MW Berkshire Wind Power plant near Hancock, Mass., and the 30-MW Hoosac wind power plant near Florida and Monroe, Mass. Projects must produce RECs that are eligible to be traded in the New England Generation Information System and the plants must be commercially operational by December 31, 2005. MTC expects the program to be self-sustaining through the resale of renewable energy certificates in the green power market. "This is a watershed moment for energy generation and consumption in Massachusetts," said Renewable Energy Trust director Rob Pratt. "Supporting such a strong mix of renewable energy technologies will provide important hedges against spikes in natural gas prices and lead to greater energy security for the region." Bolgen said that many of the projects had already lined up REC sales for the early years of the projects and were looking for certainty in the years farther out, often between years five and 15. He said that contracts for options were more attractive in the first round than straight REC sales, which points to the fact that developers are confident that the REC market is going to be more robust tomorrow than today. Bolgen said that MTC is now seeking to sell first-round REC contracts to load-serving entities, to large users, or to aggregations of small users. Most of the projects that were awarded REC price support contracts are still in the early stages and MTC is still waiting to see if creditworthy entities are willing to come forward and finance the projects based on MTC's contracts. Bolgen said that the evidence seems to show that financiers are comfortable with projects that have the long-term price guarantee. The second round solicitation will be released either late in October or early in November. More information on the solicitation is available at http://www.masstech.org/Grants_and_Awards/grant_dollars.htm |
©
2004 by the American Wind Energy Association. |
xperts in
wind plant financing met September 28-29 at AWEA's second annual financing
workshop. Soon after, green power marketing experts met in Albany for the
Ninth National Green Power Marketing Conference. At the latter conference,
one workshop focused on the nexus between the two: how the voluntary green
power market can be used to make wind projects financeable in certain
situations.