Trends Emerge for U.S. Wind Power Markets

Last week, more than 215 representatives from major debt, equity, and private equity investors came together with wind energy project developers at the American Wind Energy Association’s second annual finance and investment workshop to hear the latest information about the state of the industry and best practices for financing projects.

The wind power trade association reported key issues and trends emerged from the workshop. Project financing is still a considerable hurdle, the turbine market is constrained, merchant wind plants — those built without a long-term supply contracts — are generating interest, high natural gas prices are not always a good thing for wind power, and more sophisticated investment strategies and larger partners are all part of the changing financial landscape for wind power. “If you have a good wind project, you will be able to get financing for it,” said Carter Ward of ArcLight Capital Partners at the workshop that took place in New York City on October 25-26. Presenters generally agreed that the main roadblock facing wind power development is not getting financing, as it was a few years ago. As wind power projects have proven themselves to be a good investment, there has been an infusion of capital from many sources and interest in the sector from a variety of players. The turbine supply situation was one major theme of the workshop. As Bob Gates, Region Manager of GE Energy, said, “First we had no money for projects. Then we didn’t have enough power purchase agreements. Now we have both of those, but the turbine supply is tight.” He said that GE Energy’s order books are filled through 2007. Most turbines are sold out in the U.S. for 2006, and 2007 appears to be rapidly filling, according to Robert Poore, president of Global Energy Concepts. In this environment, which is expected to last through 2007, turbine suppliers are requiring that deposits be paid to secure turbine contracts and developers are scrambling to lock in supply, even if it means acting much earlier in the development process than they had in the past. These two trends give an advantage to the larger developer that is able to take on the costs and risks involved. Gates talked about the fact that many large components for wind have a long lead time and investors aren’t willing to take the risk to invest in new plants with the uncertainty created by the short-term extensions of the federal wind energy production tax credit eligibility period. Plus, he said, materials costs are going up, including prices for transportation, energy and steel. Another major theme of the workshop was the effect that high natural gas prices are having on the wind power market. In general, the high fossil-fuel prices will be very good for the wind power market, most agreed, as utilities and investors that want to limit their fuel-price risk start looking for other energy technologies that can be built quickly. However, that interest is making project development more difficult in some ways, as well. As utilities try to define power output from a wind project more and more precisely, they are tending to make power purchase agreement terms more onerous — too limiting in some cases to make the project viable. In light of that fact, investors and developers are starting to look toward merchant wind plants — those built without a long-term supply contract. In some markets, especially those with high renewable energy credit prices and predominant use of natural gas for electricity, merchant plants look as though they may be more profitable than those with supply contracts locked in. However, with the exception of a few cases, there has been little action on the merchant plant front yet. “Everyone’s got a merchant plant brewing, but we may have to wait until turbine supply loosens to see this take off,” said Ed Zaelke of Morgan, Lewis, & Bockius, LLP. “Inside the fence” deals — or small generation projects built by the ultimate customer, usually a large electricity user — are also apparently gaining some attention due to increasing natural gas prices. Other trends include more sophisticated investment strategies and larger partners with more players involved. Presenters laid out what equity, private equity, and debt investors are looking for and explained the government policies that affect a wind project deal. As evidenced by the new faces at the workshop, the financing landscape is in flux, with new structures, players, regulatory paradigms, and individual project characteristics coming into the picture. The next financing seminar that AWEA will be hosting will be April 19-20, 2006, in Houston, Texas. AWEA is also hosting three additional workshops in the first quarter of next year on asset management, project siting, and renewable portfolio standards. Information courtesy of AWEA
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