Financing For Wind Power – Not Exactly the "Private Capital" That Lovins Describes

Amory Lovins often derides the investment picture associated with nuclear energy projects. As he states it in his recent Grist article titled Stewart Brand’s nuclear enthusiasm falls short on facts and logic.

“They cost too much to build and incur too much financial risk.”

In contrast, here is his conclusion about alternative sources like wind and solar energy:

“The world in 2008 invested more in renewable power than in fossil-fueled power. Why? Because renewables are cheaper, faster, vaster, equally or more carbon-free, and more attractive to investors.”

I will avoid getting too deep into the fact that capital expenditure on fossil fuel extraction and production was many times greater than investments in power producing equipment of all kinds; what I want to focus on here is an article in Renewable Energy World titled Financing Wind Power that provides a bit more information on the specific factors that have made investments in at least one type of “renewable” energy attractive to capital investors seeking a quick return on their investment.

Here is a key quote from the article:

“In the U.S., we expect loan activity to increase over the next 12 months,” said Tringas. “The credit crisis effectively broke down the so-called ‘tax equity’ financing structures that financed the majority of new wind projects in the past.”

The American Recovery and Reinvestment Act (ARRA) provided a possible solution for the problem by allowing the Treasury Department to issue grants for 30 percent of the cost of new renewable energy projects. That, along with a loan guarantee program by the Department of Energy, should spur lending activity after what has been a basically frozen 2009.
(Emphasis added)

In other words, the ability to sell production tax credits provided a vital portion of the return on investment up until the credit crisis reduced the number of potential purchasers who had any profits that they needed to off-set. Now, the market for financing wind projects may be restored with BOTH an immediate 30% GRANT (as any seeker of education funds knows, a grant is a government gift that does not have to be paid back) and a government backed loan guarantee program.

You might also find this quote from John Eber, managing director, energy investments, at J.P. Morgan Capital Corporation, as interesting as I did, especially if you have little respect for today’s investment bankers:

Eber: Over the next two years we expect most U.S. wind power projects to claim the 30 percent cash grant from the U.S. Department of Treasury in lieu of the production tax credit (PTC). Many wind project owners still won’t be able to efficiently utilize the accelerated depreciation deductions earned by wind farm owners, so we expect many of them will look to us and other investors for tax equity. We will utilize very similar structures to the ones that were used for projects that qualified for PTCs. We expect to fund a significant portion of the total project cost. Utilizing the grant will limit our use of our tax capacity and reduce our exposure to project performance. These characteristics will help us draw in new tax equity investors and ultimately minimize the cost of capital to sponsors.

Think about that – the bank financing the deal wants to make sure that it has little exposure to actual project performance and it has a strong desire to use government grants to “minimize the cost of capital to sponsors.” Is this really anyone’s idea of a technology that is attracting “private” finance because it is superior to its competition? (Interesting side note: here is how Renewable Energy World described Mr. Eber’s job, “Eber manages the firm’s activities for tax-motivated (emphasis added) equity investments in energy assets.” I presume that either he or someone from his employer provided that snippet to the interviewer.)

In related news, I thought that an article from this morning’s Wall Street Journal titled Huaneng Power Up Sharply On 3Q Results, Nuclear Plan contained some useful information about the growing appetite for investments in companies pursuing nuclear power plant construction.

It also said it plans to diversify into nuclear power by forming a joint venture with its parent to build a nuclear power plant, involving a total investment of about CNY5 billion.

Deutsche Bank AG upgraded Huaneng to buy from hold and raised its forecast of the company’s 2009 earnings by 49% and its 2010 forecast by 24%.

HSBC upgraded the company to overweight from neutral and raised its target price on the stock to HK$8 from HK$7.10.

Investors reacted favorably to the news of the firm’s diversification into other sources of energy.