Challenges abound for renewable power companies, especially small and medium-sized firms.
Difficulty obtaining a power purchase agreement, tax incentive uncertainty, the European debt crisis, and the post Lehman financial crisis in the US all continue to pose serious challenges.
“I’d hate to have an $800 million deal in the market right now,” said First Wind SVP and Treasurer Steve Schauer at a panel titled, “The Future of Financing Ventures in the Renewable Energy Arena” on the second day of the Platts Annual Financing US Power conference in New York. He and several other panelists agreed that a $100-200 million project was more realistic in today’s financial climate.
“The bank market has shrunk,” Schauer said, “Most banks would rather do a primary deal than a secondary deal.” And whereas banks used to cover construction plus 18 years of operation, banks will now cover closer to seven years of operation including construction, said Mizuho Corporate Bank SVP Chris Stolarski.
“It’s a bit different than a year ago or so,” said Terra Gen-Power Vice President John DiMarco. Banks, have all kinds of requirements now, including, generally, a long-term power purchase agreement (PPA), he said.
A large and well-established company, however, with strong relationships to the eight to ten major banks in the energy space, won’t face the same kinds of difficulties, Stolarski said.
“The difficulty is the small or medium tier developer who will face a very difficult time for a deal,” Stolarski said.
He added: “All banks need to demonstrate to management that they are playing a management role in the transaction, so by default you are looking at club deals where everyone is at the table or near the table.”
More Trouble To Come?
Any problems renewables developers face may be exacerbated in 2012 as the 1603 grant is set to expire on December 31, 2011. Panelists agreed that while the grant has been important, it will likely not be renewed by an administration that is already facing steep opposition for its support of renewables. The Solyndra fallout and its political ramifications are not much help, they said.
“Solydra has become a GOP rallying cry against renewable energy,” DiMarco said. “I don’t think the current administration is going to stick their neck out anymore on renewables till after the election.” Solyndra “could have broad ranging implications, unfortunately.”
“I don’t think the grant program cured all ills, but as a private equity backer, in order to even take the grant we’d have to take the c-corp. Certainly we will miss the program,” said DiMarco. Its disappearance will be “shrinking an already not available tax equity market.”
“The program has been very successful and the cost to the government is modest so we would be supportive of it being extended but we agree that it wont be extended,” added Schauer. He said he is waiting to see what will happen in the tax equity market that does not seem to be growing.
Perhaps even more problematic than the actual disappearance of the 1603 grant program is the fact that legislation has been unsteady, DiMarco said. It has been renewed in “fits and starts,” he said, largely eliminating incentives for large healthy banks to take risks in renewables.
Ballard Spahr partner R. Thomas Hoffman, who moderated the panel, compared the renwables industry to the low-income housing sector. That industry is also heavily subsidized, he said, but no one is worried the government will change that legislation.
The question, he said: “How do we get renewable energy there?”