The Tax Equity Market

April 02, 2007 | By Keith Martin in Washington, DC

Only five developers in the United States are in a position currently to use the large tax subsidies that the United States government offers as an inducement to build power plants that run on wind, sunlight, geothermal energy, biomass and other forms of renewable energy. Everyone else must try to benefit indirectly from the subsidies by finding a large institutional investor to own a project in a partnership with the developer, claim the tax subsidies and inject some of the value into the project.

The following is a transcript from a roundtable discussion about the state of the US “tax equity” market. The discussion took place at the Infocast Wind Power Finance & Investment Summit 2007 in La Jolla, California in February. Wind farms account for roughly 80% of the current market in terms of dollar volume. The panelists are John Eber, managing director of energy investments for JPMorgan Capital Corporation, Tim Howell, managing director and origination leader for renewable energy projects at GE Energy Financial Services, Lance Markowitz, senior vice president and manager of the leasing and asset financing division of Union Bank of California, and Robert Sternthal, a director in the tax credit group at Credit Suisse. The moderator is Keith Martin from the Chadbourne Washington office.

MR. MARTIN: John Eber, how many tax equity deals were there in 2006 involving wind farms, and how many are expected this year?

MR. EBER: We believe 15 deals were done last year for about $3.1 billion of tax equity. There should be at least that many in 2007. The dollar amount should be a little higher — perhaps $3.5 billion or even $4 billion depending on whether a large acquisition occurs.

MR. MARTIN: Tim Howell, do those figures sound right?

MR. HOWELL: Yes. There are two wild cards. One is what happens with production tax credits. As long as the market believes that another extension of the credits is a near certainty, then the market will continue to grow at a rapid rate. If the credit has not been extended by mid-2008, you will begin to see a slowing in the market. We expect to see 2,500 to 3,000 megawatts of wind capacity this year in the tax equity market; that is consistent with the dollar volume that John mentioned. It does not take into account some mega deals that could come to market this year where entire companies are sold with tax equity providing some of the acquisition financing.

MR. MARTIN: You are referring to Horizon, I assume?

MR. HOWELL: That is an example, yes.

MR. MARTIN: Was there anything unusual about the deals that were done in 2006 compared to the year before?

MR. HOWELL: Yes. There was an evolution in the marketplace. Deals used to involve all equity. During 2006, we began to see deals with leverage at the project or partnership level. The market will continue to evolve this year as the market tries to respond to the situation on the ground. Developers are feeling squeezed: the cost of projects is rising faster than prices for electricity under long-term power contracts. Project costs are rising in part because of high demand for turbines. The stop-and-start nature of production tax credits does not help. Turbine manufacturers are reluctant to make the longterm commitments required to build new factories in such a market.

MR. MARTIN: Lance Markowitz, Tim Howell said leveraged deals are becoming more common. What is a leveraged deal? MR. MARKOWITZ: A leveraged deal is a three-party transaction, while the unleveraged deals in the past involved just two parties — the sponsor and an institutional equity investor willing to take part of its return in the form of tax benefits. There was no debt in earlier deals. There may have been back leveraging, or borrowing by the sponsor, but this was outside the partnership. In a leveraged deal, the debt is inside the partnership. There were a number of leveraged deals in the market in 2006. We closed one at the end of the year.

MR. MARTIN: So Union Bank has done one. John Eber, has JPMorgan done any leveraged deals?

MR. EBER: We did one last year, and we did one in 2003. Of the 15 deals that we saw last year in the market, three had project-level debt. There were leveraged deals during the period 2003 through 2005, but at roughly the same low percentage.

Equity Squeeze

MR. MARTIN: One of the most difficult issues in a leveraged deal, where the tax equity comes in as a partner and the project has debt, is the risk that the equity might be squeezed out of the deal if the project is unable to pay debt service. How is that risk addressed? Is there one approach today that is “market”?

MR. EBER: If the equity is making ongoing capital contributions to the partnership tied to production tax credits, then it is usually not much of a concern. The expectation is the lenders will not want to squeeze out the equity under such circumstances. If there are no ongoing capital contributions, then the equity will want some type of equity squeeze protection before it will buy into the deal.

MR. MARTIN: Like an agreement by the lenders not to foreclose on the project until the production tax credits have run? Surely the lenders will want some recourse. What recourse do the lenders end up with, Tim Howell?

MR. HOWELL: At least in deals in which we have participated, GE has deep pockets and the ability to fix projects if it needs to, so the banks normally do not want to squeeze it out of the deal. They want the debt to be repaid. GE has been in deals in the past where there has been an equity squeeze. Frankly, we don’t like to take losses; we would rather fix the project and pay off the debt.

MR. MARTIN: So GE does not get any special relief from lenders?

MR. HOWELL: We want the ability to fix the project. As long as the tax equity investor has that right clearly in the documents, that would be fine.

MR. MARTIN: So it is enough for the lenders to have to give the tax equity investor notice and time to fix things before the lenders can throw the project into default. John Eber, I get the impression you don’t want to get into more detail on this. Is the GE solution acceptable?

MR. EBER: It depends on the deal. Every deal is different. There are banks that are offering more flexible terms than what Tim described to induce the equity to come into the deal. The market is driving the banks to do so. However, keep in mind you are talking only about a small number of transactions with project-level debt.

MR. MARTIN: Lance Markowitz, have you seen any other market solution to the equity squeeze problem? MR. MARKOWITZ: I don’t think there is a standard approach for dealing with the problem. Companies like GE and Union Bank are veterans of the project finance market. We may be more comfortable taking project risk than many of the newer entrants. People are trying to make the equity as risk-free as possible in order to broaden the number of potential tax equity participants. Consequently, I think you will see some deals where the lenders agree to forbear from foreclosure long enough to let the equity claim all the production tax credits. This is a business negotiation with tradeoffs.

MR. MARTIN: Rob Sternthal, do you think that the drive to broaden the market will lead to guaranteed return structures where the equity is promised a minimum return?

MR. STERNTHAL: There has been a lot of discussion about such structures. As you know, Credit Suisse is an arranger while the rest of the panelists invest for their own accounts. The affordable housing market, where investors are used to guaranteed returns, is a $9 billion-a-year tax equity market. Investors in the housing market have earned yields below 6% historically, and you see some of them wanting to move into the wind sector. If that happens, there will be pressure to move to guaranteed returns. Lance was right that most such investors do not have the experience with energy deals to be able to evaluate project risk. If someone solves the legal questions with guaranteed returns, then you will see a huge increase in the number of potential tax equity participants.

MR. MARTIN: What do you think is the biggest legal question?

MR. STERNTHAL: You probably know better than I do. We haven’t really focused yet on what it would take to market such a structure.

Depth of Market

MR. MARTIN: How deep is the tax equity market? How many players bid routinely on wind deals?

MR. STERNTHAL: More than a dozen. Focusing again for a moment on affordable housing, that segment of the US tax equity market alone accounts for $9 billion in annual deal volume. Every deal is four times oversubscribed. That suggests the tax equity market is capable of investing at least the $36 billion a year, and that is in a market where some of the largest bidders sat out last year because of low returns.

MR. MARTIN: Lance Markowitz, everyone has said he sees new equity still entering the wind market. Have you seen anyone exit in frustration over inability to win a bid? MR. MARKOWITZ: I have seen a couple people exit. I don’t know the reasons, but it could be due to declining yields or increased tax risk in deal structures or it may have more to do with their own portfolios.

MR. MARTIN: Let me ask the other panelists for their impressions. Is the number of tax equity investors increasing or decreasing?

MR. EBER: It is increasing, but you are still talking about small numbers. My best estimate is that 12 institutions supplied tax equity to wind deals in 2006, but that’s only an increase from about eight or nine the year before. Last year was a huge year in terms of volume and commitments. The number of potential equity investors is growing, but at a slow pace. There are other big institutions that would like to invest, but they lack the experience or knowledge to do it. There may be new entrants as the market expands further.

MR. STERNTHAL: It may get harder. Smart developers are now combining four, five and six projects. You are seeing $500 million equity investments. Who can commit to deals that size? It takes a GE or a JPMorgan. Where you may see the new entrants is in the secondary market where they might take small pieces of deals that have already been done.

MR. MARTIN: Tim Howell, where are returns today? How much does tax equity money cost?

MR. HOWELL: Thank you. [Laughter.] We charge as much as we can and still win. It depends on our assessment of the risk in a particular project. There are real risks on the wind side, construction side, on the O&M side, all of which are factors in setting yields. You asked a question earlier about people entering or exiting the market. We have seen people leave as returns decline and structures become more aggressive. Responding to another question, we don’t feel comfortable with guaranteed return structures, and we do not think the IRS does either. They create tax ownership issues.

MR. MARTIN: What would you say is the current range for tax equity yields?

MR. HOWELL: You said yesterday in a workshop that returns are falling into the 6% range. I would say the upper end of the range is approaching 10%. It depends on the deal and the deal structure.

MR. STERNTHAL: If returns in the housing market are moving back up toward 6%, that provides a floor for the wind market. It is hard to argue that wind returns should be lower than affordable housing returns given the additional project risk.

MR. EBER: There should be a premium for taking risk associated with these projects as compared to housing. We have been investing in housing for 15 years. I am not sure we ever had a loss in affordable housing. I can’t say the same thing about energy projects.

MR. MARTIN: I spoke to an affordable housing syndicator over the weekend who said his last deal was in the high 4% range after taxes.

MR. STERNTHAL: The syndicator in that deal is losing money by selling at such a low yield.

MR. EBER: There are two types of housing: guaranteed housing, which goes at a cheaper rate where the guarantee is provided by someone like AIG, which is double-A rated, and direct housing development where you deal directly with a developer. Rates in the direct market are usually 100 to 150 basis points higher.

MR. MARTIN: John Eber, is it fair to say that wind returns are lowest in portfolio deals where there is diversification of risk across a number of projects?

MR. EBER: It should be, yes. The lower the risk and the more product you can offer to an investor, the greater efficiency and better pricing you will achieve.

MR. MARTIN: Is it fair to say that the return will be higher in a leveraged deal than an unleveraged deal and by, maybe, 200 to 250 basis points?

MR. EBER: Yes.

MR. MARTIN: So, Tim Howell, going back to you, you think the current range in equity returns is high 6% to as high as 10%, depending on whether the deal is leveraged or unleveraged?

MR. HOWELL: Right.

MR. MARTIN: Lance Markowitz, does that sound right to you? MR. MARKOWITZ: I guess, but I think the market is much more complicated than that. Every deal has a different structure. Someone suggested I should tell everyone for the next couple days that I have money available at 4%. Each deal in the handful of deals you actually get done is different. A lot of it may depend on whether you catch the person at the right time, depending upon his or her requirements.

MR. MARTIN: Okay. Let me ask you this. Are returns going up or down? MR. MARKOWITZ: Last year, they certainly went down.

MR. MARTIN: What about this year?

MR. EBER: I think they are stabilizing.

MR. STERNTHAL: Some returns are still going down, but some of the panelists may be reluctant to say it in a public forum.


MR. MARTIN: Back to John Eber, how long should a developer in our audience expect it to take to do a tax equity deal?

MR. EBER: I think it depends on the experience of the parties. I always tell people we get a deal closed in 45 days, but I don’t know whether you can.

MR. MARTIN: I have been across the table from you and heard that, but I think the ground rules are they have to accept your papers, right? [Laughter.]

MR. EBER: It is even possible to do a deal in 30 days with your papers. [Laughter.] One of the problems in the business is there are new investors, there are new lawyers, and there are new sponsors. If you have not done a deal before, it will take longer for you to get through the process. We have seen deals that have taken more than six months to close and others that have closed in 30 days. The experience of the parties is very important.

MR. MARTIN: Lance Markowitz, do you agree with that timetable? MR. MARKOWITZ: My background is project finance. It is not the financing that takes a long time. It is the project part of the process, or the time it takes to get your arms around the potential risks in a particular project. You will see a wide range of time periods. In my experience, what really sets the pace is the status of the project and what remains to be done, and not the actual financing itself.

MR. MARTIN: Suppose a developer plans to start working today on a tax equity deal. On what long-lead-time item should he start immediately? MR. MARKOWITZ: If you have a well-organized data room, the due diligence can start and you have cut the amount of time it will take to close.

MR. MARTIN: Are there any new reports that will have to be delivered and that take time to prepare?

MR. EBER: The engineering reports are becoming an issue; the equity will want a report from an independent engineer. The sponsor should probably get this going early. It can be finalized once the equity is brought into the process. Land issues can also hold up things. Some sponsors are better organized than others in terms of documentation relating to the land.

MR. HOWELL: It is also useful to know that wind consultants are stretched really thin right now. Many projects are coming to market with less on-site data and, in some cases, less long-term reference data. It takes a while to sift through the available data to assess wind risk. The equity will want a reputable wind consultant to help.

MR. STERNTHAL: Sponsors are coming to market earlier with projects. Long-lead-time items are having to be produced earlier in the process. You have sponsors bringing four or five projects at a time to market, with two of the projects not yet in service, and trying to get to closing on the entire portfolio. When you add hedging, it adds structural complexity. 

MR. MARTIN: Rob Sternthal, why would two or more equity bidding on the same project come in with different target returns?

MR. STERNTHAL: I think that’s a common misconception in the market that the equity is only looking for a yield. Tax equity investors have very different appetites. Some tax equity are happy if the base case model shows them breaking even by year 10 based solely on the P99 output. Others may be willing still to be in a loss position by year 10 as long as they can get out by year 20 with a full return. The latter party is willing to invest a lot more money up front and take more equity risk, but will demand a higher return for doing that.

MR. MARTIN: John Eber, any other thoughts about why the returns would vary among bidders?

MR. EBER: Timing is a big issue. Some people are more anxious to get a deal done and might be more aggressive on yield. Risk diversification might also be an issue. Someone might be a little more aggressive in bidding for a deal that lets him diversify his portfolio in terms of geography, turbine types or sponsors. For example, Texas is a bit of a problem today. Something like 35% of the projects coming to market recently have been in Texas. Many investors may not be willing to bid aggressively to win another Texas deal.

MR. MARTIN: Do you prefer to pay the entire purchase price in cash up front or to pay the purchase price partly over time as contingent payments tied to tax credits?

MR. EBER: We are truly indifferent. We have done both. It doesn’t matter to us from an accounting standpoint. I don’t think it matters to us from a yield standpoint. It may matter to some other investors, but we are indifferent.

MR. MARTIN: Tim Howell, does GE have a preference?

MR. HOWELL: We have done both. There are pros and cons. As long as we have the right risk balance, pricing and structure, we can do either.

MR. MARTIN: Lance Markowitz, does Union Bank have a preference? MR. MARKOWITZ: We can do both, but my preference is to pay the full purchase price at closing.

MR. MARTIN: Why? I would have guessed you would rather pay as you receive tax credits.

MR. EBER: There is a lot of administrative work in a pay-asyou-go deal. MR. MARKOWITZ: There is more complexity. You are not putting your money to work as quickly.

MR. MARTIN: I was going to ask whether a contingent payment structure ultimately gets the developer a higher price. It sounds like the answer is no.

MR. EBER: I don’t think it does.

MR. MARTIN: Does it get him a lower price?

MR. EBER: I think it is the same. I don’t see much difference between paying a purchase price that is partly contingent and paying a price that is entirely fixed. The required yield is the same. You are still utilizing tax capacity. There is the same utilization of tax capacity whether we invest up front or over time.

MR. STERNTHAL: If the yield were the same, you would assume that the contingent payment structure is better for the developer. Why pay the equity a return for its money from the start when you could take the equity over time and you could leverage the contingent payments to some extent? Some developers would rather have all the money up front. Others don’t need it as quickly.

MR. EBER: Most developers are looking for capital, and they want it today. Sometimes there are accounting implications that will cause a developer who has capital to want to use a contingent payment structure.

MR. MARTIN: Is the accounting benefit the possibility that a public company might spread its gain from the transaction over time?

MR. EBER: Maybe.

MR. HOWELL: One structure is not necessarily better than the other. Different developers have different costs of capital. One may be able to backlever its equity, and that might drive its decision. Another might have more cash to put in the project. A developer might be yield-driven versus incomedriven. Some developers prefer to put as little money in as possible at the project level on a non-recourse basis and maximize their yields. Other developers don’t have the same objectives. That’s why there are so many structures in the marketplace at the same time.

MR. MARTIN: Which probability case, Lance Markowitz, do you use to price? Is it a P50, P80, P99? MR. MARKOWITZ: I think most people do a range of sensitivity analyses. Most want to make sure the downside is well protected. In most of the deals we have done, we have looked at four or five cases, not just one.

MR. MARTIN: Do you agree with that, Tim Howell?

MR. HOWELL: The management case is based on a P50 model, but then you analyze your risk by doing sensitivity analyses at different P factors.

MR. MARTIN: Are all wind companies the same? Does every wind company, regardless of size, have an equal shot of doing a tax equity deal with someone like you?

MR. HOWELL: Certainly. We have done a lot of deals with smaller companies, but what we look for in such circumstances are people with a lot of experience who know how to get a project done. The structure will be different, of course, because a smaller company has less cash to invest. At the end of the day, this isn’t corporate finance. It is project finance. It is all about a stack of paper and the participants in the project.

MR. MARTIN: Lance Markowitz, do you agree that it is a project financing; therefore, you look at the viability of the project and don’t really care who the developers are as long as they are competent? MR. MARKOWITZ:Yes. For us, I agree, but if you look at the whole market, the big boys definitely have an advantage because they are more likely to have access to turbines. Smaller companies have a harder time laying out cash 18 or more months in advance to reserve turbines. It is easier for smaller companies to do a tax equity deal than it is to get turbines.

MR. EBER: I think that has been true of the market for some time. All of us prefer to work with developers with capital in the project alongside ours so that they have something to lose if the project underperforms, but you don’t need to ask in this market whether they have capital. You need to ask whether they have turbines. That answers the question. If you have capital, you can get the turbines.

MR. MARTIN: John Eber, what has been your experience with projects once you do the deal? How well have they performed?

MR. EBER: The ability to predict output is not as good as we would like. We are invested in 26 wind farms, and 21 of them have been in service for some time. Some go back three years, some two years, and some one year. Our portfolio has performed at 91% of the P50 level through the end of 2006. That would put the portfolio somewhere between the P75 and P80 forecast. What varies is significant. We have four or five projects that are overperforming and another four or five that are barely operating at a P95 level of output. The science of wind forecasts is imprecise. Investors should expect volatility.

MR. MARTIN: Lance Markowitz, how much say do you want as an equity investor in business decisions? Are you happy to let the developer run things and consult you only on major decisions? MR. MARKOWITZ: Major decisions. We are not in the business of running wind farms.

MR. MARTIN: Tim Howell, is same thing true of GE?

MR. HOWELL: Yes. We have investments in 25 wind farms. We have experienced the whole range of problems that developers have faced — power plant failures, transformer failures, labor problems, environmental issues. We pick experienced partners. We really don’t want to be in the business of running wind farms. We want to be consulted about major decisions, like whether to divest assets or liquidate the partnership or make a big spending commitment.

MR. MARTIN: John Eber, how often have you been consulted on major decisions in practice?

MR. EBER: Not very often. But if you are talking about major decisions along the lines that Tim just described, those are things that you do not expect to occur. We have a say in significant decisions that take the project in an unexpected direction like whether to add leverage to a deal or to bring in additional partners. We would just as soon have our partner handle all the operating decisions.

Deal Structures

MR. MARTIN: Moving to questions about deal structures, Rob Sternthal, we talked earlier about guaranteed-return structures. Do you see a unmet need in the market for such structures and do you think we will see a guaranteed-return deal done this year?

MR. STERNTHAL: I think there is a need in this market because there are so many potential equity investors sitting on the side line that want to do deals but can’t because they lack the experience to evaluate project risk. A guaranteed return structure would widen the market. However, it would probably take one of the equity investors on this panel to close first on the project and then add a guaranteed return in the secondary market.

MR. MARTIN: Lance Markowitz, did I hear you say you would not do a deal with a guaranteed return? MR. MARKOWITZ: There are two issues. One is I am guessing your tax risk would increase exponentially. For anyone who would rather not take a lot of tax risk, it would be best to avoid such structures. The other issue is equity returns would be lower because the guy who is guaranteeing a minimum return will want a large component of the return.

MR. MARTIN: John Eber, do you see the market moving to guaranteed returns? Is there a need to move in that direction in the current market?

MR. EBER: I would say no to both. The guaranteed deals we see in housing are not only guaranteeing returns. I don’t think it is possible to mirror them in the wind market. You can provide protection against some risks, but I agree with Lance that a fully guaranteed return creates too much tax risk. Also, yields would be low because an intermediary will want a return for covering what is probably a risky project. I just don’t think such deals will work economically.

MR. MARTIN: Rob Sternthal, your response?

MR. STERNTHAL: I don’t disagree with some of the comments. Tax risk is a problem. How about shedding it to the guarantor? The next question is whether the economics work. From my point of view today, they do not.

MR. MARTIN: Why not?

MR. STERNTHAL: Because if you buy an unleveraged deal at 6.5% and you sell it at 4.5% with a guarantee, you are getting 200 basis points. Now compare the 200 basis points to the risks that you are taking. You have to find a pretty sophisticated guarantor. None of the triple A actors can afford to do it because you would have to have the deal rated. It will be difficult to find someone to take that kind of risk on a $400 million wind farm for such a small return. Now, if you are starting with a leveraged deal at 10% and can guarantee it down to 4.5%, then you have a different story. You will still have to get over the tax risk.

MR. MARTIN: Another new structure in the market is the prepaid service contract where a utility buys the electricity under a long-term power contract and prepays for a large share of the output and pays additional amounts over time as excess electricity is delivered. Sometimes operating costs are passed through. Lance Markowitz, have you looked at any service contract deals? Is Union Bank comfortable with the structure? MR. MARKOWITZ: We’ve looked at the structure. On a high level, we would probably say we are comfortable with it, but we haven’t gone far enough down the road on a real deal to know for sure.

MR. MARTIN: John Eber?

MR. EBER: We looked at one; I think it was about nine months ago. At that time, the advice of tax counsel was not satisfactory enough for us to want to proceed with it.

MR. MARTIN: Tim Howell, what has been the most timeconsuming issue in the wind deals GE has done?

MR. HOWELL: Probably the wind and the technical side of the underwriting. Everything else is pretty straightforward.

MR. MARTIN: John Eber, what has been the most timeconsuming issue for you?

MR. EBER: I probably won’t make any friends, but dealing with inexperienced lawyers.

MR. MARTIN: Tim Howell, will GE do 100-0 allocations?


MR. MARTIN: Lance Markowitz, is Union Bank at 100-0? MR. MARKOWITZ: Probably for a period of time.

MR. MARTIN: What about pre-tax returns? Do you require them and, if so, how much?

MR. EBER: We are looking for a satisfactory pre-tax return, and we treat the production tax credits as equivalent to cash for purposes of calculating the return.

MR. MARTIN: Is there a minimum return you require?

MR. EBER: Yes, we do.

MR. HOWELL: We require one as well. The IRS has never said you will be considered a part-owner of the wind farm without one. We also treat the credits as equivalent to cash.

MR. MARKOWITZ: I think everybody does.

MR. MARTIN: The IRS is working on guidelines for partnership flip deals. It is hoping to issue them this summer. The IRS has tentatively decided to draw the line at 95-5 allocations and require at least a 5% residual interest. If this ends up the IRS position, do you think the market will move to 95-5 allocations as the standard?

MR. EBER: I think it would limit the market in terms of the number of investors who are willing to compete outside of any safe harbor the IRS creates.

MR. MARTIN: Tim Howell, do you think people will wait for the guidelines actually to be issued before changing their behavior?

MR. HOWELL: In terms of a 5% residual, that is pretty much market currently. Some deals may have higher residuals, but I don’t know anyone who is going lower. My guess is we would wait to change until new guidelines are issued.

Other Renewables

MR. MARTIN: Rob Sternthal, what else is competing for your attention besides wind, and how significant is wind in the total pool?

MR. STERNTHAL: Wind will probably account for 80% of the tax equity market in renewables over the next two years. Solar is gaining market share rapidly. There will be a little geothermal and biomass.


MR. MARTIN: John Eber, what percentage of your deal flow is wind?

MR. EBER: Wind is probably 75% to 80% of it. We are spending time on solar and geothermal now and, in the last year and a half, we have also looked at some biomass projects. We hope to remain very active in all the renewables.

MR. MARTIN: Tim Howell, what is the hierarchy of equity returns in wind, solar, geothermal and biomass projects? In which type of project are returns the highest? In which type are they lowest?

MR. HOWELL: Returns are less technology-driven and more driven by the deal structure. For example, biofuels deals have a lot of commodity price risk. That makes them much more risky investments than contracted wind deals. The supply of capital in the different markets is also a factor. The competition is more focused in the wind space. Therefore, there may be a random biomass deal or other type of project where the equity can command a higher price because it is willing to commit scarce resources to a small niche market. Nothing else has the same scale as wind. We are certainly spending time on the other technologies. We have more than $500 million invested in renewables that are not wind.

MR. MARTIN: Do developers of other renewables projects pay the same amount for tax equity as wind developers?

MR. HOWELL: It depends on the project.

MR. MARTIN: Lance Markowitz, any sense of the hierarchy of returns? MR. MARKOWITZ: Wind is probably the most competitive, so it receives the most attractive financing terms.

MR. MARTIN: As for solar, geothermal and biomass, which do you suspect is most risky? MR. MARKOWITZ: That is really deal specific. We have been involved in geothermal projects for many years. The technical aspects of solar projects are not particularly frightening because the basic technology has been around for many years. I agree with Tim that the perception of risk is driven in large part by the deal structure. You have solar deals in the market with varying coverage ratios. Wisdom

MR. MARTIN: John Eber, you have invested in 26 wind farms. What do you wish you had known early on that you know today?

MR. EBER: I wish I had known the yields were going to fall so far, because we would have invested a lot more money in 2003 and 2004 in wind than we did. We took fairly small pieces of deals then because we were not yet fully comfortable with the risks. We took $20 million pieces of $50 million deals then. Today, we are taking $75 and $90 million pieces in $200 million projects. If I had known what I know today, we would have put more money in sooner.

MR. MARTIN: Tim Howell, what wisdom have you gained?

MR. HOWELL: We have learned that no matter how much you plan, problems will crop up on wind farm investments. Our earliest wind farm is working fine now, but it took some work to get there. It helps to be experienced.

MR. MARTIN: Are there any market developments that we failed to mention?

MR. STERNTHAL: Most of the market has stopped insisting that projects have long-term power purchase agreements. We are looking at leveraged, merchant, hedges, dirty hedges, non-wind hedges, portfolios. I could be wrong, but I suspect that as equity investors get more aggressive, we could see fully merchant deals. Will lenders also be willing to finance merchant wind deals? It is within the realm of possibility — eventually.

MR. HOWELL: A big challenge in the current market is how to project revenue from electricity sales at merchant plants and from sales of environmental attributes.