Soundbites from Infocast's Wind Power & Finance Summit

Soundbites from Infocast's Wind Power & Finance Summit

Posted by David Burton

February 10, 2020

Posted in Power Wind Blog article


Infocast’s Wind Power Finance & Investment Summit was held in San Diego from February 4 to 6.  Below are soundbites from the speakers and panelists. The soundbites are organized by topic, rather than chronologically. They were prepared without the benefit of a transcript or recording and are edited for clarity.

Topics covered below include the tax equity market in 2020, debt structuring, contracted versus merchant projects, offshore wind and credit support in build transfer agreement transactions.

Tax equity market in 2020

People are very pleased about 2019 and very optimistic about 2020. 

  • Managing Director, Money Center Bank

2020 is off to a quick start. We are closing deals in Q1 rather than out doing business development. 2020 is going to be very busy.

  • Senior Vice President, Strategic Tax Equity Investor

There was $13 million of tax equity investment in 2019 in terms of committed capital.  There were some slippage [of fundings] into 2020. 

  • Managing Director, Investment Bank

The big story is volume.  People are talking about 1.5 to 2x demand for tax equity relative to 2019, but it is not clear that supply can meet that level of demand. 

  • Managing Director, Money Center Bank

There are a total of four new tax equity investors.  The four new entrants to the market have very sizable investment goals for tax equity.

  • Managing Director, Investment Bank

We will probably do around $2.5 billion of tax equity volume in 2020.  The biggest challenge for us is going to be completing all of our fundings as well as doing new transactions.  We have to be somewhat selective.

  • Senior Vice President, Strategic Tax Equity Investor

In 2018, there were tax equity transactions with [after-tax flip rates] in the seven percent range; there were fewer deals in the seven percent range in 2019 and some in the six percent range.

  • Managing Director, Sponsor Side Financial Advisor

The various statistic above are for the tax equity market generally, not just wind.

For a project that qualifies for a 100 percent PTC [(i.e., $25 MWh)] that has a high-resources site, we see tax equity at 65 to 70 percent of the capital stack. 

  • Managing Director, Sponsor Side Financial Advisor

Every year the sponsors want to push more merchant risk onto the projects.  If tax equity investors are taking more deficit restoration obligation (DRO) risk [due to lower levels of contracted cash flows], then theoretically tax equity investors should be looking at higher yields, but sponsors say there is no more money from the offtake contract to provide higher yields.

  • Senior Vice President, Strategic Tax Equity Investor

80 percent PTC v. 100 percent PTC

Explanation: Wind projects that “began construction” in 2016 to qualify for a 100 percent PTC (i.e., $25/MWh) must be placed in service by the end of 2020 to meet the four year “continuity” safe harbor, which is comparable to a “soft” deadline.  Accordingly, in 2021 wind projects that are within the four year safe harbor will only qualify for an 80 percent PTC (i.e., $20/MWh).

An 80 percent PTC versus 100 percent PTC means lower upfront tax equity investment and a higher DRO.

  • Managing Director, investment Bank

Repowering wind projects

I look at a repowering and like the fact that you already have the resource and a lot of data.  There is a lot of really good reasons that repowering makes sense.  But with a repowering you are searching through real estate records to find things done 10 or 15 years ago; you also see offtakers try to seize on the opportunity and squeeze on terms in the offtake agreement.  We did five repowered projects last year.

  • Senior Vice President, Strategic Tax Equity Investor

Tax equity investors are generally ready to take production tax credit risk via the 80/20 test for repowering, but there have a been a few specific exceptions. 

  • Managing Director, Money Center Bank

Explanation: Satisfying the 80/20 test requires that no more than 20% of the value of a project is attributable to the “old” components from the project that was repowered.  Once this test is satisfied, the project is deemed to be a new project for tax credit purposes.

Tax equity investors’ selection of wind projects to invest in

There is no such thing as a perfect transaction, so you have to start with the project fundamentals.

  • Managing Director, investment Bank

The projects that have the fundamentals people will be all over.  The projects that have issues will be at the bottom of the queue. 

  • Managing Director, investment Bank

If you are strong sponsor who is a serial issuer [of tax equity], you have a lot of market leverage.

  • Managing Director, Sponsor Side Financial Advisor

If you are in the ERCOT panhandle, there is probably not tax equity available because the risks are too great for tax equity to absorb.

  • Manging Director, Sponsor Side Financial Advisor

It comes down to your project fundamentals; it is another project in ERCOT?

  • Manging Director, Sponsor Side Financial Advisor

All of the transaction resources are stretched, so sponsors need to think about the sequencing [of the diligence, the documentation, the execution and the funding of the transaction to make it efficient for the deal teams].

  • Managing Director, investment Bank

Debt structuring

We see a lot of back-leverage debt.  We don’t expect to seen any senior secured debt in the 2020. 

  • Managing Director, Money Center Bank

For the wind clients we work with, more often than not there is no back-leverage because offtake arrangements are of a shorter duration, so there is not enough contracted cash flow to size a material amount of back leverage.

  • Manging Director, Sponsor Side Financial Advisor

It has been a few years since we’ve seen senior secured debt [for a wind project].  Today, with the offtake pricing where it is, we don’t see senior secured or back- leverage [for wind projects].

  • Managing Director, Sponsor Side Financial Advisor

We raised our hurdle rate.  That resulted in many deals that we could not compete for.

  • Managing Direct, Japanese Headquartered Bank

Contracted v. merchant projects

We have worked with our sponsor clients to reduce the percentage of contracted offtake.

  • Managing Director, Sponsor Side Financial Advisor

We wouldn’t do a pure merchant project.  A lot of the hedge providers are lowering their pricing, and a lot of sponsors want the upside.  So you are going to see different types of product to manage risk while providing sponsors with some upside.

  • Senior Vice President, Strategic Tax Equity Investor

There are are so many attractive transactions that don’t require you to take merchant risk, so I don’t know why we would do pure merchant. 

  • Managing Director, Investment Bank

Offshore wind

I think people will start looking at tax equity for offshore wind in 2021 for placed- in-services dates in 2023 and 2024.

  • Managing Director, Investment Bank

The expectation is most offshore wind transactions will be electing the investment tax credit in lieu of the PTC . 

  • Managing Director, Money Center Bank

Block Island is probably not a precedent for these large, 800 MW, offshore wind deals. 

  • Managing Director, Money Center Bank

Getting your arms around the whole supply chain aspect is very different than offshore.

  • Senior Vice President, Strategic Tax Equity Investor

Energy pricing basis risk: Hub v. node

Explanation: “Basis risk” typically arises in corporate PPAs because the project’s owner sells the power to the market at the price available at the node, but financially settles with the corporate “buyer” based on the price at the hub. For instance, the corporate PPA provides that the corporate buyer contracts for power at $30 a MWh, so if the price at the hub is less than $30 a MWh, the corporate pays the project owner the difference, and if the price at the hub is more than $30 MWh the project owner pays the corporate the difference. 

What actually happens is the project owner sells the power for the spot price at the node.  So if the price at hub is $29, the corporate offtaker pays the project $1; however, if the price at the node was only $28, then the corporate offtaker was only paid in total $29 (i.e., $1 + $28), even though the project contracted under the PPA for $30.

Tax equity investors have different approaches to basis risk.  We see different downsize cases.

  • Managing Director, Sponsor Side Financial Advisor

For basis risk, you look at your operating portfolio in the same area, and that may mean other haircuts to the downside case.

  • Managing Director, Investment Bank

There are times that our portfolio has more basis risk exposure than the sponsor does, and that is awkward. 

  • Managing Director, Money Center Bank

Battery storage

Is there a certain size battery that would help me mitigate my shape risk to mitigate my basis risk exposure, and from a capital cost perspective you can probably pay off that battery quickly.

  • Senior Vice President, Strategic Tax Equity Investor

It seems like there should be a future for wind plus storage, but we haven’t yet taken wind plus storage to market.

  • Managing Director, Sponsor Side Financial Advisor

Community choice aggregators (CCAs)

Explanation: CCAs are community organizations that organize to contract for power for communities or groups of communities at wholesale prices.  They predominantly exist in California, but seven other states have authorized them. 

I fully expect that when wind projects come to market with CCA offtake that the market will figure out how to get its arms around that offtake.  CCAs are a good development for the market.  It gives communities a feeling of control over energy procurement decisions.

  • Manging Director, Sponsor Side Financial Advisor

There is a lot of focus on CCA transactions [(i.e., tax equity transactions in which the project has a contract to sell power to a CCA)].  There are five other states looking at the possibility of CCAs.  We need to crack the code as to how to finance CCA transactions.

  • Managing Director, Money Center Bank

Credit support in BTA transactions

Explanation: “BTA” stands for Build and Transfer Agreement (BTA).  In a BTA transaction, a buyer, a utility, contracts with a developer to develop and construct a project and sell it to the developer at a contract price upon completion.  The utility requires certain indemnities from the developer and often asks for credit support to backstop the payment of those indemnities.

Corporate guaranties are the least expensive [form of credit support] but tend to be the most challenging from the buyer’s [(i.e., the utility that purchases the project at completion)] perspective.  It depends on the credit strength of the seller, but credit is in the eye of the beholder, particularly when you are out of the investment grade realm.  The PTC risk is a monolithic risk that goes on for let’s say 13 years [(i.e., the ten-year PTC period, plus a three-year IRS audit statute of limitations after the last year)]; it does not make sense to post a letter of credit for that.  We try to provide a hodgepodge of credit support instruments and right- size them for particular needs.

  • General Counsel, US Arm of a European Renewable Energy Developer

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Tax Equity News reports on issues where renewable energy meets tax policy in the United States.

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