Despite US renewable energy, offshore wind setbacks, IRA providing strong momentum

US power market investors remain interested in renewable energy projects despite recent headwinds and see the US Inflation Reduction Act as teeing up a tremendous amount of capital waiting to be put to work which maintains strong momentum toward the sector even if some of those investments are slowed down in the near term.

"In my view, I don't think the equity markets overall have appropriately repriced some of the risk in the markets ... but the reason why we believe in the renewables story is it's the cheapest form of generation on two thirds of the globe," Justin DeAngelis, partner and co-head of sustainable infrastructure at Denham Capital, said Oct. 30 during the S&P Global Commodity Insights Financing US Power Conference held in New York City.

"There is a tremendous amount of capital that wants to be put to work in the energy transition, sustainable infrastructure, ESG or whatever you want to a call it and there is not a lot that's going to stop it but maybe just slow it down, in my opinion," he said.

Steve Piper, director of energy research at S&P Global said the US Inflation Reduction Act could help absorb some supply chain cost increases, but uncertainty around how the IRA unspools is part of what the market is experiencing, and he asked if it could potentially lead to bottlenecks in taking advantage of what the IRA has to offer.

The two biggest bottlenecks for renewable energy project developers are transmission expansion and permitting delays, Udit Goyal, vice president of project finance at Denmark's Orsted said.

Tax policy

"At the end of the day, we don't have an energy policy we have a tax policy buried under layers of tax code ... and somehow tax equity got very complex and arcane," he said, adding that hopefully transferability is part of the answer here.

Tax equity investors take equity stakes in renewable energy projects being developed by entities that cannot avail themselves of the tax credits directly. It developed as a way to help finance renewable energy projects.

The IRA has two main levers: transferability, through which entities can sell tax credits to a third party, and direct pay, allowing investors and stakeholders who do not pay income taxes to receive tax credits from the federal government in the form of direct cash payments, which allows new entities to participate in the market.

"I believe offshore wind should be a significant part of the energy transition," but there is too much risk in it for us to get involved, DeAngelis said.

The US offshore wind industry has faced challenges in 2023 from rising interest rates, construction costs and inflation.

In fact, Orsted said late Oct. 31 that it has ceased development of its 1,100-MW Ocean Wind 1 and 1,148-MW Ocean Wind 2 projects off New Jersey as part of an ongoing review of its US offshore wind portfolio.

Asked about offshore wind financing strategies at the S&P Global conference, Goyal said it has been challenging and Orsted has used its own balance sheet for a lot of its financing, so it has not had to raise debt.

The developer did do a tax equity arrangement for its 132-MW South Fork Wind project off Long Island, New York and is in the process of raising tax equity for its next round of East Coast projects, he said.

Goyal added that with a major offshore wind tax equity deal closing on Oct. 25, some of the banks involved could be freed up to work on other projects.

Avangrid, a member of Spain's Iberdrola Group, and Copenhagen Infrastructure Partners, a renewable energy investor, said the 800-MW Vineyard Wind 1 project off Massachusetts closed a $1.2 billion tax equity package with J.P. Morgan Chase, Bank of America and Wells Fargo, with the developers saying it was the largest single asset tax equity financing.

"There will always be challenges from policy, legislation and macro-economic conditions, but at this point this is not a fringe industry" and while new challenges will pop up, "we have strong momentum and it makes sense from a sustainability and investment standpoint," Goyal said.