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'Measured' interest rate hikes should not squash renewables deals, CEO says

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An array of solar panels in Albuquerque, N.M.
Source: Associated Press

The pace of dealmaking in the renewable energy industry picked up on Feb. 7 with TerraForm Power Inc.'s $1.2 billion offer for Spanish power plant owner Saeta Yield SA, an acquisition that would mark a new chapter for TerraForm Power after it avoided being dragged down by an affiliate's bankruptcy in 2016.

In an era of low interest rates, investors have been drawn to the steady returns thrown off by renewable energy projects selling electricity under long-term contracts, BRP Energy Group LP CEO Sachin Shah said, adding that weak balance sheets helped fuel turnover in the sector.

As long as the Federal Reserve is "measured" in raising rates, "We think that there is a significant amount of capital on the sidelines, there's a lot of transaction activity in the renewables space and we think that people will pay a healthy multiple to acquire assets," he said. Shah was speaking Feb. 7 on the fourth-quarter earnings call of Brookfield Renewable Partners LP.

The TerraForm bid was announced on the same day that NRG Energy Inc. said it plans to sell its interest in NRG Yield Inc. to the private equity firm Global Infrastructure Partners and two days after 8point3 Energy Partners LP, a joint venture between rival solar companies First Solar Inc. and SunPower Corp., said it agreed to be acquired by asset manager Capital Dynamics Inc.

The deal for Saeta, which owns more than 1,000 MW of wind and solar power plants in Spain, Portugal and Uruguay, "should provide compelling opportunities for follow-on investment," said Shah, whose company is the service provider to Brookfield Renewable Partners, which was part of a group of investors that bought a majority stake in TerraForm Power after the collapse of its sponsor, SunEdison Inc.

In addition to TerraForm Power, Brookfield Renewable Partners bought SunEdison's international yieldco, TerraForm Global Inc., adding a total of about 3,600 MW of operating renewable energy projects in core markets, including the U.S., Canada and Brazil, as well as smaller collections of projects in China and India.

Taxes and tariffs

In the U.S., project financing looks to be in for a makeover, Shah said, given that an overhaul of the federal tax code by Republicans in 2017 likely "spells the end of tax equity longer term."

Among other changes, the tax law that President Donald Trump signed in December 2017 lowered the corporate rate to 21% from 35%. Companies that build wind and solar farms for years have funded their projects partly by selling clean-energy tax credits to investors with big tax liabilities. Lowering the corporate rate could, therefore, curb the availability of tax-equity financing, observers said.

Shah sounded upbeat about the prospect of the industry moving away from tax equity, which he called an "artificial subsidy" that has lowered capital costs and acted as a drag on power prices.

"So I think, all else being equal, that with tax reform you'll start to see a more rational capital stack against a lot of these projects that have been developed with tax equity and back leverage, which really means the equity owner puts very, very little skin in the game and then can accept a very, very low power price to generate a mediocre return," he said.

For America's solar industry, 2018 also brings a new round of tariffs on imported solar cells and panels, protectionist measures that opponents say will drive up costs and stifle development. Brookfield Renewable Partners CFO Wyatt Hartley said any negative effects should be temporary.

"The world's advanced economies are still in the very early stages of replacing much of the thermal, centralized generation with a mix of centralized and decentralized renewable technologies," Shah said. "As a result, we have made a concerted effort to ensure our business is well positioned during this transition."

Brookfield Renewable Partners, an affiliate of Brookfield Asset Management Inc., has access to between $3.5 billion and $4 billion in "total system liquidity" for investments related to renewable energy, Shah said.