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Market for tax equity wind deals active as project finance bankers look past PTC


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Market for tax equity wind deals active as project finance bankers look past PTC

SNL Image

In this March 20, 2019, file photo the blades of wind turbines spin under the light of a full moon at the Saddleback Ridge Wind Project in Carthage, Maine. Tax equity investment in wind projects remains strong, despite the gradual step down of the federal production tax credit.
Source: Associated Press

Despite sunsetting renewable federal tax credits, project finance bankers remain confident in the market for tax equity transactions, crediting frothy deal flow and secondary tax equity transactions as boosting investment totals.

Speaking on the main financing-focused panel at the American Wind Energy Association's Windpower conference in Houston on May 21, Joel Spenadel, an executive director at JP Morgan, estimated that wind deals accounted for three-quarters of tax equity investment in 2018.

Totals for the year were some $12 billion, which, according to Jack Cargas, managing director at Bank Of America Merrill Lynch, do not account for a number of relatively small deals.

With investment levels holding steady since 2017, tax equity saw a boost from a number of portfolio transactions in the past year-and-a-half, said Spenadel. "There were some big portfolio deals involving what we term secondary market deals: investors who either had issues with tax reform or their own internal restructurings and no longer had tax capacity and had to sell."

Despite the flurry of secondary deals, there has been approximately $6 billion to $6.5 billion of new construction in wind over the past three to four years, according to Spenadel, who added that outsize investment in wind deals in 2018 was balanced by market uncertainty caused by tariffs on solar panel imports, an uncertainty he said has since abated.

Roaring 2020s for tax equity?

"A lot of people are gearing up for the reduction in the tax credit percentage and getting a head start on that," said Kenji Ogawa, managing director at MUFG Union Bank NA.

Cargas and Spenadel both predicted a strong tax equity market through 2023. "It's not going away anytime soon," said Cargas. "It's not going away overnight."

"I don't think we've seen a deal close yet that has been less than 100% PTC," said Gary Durden, managing director at CohnReznick Capital Markets Securities LLC. "The industry has done a great job of qualifying plenty of turbines and plenty of projects for 100% PTC, so we're only just beginning to work on various structures that can accommodate 80% and 60% PTC."

Iain McMorrine, a managing director at Allianz Capital Partners of America LLC who heads up the firm's U.S. renewables team, sees some companies are lining up deals but not yet executing. "The trend that I'm seeing is that sponsors are actually trying to capture competitive pricing, they're trying to capture deals earlier in 2019 but actually not transact them until the end of 2020," McMorrine said.

Competitive pricing has been spurred on by the opportunity to invest in projects with long-term power purchase agreements, or PPAs.

"We're still continuing to see quite a bit of growth on corporate and industrial buyers," said Durden, who partly credited corporate sustainability initiatives, but added that many buyers aim to lock in favorable pricing before the production tax credit disappears.

"We've seen plenty of growth in corporate PPAs, we've financed dozens of them in the wind sector," said Cargas, who noted increased interest in affiliate PPAs in recent months.

"We've seen some affiliate PPAs come up in the past couple of months and the other things which we've seen a lot of are hedges," said Spenadel, who added that the availability of fixed-volume hedges makes them an attractive option despite heightened basis risk.

"On one end, you've got regulated busbar PPAs being the gold standard and shorter-term hedges or any offtake with a less credit-worthy counterparty can be, on the other end, a big challenge for structuring," Spenadel added.

Beyond the sea

In 2019, few conversations about trends in wind generation come to an end without contemplating the growing impact of repowerings for existing projects and offshore wind.

"Offshore's going to boom," said Cargas, who pointed to "highly competed for" requests for proposals that will ultimately result in $2 billion to $4 billion financings.

Spenadel said he has been surprised in 2019 by, "the number of repowerings we're seeing that are either going forward or being considered."

Cargas said his team has invested in approximately a dozen repowerings over the past two-and-a-half years. "Repowering is real, deals are being done," he added. "There's going to be significant incremental demand."

Related coverage of AWEA's Windpower 2019 conference:

Wind turbine manufacturers brace for lower costs, tougher macro trends

Wind developers seek ways to improve community outreach, support

Wind capacity expected to grow to boom through 2020, level off thereafter