27 June 2011
The renewable energy sector will not miss the US government’s cash grant programme as much as industry experts think, because of the growing attractiveness of the production tax credit (PTC) for wind projects, according to one top banker.
The Section 1603 Treasury cash grant programme, which allows developers to opt for a cash payment instead of a tax break, is set to expire at the end of 2011 and an extension is considered highly unlikely in the current political and economic environment.
“There’s a rush to get wind farms qualified for the grant to have that option available,” said Chicago-based John Eber, managing director of energy investments for JP Morgan. “There’s certainly not much activity going on beyond 2012 in wind, as people wait to hear about the extension of the tax benefits. We don’t expect to see the grant extended, but we do expect to see the PTC extended.”
Some wind farms turning down cash for tax break
But some US wind farms already see the PTC as the better option and market dynamics may encourage more projects to opt for the tax break over the grant, Eber told attendees of the Renewable Energy Finance Forum-Wall Street in New York last week.
The PTC’s attractiveness starts with the dramatic fall in turbine prices, which reduces the value of the grant, and the technology improvements leading to significantly higher capacity factors, which are driving projects toward the tax credits, he said. Additionally, power prices are stabilising and utilities are taking advantage by signing contracts at fairly attractive prices, leaving developers to seek the best economic deal they can get from the financing process, Eber said.
“All in all, we think the PTC is going to be a more attractive marketplace for a greater percentage of the wind developers than we’ve seen before,” he said. “With the growth in the tax equity market and the tax equity investors, I expect the capital will be there.”
JP Morgan estimates that the tax equity market will invest about $4.5 billion in wind and solar projects this year, a slight drop-off from the nearly $4.7 billion invested last year.
“I wouldn’t be a bit surprised if it ends up being greater than that with deals coming into the market before the end of the year,” Eber said.
By JP Morgan’s count, 18 investors are active on the equity side and five more investors are interested, but have not yet successfully completed deals. “We’re working with them to maybe bring more investors into the market,” he said.
Others fear end of cash grant
But Eber seems to have the minority opinion as other financiers and developers express grave concerns about the pending expiration of the cash grant programme.
If the cash grant is allowed to expire, there will be a $3 billion-6 billion gap between the amount of tax equity capacity and demand, said Kevin Walsh, managing director of GE Energy Financial Services. “We’re very concerned,” he added. “The tax equity market continues to be constrained and will be more so if the grant goes away.”
The tax equity market only has about 12-15 active investors, noted Los Angeles-based Lance Markowitz, senior vice-president and manager of leasing and asset finance for Union Bank, a unit of MUFG Group that is a major provider of debt and equity financing for renewable energy projects.
“I’m optimistic the market will cover good, solid projects,” he said. “The market will gravitate to the better ones. Post-grant really is late 2012 and I think you’re going to see by that time bigger appetites from investors.”
The net benefit to the US economy from the cash grant and PTC was about $100 million in 2010, according to GE. “There’s an initial drain on the Treasury from the grant and PTCs, but then these projects do pay taxes,” Walsh argued.
Gloria Gonzalez
