New York, Feb. 12, 2004 — The commercial development of wind power awaits Congressional action, and an end to “stop and start” federal tax policies, in order to reach its full potential as America’s most promising alternative energy source, according to a leading energy lawyer at White & Case.
“Wind power is one of the bright spots in the nation’s efforts to develop sources of renewable ‘green’ power to supplement our fossil fuel supplies,” said Art Scavone, co-head of White & Case’s Global Energy, Infrastructure and Project Finance practice. “Of all the green sources — such as solar, hydro, biomass, geothermal — wind power is the most feasible and economically viable on a mass scale.”
New Legislation Needed
However, Scavone says that Congress must enact new energy legislation that gives energy companies and investors more long-term continuity in order for wind power’s promise to be realized. He cites the example of several wind power projects that went into commercial operation just prior to December 31, 2003.
That was the last day for which wind power producers were eligible for a Congress-authorized “production tax credit,” which offers energy companies a tax credit of 1.8 cents per kilowatt hour produced.
“It’s likely that if these projects were not projected to be in commercial operation by the end of last year, they would not have been built at all. When production tax credits are offered, you see a surge of activity in the wind power sector. When the tax credits expire, most investment is put on hold.”
Scavone said he expects Congress to retroactively reinstate the production tax credit later this year, but based on past history, it may only be extended for two or three years. “This ‘stop and start’ approach is not very attractive to energy companies or investors,” said Scavone.
He suggests the better solution would be for Congress to extend the production tax credit for at least 10 years. This would provide stability to the industry and make investors feel more secure about developing and funding a significant number of wind power projects, as well as improving the business climate to encourage manufacturers such as turbine providers to invest the necessary money to further improve technology.
A Growing Marketplace
Ultimately, however, Scavone believes wind power will command more of the U.S. marketplace, especially as additional states adopt a renewable portfolio standard (RPS). Thirteen states now have RPS mandates, which set targets calling for a certain percentage of all power purchases to come from a renewable power source such as wind power. While the percentage varies by jurisdiction, New York recently raised its RPS to 25 percent and California’s RPS is at 20 percent. Eleven more states are considering similar RPS mandates.
International Investment Leads the Way
Indeed, industry reports estimate that by 2010, the amount of energy derived from wind power will increase by 25 percent and account for the majority of renewable energy produced. International investment may help meet that need.
“If you look at the bulk of wind power projects financed in the United States over the past several years, the majority of the lenders are U.S. branches of international banks, especially
those from Europe,” said Scavone. “Wind power is already widely accepted in the European Union, and lenders there are far more familiar and comfortable financing wind projects.”
And though financing still remains a challenge, taking an innovative approach to structuring projects can help make them viable. For example, one of the FPL deals on which White & Case recently advised was a bond financing for FPL Energy American Wind, a subsidiary of FPL Group. This was structured as a pooled financing of $380 million of senior secured Rule 144A bonds to finance seven wind-powered electricity generating facilities located in six different states in the United States. The deal was the first capital markets financing of a wind project in the U.S.
“Selling bonds, as was done recently for the FPL project, was significant for two reasons. First, it brought Moody’s and Standard & Poor’s up to speed on wind risk. Based on their review of the wind data and deal structure, they were both able to assign an investment grade rating to the bonds. Second, with this investment grade rating, it potentially opens the wind industry to a new source of capital, the institutional investor, who has been absent from the market since the early wind projects in the 1980s. Innovative arrangements such as these allow us to help our energy clients keep up with the changing dynamics of the industry,” said Scavone.
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