The tax equity market for renewables continues to be an engine for investment, along with other forms of financing using U.S. Treasury Department Section 1603 tax grants, according to John Eber, managing director of energy investments for JP Morgan Capital Corp.
Speaking at SNL Financial's 24th annual Power and Utilities M&A Symposium in New York City on Jan. 24, Eber said new tax equity investors also have emerged.
A dominant player in the renewables space since 2003, JP Morgan's Energy Investments group, a division of JPMorgan Chase & Co.'s investment bank, has invested more than $3 billion in 80 wind and solar projects.
JP Morgan partners with large banks, investment banks and insurance companies, as minority partners in its tax equity deals.
"There was a tightening in the market due to the recession. Many of our partners and investors pulled back, or pulled out, but we continued to be there throughout the whole cycle," Eber said.
There are about 18 active investors like JP Morgan in the renewables space — seven exclusively investing in solar, four exclusively in wind and seven who do both, Eber said.
Rick Needham, green business operations director at Google Inc., said at the conference that the Mountainview, Calif.-based technology company partnered with JP Morgan on its $38.8 millioninvestment in a utility-scale wind farm project developed by NextEra Energy Resources LLC in North Dakota.
Most renewable structured financings by JP Morgan use a vehicle called a partnership flip structure, in which a wind company, for example, will form a partnership with two types of equity, class A and class B. The investors hold one class of equity and the wind developer holds the subordinate class of equity.
"The intent is to allocate as many, if not all, of the tax benefits to us, and some of the cash to us, to get our return, and then allocate the remaining cash to our partner, so he gets his return predominantly in cash," Eber said.
The use of production tax credits and accelerated depreciation in the partnership flip structure has been the backbone of tax equity investment for wind farms since 2002. Solar projects have received the investment tax credit and accelerated depreciation, and geothermal projects have received the production tax credit and accelerated depreciation.
Since Congress passed the American Recovery and Reinvestment Act of 2009, and made stimulus funds available for investment in renewables, there has been an option to convert the production tax credit into an investment tax credit, and then further to receive the investment tax credit as a Section 1603 grant. The grant program was extended through December in tax legislation signed by President Barack Obama in December 2010.
The Section 1603 cash grants have broadened developers' financing options, as some tax equity investors struggled during the recession.
"The field has changed over the years as people's ability to be tax investors changed. If your parent company is not consistently profitable, and is consistently a large taxpayer, it is difficult to be this type of investor," Eber said.
GE Energy Financial Services, another tax equity player with about $6 billion in renewable energy investments, has incorporated Section 1603 grants into its financing programs.
"One of the things that we have been doing is bringing in investors who want to enter into the renewable investment space to participate in our transactions," GE Energy Financial Services President and CEO Alex Urquhart said in an interview with SNL in December 2010. "[M]ost of these investors are interested in grant deals, not [production tax credit] deals. In some cases, they don't have tax base. They don't have the predictability of the tax base. To continue to increase the size of the investor pool, I think the grant is a better way to go."
Leveraged leases, another form of tax equity investment, became uneconomic financing vehicles after the production tax credit was passed in the 1990s because of how the law was structured. But leveraged leases are desirable for investors again because of how the Section 1603 grants and the investment tax credits are designed.
Wind energy developer Pattern Energy Group LP closed a leveraged lease equity financing with insurer MetLife Inc. for Pattern subsidiary Hatchet Ridge Wind LLC, the lessee of a 101-MW wind energy project in Burney, Calif., in December 2010.
Pattern CEO Mike Garland said MetLife's investment was the first closing of a leveraged lease on an operational wind farm since the early 1980s.
"The lease is an indication of the transition from just being a [production tax credit] world for wind," Garland said.
Going forward, the San Francisco-based wind developer, whose backers include Riverstone Holdings LLC, is keeping its financing options open.
"We look at each project individually. [A leveraged lease] is something we will continue to look at, but we're not committed to doing it on all of our projects," Garland said in a recent interview. "The irony is that we are already starting to be taxable, so there is the obvious [question] that if we are taxable, do we need a leveraged lease?"
Acting on its own behalf, and on behalf of its partners, who are also large taxpayers, JP Morgan intends to continue to finance renewables with tax equity.
"We have been investing in all of the cycles, so the returns, not unlike lending, follow a certain pattern," Eber said. "The returns vary considerably from year to year, depending on market circumstances. We have just been a continuous investor throughout that cycle."
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