7th MARINE LAW SYMP. - Third Panel: Financing/Economic Issues
Four panelists, Susan Farady introduces all panelists and says we will shift gears from regulation to financing.
Edwin Feo, Milbank, Tweed, Hadley & McCloy LLP: He did his first deal on wind in 1980s. Describes development this way. First there was none; then tax credits, then Renewable Portfolio Standards and then Production Tax Credits. What are the issues? Technology. Finally, transmission connections and a well functioning grid are important.
James Duffy, Esq. - Nixon Peabody LLP. Finance basics: there are 4 stages: #1: out of developers’ pocket. #2: Equipment deposit stage: #3 Construction stage: any previous stage is replaced by construction financing. #4: Operating stage.
Production Tax Credits: marine & hydrokinetic were added. Dollar for dollar reduction in federal income tax liability. If you don’t have income then this will not help you. The amount of tax credits depends on how much energy is generated. Problem is that most developers will not have enough income to take advantage of these credits. Every project is different. Keep in mind, PTCs will not be realized until later stages of the project. The amount of credit changes every year. Now it is 2.1 cents per kilowatt hours but it may change. The amount of credit may be reduced if there is financing from state or federal government. It is by no means easy to raise money on the base of these tax credits.
Chris Brown - Deepwater Wind. All about the wind and deep water. Who are we and who are we backed by? Backed by DE Shaw & Co. They are an alternative energy fund. Our goal is to generate cost competitive renewable power. His idea is to site projects over the horizon. Siting projects farther out in deeper water is the answer. Traditional/Monopile Foundation is limited shallow water up to plus/minus 70 feet. DWWs jacket foundation allows putting turbines into depths of 50 meters. The jacket is a like a casing around the monopiles.
Next speaker: Allan MacAskill - SeaEnergy There is a lot of political support in Europe: 20% of all energy should come from renewables by 2020. In the UK, 15% of energy from renewables by 2020. Economic problems. How does this relate to CO2 reduction targets? Governments are not changing their commitments. Some are increasing their commitments (UK for example, from 60% to 80% by 2050. Incentive mechanisms: Feed-in tariffs are used in most EU countries. Germany is leader. Ireland may follow. Germany has a special rate offshore of 15 Euros/kwhr. Other incentives are the German infrastructure Law that means the grid connection costs will be paid for by the consumers. This is going to be a big industry over the next few years. The strategy of SeaEnergy is to build an aggregate portfolio of 3-5 GW in 5 years. They will deploy the portfolio over a 10 year period. They built the Beatrice project which shows that it can be done. Mr MacAskill is showing a video of the construction of the Beatrice offshore installation. This is a jacket installation. Everything was pre-assembled onshore. Weight: just under a thousand tons. The problem is that we have to mass manufacture the turbines. Otherwise it will not be feasible.
Next speaker: Christopher Stolarski, Mizuho Corporate Bank Ltd. - What we need is stability. What a relief to be away from Wall St. these days. He apologizes that he doesn’t have any slides but lately whatever he writes in the morning isn’t necessarily true in the afternoon, including the name of the bank! [hysterical laughter from audience] Renewable energy can be a stable enterprise. However, the cash flow risk is an issue for investors. Revenue minus cost to operate will give you the cash flow. Longer term contracts are needed if cash flow is weak. We can leverage the PTCs. Regulatory risk. When we (a bank) come into the project, we want to make sure everything is sorted out. In regards to operations & maintenance, it is hard to know b/c this is new technology. It is hard to guarantee the maintenance of the pro forma in this case. What are the types of financing available: 4 stages of financing, it would be very hard to get financing for the first stage (development stage) now. A few years ago, you could have gotten it. There is financing for turbines. Unfortunately, the PTCs are problematic b/c a one year extension is not enough and will not help much with financing. We need to increase the supply of investors. Term financing side: 2 types. One, there is a strategic partner that uses the tax subsidies themselves. In that case, you are looking at the utility and the credit worthiness. Others will use tax equity. Why is Mizuho interested? It is a Japanese bank. We have an offset policy and also Japan is a signatory to the Kyoto protocol.
Mr. Feo, Moderator comments: European approach to financing is different. There are different monetary policies and incentives. There is a lot of risk involved. In Europe, manufacturers have de-risked the technology. In other words, they are willing to guarentee the
Question to James Duffy: What are the investors like at this point? Duffy: Problems is that no one wants to be the first investor.
Chris Brown: We aren’t even talking to the bankers yet. We have to get all the permits done first. We don’t know how much time is needed to for environmental assessment.
Question from audience: What is it going to take in the US to incentivize this industry?
Chris Brown: We aren’t going to get feed-in tariffs like in Europe. We’d love it, but that is not going to happen.
Feo: We need to get a funding mechanism set up for the infrastructure, for setting up the grid.
MacAskill: The German/UK market seems to be ahead but the capital side of things is still up in the air
Question from audience: How does cap & trade emission system trading scheme change the economics?
MacAskill: We did a study, which is now on our website, that shows that with the cap & trade, wind is much more competitive with conventional energy production.
Feo: The current pricing of electricity is not sophisticatedly priced and that’s part of the problem.
