Texas wind energy financing in disarray after winter storm
Renewable energy investors are reassessing their plans in Texas after last month’s winter storm froze some wind power projects and left their complex financing arrangements in shambles.
The disarray threatens to hold back the development of America’s largest wind power market, undermining U.S. goals to reduce carbon emissions.
The reason: Derivatives designed to protect so-called tax equity investors have exploded dramatically, threatening funding that was worth more than $ 17 billion to the US renewable energy industry last year.
“It’s doable, but it’s going to be more difficult” to make these kinds of tax fairness deals in the future, said Rubiao Song, head of energy investments at JPMorgan Chase, during a webinar on funding energy in Texas which drew 3,000 listeners last week.
Tax equity investors – primarily big banks, but also companies ranging from Warren Buffett’s Berkshire Hathaway to Swiss chocolate maker Nestlé – can use the capital they invest in renewables to offset their U.S. tax obligations, through credits. wind and solar tax.
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But to ensure investors get the credit they expect, they typically require wind farms to buy a swap from a bank to lock in the selling price of electricity. Swap contracts require the wind farm to provide a fixed amount of electricity every hour in exchange for a fixed payment from the bank, typically around $ 20 per megawatt hour.
Those fixed-volume blankets exploded when nearly half of Texas’ power generation went out in February. Wind farms with insufficient deliveries were forced to buy electricity on the open market at $ 9,000 per MWh for hours or days, generating huge losses and putting some in default.
“Project lenders and tax fairness are going to take a very careful look at what happened, and they’re not going to start over,” said George Humphrey, energy projects lawyer at Thompson & Knight in Houston. “Exposing yourself to the market is crazy. This is what happened under these hedges.
Hundreds of millions of dollars in swap payments are now in dispute. Tax stock investors and electricity swap traders – often two branches of the same bank – were in intense discussions with wind farm owners over how to unravel the mess, bankers and lawyers said. One project turned to litigation.
In this case, the most public example of how the hedges have gone wrong, a 210 megawatt wind project called Canadian Breaks, seeks to evade obligations to deliver electricity to JPMorgan Chase by claiming the storm has crippled the operations. Bank says it owes Canadian Breaks $ 79 million for six days of bills; the total project turnover for this whole year is expected to be only $ 15 million.
JPMorgan had its own clearing obligations, the bank said in a legal brief this week, and was forced to buy electricity from the market to meet delivery commitments to an electricity customer, by paying a price “$ 8,980.45 / MWh more than JPMorgan would have paid if Canadian Breaks had played”.
At least 46 projects, mostly wind, with a total capacity of 9,000 MW “would suffer serious financial losses” from the $ 9,000 price of electricity, said a group of generator owners including BlackRock, Capital Dynamics and Copenhagen Investment Partners in a filing with the Texas Utilities Regulator.
Hedge traders, who are secured creditors, were however reluctant to seize failed projects, said Joan Hutchinson, managing director of Marathon Capital, an energy and infrastructure investment bank.
“Each party has a contractual right which is to its advantage, but no party has a unilateral right which is clearly better than a negotiated solution,” she said.
With fixed volume hedges suddenly fallen into disuse, tax equity investors may demand other forms of collateral from wind projects, although these may be more difficult to obtain. Power purchase agreements (guaranteed supply contracts with commercial buyers) are one such alternative, but the customer base is limited.
“The cost of capital will definitely go up” for wind power, said James Wright, US head of renewable energy, clean energy and sustainability at lender CIBC Capital Markets, during the webinar last week. .