Jason Ford

US wind financing surges 82 per cent to $7.1bn

News Analysis

The US witnessed an 82 per cent surge in wind energy project financing following the release of guidance last year that clarified the qualifying criteria for the wind energy Production Tax Credit, according to a new report by Clean Energy Pipeline and law firm Orrick, Herrington & Sutcliffe LLP. 

The “US Renewable Energy Financing and Regulatory Outlook 2015” report showed that during the second half of 2014, wind energy project finance shot up to $7.1bn, an 82 per cent increase on the $3.9bn invested in H1 2014.

This rise followed the release of qualifying criteria by the Internal Revenue Service in August 2014, which specified that developers would be eligible for tax credits if they had completed construction by the end of 2015 or if they had started physical works prior to January 2014.

The IRS guidance indicated that projects would be eligible for a tax credit from the year they entered construction. In March 2015, the IRS released further guidance indicating that developers had until the end of 2016 to complete wind projects.

Some $29.3bn of project finance was invested in the US renewable energy industry in total during 2014, only slightly less than the $30.5bn invested in 2013.

Within the renewable energy financing landscape, holding company loans took greater prominence, while corporations boosted their activity and YieldCos remained popular.

According to the report, there is a growing use of back-leverage debt, or holdco loans, which are secured by the cash flow allocated to the sponsor’s equity share.

“Utility-scale solar projects have traditionally utilised term debt, but this year, many sponsors are choosing to fund the projects during the operating phase with all equity (a combination of sponsor equity and funds provided by tax equity investors) at the project level,” said Mark Weitzel, Partner and Co-head of Orrick’s Energy & Infrastructure group.

“Many sponsors are then funding their own equity contributions through so-called ‘back leverage’ loans, where they borrow at an upper tier level, which is similar to a mezzanine product. The debt is not secured by the project, but by the sponsor’s interest in the project company, without recourse to the sponsor itself. Investors like Ares Capital have been doing holdco deals like this for some time. It is a little riskier and is more like equity, but it has better returns.”

YieldCos, publicly traded investment funds that invest in operating renewable energy assets, secured $3.8bn of equity on the public markets in 2014, an increase on the $1.1bn raised in 2013, according to Clean Energy Pipeline figures.

More YieldCos are expected to come to market over the coming year. For example, First Solar and SunPower announced in February this year that they were in advanced negotiations to form a joint YieldCo to house solar generation assets.

“There will likely be more YieldCos in 2015,” said Weitzel. “Three to five companies have made YieldCo registrations. I would expect more to come out in the first half of the year, as long as the capital markets continue to be strong.”

Sustained YieldCo activity has stimulated the M&A markets. YieldCos acquired 3.8GW of effective capacity in 2014, up from the 2.6 GW bought in 2013, as a result of more vehicles coming to market and an inflation in the size of acquisitions.

One of the largest M&A deals driven by YieldCos in 2014 was SunEdison and YieldCo vehicle TerraForm Power’s agreement to buy First Wind Holdings for $2.4bn.

“Existing Yieldcos will continue to be strong acquisition vehicles,” said Weitzel. “They made promises to the public to deliver a 3-5 per cent cash yield every year, and the total return, including annual growth, is supposed to be much bigger.

“The only way to achieve this is to continually be in acquisition mode. Terraform has a very assertive programme, as does NRG, Abengoa and NextEra.”

Corporates also ramped up their renewable energy activity in 2015, as Google, Microsoft, IKEA and Amazon all announced investments in renewable energy sources.

Some corporates are attracted by the promise of long-term fixed prices for energy, while others are keen to take advantage of the tax benefits. IKEA, for example, intends to invest $1.7bn in renewable energy projects this year as part of a plan to reach 100 per cent renewable energy by 2020.

This article originally appeared on www.cleanenergypipeline.com a clean energy news service operated by VB Research, a sister publication to The Engineer. The reporter, Jessica Mills Davies, can be reached at jessica.millsdavies@vbresearch.com.