IHS Markit's Maxwell Cohen answers our questions on what the financing outlook will be for the wind market after PTC sunsets
What strategies have developers adopted to ensure that their project will meet the PTC 2020 deadline?
Maxwell Cohen: Most are focused on ensuring they have their financing, interconnection, and turbines lined up (if not yesterday then tomorrow), as well as making firm plans for balance-of-plant, cranes, and other logistics. Since most wind projects typically come online in the fourth quarter each year, anything developers can do to pull forward their construction timelines will likely help them avoid the turbine delivery bottleneck that’s likely coming in August/September 2020.
What strategies have you seen developers adopt to obtain financing after PTC has been fully phased-out?
Maxwell Cohen: We are only just starting to get an indication of how much will be built in 2022 when the 60% PTC will be available, so there isn’t much hard evidence yet of which strategies developers will use. Debt will almost certainly play a larger role. When IHS Markit models wind project economics, we assume no tax equity for projects online in 2024 and onwards and moderately lower target returns, partially mitigating the loss of the PTC.
How have the tariffs imposed by this administration affected developers’ ability to complete their projects on time? How have they affected their future wind plans? Have they driven up the cost of future wind projects?
Maxwell Cohen: Per-kW turbine prices were falling about a year ago, accounting for a large part of recent capital cost declines. Tariffs, along with demand for turbines during the PTC period, have caused a bit of a rebound in turbine pricing. Along with anticipated market contraction post-PTC, the decline in real capex is likely to be blunted in the coming decade, with more progress being made in deploying turbines with higher capacity factors. As for project timing, I don’t think tariffs per se will make it difficult to complete projects on time; the potential turbine delivery bottleneck will likely have more of an impact.
What sources of capital or financial mechanism are available for wind projects in the future?
Maxwell Cohen: Private equity, pension funds, sovereign wealth funds, funds with climate goals, and developers based outside the US are increasingly interested in participating in the US wind market. Private equity has a higher tolerance for risk and is a good source of capital for repowering projects. The other entities I mentioned may have relatively low costs of capital, which could be beneficial for a post-PTC market. If you look up at Canada, we’ve seen First Nations participating in wind projects, and those projects actually were priced lower than similar projects without First Nations investors. We think this is due to beneficial taxation and/or low-interest financing, similar to what’s available to cooperatives here in the US. So those could potentially become interesting players in the US market in the future.
Will there be enough demand for the pipeline of projects to find contracts? How will demand be affected after PTC sunsets?
Maxwell Cohen: It’s definitely a buyer’s market these days, and it will only get more extreme post-PTC. Non-utility offtake and hedge agreements depend on wind being priced at a significant discount to wholesale power, so we could see those decline relative to other offtaker types. Solar’s investment tax credit phases out on a slower schedule and stays at 10% in perpetuity, so non-utility buyers in particular will probably shift somewhat from wind to solar. On the other hand, utilities are increasingly interested in owning wind assets outright. Utility-owned wind used to be 10-20% of the market in any given year, but it looks likely to be as much as half of what’s built in 2018 to 2020. Developers with an IPP model will need to consider how comfortable they are developing and flipping projects to utility owners.
What is the financing outlook for wind + storage projects? What kind of financial structures do you see for wind+storage projects?
Maxwell Cohen: Solar plus storage is more advanced than wind plus storage in terms of deployment, so we can look there for trends that could be a leading indicator of what will happen for wind plus storage. What we find is an interesting trend in utilities experimenting with different ways to compensate the storage component of hybrid projects. Instead of just bundling the cost of storage into a traditional solar PPA, for example, NV Energy signed contracts that disaggregate the two technologies, as well as provide stipulations about the battery’s availability and number of annual cycles. As other examples, First Solar’s project for APS will only be compensated for energy delivered during peak hours, and an EDF Renewables project will receive the locational marginal price plus a flat $15.25/MWh adder. If there’s a theme here it’s that utilities seem to be thinking harder about what exactly they want from storage, and structuring contracts around that. These evolving contracting models will have knock-on effects on how financiers view the risk and attractiveness of these projects, potentially leading to different financial structures.
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