Financing Wind Power Bob Percopo Scottsdale, AZ May 7 – 9, 2008.

Financing Wind Power

Bob Percopo

Scottsdale, AZMay 7 – 9, 2008

Current Financial Situation

• Commercial banks are unable to securitize loans.• Investment banks are having difficulty doing deals.• Rating agencies have tightened their standards.• Market does not know if production tax credits will be renewed for

long term or just a year.• For conventional coal or gas fired power plants, greenhouse gas /

CO2 policies, if put in place, could add 25 to 40% to capital cost of projects, reducing debt service coverage ratios.

• Insurance companies may offer a better alternative for financing projects.

U.S. Wind Power Generation has been Increasing

Electricity Net Generation from Wind in the U.S.

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

2002 2003 2004 2005 2006

Th

ou

san

d K

wH

ou

rs

Wind

Source: U.S. DOE Energy Information Administration

Data as of 4/2008

Current Industry Challenges - Worldwide

• Installed wind capital costs have been rising due to:• Rising costs of components and raw materials• Supply chain problems• Rapid increase in turbine sizes• Decline of leading currencies• Higher than expected maintenance costs• Lack of trained technicians and engineers

The worldwide success of wind energy and its tremendous growth have put unprecedented pressure on the manufacturers and capital costs of wind turbines and their components.

Source: Datamonitor

Rising Costs for Raw Materials

• Demand from China for raw materials has increased their cost.

• China has set its sights in becoming a global leader in wind turbine

manufacturing.

• Oil, Copper and Steel prices are up.

Supply Chain Problems

• GE has confirmed that wind turbine supply is getting worse• Its backlog of wind turbines has grown to $12 billion, up from $11 billion

in 4Q07 and more than twice the size of the backlog in 1Q07.

• Wind park developers and analysts have stated that a shortage of wind turbines has forced power providers to push projects into the future and juggle supplier agreements.

• Lead time is around a year to a year and a half.

• Close relationships with turbine suppliers have helped ease supply problems for some developers.

Source: CNET News

Industry Response

• Challenges facing the wind energy industry are only moderately affecting wind’s competitiveness, as rising steel, copper, and carbon prices are also making coal, nuclear, and other electric power plants more expensive to build.

• Most turbine and components manufacturers have taken steps to respond to the boom in demand by substantially expanding their production capacity. Backlogs continue, however.

• Utilities companies are increasingly having to turn to third-party financing to fund wind farm projects as their balance sheets are unable to absorb the increased costs.

Source: Datamonitor

Growth Likely to Remain Strong

• In spite of the challenges, growth is likely to remain strong on the back of record investments.

• Worldwide, the wind energy industry is driven by policy.

• Supported by a growing array of tariff and fiscal support

initiatives.

• These tariffs and initiatives create a stable global environment

for continued sector growth and investor appetite.

• 2007 saw global installed wind capacity surge by 31% compared

to 2006.

Source: Datamonitor

Questions Remain

• In the U.S., will demand for new wind farms continue strong once utilities companies’ Renewables Portfolio Standards have been met?

• Will turbine supply squeeze jeopardize wind energy growth and impact utilities’ likelihood of achieving renewable energy targets?

• What happens if PTCs are not extended?

• PTCs are available only for wind energy actually delivered.

• If PTC’s are lost, the PPA will provide that the purchaser make the seller whole by paying for the lost PTC.

• Purchaser also has to pay a gross-up for the income taxes payable upon receipt of the lost PTC payment.

Debt Structuring

• Most utility-scale projects are structured with 40 – 70 percent debt.

• Usually non-recourse financing

• Long-term (15 to 20 years) Power Purchase Agreement from credit-worthy utility is key in order to avoid market price volatility.

• If project is located outside the U.S. and involves a government utility, it is important to check the country’s credit rating with

some of the major rating agencies, such as S&P and Moody’s.

• If project does note generate as much power as anticipated, the project owner may have to purchase power on the open market to make up the shortfall.

Key Provisions in a PPA

• Long terms – 15 to 20 years

• Purchaser has opportunity to extend beyond initial term, such as additional 5 years.

• PPA can be terminated by either party prior to commercial operation if:

• PTC is not available.

• Seller’s or purchaser internal approvals or any required regulatory or third party approvals are not received.

• Construction and operation permits are not received.

• Seller fails to enter into acceptable interconnection agreement.

• Financing is not available.

• Transmission access has not been secured.

• Site control is not secured.

• Turbine or supplier shortages, or actual costs being greater than anticipated are not conditions allowing seller to terminate early

Key Provisions in a PPA

• Price terms vary depending on:

• Structure of the project financing

• Quality of the wind resource

• Available transmission resources

• Turbine performance characteristics

• PPA’s typically provide for a lower initial rate, or trial price

• Most PPA’s typically require seller to deliver and sell to the purchaser all the wind energy generated.

• Many PPA’s are structured as take-or-pay agreements

• Seller is often responsible for the costs of all transmission upgrades necessary to deliver the wind energy

Insurance Industry Characteristics

• Industry made up of a number of well-capitalized, large companies.

• Providers of debt.

• Providers of equity.

• Local currency funding capabilities.

• In-house technical expertise that most lenders need to engage from the outside.

• Local knowledge – insurers take on risk every place they operate.

Insurance Products

• Property with Business Interruption

• Liability (Casualty)

• Construction CAR/EAR with Delay in Startup

• Marine Cargo with Delay in Startup

Key to a Project Financing are the following:

Additional Products

• If the project is located in a country subject to political instability, political risk insurance may be necessary to protect investors’ rate of return.

• Environmental coverage

• Future Products under Consideration

• REC surrender shortfall – Facility operates at a lower performance factor and suffers a financial loss due to the need to purchase additional RECs in the open market.

• REC sale shortfall – Facility expecting to operate at a certain level sells RECs but due to lower-than-expected performance may need to purchase additional RECs in the open market to replace those it may be committed to sell to a third party.

Contact Information

AIG Global Marine & Energy – Project Finance Advisors

Bob PercopoExecutive Vice President

175 Water Street, 29th FloorNew York, NY 10038

Phone: 212–458-5994Fax: 212–458-5907

Email: [email protected]

Questions & Answers

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