How Leasing Can Maximize Benefits in Wind Power Project Financings

A growing share of new wind projects are being built in developing countries, which are rapidly adopting pro-renewables policies. In 2010, China surpassed the United States in total installed megawatts (“MW”) of wind energy capacity. But even in the United States, where electricity demand fell during the 2008/2009 recession, aging power plants and a suite of policies that support a shift toward cleaner energy sources continue to drive investment in wind power. In 2008 and 2009, the construction of wind power projects in the United States added 8,500 MW and 10,000 MW, respectively, to our national electricity grid. That accounts for 40% of all new electricity-generating capacity to come online during that period; a bigger share than any other technology. In 2010, 5,100 MW of new wind power projects were constructed. Meanwhile, the size and complexity of projects increased, capped with the financial close on Dec. 16, 2010 of the largest land-based wind farm in the world ' the $1.3 billion, 813 MW Shepherds Flat project in Oregon.

One key driver of this growth during the recession has been the popular federal Section 1603 cash grant program. Passed as part of the American Reinvestment and Recovery Act of 2009, the Section 1603 program allows certain renewable energy project developers to receive a grant from the U.S. Treasury Department equal to 30% of the capital costs of the equipment used to make electricity (which, for a wind project, tends to be about 90-95% of total capital costs). The cash grant can be elected in lieu of the previously (and still) available 30% investment tax credit or the production tax credit. The cash grant provides a lump sum of cash to the owner of the facility, monetizing the benefit previously only available as a shield or offset to future tax liability. The cash grant thus provides additional liquidity to finance construction of new renewable power projects. Absent the Section 1603 stimulus, tax credits alone would have been insufficient to enable so much new investment. In any market, energy project developers typically do not earn significant enough profits during the early years of operation to be able to use tax credits themselves, and during the recession the outside tax equity investors who stepped in to buy those benefits became scarce.