At the recent Standard & Poor’s 2006 Project Finance Hot Topic Conference, renewable energy projects were among those drawing the most attention from investors and issuers in attendance.
High gas and oil prices, federal tax credits, technological advances and urging from states to increase output from alternative sources are some of the factors that have made wind-powered generation plants so appealing.In fact, 22 states and the District of Columbia have requirements that renewable resources must be part of their electricity output.
Terry Pratt, project finance analyst at Standard & Poor’s, notes that the federal tax credits, which could be as much as 30 to 50 percent of capital costs, expire in 2007, making it difficult to say with certainty that the push for wind power will continue into 2008, though that is the indication.
“The outlook is good for these facilities,” said Pratt. “There are risk factors for investors, but these projects have become big in the past five years as natural gas and oil prices have risen.”
Large private equity groups and the private equity arms of groups like Credit Suisse and Goldman Sachs have become more involved in project finance, according to S&P.
Also, investors have been changing their focus more quickly. Ethanol, for example, had been a hot commodity, but now that oversupply may be a problem soon, investors are moving on, making wind power the popular choice, S&P said.
Industry estimates show $3.3 billion for use for wind farms in the U.S. in 2006, with total capacity at 12,000 MW, which is three times higher than five years ago. In addition, the investment in wind farms next year should surpass the 2006 amount.
While Standard & Poor’s believes that wind power projects will increase, it notes certain obstacles and risk factors for financing projects- like the possibility that the wind can die down and lower the output that can be sold, or operational risks like construction risks, the uncertainty of using unproven technologies and counterparty credit risk.
At present, Standard & Poor’s rates five wind-power projects and two related holding companies. Those five projects are portfolios of wind projects and have “stable outlooks” and have investment-grade ratings of “BBB-” or “BBB.” By using the portfolio approach, according to Pratt, the projects have the diversity to help reduce the risk in wind variability and wind turbine technology.