WindEnergyUpdate talks to Chip Carstensen, senior director for energy and wind at Nord/LB New York, about the future of project financing for the US wind energy sector.

By Rikki Stancich

The close of October blew in a gust of hope for wind energy finance, with the closure of a deal for Irish Wind Capital Group, which secured project debt financing totaling $240 million (€160m) for its 150 megawatt Lost Creek wind farm project in the US.  

The project is be financed by four banks, including Nord/LB, with debt facilities comprising a combination of construction and term loan facilities. The transaction will be the first to qualify for a US government investment tax credit cash grant under its stimulus package.

WindEnergyUpdate talks to Chip Carstensen at Nord/LB to get the lay of the land for on and offshore wind project financing in the US and to learn the secret to securing it.

WindEnergyUpdate: What particular challenges does wind project financing present and what are the best solutions in terms of deal structuring?

Chip Carstensen: Europe is way ahead of the US when it comes to project financing because of the feed-in tariffs. In short, it’s the rate-payers who pay for renewable energy in Europe, whereas in the US, it’s the tax payer who pays. For this reason, project financing for wind projects is more difficult to source in the US than in Europe.

In contrast to onshore wind, offshore wind projects have much higher costs, the opponents seem to be more vociferous and there is also a lot of regulatory uncertainty – which is why there is not a single offshore wind project yet. We are currently talking to a customer about a wind project off the coast of Delaware, but that won’t come online until at least 2012.

In the absence of feed-in tariffs, developers need to sign a power purchase agreement with a utility. The problem is that right now power demand is down due to the economic downturn and with the price of gas so low utilities are loathe to sign high-priced long-term agreements for more expensive renewable energy.

So, high costs, regulatory uncertainty and local opposition – the NIMBYs and the BANANAs (“build absolutely nothing anywhere near anything” crowd) -  are the three key factors blocking offshore wind project financing. 

WindEnergyUpdate: The Delmarva-Bluewater Wind project will be the first offshore wind project in the US. How did they ‘get it right’ in terms of their project financing strategy?

Chip Carstensen: They worked very hard with the local community and demonstrated to the community that they could guarantee energy price stability and create jobs. They engaged well with the local government. And they managed to get a long-term agreement with the utility, Delmarva, on the basis of favourable projected costs.

In the US, the poster child for how difficult offshore wind projects can be is the Cape Wind project, which has hit a wall of public opposition. 

WindEnergyUpdate: The US wind energy sector has already benefited from US treasury grants. How is positioned to benefit from the loan guarantee program?

Chip Carstensen: The investment tax credit (ITC) program has worked very well for onshore wind projects. The scheme was transparent – everybody had a good idea of what needed to be done in order to get the money – and there was no ceiling on the funding available. However, the ITC is due to expire in 2011. It needs to be extended, but nobody has any idea whether it will be or not.

There were a lot of contracted revenues that came out of it  - in other words, projects that made a deal with utilities to buy power. You need to have the PPA with a utility, because without it, you won’t get any project financing.

But I’m not convinced about how successful loan guarantees will be. The program has been around for a while but nothing has been paid out so far- as far as I know. Not only is there is there a ceiling on the funding available (US$750 million) it is not clear who will benefit and whether those who go through the protracted application process will even be successful.

From what I’ve seen, not many developers consider it a serious way to raise a lot of capital.

WindEnergyupdate: In your view, what is the way forward, in terms of getting more projects off the ground?

Chip Carstensen: Feed-in tariffs (FiTs). The US has just overtaken Germany in terms of installed capacity  - but there is nothing particularly remarkable about that. The US should be ahead of Germany - we’re a bigger country! Germany has more installed CSP than the US and yet they only have about three sunny days per year…It doesn’t make much sense.

Ontario has just introduced a feed-in tariff and it’s likely that project financing for both onshore and offshore wind projects will pick up dramatically. 

But in the US there is a very low likelihood that FiTs will ever be introduced. There is simply a lack of political will – the politicians would rather hide the cost of renewable energy behind complicated tax schemes than have households’ utility bills jump. Europe is way ahead.

There also needs to be more transmission – there is already a lot of power, but here is not enough transmission.  There are projects in Texas where the windmills are blowing, but they are often curtailed so they are not making sufficient returns to cover their costs.

WIndEnergyUpdate: What needs to happen to kick start project financing for the offshore wind energy sector?

Chip Carstensen: The challenge is not so much getting the PPA signed, it’s that power demand and the price of gas is low. Why would the utility buy the relatively more expensive renewable energy?

So either it’s a case of waiting until fossil fuels become scarcer and therefore more expensive; or until the regulatory framework includes a mandatory requirement for utilities to source a higher percentage of renewable energy. Currently most of the Renewable Portfolio Standards lack any real teeth.