Financing of American offshore wind farms – Lexology
The cost of offshore wind is falling rapidly. In its “2019 Cost of Wind Energy Review”, the National Renewable Energy Laboratory estimated that it costs an average of $ 85 per MWh to run a fixed-bottom foundation turbine in 2019, down about 30% per MWh. compared to 2017 (124 USD). MWh) and 50% compared to 2016 (173 USD / MWh).
Yet even a mid-sized offshore wind farm costs billions to build. And to date, although there are many offshore turbines in operation around the world, only one small project has reached financial close in the United States.
That could change soon. The Biden administration recently set a goal of installing 30 GW of offshore wind capacity in the United States by 2030. In 2021, a new project, Vineyard Wind, has been approved for development, and four more have been approved. started or have progressed in the environmental review process.
Financing can be difficult, but the capital stack of a typical offshore wind project in the United States should be quite similar to that of other large-scale renewable energy projects. Most consist of construction debt and construction equity, replaced by mini-perm term debts, tax equity, and cash equity at the time the project begins operations. Occasionally, mezzanine debt is used during construction.
In this article, we focus on some of the latest financing opportunities available for offshore wind developers in the United States. This includes the relevant production and investment tax credits, the safe harbor rule, the effects of possible legislative developments and other financing options.
Production tax credits
Until recently, all onshore and offshore wind projects were eligible for production tax credits (PTC) at specified percentages of a benchmark rate of 1.5 cents per kWh of electricity produced and sold to unrelated parties. The rate has been adjusted for inflation each year. In 2020, the benchmark rate was increased to 2.5 cents per kWh. For projects whose construction began after December 31, 2016, the percentages of the benchmark rate available for credits have decreased in accordance with the âphase-outâ rules. Projects that began construction after 2020 would not have been eligible for PTCs.
This changed when the Consolidated Appropriations Law of 2021 was enacted on December 27, 2020. The law provided for a one-year extension of the PTC, so projects that began construction in 2021 are eligible for PTCs.
Investment tax credits
Instead of taking CTPs as described above, wind projects could benefit from one-time investment tax credits (ITCs). Projects that began construction in 2017 or later were subject to decreasing rates in accordance with a phase-out schedule. For example, an eligible project that began construction in 2020 was eligible for an ITC equal to 18% of the property tax base of the applicable ITC. As with PTCs, ITCs would not have been available for projects whose construction began after 2020.
This changed when the Consolidated Appropriations Act of 2021 was enacted on December 27, 2020. The law extended the single option to receive JTIs, instead of PTCs, so that projects that began construction in 2021 are eligible. for the 18%. CTI.
More importantly for the offshore wind industry, the new law introduced certain targeted aids that are specifically aimed at helping offshore wind projects. In particular, it has provided a stand-alone ITC for qualified offshore wind installations equal to 30 percent of the applicable ITC ownership base for any project whose construction begins after 2016 and before 2026. In addition, the rate of 30 percent is fixed and not subject to a non-rule phase. To receive the stand-alone ITC, projects must be located in US Inland Navigable Waters or US Coastal Waters, as described in PTC’s definition of âQualified Offshore Wind Facilityâ.
Safe port of continuity
On January 4, 2021, the Internal Revenue Service (IRS) issued Notice 2021-05, which extended the âsafe harbor of continuityâ period from four to ten years for offshore wind projects. Therefore, federal tax credits can be claimed for projects that begin operation within ten years of the start of construction. In addition, the projects are presumed to have continued construction continuously during this period, thus meeting one of the eligibility conditions for obtaining any tax credit.
The notice made it clear that the IRS understands that offshore wind projects have longer construction schedules and are subject to more frequent construction delays than onshore projects.
Possible effects of future legislation
As part of its US Jobs Plan, which includes several measures to accelerate the decarbonization of the US energy sector, the Biden administration has proposed the introduction of a “direct payment” option for federal tax credits. . The proposal would allow developers to receive tax refunds regardless of their tax obligations. Thus, they would not have to find tax capital investors able to use the federal tax credits to profit from them. It is not clear whether the “direct pay” option will gain in popularity (which will depend on any “haircuts” that can be applied to such an option), but if implemented it could have some consequences. important implications for the sector.
In addition, some legislative initiatives to raise the federal corporate tax rate have been introduced in Washington. This includes a plan by the Biden administration, announced by the Treasury Department in April, to increase the corporate tax rate from 21% to 28%. Higher rates could impact the tax fairness market, increasing the demand for tax fairness investment from investors and potentially making it easier for developers to attract tax fairness investments.
Other financing options
Offshore wind projects typically take two to three years to build, which is more than double the time it takes to build an average onshore wind project. Tax equity investors typically need to commit capital when construction begins, and they don’t make the majority of their investments until after the project is up and running. Thus, it generally takes twice as long for tax capital investors to invest their committed capital in offshore projects, compared to onshore projects. To reduce the time commitment required of tax capital investors, developers could forgo part of the tax capital tranche they usually get at financial close and instead use mezzanine / bridge debt facilities. Halfway through construction, they could turn to tax equity investors to partially or totally replace their bridging debt.
In addition to traditional sources of capital for offshore wind projects, such as (a) construction debt and mini-perm term debt provided by commercial banks, (b) tax equity and (c) equity in cash, developers could explore opportunities for other sources of capital. These could include project obligations that correspond to longer term drawdown contracts. In addition, financing from export credit agencies and financing from suppliers may be a viable option depending on the equipment manufacturer.
Developers could tap into various funding programs designed to support renewable energy projects. Of note is the Renewable Energy and Energy Efficiency Program administered by the US Department of Energy (DOE). On March 30, 2021, the DOE loan program office released an offshore wind “fact sheet” indicating that US $ 3 billion in loan guarantees has been set aside to support offshore wind projects.
This DOE program provides a repayment guarantee for senior construction debt and can provide direct loans to developers, providing an additional source of capital at potentially lower cost. Although the size of the program is quite small compared to the size of projects under development, it can be particularly useful for projects that use innovative technology (eg floating offshore wind). Given DOE’s internal engineering resources, its participation in a project may reassure other funders.
The need for these other sources of capital will be determined by the strength of the commercial bank market for construction and indefinite short-term debt, as well as subsequent developments in the tax stock market.
The US regulatory environment for offshore wind is changing rapidly, opening up new opportunities for financing new projects. As the market takes off, there is likely no shortage of investors interested in the space.