Number crunching

By Gregory Burkart

Spending in the renewable energy sector is set to climb this year – reversing last year’s 40 percent decline – with much of the $66 billion of clean-energy money being used up. Gregory Burkart, Managing Director for Duff & Phelps, explains how to get all the numbers to add up.

“We're certainly seeing an uptick in manufacturing and basic activity.”
-Gregory Burkart

Prior to the credit crunch in mid-2008, most renewable or alternative energy projects relied on federal investment tax credits and production tax credits that offset tax liabilities against investments in wind farms and solar plants. However with most financial institutions posting steep loses in 2009, tax credit finance became obsolete. Fortunately the American Reinvestment and Recovery Act replaced part of the need for tax credits and gave the industry a huge boost last February.

The act included $6 billion to support loan guarantees for renewable energy and electric transmission technologies, which was expected to guarantee more than $60 billion in loans. The act requires the DOE Loan Guarantee Program to only make loan guarantees to projects that are involved renewable energy, electric transmission or biofuel technologies that start construction by September 30, 2011.

The tax section of the act provided a three-year extension of the production tax credit (PTC) for most renewable energy facilities, while offering expansions on and alternatives for tax credits on renewable energy systems. The act also allowed owners of non-solar renewable energy facilities to make an irrevocable election to earn a 30 percent investment credit rather than the PTC.

As the Managing Director of Duff & Phelps, Gregory Burkart specializes in structuring and negotiating government-sponsored economic development incentives packages. Here he offers his advice to renewable energy projects that are currently looking for funding.  

What’s the climate like at the moment for renewable energy projects that are seeking funding?

Greg Burkart. We’re noticing that there’s been a pick-up in basic industries in the United States, particularly areas like paper and steel manufacturing. Consequently as these companies come back online – they’ve been through extended periods of layoffs, or in some instances even shutdown – a number of communities are trying to incentivize the companies to come back and actually reopen mills or plants within their geographic territories. So we’re certainly seeing an uptick in manufacturing and basic activity.

The other side of this is that we’re seeing a lot of activity due to the Recovery Act, with many of its provisions set to expire at the end of this year. And so we are seeing a lot of companies who just learning now about these various benefit programs and who want to apply for the benefits before the expiration.

We are seeing both of these happening and in respect to basic commodities and manufacturing, as companies bring those facilities back online they’re trying to be as efficient as possible and so we see them looking at investments in new energy efficient technologies – they want to have the lowest overall operating cost as they bring those facilities back online.

And so the stimulus bill has really had a major effect on this?

GB. Well, for example we’ve just received a distribution project, and it’s for foods and for consumer products. They’re tapping into a new market in the Midwest, and what they have decided to do is to put solar on the roof, to use geothermal to cool part of the facility, and then they’re also going to use a small wind project in order to generate their own electricity. They’re also starting to look at the potential of establishing a manufacturing facility down in the Carolinas.

This company is looking at tapping into the federal program for direct loans under Section 136, because they make components for an alternative technology vehicle that’s going to be a brand new highly efficient transmission facility. What we do is help companies understand and navigate the benefits of these federal programs.

And do renewable projects provide a good return on investment for potential investors?

GB. They do. At the federal level we have these programs that are a cash grant in lieu of taking an investment for a production tax credit and that would be for facilities like the distribution center that was generating its own electricity or its own energy through geothermal. It’s a 30 percent cash grant, and it’s basically 30 percent of the eligible cost you can receive within 60 days of placing the asset in service, which significantly enhances the rate of return.

When Congress originally passed this program through they thought it would cost about $350 million, and in the middle of April, the US Treasury had cut checks for about $3.1 billion. So it’s been a very popular program, as you can imagine.

And have the way the projects are structured and financed seen any major changes or developments in the way these things are happening in the past six months to 12 months?

GB. What we’re seeing is that the market is starting to respond and develop some new financing tools. For example using specifically the 1603 cash grant program, banks have created what they call these bridge loans, they’re specifically lending against the expected cash payment, so it’s a relatively short-term loan during the term of construction. As soon as the asset is placed in service they have the ability to receive a cash grant through the treasury. These cash grants have been coming out pretty quickly. They’ve been coming out on average within 60 days of receiving the application.

You mentioned some of the smaller scale kind of projects, but what about some of the larger projects? Is there a different approach for these?

GB. Under the 1603 cash grant program wind farms have been a big beneficiary. They haven’t had as many projects; there’s been about 110, maybe 115 projects, but they’ve garnered the lion’s share of funding. At last count these counted for well over $2 billion, and the average project was about $44 million. Compare that to solar, and the number of solar projects is about three times that – about 385 projects ¬– but the projects are smaller in scale. And they seem to be much more rooftop type of installations. And the average grant for solar is $404,000, so you can see it’s a much smaller scale than wind.

You mentioned that companies are looking to get the loans before the recovery act funding expires. What do you see as the prospects for post-Recovery Act – what’s going to be happening then?

GB. There’s a lot of movement afoot, and right now one of the alternatives that’s being discussed is to turn the 1603 cash grant program into a refundable tax credit program. The industry doesn’t look at that as favorable, the cash grant program. You can see just by the numbers that it’s been a very popular program and the primary reason is because of the delay in receiving the benefit – you have to wait to receive that benefit when you file your tax return. Whereas the cash grants are received within 60 days of placing the asset in service, or filing your application, whichever date is later.

If projects are looking for funding are there any key points they should be thinking about? Is there a checklist that they should be hitting?

GB. First and foremost, is to make sure that you file your application on time because the funding is tied to some very specific milestones and each program has a different timetable, so pay specific attention to those deadlines. The 1603 cash grant program, for example, has to place the asset in service in 2009 or 2010, and if you start construction in 2009 or 2010, then you have to complete it by the normal credit termination date. So for example, for a wind project it would be 2013. The deadlines are key, with some very similar tight time frames for loan guarantees that are coming up.

Secondly, the applications are much more complex than people think and so you really need to ensure that you give yourself enough time to complete the application – you want to make sure that you file a good, solid application because you never have a second chance to make a first impression. If you file a haphazard application with the Department of Energy (DOE) the first time around in a rush to get to meet the deadline, that impression is going to stay with the DOE throughout the review cycle. And you’re going to inadvertently create an image of yourself that is not favorable.

The third element is that when the applicants are filing their applications, they need to pay particular attention to the financial assumptions and also their modeling, because in many instances the DOE will ask you for your financial modeling. They’ll go through it without the benefit of having you in the room so it’s not like your typical application that you’re going to send to your banker – there’s much more due diligence and much more scrutiny, because they stress cut these models. The DOE doesn’t tell you what all the stresses are before they start running your models through, so you really have to pay particular attention to the financial modeling.

Investment to reach $200 billion by 2010?

Bloomberg New Energy Finance Chief Executive Officer Michael Liebreich believes that renewable energy investment may rise as much as 23 percent in 2010 as government stimulus funds in the US and Europe are spent on wind and solar energy. Spending reached $162 billion in 2009 and Liebreich believes this will rise to somewhere between $175 billion and $200 billion.

New Energy Finance estimates that two-thirds of the $184 million that the US, Europe, China and other regions have earmarked for clean energy projects, will be spent through 2011 with the construction of windmills, solar power and biomass plants continuing even after UN negotiators fail to reach a binding treaty to limit carbon dioxide emission from fossil fuel plants.

China replaced the US as the biggest investor in renewable energy last year, spending $34.5 billion on low-carbon energy technologies in 2009, compared to the US’s $18.6 billion. The UK was the third-largest renewable investor in 2009, accounting for 10 percent of the G20 total, followed by Spain, Brazil, Germany and Canada.

Source: businessweek.com