Renewable energy investors are reassessing their plans in Texas after last month’s winter storm froze some wind power projects and left their complex financing arrangements in shambles.
The disarray threatens to slow the development of America’s largest wind market, undermining American targets to reduce carbon emissions.
The reason: Derivatives designed to protect so-called tax equity investors have exploded dramatically, threatening funding that was worth more than $ 17 billion for the US renewable energy industry last year.
“It’s doable, but it’s going to be more difficult” to do these kinds of tax fairness transactions in the future, said Rubiao Song, head of energy investments at JPMorgan Chase. online seminar on Texas Energy Funding which drew 3,000 listeners last week.
Tax fairness investors – mostly big banks, but also companies ranging from Warren Buffett’s Berkshire Hathaway to Swiss chocolate maker Nestlé – can use the capital they invest in renewables to offset their U.S. tax obligations, thanks to wind tax credits and solar.
But to ensure investors get the credit they expect, they typically require wind farms to buy a swap from a bank to lock in the selling price of electricity. Swap contracts require the wind farm to provide a fixed amount of electricity every hour in exchange for a fixed payment from the bank, typically around $ 20 per megawatt hour.
Those fixed-volume blankets exploded when nearly half of Texas’ power generation was cut off in February. Wind farms with insufficient deliveries were forced to buy electricity on the open market at $ 9,000 per MWh for hours or days, generating huge losses and causing some to default.
“Project lenders and tax fairness are going to take a very careful look at what happened, and they won’t do it again,” said George Humphrey, energy projects lawyer at Thompson & Knight in Houston. “Gaining market exposure is crazy. This is what happened under these hedges.
Hundreds of millions of dollars in swap payments are now in dispute. Tax stock investors and electricity swap traders – often two branches of the same bank – have had intense discussions with wind farm owners about how to unravel the mess, bankers and lawyers said. One project turned into litigation.
In this case, the most public example of how the blankets went wrong, a 210-megawatt wind project called Canadian Breaks, seeks to evade obligations to deliver electricity to JPMorgan Chase by claiming the storm has crippled the operations. Bank says it owes Canadian Breaks $ 79 million for six days of bills; total project revenues for this whole year are expected to be only $ 15 million.
JPMorgan had its own clearing obligations, the bank said in a legal filing this week, and was forced to buy electricity from the market to meet delivery commitments to an electricity customer, by paying a price “$ 8,980.45 / MWh more than JPMorgan would have paid if Canadian Breaks had played”.
At least 46 for the most part wind projects totaling 9,000 MW of capacity “would suffer serious financial losses” from the electricity price of $ 9,000, a group of generator owners including BlackRock, Capital Dynamics and Copenhagen Investment Partners said in a statement. deposit to the Texas Utilities Regulator.
The hedge merchants, who are secured creditors, were reluctant to exclude projects that were in default, said Joan Hutchinson, managing director of Marathon Capital, an energy and infrastructure investment bank.
“Each party has a contractual right which is to its advantage, but no party has a unilateral right which is clearly better than a negotiated solution,” she said.
With fixed volume hedges suddenly out of favor, tax equity investors may demand alternative forms of collateral from wind projects, although these may be more difficult to obtain. Power purchase contracts – guaranteed supply contracts with business buyers – are one of these alternatives, but the customer base is limited.
“The cost of capital will definitely go up,” for wind power, said James Wright, head of US renewables, clean energy and sustainability at lender CIBC Capital Markets, during the weekly webinar. last.