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Financing renewables

Funding the biggest-ever wind farm

Northland Power was one of Canada’s first independent power producers. Founded in 1987, the company has grown into a sought-after developer of clean energy projects, including offshore wind. Chairman James C. Temerty discusses trends, challenges, and opportunities in offshore wind energy financing.

Offshore wind energy financing appears to have shifted from projects carried on the balance sheets of large European utilities to project financing via independent power producers. Has a mature market arrived?
J. Temerty: Entities like Northland Power are frankly indebted to these big European utilities, who plunged into the business of building offshore wind power. Back when offshore wind started – about a dozen years ago – I know Northland Power would not have been able to do any of those initial projects. I doubt any of the other independent power producers in North America or Europe would have been prepared to do those projects because they were so risky.

What did people know? What would people find dropping foundations down 50 feet? 100 feet? More than 100 feet? In the early going, it was very tough for these big utilities. They had a very difficult learning curve. In a number of cases, they ended up behind schedule and over budget. But this led to people like Northland Power having an opportunity to build on the experience that these large utilities had provided.

Northland Power entered the offshore wind market with its participation in the Gemini project. What attracted you to the project?
J. Temerty: When we got into Gemini, we found ourselves engaging in a project which fit our business model and our investment strategy to a T. Gemini very much followed the model we developed from the outset to today. We don’t stray from that model – always financed on a non-recourse project financing basis.

Here’s Europe, where heretofore these offshore high-risk, big-capital projects were being built by these mammoth utilities. And here comes a private enterprise, Northland Power, and it proposes to build what then was and still is the biggest, in terms of capital costs, wind farm in the world. Everybody focused on: "What is this? And they’re going to do this non-recourse project financing? No big balance sheet to fall back on?"

People were predicting: “There’s no way they’re going to do this in the timeframe they are guiding.” Siemens, privately, suggested that we wouldn’t close before September of that year [2014]. We closed in May. And so a light was shone on this business: "How did that happen?" We dealt with a multiplicity of financial institutions. Basically, they trusted us. They knew our track record.


How will the extension of the Production Tax Credit for wind energy passed at the end of 2015 impact the growth of offshore wind in the USA?
J. Temerty: It’s going to happen in the USA I have faith in that. But here’s the thing for us: The Production Tax Credit [PTC] is not very helpful for a Canadian company. In order for us to take advantage of the PTC, we have to have a tax appetite; in order to have a tax appetite, I need to find a partner in the USA who has a nice fat tax appetite, and I need to make an arrangement with that partner. That’s hurdle number one. Hurdle number two: the rates available in the USA are very thin. And hurdle number three: How do we find utilities, jurisdictions willing to grant us 15- to 25-year power purchase arrangements?
 
Can you describe the importance of stable, consistent, long-term policy to independent power producers like Northland Power?
J. Temerty: Nothing is more unnerving than being in a political environment that’s not stable, and in a policy environment that is not reliable and predictable. It’s anathema to people like us. There are great swaths of the globe we can’t touch because that political stability and that policy dependability is not available. That’s the problem with working with governments. It’s a marvelous thing when you can get business that’s tied to any government willing to contract with you or take your product for a very long term. That renders whatever you want to do extremely financeable; and our model, our project non-recourse financing, depends on that. At the same time, it can be extremely disruptive when policy changes, and all of a sudden they say, "No, you know what, something is wrong with the picture, we need to make drastic revisions," and everything stops.

I love wind because more and more of these things are being built with tremendous reliability and long-term livability.
James C. Temerty, Chairman of Northland Power


How can project developers attract new pension funds and other institutional investors to broaden the pool of capital available to fund projects?

J. Temerty: Gemini, that is a multi-billion-dollar project, and we funded it. And that’s the biggest-ever project financing that I know of; money was there. And when we did Nordsee One, we turned a lot of institutions down. I had to go to chief executive officers and say, "I’m sorry, but it’s closed." Pension funds are keen on our business.

I love wind because more and more of these things are being built with tremendous reliability and long-term livability. Siemens is designing turbines for 25 years, which means they will probably last at least 35 years. And at the end of that, what happens? You change the blades. It will just keep going. I expect these wind plants to be very long-lived. Pension funds understand what that kind of opportunity represents for them.

Justin Gerdes, independent journalist for energy issues.
Picture credits: Adriana Zehbrauskas, Mexico