The elimination of the Section 1705 loan-guarantee program by the U.S. Department of Energy (DOE) has introduced considerable uncertainty for several offshore wind projects.
The loan-guarantee program – through which the federal government covers a borrower's debt obligation in the event that the borrower defaults – had been a critical tool for offshore wind developers to get financing.
The DOE says its Financial Institution Partnership Program (FIPP) allows the federal government to share some of the financial risks of projects that employ new technologies that are not yet supported in the commercial marketplace or where private investment has been inhibited.
In a FIPP financing, the DOE pays the credit subsidy costs of loan guarantees and provides a guarantee for up to 80% of a loan provided to a renewable energy generation project by qualified financial institutions. These lenders apply on behalf of the project sponsors or developers and are required to hold a meaningful portion of the unguaranteed credit exposure of the project, aligning their interests with the DOE and project sponsors.
However, without the federal government providing such a financial backstop, the status of several current and future offshore wind projects remains in doubt. Some wind developers, such as NRG Bluewater Wind and Cape Wind, have already been contacted by the DOE.
NRG Bluewater Wind has delayed the construction of a meteorological tower at its planned wind farm off the Delaware coast, citing financial uncertainty due to the elimination of the loan-guarantee program, says Peter Mandelstam, founder and president at NRG Bluewater Wind.
‘It injects considerable uncertainty into the financing for and viability of all U.S. offshore wind projects,’ he says.
NRG Bluewater's planned wind farm would put 49 to 150 turbines about 13 miles off the Delaware coast to generate up to 200 MW of electricity. The company is under contract with Delmarva Power to begin producing power by 2016 and has recently engaged in preliminary discussions with European lenders to get the Delaware project financed.
The DOE also notified Cape Wind Associates that its application for a loan guarantee could not be completely processed by the program's Sept. 30 deadline, according to Mark Rodgers, communications director for Cape Wind.
As result, the application will be on hold until further resources can be made available to the loan-guarantee program, according to Cape Wind, which has proposed a 130-turbine project in Nantucket Sound.
The loan-guarantee program, while crucial to the early offshore wind projects, was also a place where Congress routinely went to pay for other programs. Therefore, the program was oversubscribed well before its Sept. 30 expiration date.
‘Congress pulled previously appropriated funds for loan guarantees multiple times over the past couple of years to offset other spending,’ says Christopher Long, manager of offshore wind and siting policy for the American Wind Energy Association.
According to the DOE, 19 loan guarantees or conditional commitments have been issued since March 2009, totaling $11 billion in investment.
‘In light of the impending, statutorily imposed deadline, we expect that all, or nearly all, of the remaining funding will be utilized by a group of other projects already in the pipeline that have the strongest chance of completing all necessary steps prior to the September 30th deadline,’ wrote Jonathan Silver, director of the DOE's Loan Programs Office, in a DOE blog. ‘Unfortunately, this means that we will simply not have the opportunity to support every project that has applied for the program.’
Now, the offshore wind industry must contend with losing one of its main financing options.
The offshore wind development community has identified both the revival of funding for the loan-guarantee program and the enactment of a long-term extension of the investment tax credit (ITC) as its top priorities, explains Long.
‘The focus in Washington, D.C., at the moment is on deficit reduction,’ he says. ‘But, a strong case can be made that the loan-guarantee program leverages billions of dollars in private funding at little cost and little risk to taxpayers. We will continue working with our members and partners to urge Congress to restore funding to the program along with enacting a long-term extension of the ITC.’
Jim Lanard, president of the Offshore Wind Development Coalition, is hoping that Congress will resuscitate the program.
He says the loan guarantee provided developers and the financial community with a ‘bridge to efficiency’ and that future offshore wind development means more job opportunities.
‘European countries recognize the huge job potential of offshore wind and are supporting efforts to install more offshore wind farms,’ Lanard says. ‘Key policies include approaches that allow projects to be financeable: regulatory certainty and revenue certainty. And, when U.S. policies provide for regulatory certainty and revenue certainty, we will see thousands of high-skilled jobs created for our workers.’
He adds that the wind industry needs to do a better job of communicating.
‘In Europe, there is an expectation that the offshore wind industry will add 215,000 jobs by 2030,’ he says. ‘That's the message we should be trying to send over here.’
The DOE's Silver leaves open the possibility that the loan program could resume.
‘If, in the future, the Loan Programs Office has sufficient budget resources, we may be able to continue evaluating these projects,’ he wrote in the DOE blog.
Photo courtesy of REpower Systems AG
