The importance of increasing resources (in this case, power generation) via redevelopment of existing resources is paramount to a successful energy transition. For this reason, it is important to understand the financing structures currently available for repowering of existing wind farms. For more information of wind repowering, TurbineHub.com has developed a forecast of repower capacity additions, TurbineHub Repower Forecast.
Repowering presents a great example of how investment managers can generate alpha in via fundamental analysis and better signals. TurbineHub.com gives users the ability to visualize and spot investment signals in real time.
Figure 1. Evolution of Investment Skill
Source: The Hierarchy of Alpha, Christopher M. Schelling, CAIA
In his July 11, 2001 memo titled "What's it all about, Alpha?", Howard Marks of Oaktree Capital made a few observations that help guide the development of TurbineHub.com
"Although the more efficient markets often misvalue assets, its not easy for anyone person – working with the same information as everyone else and subject to the same psychological influences – to consistently hold views that are different from the consensus UandU closer to being correct."
"Alpha is a variable equal to the contribution resulting from the skill of the portfolio manager"
"Examples of its ingredients include superiority in (a) collecting and analyzing information, (b) discerning which factors are most important in determining future value, and (c) resisting the market's manic-depressive fluctuations. "
"It's essential to recognize that investment skill isn't distributed evenly – that the investment world isn't democratic or egalitarian."
"That's because, in my view, alpha is best thought of as "differential advantage," or skill that others don't possess. Alpha isn't knowing something, it's knowing something others don't know."
"The Key turning point in my investment management career came when I concluded that hard work and skill would pay off best in inefficient markets. "
Return = Alpha + (beta*the market's return)
Source: Memo to: (oaktreecapital.com)
Figure 2. Repowered Wind Farm by Owner
Total Online Capacity and Repower Turbine Count
Source: ACPA, TurbineHub.com
Figure 3. Example 200 MW US Wind Farm Repower: Capital Structure
Mezzanine Option
Assumptions:
$160 million Capex required
25% increase in Nameplate Capacity (250 MW)
40% post-Repower capacity factor
Source: CIP, TurbineHub.com
Figure 4. Example 200 MW US Wind Farm Repower Monthly Revenue Projections
Source: TurbineHub.com
Tax Equity Financing
The United States renewable energy tax equity was a $17 to $18 billion market in 2020. Roughly 50% of tax equity last year was supplied by just two large banks: JPMorgan and Bank of America. Tax equity yields or commitment fees, in 2021 the target IRR hurdle was in the 6% to 8% range.
Figure 5. Tax Equity Deal Volume and PTC Allocation
Source: Chadbourne & Parke LLP; Renewable Energy World; Platts; Norton Rose Fulbright; Mayer Brown
Tax Equity Options
Source: Norton Rose Fulbright
Source: Norton Rose Fulbright
Source: Norton Rose Fulbright
According to Norton Rose Fulbright, "Many tax equity investors are limiting the percentage markup they are willing to see in fair market value above cost. Some are requiring tax insurance to cover basis risk. Premiums on tax insurance run generally 2.5% to 3.5% of the maximum potential payout.
Cash sweeps are another source of tension in deals. Solar companies want to retain enough cash to cover debt service on back-levered debt. Many tax equity investors agree to limit sweeps to 50% to 75% of cash or, in some cases, to prevent the sweep from reaching cash to cover principal and interest on the debt."
Michael Masri, Brian Greene, Kelann Stirling, Jared E Joyce-Schleimer and Sophia Han of Kirkland & Ellis LLP did a great summary of Tax Equity investments in the wind energy space. Many insights can be applied to Repowering of wind farms
50 to 60 per cent of the total capital cost for wind developments, so sponsors need to complete the capital stack with sponsor equity or debt (or both).
There are some creditworthy sponsors may be able to