Financing Wind Farm Repowers

Updated: Aug 21

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

The Hierarchy of Alpha
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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 fill the entire capital stack with sponsor equity or corporate debt without seeking project financing, but for many developers that is not an option.

  • The tax-equity investor is typically allocated 99 per cent of the tax benefits and some portion of the cash (usually around 30 per cent or less, depending on the project) until the tax-equity investor reaches a target yield or a fixed date passes.

  • Tax-equity investors typically take minimal construction risk

  • Where the construction debt will be repaid in whole or in part with tax equity, typically the construction bridge lenders will require that the sponsor have a tax-equity commitment in hand.

  • Tax-equity investors will generally not accept a position structurally subordinate to long-term debt.

Source: Tax-equity Financing - Lexology

Figure 6. Time-Lapse of Pinnacle Wind Repower from Space

Sources: Planet Labs, TurbineHub


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