Community Renewable Energy

Debt Financing

Securing debt financing for a project will often require completion of almost all of the pre-construction work, including wind monitoring, permitting, zoning, interconnection studies, and initial power purchase negotiations. If financing is approved, it likely will come with many “conditions precedent,” which must be satisfied before funds are released. It is likely that there will be additional conditions after the project is built, to ensure a very low risk of default. These conditions can add unexpected costs and cause delays if not anticipated.

Since lenders do not share in any profits or benefits of the project and only get paid according to terms, they can be very risk-averse and may demand all risks to be identified and resolved. They may also require project insurance, reserve accounts, maintenance contracts, and sponsor pledges. Early contact with debt financers to understand their appetite, concerns, conditions, and requirements is essential. There are a variety of potential sources of debt financing, ranging from local lenders to larger regional or national banks and commercial finance firms that focus on energy project finance.

Local Lenders

Local bankers are the best source of debt financing for small, locally owned projects. These bankers have an interest in the community and established relationships with local residents. However, financing a wind turbine is very different for traditional farm lenders than financing agricultural land or machinery. Bankers may be unfamiliar with the technology and the project risks, the required loan amounts may exceed the bank’s lending threshold, and the bank may seek to secure the loan with investors’ land because the turbine itself has no collateral value to the bank. At the same time, as the number of successful small wind power projects grows, community banks will likely become more familiar with them and will better understand the lending risks.

Regional Banks

Foreign banks have provided debt financing for many large U.S. wind power projects while U.S. commercial banks have stayed on the sidelines. Mid-tier regional banks may be willing to provide debt for smaller projects. In addition, outside corporate investors may have banking relationships that can open doors in providing debt financing for a project.

Commercial Finance

Commercial finance companies that specialize in energy projects are participating in financial structuring of wind power projects. They can package a project and sell it to both potential lenders and equity investors. However, they also typically have a minimum project size threshold that is above that of most community wind projects.

John Deere Credit Wind Energy

John Deere Credit™ (JDC) has recently entered the renewable energy arena with a business unit focused on development and investment in community-based wind energy projects. Deere & Co. has identified that wind energy, along with other renewable fuel sources such as ethanol, is an area of interest for their agricultural customers and landowners. This initiative complements Deere’s activities in a variety of other renewable alternative energy projects and also provides a source of revenue growth for Deere’s customer base and shareholders.

Generally, John Deere Credit’s role in wind energy projects is that of both a debt and equity investor that enters into agreements with local developers and landowners to facilitate wind energy projects. The business model usually includes local owners as limited partners who provide management oversight and a role in project development. Ultimately, these limited partners can gain ownership and the benefits of the project assets, including the wind turbines. Often, members of these partnerships or shareholders in these corporations are the local landowners themselves.

Think of JDC as a “phase 2” participant in high-potential wind energy projects. These projects are normally beyond the initial stages in the development process, and have completed wind assessments and obtained local permits and potential power purchase agreements. You can learn more about wind energy and John Deere Credit involvement on their web site.

Debt Structuring

Utility-scale projects can be structured with 40–70% debt, using non-recourse financing (i.e., secured by the project itself). Although the project financing could be secured with power purchase agreements, banks generally do not go beyond these debt levels because of the perceived risk factors associated with wind projects. Lenders carefully scrutinize the production and revenue streams from the project. Revenues sufficient to cover 1.2 to 1.5 times the size of debt payments (the debt coverage ratio) are common and depend on a number of factors, including the quality and length of on-site wind measurements.

Some banks may be willing to “monetize” the future value of the PTC. This, in effect, reduces the amount of equity that an investor would put into the project by paying down this additional debt as the PTC is realized over the life of the project. Other banks, however, may not even recognize the value of the PTC and may require that a project be able to meet debt service coverage requirements without it. Again, the project sponsor should consult early in this area.

Requirements for Financing

• a comprehensive wind monitoring study provided by a meteorologist, conducted at the site for at least one year, or a combination of on-site measurements which correlate very well to a long period of high-quality data from a nearby meteorological station
• a project feasibility study by a consultant, including estimates of expected project performance that account for seasonal and interannual variability
• at some sites, a means of ensuring ongoing wind access, e.g. a wind access easement
• proven expertise in managing a wind project or an agreement with a qualified third-party project manager
• zoning and all site permitting approvals that have satisfied their appeal period
• proof of authority to execute the project on the subject properties, clear title to that authority, and use agreements that provide control transfer and landowner payments in event of default, a cure period, and limitations on cross-liability
• turbine selection and performance data
• turbine warranties and a project operations and maintenance (O&M) plan and agreement
• a plan for maintenance during the period after the turbine warrantee expires until the end of the debt service, which may include provision for capital replacements and deteriorating performance
• provision for a project decommissioning fund, especially if the PPA and debt term are the same
• completed interconnection facilities and transmission upgrades studies and a schedule for any required upgrades
• a long-term power purchase agreement (at least ten years and preferably fifteen or twenty years—in any case at least as long as the requested term financing) with a creditworthy utility that will purchase the electricity generated at specified prices, or a plan for internal use of the production
• commitments for all required equity
• a binder for all necessary insurance
• a business, financial, and risk management plan for the project, including complete pro forma financial statements