Energy

Goverment Money Is Not a Silver Bullet for Cape Wind's Offshore Project


Supporters and protesters of the Cape Wind Farm in 2010

Photograph by Joanne Rathe/The Boston Globe via Getty Images

Supporters and protesters of the Cape Wind Farm in 2010

The Department of Energy has given a $150 million loan guarantee to what could end up being the first offshore wind farm built in the U.S.—the Cape Wind project slated for construction in the middle of Nantucket Sound.

While it’s certainly a nice chunk of money, Cape Wind had initially sought $500 million from the DOE. The loan is contingent on Cape Wind securing the total $2.6 billion in financing it needs. So far it has raised about half that.

Cape Wind is the brainchild of its chief executive, Jim Gordon, who has spent the past decade (and tens of millions of his own money) fighting a pitched political battle over the project. Lined up against him was a cast of opponents, from Cape Cod elites, such as the Kennedys, to commercial fishermen, to even a handful of environmentalists concerned about the impact the project’s 100-plus turbines will have on migratory birds. But Gordon has pretty much beaten them all. Cape Wind has racked up 26 legal victories. The latest came in May, when a federal judge dismissed a lawsuit challenging the agreements that Cape Wind has signed to sell power to two Massachusetts utilities, NSTAR Power (NST) and National Grid (NGG).

Cape Wind got through a crucial hurdle at the end of 2013, signing a deal to buy turbines from Siemens (SIE:GR), thus qualifying for an expiring federal tax credit.

Now the project faces what is arguably a much bigger challenge: raising money from the private sector. In March, Gordon scored a big win in securing $400 million in debt financing from French, Dutch, and Japanese banks. But debt was always going to be the easiest piece to line up. The real challenge is finding equity investors. This sets up a tricky challenge for Gordon: The returns that equity investors typically look for in a big, renewable project such as this exceed what Cape Wind may be able to produce legally. The power purchase agreements (PPAs) Cape Wind has with NStar and National Grid cap the amount of total return the project is able to generate. That protects ratepayers from getting gouged by high power bills, but it also puts a squeeze on Gordon’s ability to promise returns to investors. At a certain point, the project is obligated to give money back to its customers rather than to investors.

The DOE loan guarantee could help Cape Wind raise the amount of return it offers its equity investors, but the company is still going to have a hard time attracting the money it needs, says Amy Grace, an analyst with Bloomberg New Energy Finance. “It’s helpful, but it’s not a silver bullet,” Grace wrote in an e-mail. “It could lower their cost of debt, which would give more upside to the equity, but it’s still a challenge.”

Only about 10 to 20 investors buy equity in large renewable energy projects, and they have a lot to choose from around the world, plenty of which are much less risky than a $2.6 billion offshore wind farm. “These investors are very risk averse,” says Grace. “There are certainly comparable returns to be had for a lot less risky onshore wind projects.”

To attract the kind of equity it needs, Grace says Cape Wind will have to bank on a business thinking beyond the pure risk-return calculation and invest based on the altruism of renewable energy. “The only one I can think of who might be interested is Google (GOOG),” says Grace. “They have a clean energy agenda, but they’re not going to make a dumb investment.”

And Cape Wind needs a big share of what is a relatively small pie of clean energy tax equity investment (which benefits from special tax credits). The peak year was 2012, when total tax equity investment hit $6 billion, says Grace. Cape Wind alone needs about $1 billion.

The project still has its detractors, who point out that the Energy Information Agency recently scored offshore wind as the second-most expensive source of power. Still, interest in ocean-based wind farms is starting to creep south down the East Coast. Maryland’s Democratic governor, Martin O’Malley, has spent years pushing for offshore development in his state’s waters. Last year the Maryland legislature passed a bill to levy a $1.50 monthly charge on the state’s ratepayers to finance a wind project if one gets built.

Dominion Virginia Power (DRU) has started drilling test borings off the coast of Virginia Beach.

Philips_190
Philips is an associate editor for Bloomberg Businessweek in Washington. Follow him on Twitter @matthewaphilips.

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