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 the 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’s raised about half that.
Cape Wind is the brainchild of its CEO Jim Gordon, who’s spent the last 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 like 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 and National Grid.
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 like this exceeds what Cape Wind may be able to legally produce. The Power Purchase Agreements (PPA’s) 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 to 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 email. “It could lower their cost of debt, which would give more upside to the equity , but it’s still a challenge.”
There are only about 10 to 20 investors that buy equity in large renewable energy projects, and they have a lots to choose from around the world, plenty of which are a lot 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 firm thinking beyond the pure risk-return calculation, and investing based on the altruism of renewable energy. “The only one I can think of who might be interested is Google,” 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 it s a relatively small pie of clean energy tax equity investment. 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 Gov. 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 rate-payers to finance a wind project if one gets built.
Dominion Virginia Power has started drilling test borings off the coast of Virginia Beach.
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