December 6, 2015
Illinois, U.S.

Invenergy wind power business will shift from government subsidies

This $2 billion deal was more about the past than the future | By Steve Daniels | Crain's Chicago Business | www.chicagobusiness.com

Invenergy, the largest independent wind power producer in the U.S. and Chicago’s main player in the burgeoning clean-energy economy, hit the jackpot with its remarkable $2 billion deal to sell seven wind farms built with immense state and federal financial assistance.

But that agreement, announced in July and yet to close, was more about wind power’s past than its future. The company founded and run by wealthy power-industry entrepreneur Michael Polsky increasingly is navigating a future in which it will rely more on market forces and less on government.

Founded in 2001, Invenergy has grown to 710 employees, more than 300 of whom work in the Chicago headquarters. It operates projects all over the U.S. and as far away as Poland.

In 12 years, Invenergy, which is not affiliated with a utility holding company, has built or is developing nearly 10,000 megawatts of capacity. To put that in perspective, Commonwealth Edison developed about 12,000 megawatts of nuclear power in Illinois over two decades, in the 1970s and ’80s, and did so with near-certain profits from rate-paying customers. Though not blessed with a government-conferred monopoly, Invenergy’s growth nonetheless largely is due to state and federal policies that mandated and subsidized greater use of renewable power.

But Polsky and Invenergy have entered a new era, with government playing less of a direct role in the industry’s development. To be sure, government influence is still present: With or without continued subsidies, Polsky is bullish on wind’s long-term future thanks to government regulations clamping down on carbon emissions. “I think Invenergy has a future and will have a future,” he says.

Increasingly, though, wind power must compete on a more level playing field with traditional sources of electricity, such as coal, natural gas and nuclear.

Pivoting in business is something Polsky, 66, has done repeatedly. An emigrant from Soviet Ukraine, he made a fortune building natural-gas-fired power plants in the 1990s and sold his company for $450 million in 2000, just before the independent power-generation business crashed because of soaring natural gas prices at the time.

He formed Invenergy at first to acquire financially troubled gas plants on the cheap. Those opportunities proved limited, and two years later, he placed his bets on a wind industry he thought was poised to take off.

They paid off spectacularly in July with the announced sale of seven wind farms, including two in Illinois, for $1.1 billion in cash plus the assumption of more than $800 million in project debt. The two Illinois projects—California Ridge near Danville and Bishop Hill I, which is 90 miles northwest of Bloomington—account for 40 percent of the 930 megawatts of capacity to be sold to renewable-energy buyer TerraForm Power.

What’s striking about the Illinois farms is how heavily subsidized they are, aided by two separate arms of the federal government. The two Illinois projects in 2012 won a combined $245 million in Treasury Department grants under the 2009 federal stimulus plan. That program provided more than $24 billion in subsidies aimed at covering 30 percent of the construction costs of renewable-energy projects launched during that time.

In addition, the two farms obtained 20-year contracts to sell their output to the federally owned Tennessee Valley Authority, which powers much of the southeastern U.S. California Ridge sells at $69 per megawatt-hour and Bishop Hill I at $77.50 per megawatt-hour, according to the Lawrence Berkeley National Laboratory. Those numbers were high in 2012 and are more than double the price of wholesale power now.

Polsky declines to talk about how profitable the Terra-Form deal is for his firm. Invenergy declines to disclose its annual revenue.

Though Terra-Form expressed the desire in July to acquire more Invenergy projects in the future, it since has suffered major financial setbacks that make more such deals unlikely. In energy parlance, TerraForm is a “yieldco,” existing strictly to acquire assets with long-term sales contracts and distribute most of the earnings to investors.

Earlier this year, yieldcos appeared to be the wave of the future in the energy industry—a way for individuals to invest safely in clean energy and for developers like Invenergy to finance future projects by cashing in early on previously contracted projects. But investors in recent months have soured on the yieldco strategy amid concerns about the cost of financing these firms.

Since the July announcement of the Invenergy deal, TerraForm creator SunEdison’s stock has plummeted (as has TerraForm’s) from $29.86 to a closing price of $3.64 on Dec. 4. The company has said TerraForm no longer will purchase assets from firms other than its parent. And billionaire hedge-fund manager David Tepper has taken a big position in TerraForm and in a Nov. 25 letter expressed concerns about the company’s recently announced acquisitions, including the Invenergy deal.

There’s even a question now about whether SunEdison will need to restructure. The deal is scheduled to close later this month.

“On paper and in theory, the yieldcos are a great idea,” says Mark Bolinger, senior researcher at the Berkeley Lab, which has a focus on renewable energy. “(But) these vehicles are still at the whim of public markets.”

For Polsky, such energy-industry gyrations are nothing new, even if this one is on a larger scale than normal. (The assets to be sold to TerraForm represent 10 percent of Invenergy’s contracted portfolio of power projects.) A period of change is underway for his industry that will require nimbleness.

The stimulus grants were a one-time boon, born of economic trauma. They’re gone.

Long-term sales contracts with utilities—often negotiated to comply with state laws requiring greater use of renewable energy—are rarer than they were even three years ago as many states have achieved their near-term goals.

And, most ominously, there’s a greater chance today that incumbent power generators like Chicago-based nuclear giant Exelon, parent of ComEd, will succeed in killing the federal production tax credit, which has been a crucial element in making wind farms economically feasible. The tax credit, which in today’s low power-price environment can provide 40 percent or more of a wind farm’s revenue, expired for new projects at the end of 2014 and has yet to be extended despite heavy lobbying by the wind industry. It could be extended in any year-end budget deal between the White House and congressional Republicans, but industry sources put the chances at about 50-50.

Wind power accounts for more than half of Invenergy’s business. The company also develops utility-scale solar power projects and natural-gas-fired plants.

“There are many options we have,” Polsky says. “We’d just have to put new emphasis on other areas.” They include building more natural gas plants, which account for about a third of Invenergy’s portfolio today, and doing more abroad.

But make no mistake: Polsky remains a big believer in the future of the U.S. wind industry. Generators like Exelon complain about the subsidies renewable energy receives, he says, but they tend not to acknowledge the technological advancements that have dramatically reduced the cost of wind power.

Costs have come down 20 percent in the past five years. “It costs a fraction of what it used to before, and efficiency went up,” he says. “We can build wind without the (production tax credit) cheaper than with the PTC five years ago.”

One of the biggest shifts in how new wind farms are developed is the source of long-term contracts now versus a few years ago. Invenergy, like other developers, used to depend heavily on the numerous state laws that set “renewable portfolio standards,” or RPS, requiring power consumed within their borders to come from a steadily increasing percentage of renewable sources.

Today, as those initial goals have been reached, “we see very few wind farms built just because of RPS (laws),” Polsky says.

Instead, utilities contract on their own, largely to comply with future emissions-reduction requirements stemming from the federal Clean Power Plan, he says. And, increasingly, large corporations are financing wind-farm development in a bid to burnish their green bona fides.

“More than 13,000 megawatts of (power purchase) contracts have been signed since the beginning of 2013,” Michael Goggin, senior director of research at the American Wind Energy Association, writes in an email. “We are seeing the trend in non-utility buyers continue this year, with companies like Dow Chemical, Wal-Mart, Procter & Gamble, Amazon and Microsoft all signing long-term (agreements) for wind in 2015.”

Just last month, Invenergy announced contracts to build wind farms in Texas for Owens Corning and data-center operator Equinix.

And on Dec. 3, Google announced plans to finance 842 megawatts of renewable energy around the world, with Invenergy responsible for 225 megawatts of wind power at a yet-to-be-disclosed site in the U.S.