This past November 2nd, the Energy Club hosted CBS alums Chris McCall and Jim Trousdale (both class of ’98), who gave a highly informative talk about the key finance aspects of the burgeoning wind energy industry. Messrs. McCall and Trousdale spoke from ample experience: both have been in energy project finance since they graduated from CBS, and they are now vice-presidents at Fortis Capital Corp.’s and CIT’s project finance and electric power and infrastructure groups, respectively.
Wind Farm finance projects are a subset of energy project finance. At current output levels, wind is a small piece of overall electricity generation in the U.S. (less than 1 of total megawatts generated). So why so much bluster about wind? Gale-force growth: wind power installations in 2005 are predicted to surpass 2000 MW, which would be the largest single year jump in capacity installations on record. Key catalysts in the record near-term growth of wind energy include governmental stimuli through tax credits for producers, states’ adoption of minimum renewable electricity source requirements environmental concerns over fossil fuel driven power plants, and perhaps most importantly, significant increases in the cost-competitiveness of wind energy through improved turbine technology. To that point, according to the American Wind Energy Association, wind energy is, at current natural gas wholesale prices, the cheapest source of new energy generation. Nevertheless, wind cannot completely replace traditional energy sources because it is an intermittent energy source—wind levels everywhere have some randomness, which necessarily affects the wind turbine’s power output.
This contrasts with a coal or gas-fired plant, whose output can be controlled by the operator. Another constraint on wind power is the building of transmission infrastructure; there are many places sparsely populated locales in the U.S. where turbines could be erected, however, the cost of building the transmission infrastructure to transport the power to high-demand urban areas make such projects untenable.
The speakers’ involvement in wind projects has been related to financing: typical vehicles include mainly senior debt and, more recently, public bond offerings. Mr. Trousdale led off with an overview of how a typical power purchase agreement is analyzed from a senior lender’s perspective. He detailed the main risks under analysis in a project, such as the turbine technology; the construction, operation and maintenance of the wind farm: regulatory issues; syndication of the loan; and the solvency of the purchaser (off-taker). Revenue for the operator is protected under “take-or-pay” provisions that obligate the off-taker to pay for all power produced, whether it is consumed or not. Another critical piece of the contract is hiring a specialized consultant to perform statistical analysis of the wind energy itself, which often takes at least a year of detailed survey; the agreement must guarantee a certain range of output levels with 95 confidence.
Mr. McCall led the group through a discussion of an important 2002 wind farm project in Texas called Desert Sky that both he and Jim worked on. Desert Sky is a 150 turbine, 160 MW project developed to generate power for the San Antonio, Texas area in 2002. Project Finance magazine, a leading trade publication, named this project “The Renewable Energy Project of the Year”; projects of its scale may become more of the rule as wind power goes more mainstream.
The discussion carried several important themes: that renewable energy project finance will be a major growth area in the U.S. over the next ten years and thus an interesting opportunity for CBS finance grads. To get initial exposure to what the job is like, both Jim and Chris strongly recommended students take “Project Finance,” which will be offered in the spring semester. And when asked about finding jobs in this more boutique field, their univocal responses was “off-campus is the only way to go,” so “pick up the phone and start calling people.” Sound advice, but if the market for wind power projects grows in line with expectations, that may not always hold true.