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Wednesday, March 27, 2013

2013: A Big Year for Offshore Wind

If you have been watching the offshore wind industry in the United States for the last decade -- and if you are reading this blog, I assume that you have -- you are probably tired of hearing the much-hyped announcement at the beginning of each year, i.e., "THIS YEAR WILL BE THE YEAR THAT WE PUT STEEL IN THE WATER!!"  Eleven months later, December arrives and we are forced to admit that this was not, in fact, "the year." 

Faithful readers, I beg you to put your skepticism and regulatory fatigue aside because 2013 will actually be the year that we see the first wind turbines constructed in US waters.   

(1)  Cape Wind Makes Strides Towards Obtaining Financing

More than twelve years after Cape Wind announced its plan to construct the United States' first offshore wind project in Nantucket Sound, the project's developers have signed on with the Bank of Tokyo-Mitsubishi UFJ (BTMU) to arrange debt financing for the project.  BTMU will also commit "a significant amount of debt capital" that will go toward development and construction costs.  Arranging financing for the project is the critical step that Cape Wind must complete before initiating construction on the project.

Cape Wind began seeking financing in 2012 after it finalized the second of its two 15-year power purchase agreements (PPA) with National Grid and NSTAR, the state's two largest electric utilities.  Cape Wind's PPAs account for 77.5% of its projected output.

Cape Wind Associates has designated Barclays to provide financial advisory services to Cape Wind.  Barclays will continue to assist them to procure investors and equity financing for the project.  Although Cape Wind has not disclosed its full project costs, news analysts have predicted that the project costs will approach $2.6 billion.

Cape Wind's deal with BTMU is strong evidence that the project is on track to meet its construction schedule.  Cape Wind has stated that it intends to begin construction on the planned 130 turbine-project by the end of 2013 with the expectation that the project will be partially commissioned in 2015 and fully commissioned in 2016. 

Potential investors have a keen interest in Cape Wind's ability to meet its end-of- 2013 "begin construction" milestone.  If Cape Wind can begin construction before January 1, 2014, the American Taxpayer Relief Act of 2012 (P.L. 112-240), or "ATRA", effective as of January 2, 2013, will enable Cape Wind to take advantage of the much-discussed Production Tax Credit ("PTC") or the Investment Tax Credit ("ITC"). 

Before the ATRA amendment, Internal Revenue Code Section 45(d)(1) provided that a project had to be placed in service “before January 1, 2013” in order to claim the PTC which is currently 2.2 cents per kilowatt hour sold to a third party.  The January 2, 2013 Amendment now provides that a renewable energy project is eligible for the tax credit if “the construction... begins before January 1, 2014”.  In the same legislation, a corresponding change inserting the language “the construction of which begins before January 1, 2014” was made to Section 48(a)(5)(C)(ii) of the Internal Revenue Code to allow facilities eligible under amended Section 45 the option to elect to use the ITC in lieu of the extended PTC.  The ITC will provide a potential investor with tax credits equivalent to up to 30% of the project cost.  Of course, a project can only claim the ITC or the PTC-- not both.