Observations from AWEA WINDPOWER

Attendance at this year’s WINDPOWER conference was down, but the mood did not match. Below are some takeaways from the conference.

Industry Observations

  • Construction levels are still high due to the short-term extension of the Production Tax Credit (PTC) at the end of 2014 for work started that year. Completion of new wind farms will continue through 2015 into 2016 as developers that took advantage of the PTC extension work through their backlog.
  • The price to produce a kWh continues to decrease as wind farms increase power production driven by taller towers, larger rotor diameters, more productive turbines and smarter construction. As the price per kWh decreases wind is becoming less dependent on tax credits and is able to compete with traditional power sources. Even though the price per kWh is decreasing, more work needs to be done for wind to fully compete without subsidies.
  • The market is clamoring for long-term guidance from the government about the extension of the PTC.  The preference is for a longer-term extension that would allow enough time for the industry to reduce the cost of wind power to a point where tax credits are no longer needed. Many interested parties are seeking a 5-10 year extension while some are hoping for the tax credit’s permanent inclusion in the tax code.
  • At the state level, there continues to be bi-partisan support for comprehensive legislation supporting this sector.
  • Even without the extension of the PTC, alternative financing vehicles called Yieldcos, are finding cheap financing from yield driven investors and funding non-PTC dependent projects.

What does this mean for the wind power sector?

  • Obviously a longer-term extension of the PTC would provide the clearest path for companies in this sector, but that is unlikely to happen in the near future. Without an extension, work will be undertaken by Yieldcos, very large developers, and in states with a strong Renewable Portfolio Standard.
  • In order to maximize the return to shareholders the Yieldcos will need to focus on the highest returning projects and selectively choose the best partners to work with.
  • Companies that succeed in this environment will be in higher demand from acquirers seeking to leverage the investment in wind. As a result, valuation multiples should be strong for companies in this category.
  • Consolidation from the companies positioned less favorably will take place as well, although at less attractive multiples.

Overall there is good reason to be optimistic about this sector’s long-term prospects. Companies are managing to work and grow profitably in the current environment. While the lack of PTC extension might be an issue for some companies, the strong companies will adapt and become stouter.

If you have comments or questions about this article, or would like more information on this subject matter, please contact us.
Michael Rosendahl

Investment Banking
New York Office

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