Why Bank Profits are Good for Renewable Energy

by Dave Forest
August 20, 2010

Had a long flight home yesterday from South America. Lots of time to read through a pile of news on resource projects and financing.

Here's an important development that caught my eye.

Wind power developer EDP Renovaveis recently closed a $141 million financing with American bank Wells Fargo. The cash is going toward the development of EDP's Vento III wind portfolio, which holds projects in Oregon, Kansas and Iowa.

Wells' investment into Vento is a tax equity financing. Meaning the bank loan will be paid back (at least partly) with tax credits generated by EDP's wind projects.

Up until three years ago, tax equity financings were common. Renewable energy projects generate a wide range of tax credits. So project developers agreed to transfer these credits to bank sponsors in exchange for development funding.

Banks can then use the credits to offset their own profits. Helping maximize their bottom line. It's generally easy for a lending bank to model the credits coming from a particular operation, so this is a low-risk form of payback.

But then came the financial crisis. Suddenly most banks weren't making profits. And without profit, tax credits to shelter profits are useless. Tax equity financings ceased almost completely.

But developments like the EDP financing suggest that banks are once again making enough money to make tax equity attractive. Opening up one more project finance avenue for renewables.

A good shake for wind, solar, geothermal and run-of-river.

Here's to a return to profits,

Dave Forest