Michael Polsky |
PJM has attracted a slew of attention in the past few years, as low power demand nationwide, low gas prices and a greater tolerance for merchant risk has made the region a hotspot for developers. “The capacity payment system in PJM is better than no capacity payment system. Unfortunately it’s a year-by-year auction...year-by-year means that if you’re trying to do a long-term project financing, you don’t have the revenue certainty that you may need,” said Jim Murphy, coo and cfo of Invenergy in the second installment of a rare interview about the privately-held business. Murphy and Michael Polsky, founder, president and ceo, sat down with Executive Editor Peter Thompson to discuss the market, as well as Invenergy’s solar strategy and why an IPO is not in the cards.
We’re heading toward another production tax credit expiry. Anything unusual or different you expect to see than we’ve seen in past expiries
Jim Murphy |
JM: Well initially the focus is doing all of the projects that we can that are going to qualify. We have a number of them that will get done this year. We’ll get started with construction comfortably this year and be placed in service either this year or next. Going in to 2014, it’ll be less clear. I think there will be demand for wind projects with or without PTC. There are some who believe that the renewal is coming and so maybe will slowly develop some of them and wait for that. There are others that are going to make sense without.
MP: This is something that has to play itself out. It is one of those things that is very hard to speculate. Obviously, in a lot of ways wind competes with natural gas and it depends where gas would be at the time. PTC does reduce the costs of wind power. On the other hand some players benefit more from PTC than others, like corporations that have a substantial tax base, they can do it without a lot of time and effort to monetize these PTCs. So obviously, in some ways for Invenergy and many other people, there is something to be said for equalizing the playing field where there is some mechanism that would not benefit one at the expense of others. So maybe something would happen that would equalize players—not those that had tax appetite versus those that don’t have it.
Flipping from financing to M&A. What is your strategy in terms of acquiring and selling assets on the wind side?
JM: Our strategy is to be opportunistic. We’re developers and that is where the highest value is that we see. So, typically we’re not active in acquisitions of operating assets. We’re not active in acquisitions of construction assets. Maybe early to mid-stage development can provide some opportunity if you have a developer who needs a relationship with a turbine supplier or needs the capability to get the PPA. That’s always been a strength of ours and an area where acquisitions can make sense. We’ve done a number of those over the years in our wind business and in our other businesses.
As far as the divestiture side of that question, again we are opportunistic always. If someone has a higher value on the asset than we have as a hold, we are open to discuss.
How would you characterize the market at the moment for wind assets?
JM: I think for projects with PPAs or other long-term price certainty arrangements, the market is exceptionally strong. We’ve seen over the last few years a migration. First it was the strategics buying into these portfolios. Then it went to the infrastructure funds and now we are seeing the retail investors through the yieldcos, the Canadian IPOs etc. So I think the market has been very efficient in finding homes for long-term contracted assets, especially in portfolios. That’s been a great opportunity.
What are the most attractive wind markets to you at the moment in the U.S. and Canada?
MP: I think for us—relying on long-term arrangements—we see markets where you can really be a low-cost producer and where people are buying wind because it’s a low-cost resource. Texas, Oklahoma, Kansas, Iowa. Places where there is very strong wind. Nowadays you can buy wind for less than $30 per MWh, including PTCs. So that seems a very attractive market.
It’s not a secret market where you can escape competition. People are everywhere. It’s the quality of sites we have and other people have that could make a difference. Access to transmission [is a factor]. So I think it’s a well known fact where the wind is and where the opportunities are nowadays.
So it’s a fairly static picture in some ways?
MP: No. It’s static but there are some dynamic issues here. State RPS come in to play. Like I said, gas price variations. Also financial markets—a few years ago during the financial crisis, nobody would touch hedges. Now people seem to be more comfortable with hedges again. So there is some dynamic element, obviously wind is where the wind is.
What is your outlook on solar? What are your plans?
MP: Obviously we were a little late coming to solar. We also have not been in the retail solar business—rooftops. Primarily we are doing ground-mounted systems. We try also to be opportunistic with solar. We have solar installations in the U.S. and Canada. And we’re trying to do more.
The solar market has been very unique and different. A lot of manufacturers play the vertical integrated model where they secure the sites, build the project and flip it later. That was very different from any other business because they knew their costs curve. They knew how they could monitor the market. They could play how busy they are at the factory and decide how they are going to price to themselves. I think the market had been dominated by many players like that.
I think some rooftops in some states where given an unfair advantage compared to ground- mounted systems because they were receiving full retail rates, sometimes even more for putting solar on the roof. Which sometimes is a questionable model in some cases, versus ground mounted systems that were paid a fraction of the price.
We think there is a great future for solar, but there are some issues related to solar as well.
What percentage of Invenergy’s efforts would solar account for now?
JM: Ballpark about 10%.
Which parts of the solar market interest you?
MP: We’re primarily interested so far in ground mounted, which are in most cases utility scale systems that you sell into the grid...into the transmission system, rather than rooftop. That’s been our model. That’s what we are doing now and what we plan to do in the future.
What drives that interest versus the rooftop?
MP: I think it’s a different business to deal with individual owners of the homes of the facilities. We just felt it was a different business model. Not that it’s a bad model. It’s just different. Historically, Invenergy was doing more utility systems and that’s what we felt our expertise has been in.
The big advantage for rooftops has been that they are displacing full retail rate. So they were receiving 20-25 cents per kwh for solar in California, versus on the ground people were selling for at 7-8 cents a kwh. So it’s a very uneven game here.
What is your take on the capacity payment system in PJM? What is your exposure there?
JM: We’re active in the PJM market. The capacity payment system in PJM is better than no capacity payment system. Unfortunately it’s a year-by-year auction...year-by-year means that if you’re trying to do a long-term project financing, you don’t have the revenue certainty that you may need. There may be ways to structure around it. There may be ways to bring in intermediaries who are comfortable bidding year-by-year and would go long for you so that you can project finance. But, as opposed to markets that don’t have a viable capacity component altogether, we see it as favorable.
What other generation technologies are you looking at?
MP: We are constantly looking at everything. We look at thermal, including co-gens, wind and solar and batteries. We look at everything because of technology improvements, the market conditions, acceptance of certain technologies so you have to be really plugged in. We can’t say right now what would make sense some years from now. We try to stay tuned in.
JM: I think geographically you’ll also see some expansion from us. We started in the U.S. and Canada. We’ve got projects operating in two European countries right now. We’re looking at other places that make sense and we’ve taken a slow-go approach there. We do see some good opportunities and have teams working on developments in other places.
You mentioned yieldcos and IPOs. It sounds like this is not something you feel the need to do?
JM: We’re feeling like we’re able to get a competitive product without going that route. There are a lot of administrative and other infrastructure requirements that go with a public offering that we are not particularly interested in.
Competitive product in the sense of delivering power?
JM: No, competitive product in the sense of if we are looking for equity investment in our projects, I think that we have enough relationships to be able bring that.
What is the forward story for Invenergy? What are you looking to do over the next 5-10 years?
MP: I think Invenergy will be known as a very diversified developer. We do thermal, we do wind, we do solar, we’re looking at some other development opportunities. So we feel the future will bring opportunities. Like Jim mentioned, this business has been a very opportunistic from day one—from the old co-gen days in the 1980s. Markets were rotating, the rules were changing, the opportunities were new and some were disappearing. So power development has historically been a very opportunistic business. So if you make long-term plans saying I’m going to do so many megawatts in so many years you can make the megawatts, but for us this model has not been good because we are an independent company, a self-sustaining company. We have to rely on our own revenue stream to support ourselves so we have to do projects that make sense.
How many megawatts we can put in each year I don’t think we can tell anyone, but I’m sure there will be a lot of megawatts and they will be good quality megawatts.
We feel with our experience, expertise, and track record, there will be business opportunities for us.