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Q&A: Don Kyle, Tim Howell and Kevin Walsh, GE EFS — Part II

GE Energy Financial Services is a prolific investor in renewable projects in several sections of the capital stack, ranging from equity and tax equity to debt. Like its investments in gas-fired projects, GE EFS’s financing activity in the renewables space is often linked to the manufacturing business of its parent company, GE, which makes not only gas and wind turbines, but also inverters used in solar projects.

In last week's issue of PFR, Don Kyle, senior managing director at GE Capital Markets, and Tim Howell, m.d., power and development, at GE EFS, discussed the firm's investment targets and strategy for conventional generation in a shifting U.S. power market.

In the second part of this exclusive interview, Kevin Walsh, managing director and group head of renewable energy at GE Energy Financial Services, talks with PFR reporter Fotios Tsarouhis about what is driving development of renewables both in the U.S. and abroad, and what markets GE’s project finance arm is focusing on.

PFR: What kind of deal volume is expected this year in renewables, and how does it stack up with last year?

I think it’s comparable. Last year was a good year for us: We invested about a billion dollars of equity (tax and cash equity) in renewable projects in North America. I expect this year we will invest about the same or perhaps more.

The five-year extension of the [production tax credit] and the [investment tax credit] in the U.S. has certainly given the industry a longer-term planning horizon. We expect to invest throughout that period and continue to support the industry and projects using GE technology with capital. 

While the PTC steps down over time, the timing and reduction in benefits is understood, so industry participants can plan accordingly. We expect that the continued evolution of wind technology will eventually make up for the reduction in incentives. Our sister company GE Renewables is doing great things on the equipment side, investing significant sums of money and intellectual capital to continue to evolve the technology so that wind can remain relevant and competitive as incentives taper off.

GE’s investment in the digital wind farm promises to be a game changer, increasing output and enhancing reliability for our customers’ projects. Our GE Energy Connections business is doing similar things on the solar side with our inverters and transformers and our energy storage business, part of GE Current, is gaining traction in the market.

PFR: Is there a downside to the tax extenders —slowing some deals that may otherwise have been finished more quickly?

I think 2016 will still be a good year for wind in the U.S., but some deals may drift into 2017. I think that is natural.  Before the PTC was extended, the system, i.e. supply chain, contractors, investors, was gearing up and it was going to be stressed a bit in 2016.  While some projects may move to 2017, industry participants are still very focused on getting projects done as soon as possible. Projects are expensive to develop and buyers of power generally want to start receiving output from a project by a given date.  That wouldn’t necessarily change just because the PTC was extended. There is still natural pressure to get projects done as soon as possible. We have an expression here at EFS: ‘time kills deals.’  You don’t linger over deals. If they can get done profitably for all participants, they usually get done as soon as possible.

PFR: What (if any) impact do you see on EFS as a result of GE Capital’s downsizing?

We don’t see any significant changes. GE Capital has clearly communicated its confidence in EFS and our importance to GE.  They have confirmed that we will be allocated capital to invest — including $1 billion plus per year in North American renewable projects — provided we continue to meet GE’s risk-return standards,  which we been doing at EFS for many years.  We also support GE’s industrial customers, which is valued.

PFR: Is there any geographic area of the United States that you are primarily focusing on?

We see projects all over the country. Our customers are the source of our deals. They come to us after they’ve been developing a project in Texas, California, Arizona, or wherever for a few years. They come to us when they are ready to build the project and need project financing. Our portfolio of renewable investments is diverse geographically, which is desirable.

Not surprisingly, wind and solar development is happening where there are attractive wind or solar resources, but also grid access, a favorable regulatory/siting climate, state incentives such as a [renewable portfolio standard] and where the price of power makes it an attractive business proposition. It’s usually a combination of factors.

PFR: How do you see the market outside the U.S.?

We’re a global investor. We’ve been active, for example, in solar in Japan. That has been fertile ground for us. My colleague Sushil Verma leads our efforts there and has done a terrific job for us. We have also invested in projects in Ireland and Australia recently, and we’re pursuing investment opportunities in Mexico, both wind and solar. We’re a global investor, principally investing where we think the risk-return equation is suitable for us and where we can help GE’s customers.

What types of generation are you looking at?

In renewables, it’s primarily utility-scale wind and solar. We have invested in other technologies such as hydro, geothermal and biomass and we will continue to do so as the opportunity arises, but the bulk of our capital will go into wind and solar in 2016.  We are getting more active in commercial and industrial solar as well as energy storage as we believe these markets have strong growth potential and GE is active here on the industrial side as well. We will also look to support GE businesses that were formerly part of Alstom, including hydro, offshore wind and [high voltage direct current] transmission.

PFR: GE EFS is also active in tax equity. One recent deal was for EDF’s Pilot Hill Wind project in Illinois (PFR, 11/20). What does the future look like for tax equity investments at GE Capital and at EFS?

I think you’ll see us do more of those types of deals. This is a good example of the types of deals we like to do. It has a high-quality sponsor in EDF, uses GE equipment — so proven world-class technology — and it has a strong offtake party with Microsoft. The increased involvement by corporates and industrials like Microsoft as buyers of power from these projects is an exciting development for the industry.

We just got off the phone with another blue-chip corporation saying they want to buy more power from wind and solar projects here in the U.S. Why? Because it’s an attractive economic proposition for them. The rates are attractive and you essentially lock in the price for ten plus years, so it’s a form of hedge against volatility in fossil fuel prices. It’s a part of the market that’s become more interesting and exciting for us.

PFR: Do you think a lot of these corporations coming out of Silicon Valley and contracting renewables are going to be a major or greater force in the market in the years ahead?

I would say that it’s likely to continue. I can’t tell you that it’s going to accelerate, but I think it’s going to continue. The pricing is attractive and the added value of being a form of hedge to mitigate volatility in their energy portfolio is attractive.  These appear to be hardcore business decisions based on economic value, and they have the green attributes to go with it.

PFR: What sort of internal factors are shaping the environment at EFS?

We’ve been successfully investing in the energy space for thirty plus years. We’re investing GE’s money, earning an attractive return for GE Capital and supporting the industrial side of GE. We launched a dedicated renewables business at EFS, which I have been fortunate enough to run, about ten years ago. We saw the emerging opportunity in renewables and went after it with a dedicated team and it paid off.

Over that time we have committed over $12 billion dollars of capital to the renewables space, making us one of the more significant players globally. At the end of the day it has to deliver the right returns for our shareholders and we believe that it has and will continue to do so.

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