Dan Sinaiko Quoted in Power Finance & Risk on Outlook for Project Development in Texas

Power Finance & Risk has quoted Daniel Sinaiko, co-head of the global project finance practice at Akin Gump, in the article “Lenders and Investors Wary of ERCOT ‘Gold Rush’.” The article looks at whether the low reserve margins in Texas are going to spur more project development work.

According to PFR, developers are hopeful they will be able to raise the necessary capital to keep the lights on in Texas, using innovative structures to make up for the lack of predictable, long-term cash flows. Scarcity of supply, meanwhile, is likely to push up electricity prices, which would be a boon for generators looking to cover their capital costs.

“Peak spot market pricing in parts of ERCOT [Electric Reliability Council of Texas] runs into the thousands of dollars per MWh, and a lot of it is due to oil and gas producers having very high energy demand,” said Sinaiko.

The article reports that improvements in hedge terms, the promise of scarcity pricing and the apparent need for additional resources have prompted what some are calling a “stampede” of developers, particularly of solar projects, toward the state.

To illustrate this point, Sinaiko said tax investors with hedge desks “have been showing up with deals and are going to be very active writing paper that supports offtake activity, debt finance and tax equity. It’s not all clear sailing because attracting commercial banks and long-term investors in Texas is not assured given the overbuild risk.”

The Texas Panhandle, however, where rapid development of the wind fleet has led to congestion in the transmission system and negative spot prices, tells a cautionary tale.

“I see a lower degree of optimism and enthusiasm in the commercial bank market and to some extent from infrastructure investors who don’t see long-term value and are more fearful of short- and medium-term risk because of a gold rush swamping the market,” said Sinaiko. “We have seen very aggressive positions taken on merchant tail by those who believe in the market. Proposals for some assets with short offtake windows have shown negative IRRs during the contracted period.”

Sinaiko advised that independent power producers “should be able to identify construction financing for new generation without too much trouble, but term financing may be a problem. We have seen a number of investment funds forego term financing, preferring to keep their capital deployed on assets instead of levering.”