Ed Zaelke Participates in Wind Power Roundtable Sponsored by Power & Energy Solutions

Akin Gump global project finance partner Ed Zaelke participated in a roundtable on the state and future of wind power in the United States sponsored by Power & Energy Solutions; the transcript appeared in PES’ North America Wind magazine.

On Akin Gump and the wind power industry, Zaelke notes, “I am co-chair of the global project finance practice at the law firm of Akin Gump Strauss Hauer & Feld.  Our group consists of about 40 lawyers worldwide.  About 25 or so focus exclusively or almost exclusively on renewable energy. Years ago, I decided to immerse myself in the wind industry, not just the legal issues, but the financial, technology and policy issues as well. This has carried over to our entire group. We believe that, by becoming part of the industry on a broad scale, not just lawyers looking in, we understand our clients’ problems better and can help develop more creative solutions – beyond just legal solutions. Furthermore, through our understanding and knowledge of the market, we are in a better position to “help deals happen” through introduction of our clients and contacts and by becoming involved in the structuring of complicated financial transactions at an early stage.”

On the state of the sector, he says, “This has been a very difficult year for the wind energy market in the U.S. In some ways it is more difficult than the slowdowns in 2001 and 2003 when the extension of the PTC was also uncertain. That is because today the domestic wind industry has so many more people who depend upon it for their livelihood. With the exception of those in the construction trades and some of the developers, most of the industry is at a standstill. There are few, if any, turbine orders being placed, limited M&A activity and very few financings happening. Fortunately, we are seeing that start to change a bit. It appears that, as we get closer to the election, companies are becoming more confident in an outcome that will allow the PTC to be extended. As a result we are seeing M&A activity start to pick up. That is often the first signs of an uptick in the industry.”

On promises for growth for the sector, Zaelke states, “I refuse to let a sluggish 2012 change my bullish outlook for the growth of the wind energy industry in the U.S. Thirty years ago, when I decided to make this industry my career, I thought the fundamentals behind developing an energy economy based upon the extensive development of wind and solar resources were very strong. I may have been a bit ahead of my time with those thoughts. However, the fundamentals underlying the need for renewable energy have gotten even stronger since 1982. For example, we know a lot more about the impact of CO2 on climate change.”

“Our country has also fought two wars in the Middle East and we continue to lose American lives today. In the end, however, it is going to be the cost of wind energy in relation to other means of producing energy, in addition to the environmental issues, jobs and energy security benefits, that will ultimately drive wind energy to the 20 to 30 per cent penetration level in the U.S. In many areas of the country wind is now cheaper than all other forms of generation, with the exception of natural gas, which is at historic lows. As the economy improves and we continue to see coal plants taken offline as they lose their cost advantage, I expect the growth curve of wind will again pick up.”

On the impact of the uncertainty surrounding the extension of the Production Tax Credit (PTC), he states, “The Production Tax Credit has now been in existence for 20 years. By any measure, it has been an incredibly successful policy. Over those 20 years I am guessing that the PTC may have reduced taxes on wind energy production by $20 to $30 billion. However, the taxes collected on other profits, manufacturing, employee wages, and land payments to farmers exceed that amount by a large margin. In addition it has taken an industry that was in its infancy and built it into a $20 billion per year piece of our economy with over 75,000 direct jobs in manufacturing and construction and probably 125,000 or so jobs when the indirect jobs are considered. That doesn’t even consider the benefits to family farms from royalty payments. The real benefit from the PTC, however, has come in the past 5 years or so. Given the success of the PTC, the industry began to believe that Congress would continue to renew it every couple of years, as Congress does with many tax credits. This caused an increase in investment in domestic production and research. As a result, the cost of producing a kilowatt hour of wind is down 50 per cent in some areas over what it was 5 years ago. The uncertainty created by this Congress over the PTC has dampened the momentum the industry has been experiencing and it will take some time to find that again.”

On whether financial markets are currently too weak to raise funding for growth in the industry, Zaelke says, “Except for the period of the year or so after start of the U.S. financial crisis starting in late 2008, I don’t think the wind industry has suffered from a shortage of available debt or equity for good projects. What is clear is that the availability of debt from most European banks, which in the past have been willing to take some risk for a better return, is gone. Going forward, projects are likely to require more equity, with the debt that is available broken into two pieces. There will be a very “safe” piece held by banks and institutional investors looking for a safe yield. In some cases there will also be a second piece held by a set of mezzanine lenders who may take more risk to fill small gaps in available equity. Tax equity will continue in relatively short supply. It will remain a significant cost for those developer or owners who cannot use the tax benefits themselves. Project equity continues to be a challenge. It may be filled to some degree by private equity funds who sponsor some of the larger independent developers. Private equity needed to support the smaller developers continues to be a difficult need to fill.”

On whether the wind power industry is drawing young people to work in the field, he says: “I speak often about the wind industry to law students and other people just starting their careers. I tell them that I have the best job in the world. I am doing challenging work in a new and changing area and the end result is a product that, over time, will improve the lives of all Americans and other people around the world. In what other industry can you find this? Yes, as the industry has grown, it now has to fight with fossil fuel and other industries for a share of the country’s energy mix. However, if we can ever reach a point where we look 10 or 20 years ahead in making policies, rather than continuing to think short term, the need for this industry and the changes it will have on our country are very clear. Being part of that change is both challenging and exciting. Young people are listening. For several years now, we have been attracting some of the best and the brightest to all segments of our industry. I expect that to continue for years to come.”

On the greatest challenge(s) to the industry, Zaelke states: “The wind industry faces many very real and important challenges, so it is hard to focus on just one. However, the challenge that we have faced the longest is the lack of a true long term federal energy policy. More importantly, a policy that gets us off of this two year cycle of the PTC and properly designs an energy mix for the country that helps create a long term clean and sustainable energy future for generations to come. There are a number of separate economic interests that are pulling and tugging at what that policy might be and, frankly, many interests that are quite satisfied with the status quo. I think that the status quo of an energy-non policy has already taken us down a path or irresponsibility to both our current population and future generations. Our greatest challenge as an industry may be finding and supporting the leadership the country needs in order to balance and, in some cases over-come, the various interests.”

To read the full roundtable discussion, click here.