A Conversation with Renewable Developers and Investors About COVID-19’s Impact on Their Business
First question, what should be the biggest concern of developers during the COVID 19 crisis? Development delays, uncertainty in the tax equity markets, uncertainty in the debt markets, uncertainty in the M&A markets, or availability of offtake agreements? Let’s just get a, a sampling of the folks that are watching as to what they think the biggest issues might be. So if you vote now, we will tally those up and see the results that we get. Development delays seems to be the winner, followed closely by uncertainty in the tax equity markets. Less concern, and almost no concern about the M&A markets. So that’s interesting.
Let’s look at the next question. This is more of a yes or no question we have for you. Which is, will the renewable energy industry be included in a stimulus 4 package from Congress? A simple yes, a simple no, or you’re throwing in the towel on Congress, and you don’t think there will be a stimulus 4 package at all. Curious to see what the results are going to be here. And the votes are in. Some pessimism over—almost 60% don’t think we’re going to get included in the stimulus 4 package. Well, we’re going to have to tell our friends ACORE and … that they’ve got their work cut out for them. Thank you for those. Let’s get started on the questioning with our panel. Carl, maybe you can start it out and let’s see what folks have to say.
Sure. Thanks. I think the questions we’re going to throw across to the panel are both forward looking and kind of immediate. I think the first question for the panel, and feel free to chime in as you’d like, is looking out over the next 18 months, can you list maybe three or four of the biggest challenges you think the crisis has presented to the industry at large? And again, this is kind of like a longer-term view for the markets? Michael, why don’t we start with you?
Yeah. Thank you very much for having us here. I really appreciate the opportunity to address the group thanks to McDermott. Yeah, looking in the longer term, I think, it’s hard to separate that from the near-term issues that we’re seeing with disruptions associated with COVID. But eventually this pandemic will pass to some extent, and we’ll adapt to it at least and find a way to keep working. Over 18 months period though, I think we’re still going to see a lot of fallout from the events of today. Things like lower power pricing that are affecting us in various markets from demand destruction. We don’t know how long that will persist. That’s affecting the day to day operations of our project and actually will have long term effects on power markets. Supply, supply chain disruptions that may be occurring. We’ve received force majeure notices from our major suppliers for turbines, for example, for wind energy. Those make it more difficult to finance projects, it creates risks associated with PTC. As developers, we work on a multi-year timeline, two years or more, when we look at the late stage of project development. And those disruptions can make us span a PTC phase out period, which is very difficult to manage. The permitting delays that we’re seeing in development right now are going to have long term effects over the next year and half as well. Every day that we have a delay trying to get a permit today leads to a delay on the back end when we can actually come to a project that’s ready for notice to proceed. You know, certainly we see in financial markets right now, it’s just unknown in terms of how long it would take that to resolve, ultimately, and how people will readjust their long-term prime horizon for profitability and ultimately, their appetite for production tax credits.
Michael, I’m curious, before we go on to get the same question from Susan or Tracey, you talked about permitting delay, what, what kind of issues are you facing with permitting delays?
Well, you know, side acquisition, development, permitting. A lot of that is very much a hands-on business in an environment where we have no hands available. So we can’t meet with landowners to complete lease agreements. We can’t meet with permitting authorities to go through details of projects or their work, work practices have been disrupted and delayed as well. We can’t have public hearings, which is a problem. Usually a requirement for many of the permits that we see, those have been delayed. It just makes it generally difficult for us on a development perspective to get people out to sites to do engineering assessments, site planning, surveys, those sorts of work. So all of that compounds to significant delays that we see that either the development that supports the permitting process or the actual permitting process itself.
Thank you. Susan, kind of same question from, from Carl, I guess. What, what do you think?
Yeah, thanks for having me join and bring an also a financial investor perspective to the panel. We’ve got three, three key points, both which the industry has been dealing with this as challenge today, but over the next 18 months will continue. First, is the safety and health of our people. Safe—safe, but I do believe the safety-first culture of the renewable energy industry has already been remarkable and showing how we can work from home. But even more importantly, that we have thousands of our employees that are keeping our essential services, electricity flowing, safely at project sites, remote control centers, etcetera. But that will continue to be a challenge. And we’re facing unchartered territory as well, trying to figure out how we might start going back to work and traveling again over the next 18 months in part. Second is liquidity. Renewable energy industry is capital intensive. They’re—our lifeblood is access to the capital markets at competitive costs. So continuing to see the markets open up pricing reflect the real underlying risk renewables, which we provide long term assets which have generally stable cash flows. And seeing our clients stay healthy, our projects continuing to, to work well, and it’s, again, important to that access to capital across private, public sectors and also the important tax equity market. And then third is going to be delayed—following on what Michael said, delays. The developers are seeing them now and we’ve got 18 months ahead of us when we have some critical deadlines that the industry will have to try and adjust and work through. We’ve got, we’re working on safe harbor relief. We’ve got, you know, some setting tax credits. And also, just generally, dates that have been promised for commercial operation in these contracts that, and they need to be … from relief, even at the micro level.
Tracy Stoddard, anything to add?
Michael did an excellent job. You know, our companies are similar in that we’re developers and owner operators, both sides. One example, maybe, of this cascading impact of getting squeezed on the front end of a process where the back end is fixed, whether it’s a, you know, PTC or ITC window that that we’re driving towards. We submit several projects into the PJM. In this most recent window, solar projects. And as Michael said, you know, it’s a contact intensive business securing land. So we had a lot of, you know, last minute, you know, land acquisition going on. Big decisions for folks. You know, we’re talking about their farm. Do they want to keep, you know, farming the land? You know, it’s these kind of things that we’re trying to hit a window in, in a point where, you know, this personal contact just can’t happen. So the flow on it could have been had we not got projects into the, into the queue window, there’s no opportunity to build those projects in 2022 and 2023. You know, because March 31st was still the date for PJM, although PJM did work with folks, but that date was still kind of the date. So that’s a bit of that cascading effect of just being squeezed on the front end. You know, the industry consultation or that the agency consultation that Michael mentioned and public meetings, we’re seeing all the same things that, you know, it’s, it’s certainly slowing us down. One thing that that I would mention is what we are seeing, though, is that it doesn’t matter where we go, who we talk to, people are doing the best they can. And it’s, it’s kind of impressive some of the, you know, the effort and the creativity and the extra mile that we see. I mean, that’s evident in our industry anyway, but, you know, in the last couple months, it’s been, you know, sort of kicked up a level, and it is really sort of heartwarming to see how the industry is pulling together. And everybody really is trying as hard as they can. Nobody is, kind of, sitting back and saying, well, jeez, let’s wait this out and see how it comes on the back end.
Tracy, I’m curious, you mentioned the, the permitting issues and Michael mentioned the same. Given the record unemployment rate and the concern we have of keeping, kind of getting the economy where we started. We have had some, some headwinds from a permitting standpoint in various parts of the country. Do you think that will, will, will back off a bit? Or do you think that the, you know, the, the issues we’ve had in permitting are going to be just as tough even in this environment?
Jeez, how do I address that? I mean, it would—I guess, as an optimist I would like to see, you know, some maybe some relaxation on some of the headwinds. But, you know, for us, we’re kind of assuming business as usual there. It’s just all of the front end’s work we need to do that Michael pointed to with agency contact and field work and, you know, all of that things—all of that work in order to get, you know, an application package. If you’re going into a state level permitting process, to have those several thousand pages of, you know, binders to drop on somebody’s desk in a few months. That activity is just—it takes longer, and it is harder to do so, you know, the later you get into the process, the later you come out the back end. And you know, if it’s a solar project, you’ve still got the same ITC timelines. So that’s really kind of what we’re focused on is just trying to figure out how to navigate—and I guess I’m into the, the near-term impact more than the longer term. But if you’re late, late getting into—later getting into the start of the permitting process, you’re going to be later coming out of the back end. And then, despite all of your good planning of not wanting to run with the entire herd in Q4 of an expiry year for a tax incentive, you may get forced there and then that loops, you know, just more impacts on your project in terms of, you know, construction and availability of cranes if it’s wind, you know. So it, it does cascade that way.
Carl, before I turn it back to you, let me ask another question to Mike. We talked about the 18-month period that everyone’s looking in immediate terms what you need to do, to do. Michael, what, what you thinking about in the next 30, 60, 90 days? What’s your, what’s—as the founder and president of company, what’s keeping you up a night right now?
Our commitments to make construction plans that we have for next year, really, in the near term. We have a number of projects that are in late stage development that we’re hoping to finance to the end of the year and bring forward next year. But the delays that I described before, and Tracy went through, are making that more difficult day by day. And although we’re not in a project financing currently, if we were to engage in one, we don’t have a completely clear picture of what that would mean in terms of the timing to close those transactions, to achieve the construction financing that we need at NTP to develop a project for construction scheduled to meet the 80% PTC threshold. So sorting that out and trying to, you know, see weeks, months into the future and understand what those markets will be when we need to access them is a big a concern for us.
Good. I lied Carl. Before I head back, let me ask the same questions to see them from the investor’s perspective. What, very short term here, what, what you looking at from, from the money side of the world?
Just like that. I think at the macro level, we closed our office early, relatively early, March 10th, to focus on being healthy. We have 60, 60 people on our team, but we need to keep all hands-on deck and be able to close and provide funding. We close transactions on a regular basis, and have continued to, to get that into, into the projects and out to our clients themselves, like Michael and Acciona. I think as we’ve, we continue to fund ourselves now and in its stable position and look for growth opportunities, as we see the pipelines may be delayed, projects could be delayed, but the pipelines are still there and growing for our top tier clients. But we also, with that, given some of the challenges of sectors, there’s certainly an increased scrutiny on credit quality of our portfolio and managing through any credit problems that arise.
Yeah. Carl, back to you.
All right. Thanks, Ed. So I was going to turn it over to Michael, again, if he wanted to give a quick update. You know, in the M&A markets we’ve seen a relatively frothy M&A market cooldown in some respect since COVID 19. We see some deals continuing to proceed and others kind of, you know, have emerged. How do you see the M&A market for renewables adjusting? Maybe now, 3 months, 6 months out?
For us, we really—our M&A market is really the project level market. We haven’t been looking at large portfolio acquisitions on the project end. Things were naturally slowing down from last year just in wind, in particular, as we went from the 100% to 80% transition. So there was a big push to get projects that could get lined up to take full of full advantage of the 100% tax credit. That seemed to slow down significantly as the projects were capable of achieving that were acquired, financed, and set up for potentially taking place this year. here are a number of projects that, kind of, didn’t get picked up in that M&A, M&A ramp that carried over into this year trying to restructure themselves or otherwise are just trying to sort out development issues, that had a project level that I’m maybe didn’t quite get there last year but might get solved in time for building next year. So, it’s a smaller group of projects that we’ve been looking at. Maybe not as strong, in some cases, but there’s still good projects out there, definitely. But the same issues that are affecting us and development also turn around in an acquisition mode. We have to do due diligence in projects. We have to be able to have people visit sites, meet with sellers. We need to do surveys. We need to have independent engineers on site. All of that’s difficult right now, which inherently, has got to slow down the process significantly. Although our development and finance team can work from home, and we do that efficiently, and everyone’s trying really hard to keep those processes moving, it’s inherently going to be more difficult in the current environment.
Thanks. Have you seen—I guess, you know, to that point, have you seen the use of technology? Whether it’s drones or, kind of, remote kind of services on the side of the engineers and people to still be able to get out there and move things along? Or is it just not keeping up with what you really need to get the job done?
Well, kind of like, like testing and the COVID crisis. If you didn’t have it in place before it started, it’s pretty hard to make a big change in the short term, but we haven’t used drones. That’s a great idea. We use them for blade inspections on other things. But where we have been, actually on construction sites, and we have two going on now, is we have remote cameras that our construction managers can use remotely, pan around, zoom in with remarkable fidelity. So it’s kind of a zoom picture of your wind farm construction.
Nice. Nice, all right. Thanks. I think if, if you could we’ll switch over to Susan. I think one of the questions we had is which markets may be doing better than others? I think as an investor in this space generally, are you seeing any areas, whether it’s wind, utility solar, C&I solar, ready solar, that look more vulnerable to the others or stronger than others, and which ones may, kind of, come out of these tough times in better stead?
Well COVID 19 is impacting all businesses. Generally, we’re seeing projects, whether it’s the wind projects or solar or energy efficiency projects that were already under construction are continuing to be—to finish on target. And particularly, when they’ve already has financing committed in place are staying on more on schedule. Things that are about ready to start getting slowed down for the reasons that Michael just talked about. That even the university’s where there’s been some—we’ve been involved in some significant projects recently as they’re trying to agree to themselves. You have governments, universities and customers first, focus on, on the same issues we talked about, which is delaying things. But we’re not seeing cancellations per se of projects, just being pushed out a quarter, maybe a quarter or two as we work through this. But they are certainly one of the specters. We’ve been an investor in residential solar, which has really gotten some press. That’s an industry that’s had to immediately change their business model overnight. Shift their sales, or stop their door-to door-sales, and also be faced with their retail partners shutting down as well. So they’ve had a dramatic slowdown in the second quarter in their growth. But they too, were, you know, were hearing or adjusting to remote sales, new technology, learning how to digitally build their pipeline, and that may be part of—more part of their model in the future. And their value proposition, though, is still the same. Fundamentally, they’re providing lower electricity rates and increasing the resiliency to consumers’ residential homes in California and other places. So they’re, they’re adjusting to the new world, too. And also, with the risk in and consumer credit there’s certainly likely delinquencies and payment problems in the short term. But what we like is that they’re also providing savings to their customers versus the alternative is going back to regular alternatives with utilities. And they also focused a lot on credit up front. And they’re underwriting.
No, it’s interesting. I think we’ve seen technology become pretty critical for the residential solar, as seeing there’s been numerous people have been opportunistic and kind of revamp their processes. And kind of really moving full speed ahead and others that haven’t kept up with the same, same extents. So that’s interesting how some are adapting, some are not. Thanks. I think if, if we can move onto Tracy. Tracy, I think the next topic we’re going to cover is tax eligibility. You know, we mentioned earlier how you’ve seen equipment in labor delays affect tax credit availability for numerous developers so far, and this may continue as the pandemic for long or even be exacerbated. Do you have any particular steps that you have seen, that you may be taking to shore up your projects’ eligibility in light of this?
Yeah. Thanks, Carl. In terms of shore up, I think, I’m not sure we’re doing things all that different, but it’s definitely asking—the circumstances are asking us to be more diligent in some of the things that we do as a matter of course. So example I would use is we have a 2020 wind project that’ll go COD later this year. It’s under construction now, so deliveries are still happening. Crews are still working. Things are going slower. But back to the everybody’s doing the best they can. So we’re not, let’s say, worried about our schedule. But of course we’re planning for contingencies. But just one aspect of that is, you know, back to the stimulus 4 question, if no, let’s say, relief on timing comes, you know, it now moves us into needing to be a lot more diligent about—diligent about our planning for if we don’t make the four year window, you know, showing continuity. So we’ve got a couple of our folks spending a lot of time on our what we call our PTC laws and just going back to April of 2017 and making sure that there’s no gaps and we like our story and we’re very confident about it. I mean, we are anyway, but the current circumstances force us to go back and just make sure that that we’re very, very well covered there. That’s one example we’re seeing right now. One other, maybe this isn’t so much on the tax eligibility, but we had been fairly active as a buyer in the M&A side. What we’re seeing now, we still poke a little bit as a buyer, but on the sell side we’re aware of, you know, say a few wind projects that were slated for 2021, a little bit of delay in permitting now. So there’s this uncertainty of, are they still a 2021 80% project? Or did they become a 2022 60% project with no stimulus 4? And, I mean, it’s no fun to be a solar right now because you’ve got buyers like, you know, Michael and I asking all of these sorts of questions and you know, there’s it’s tough to, to have a, you know, 100% answer, right.
Hey, Tracy, question from the audience. Maybe since you talked about tax equity you could follow up on this. The question is, what signals in the market are monitoring to engage the appetite for tax equity? I find this interesting. I saw, you know, Wells Fargo having a reporting, a penny a share earnings in the first quarter and earlier this week. And, and are you looking at those factors or is it really, you’re in the market. You know your tax equity players… are you talking to brokers? How are you trying to figure out crystal balling the availability of tax equity of your project in this environment?
I’m not going to be able to say too much there. I’ll get out over my skis very quickly since it’s, it’s our finance folks that drive that. But certainly the—one of the signals is just, let’s say, the conversations that had been going on a couple of months ago. What, what is the cadence of those and are folks on the supply side for tax equity, on the investment side still engaged? I mean, we are seeing very good engagement there, and I know our are folks are, you know, quite positive about how things are, are working. So in terms of like, are we still seeing willingness? I mean, yeah, absolutely. As far as what signals are we monitoring farther out? I’m, I’m sorry. I just don’t have the, the answer there.
Understood. Carl, we only have a couple minutes left. Not surprising, given the depth of knowledge of our panelists today and their experience. So maybe you have a wrap up question, and we can see, we see where we can we can end it.
Sure. I think one of the things we’ve noticed is we’ve seen demand in—for energy decline in recent weeks due to the crisis and as well as the quarantine. And as power demands and patterns shift, we’ll probably some industries emerge from this crisis a little weaker, like hospitality and retail, while others may prevail unscathed or even stronger, possibly technology and data centers. How have you seen, you know, this change or shift in demand affect the markets? And maybe what would you say as a developer, what adjustments are you making in return? And, maybe, I don’t know if we want to start with, with Susan on this question?
I sense more generally, because we’re—we don’t go out and secure the offtakes ourselves, but it’s, it’ll be interesting to see while there’s the demand in electricity is causing, at wholesale level, some reduction in pricing. The wholesale market pricing and C&I shutdowns have reduced the demand, although we’re all using more electricity at home. But I think another trend focus on, which could be even longer term, and will impact the oil and gas sector, broadly, is the double whammy of COVID 19 on oil and gas prices that were already low and suffering in an industry that has a lot of leverage. I think the renewable energy industry energy itself, our projects cannot be highly leveraged with that, which is unlike the natural gas fracking industry in the US. And we’re starting to see those headlines. And it’s really— a recipe for, for a lot of trouble when you have leverage in a crisis like this, but that fundamentally will impact natural gas prices. The future outlook for renewable energy pricing in projects. In a pos—it could be in a positive way.
Sure. Sure, no, thank you for that. I think in the interest of trying to keep to our, to our schedule. Michael, would you like the add anything to that analysis?
Well, you know, the crisis has unfolded so quickly, and we’ve seen demand, decline, destruction, and collapse in the economy with such a fast rate. It’s almost hard to assess right now what the longer-term implications would be right now. I mean, we’ve still been working with counterparties on power purchase agreements that were planned for next year, and we haven’t seen an immediate effect. But as we move through this, it takes longer for the economy to reopen, companies feel more pain on their bottom line, you have to wonder if it’s going to have an effect on demand in the near term.
Yeah, I would I would agree. And, Tracy, do you have any final thoughts on this matter? This one, no. Nothing to add that Susan and, and Michael haven’t already touched on.
Got it. Thanks.
But thank you.
Thank you, all the panelists, we are out of time, we’re a little over. We have a number of questions from the audience that we did not get to. We’ll try to circulate them after the webinar and let folks enter them directly. Thank you again for everybody listening. And thank you to our panelists. And we will see everybody again next Thursday. Bye.