NextEra turns focus to repowering wind assets to capture tax credits

Source: By Lucas Bifera, SNL • Posted: Monday, August 1, 2016

Turning old wind farms into new wind farms could become a cornerstone of NextEra Energy Inc.‘s investment strategy in the coming years, especially if the company has stockpiled cheaper, more efficient turbine equipment during a broader pause in the wind industry’s development pipeline.

NextEra management during a second-quarter earnings call emphasized the company’s decision to repower a pair of wind facilities in Texas totaling 327 MW for roughly $250 million, an investment it hopes to replicate across its wind holdings, so as to capture federal production tax credits for repowered wind plants, per guidance the Internal Revenue Service issued in May.

That guidance effectively laid out qualifications for repowering eligibility, such that equipment upgrades made to existing facilities must be equal to 80% of the value tied to the original facility.

The company declined to identify which facilities specifically they will repower in Texas, but did suggest that the move to repower older wind facilities, whereby existing turbines would be switched out for newer, more efficient models, could provide an immense growth if applied across segments of the company’s wind portfolio.

“We are … conducting due diligence on the rest of our U.S. wind portfolio, and are beginning to talk to customers in order to assess the potential size of this opportunity,” NextEra Executive Vice President of Finance and CFO John Ketchum said during the July 27 call.

Management suggested that returns on repowering are expected to be as good as new projects and showed a preference toward contracted or rate-base assets rather than merchant assets, some of which the company intends to likely sell to bolster its financing plan.

“We continue to expect opportunities to recycle capital through potential additional sale opportunities of merchant and other nonstrategic assets in our portfolio,” Ketchum said. “Capital recycling remains an important part of our financing plan as we continue to execute on our strategy to become more long-term contracted and rate regulated.”

The repowerings will begin construction over the next few years, consistent with the stepdown of federal wind production tax credits, which are set for 80% in 2017, 60% in 2018 and 40% in 2019, and terms laid out by the IRS for repowering eligibility.

Repowering wind facilities typically becomes most attractive after a 20-year operational life, according to a report by the National Renewable Energy Laboratory. But the decision to repower, using an 80/20 framework as laid out by the IRS, could mean that plants would become immediately more valuable, while locking in the credits.

“There are a couple benefits to repowering, the first being more efficient operation of a wind farm and potential for higher earnings, and second, assuming repowering is extensive enough, they will have been considered to be built as new wind turbines and entitled to 10 years of tax credits,” Keith Martin, a partner at Chadbourne & Parke LLP, said in an interview.

The benefits could extend beyond tax credits, particularly if the more efficient turbine equipment was purchased in bulk from manufacturers at the precise 80/20 margin and stockpiled amid greater uncertainty around wind tax credits.

“I expect bigger companies will have stockpiled equipment,” Martin said. “As to whether you get PTCs, you go turbine by turbine and test whether spending on upgrades is four times the market value of the old components.”

Analysts responded favorably to NextEra’s decision to seek out repowerings, but did flag that each repowering project is effectively a “whole new project,” meaning that permitting, leases, contracts and hedging must be reconsidered in addition to the equipment upgrade.

“We view the repowering opportunity as just another attractive avenue via which NEE can extend high single-digit EPS growth beyond 2018,” Wells Fargo Securities analysts said in a July 27 note.

“[NextEra Energy Resources LLC] development continues to drive growth, and repowering opportunity could be meaningful, but size of opportunity remains a question mark,” Guggenheim Securities LLC analysts said in a July 27 report.

“Projects that are merchant have one less difficulty associated with them; that is, you don’t have a [power purchase agreement] counterparty to have a discussion with,” NextEra Energy Resources President and CEO Armando Pimentel said on the call. “Having said that, we have had discussions with a couple of PPA counterparties and they love the idea of repowering.”