Comparison of Financing Costs for Wind Turbine and Fossil Powerplants

This report compares the financing costs of wind turbine and conventional fossil power plants. In both cases, the basic financial structure is assumed to be based on private power developers using a project finance arrangement. This is the dominant method used for wind turbine projects and is very widely used for conventional fossil power plants. We measure financing cost using the weighted average cost of capital. The two principal forms of finance are common equity and long term debt. The capital structure of a project reflects the weights of each type of capital. In the past two years there have been only two wind turbine projects that have been financed, so the basis for broad conclusions is limited. Nonetheless, there appears to be a significant advantage in financing costs for conventional projects compared to wind turbines. There are two sources for the disadvantage facing wind projects. First, the cost of equity capital is significantly more expensive for wind than for conventional power plants. Secondly, the capital structure of wind projects has a much greater fraction of this expensive equity than conventional alternatives. The expensive common equity for wind turbine projects appears to reflect the perception of technological risk. The capital structure effect, however, may be an unintended effect of the production tax credit created in the Energy Policy Act of 1992. The tax credit is a benefit to equity investors only. It does not help projects sustain debt by creating cash that can be used to repay lenders. We estimate that if the production credit were paid in cash as opposed to a tax credit, much of the capital structure disadvantage for wind turbine projects would be eliminated.