Credit crunch sends SDG&E into wind business

After financing problems delayed a Montana wind farm that San Diego Gas & Electric needs to meet state green-energy goals, the utility decided to step in a big way — it is planning to spend $600 million to finance the massive project along the Canadian border.

The credit crunch made traditional bank financing difficult, if not impossible to find, SDG&E President Michael Niggli said Tuesday in announcing the deal with San Francisco-based wind farm developer NaturEner.

“It would not have been developed without this contract,” he said.

With 14 percent of its electricity coming from renewable sources this year, SDG&E is furthest behind among big for-profit California utilities in meeting a state mandate that it get 20 percent of its power from wind, solar and geothermal power plants.

It signed a contract with NaturEner for 309 megawatts from the new $800-million wind farm, called Rim Rock Wind — that’s about 6 percent of the total electricity used in the county.

But, unlike Glacier Wind, a neighboring wind farm also under contract to SDG&E, Rim Rock wasn’t getting big bank financing.

After Lehman Brothers collapsed and other financial institutions ran into trouble, the traditional method for funding renewable power investments dried up, said Alfred Cahuas, NaturEner’s chief financial officer.

The federal government subsidizes such investments by giving investors a credit on their taxes.

But without profits, the big banks had no tax bills to cut.

“We needed to look at another source of funding,” Cahuas said.

The utility made sense because it has reliable profits and a big interest in getting the project built.

Also, a recent change in federal law allowed public utilities to take advantage of the tax credits.

Together with accelerated depreciation, the tax benefits come out to about 45 percent of what investors put into a project, SDG&E said in a filing with the California Public Utilities Commission.

SDG&E is asking the commission to approve its investment.

Niggli said that will save electricity buyers money because its guaranteed rate of return on investments, 7.3 percent after taxes, is less than the interest rate banks are charging.

“In today’s market, you might have to pay 10 or 11 percent, if you could get the money,” he said.

Each percentage difference in financing translates into $120 million less in energy costs over the life of the contract, Niggli said.

The contract calls for construction to begin next year and to be finished by the end of 2012.

After bank financing for renewable projects stalled, energy companies have stepped into the gap, said Mark Bachman, a financial analyst who watches the solar industry for Auriga USA in Portland, Ore.

An example, he said, is a solar farm in Nevada financed and owned by Sempra Generation, a sister company of SDG&E.

SDG&E will have a majority stake in the holding company for Rim Rock for 10 years while the tax benefits are greatest. After that, NaturEner will be the majority owner.

Niggli said there is no conflict of interest in the company essentially buying power from itself because the contracts for that purchase have already been approved by the utilities commission, which will also have to agree to any changes.

The electricity the Montana wind farms produce won’t actually be used in San Diego, but will be sent over the border into Canada. However, SDG&E will get credit from California for its green production as if the electricity was used here.