Google Profits From Tax Credit for $750M Energy Plan

Google Inc. plans to ramp up its $750 million investment in clean energy projects by taking advantage of tax rules to channel more funds into wind, solar and other renewable power sources.

All except two of the company’s investments in clean energy projects were structured as tax equity financing, tapping government incentives that encourage large companies to back promising projects that often have yet to generate income, said Rick Needham, Google’s director of green business operations.

“It’s part of our culture to try and find ways that we can make things better,” Needham said in an interview at Google’s headquarters in Mountain View, California. Each deal, he said, is an opportunity “to support something that we think is important, which is deployment of more clean energy and doing it at a scale and in places where it can eventually lead to a lower cost of clean energy.”

Google’s goal is to promote technologies and new financing arrangements that will give a boost to the industry and diversify its sources of earnings. Rivals may follow its lead. “A lot of us are hopeful that they will bring more investors into the market,” said Mark Regante, a partner at Milbank, Tweed, Hadley & McCloy LLP, a New York law firm that represented lenders for a project Google now backs.

“Part of their motivation is to basically try to lead more of corporate America,” Regante said in an interview. “Right now the tax benefits are a significant element of getting to the targeted yields that” potential investors want.

Selling Tax Credits

Renewable energy plants qualify for tax credits that they typically can’t use until they are selling power and generating profits that can be taxed; once complete, many don’t have enough taxable profit to use the entire benefit. By selling these credits, developers receive funds to back their projects, and the large corporate buyers can apply the credits to their own tax bills.

In June, Google created a $280 million tax-equity fund to help SolarCity Corp. pay for rooftop solar systems. SolarCity finances the installation of photovoltaic panels on houses, and homeowners pay a monthly fee to lease the gear and purchase electricity. The investment was the first time a major corporation, rather than a financial company or utility, provided this type of financing for a solar installer.

‘Serious Player’

Google is a “serious tax equity player,” Needham said. “We realized we have cash on our balance sheet, we have tax capacity, we could be doing this. A lot of companies could be doing this. A lot of companies could fall into the breach and fill that hole and make good returns. We would encourage them.”

Google has invested in a wide variety of early stage companies and projects since 2006. Needham said its funding decisions are based on meeting two goals: they must generate a return, and they must be innovative. Often it considers investments that made other potential backers wary.

“We can help look at some of these technologies, some of which we’d call more evolutionary, that people are less willing to finance,” he said.

Google invested $100 million to support construction of Caithness Energy LLC’s 845-megawatt Shepherds Flat Wind Farm in Oregon. The project will be the first in the U.S. to use General Electric Co. wind turbines with permanent magnet generators instead of traditional ones with gears. The new technology improves efficiency and lower energy costs from turbines.

Leveraged Lease

The web company also paid $157 million to buy and lease back to Terra-Gen Power LLC two phases of its 1,550-megawatt Alta Wind Energy Center, a financing arrangement called a leveraged lease. When complete, the Tehachapi, California-based plant will be the largest U.S. wind farm, and Needham said it was one of the first leveraged-lease deals in the wind industry.

In April, Google provided $168 million to support construction of BrightSource Energy Inc.’s 392-megawatt Ivanpah project in California’s Mojave Desert, one of the first utility- scale solar thermal plants to enter construction in the U.S. in three decades.

In May 2010, it invested $38.8 million to refinance two NextEra Energy Resources LLC wind farms in North Dakota.

SolarCity estimated that the top 200 U.S. companies have more than $1 trillion in cash available for investments.

“At a time when American companies are sitting on record amounts of cash, Google is showing that solar is a great investment, and should absolutely inspire other companies to follow its lead,” Benjamin Cook, the San Mateo, California- based company’s vice president of project finance, said in an e- mailed statement.

‘Transformational Capacity’

The two key criteria that Google uses to evaluate all these energy investments are the “returns, given the risks” and the “transformational capacity” of a specific technology or financing method, Needham said.

“We wouldn’t be making these investments if they didn’t make good business sense,” he said.

Google is also backing offshore wind. The company is providing 42 percent of the equity needed to complete pre- construction work on the Atlantic Wind Connection. The offshore transmission cable would serve yet-to-be-built wind farms off the Atlantic coast, and total construction costs may reach $5 billion.

Offshore Wind

The project is intended to serve as the “backbone” of America’s fledgling offshore wind industry, Needham said, and will use high-voltage direct current, “which is not something that is all over the place in transmission.”

The cable, and a $5 million investment in an 18.7-megawatt photovoltaic plant in Germany, are the only ones that Google does not consider part of its tax-equity financing efforts.

The company fell 2.6 percent to $532.53 at 1:45 p.m. in Nasdaq Stock Market trading after Morgan Stanley downgraded it to “equal weight” from “overweight.” The shares have risen 16 percent over the past year.

Google is contemplating investments in other forms of clean energy that may be riskier than the projects it’s already backed. One promising area is geothermal, especially geothermal technologies that may improve resource assessment, drilling or power plant efficiency, Needham said.

If there’s a deterrent to Google backing geothermal projects, it’s the typical five-year development timeline, from resource exploration to commercial operation. “It is a long time to get that power,” Needham said. “We like projects where we’re able to get power online sooner rather than later.”

‘Zero-Carbon Technologies’

Google also is open to more offshore wind projects “if the economics make sense for us and we think it can have some transformational aspect to it,” he said. Offshore wind farms that use new technology, such as larger capacity turbines or models without gears or permanent magnet generators, may be attractive opportunities.

The company’s energy focus is squarely on clean energy, and Needham said Google has no interest in nuclear or natural gas. “We’re focused more on zero-carbon technologies for our investment dollars,” he said.

For technologies that are newer, or not as widely deployed, Google is “more willing than some other companies to take some calculated risks,” though “we would expect to get better returns on those kinds of investments,” Needham said. The Atlantic Wind Connection is an example of that type of deal.

“Development stage equity earns a higher return; it’s a higher risk investment,” he said.

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