SAN FRANCISCO - Regulatory requirements, driven by public opinion, mean that financing for renewable energy projects in California will soon be measured in billions of dollars of bond issuance.

That was the take of speakers on a renewable energy panel this week at The Bond Buyer's California Public Finance Conference here.

"Given the mandates, the political pressures, and the public clearly pushing for renewable mandates, the issuance volume in California is going to go up substantially," said Daniel Hartman, managing director at Public Financial Management Inc.

Until now, municipal utilities and public power credits have mostly dabbled in renewable energy, he said, but that is changing rapidly.

"What you're going to start to see in 2009 - not 2008 but 2009 and beyond - is a sizable increase in issuance, I think somewhere in the two-and-a-half billion dollar range in 2009 and going up from there," Hartman said.

Renewable energy investments in the United States are being driven largely by state-level renewable portfolio standards, or RPS, according to Anne Selting, a Standard & Poor's director.

"A renewable portfolio standard is simply a requirement that an electric utility procure a certain amount of its generation through renewable resources by a certain date," she said.

In California, investor-owned utilities face a 20% RPS standard by 2010, with the standard widely expected to increase to 33%, Selting said. While the state regulations do not explicitly apply to public power entities, legislation clearly indicates that they should cooperate in the spirit of the law, she said.

Similar rules are proliferating across the country, and the goals are ambitious considering where things stand now.

Currently, Selting said, about 2.5% of electricity is generated from renewable sources, or 6% if you count hydroelectricity.

"We're starting at a very low level of RPS," she said. "We have a long ways to go if we're going to meet these policies."

For the most part, renewable energy means wind turbines, though geothermal sources also have potential in California, Hartman said.

A key question going forward, panelists said, is the fate of the federal production tax credit, which provides a tax benefit for wind installations but will expire at the end of the year unless Congress acts.

The so-called PTC has a big impact on the viability of wind power in the U.S., according to attorney Girard Miller of Fulbright & Jaworski LLP.

"The industry is seriously and adversely affected without the production tax credit," said Miller, who has represented wind turbine makers. "Without the PTC there's a reluctance in the industry to commit to the United States," he said.

The PTC is at the center of an increasingly common financing arrangement in financing wind projects for public power credits.

That involves having a private owner build the project itself, using the tax credit as a subsidy, and having the public power entity issue tax-exempt prepayment bonds for the power.

"They should in theory minimize the cost," said Larry Sobel, a partner at Orrick, Herrington & Sutcliffe LLP. "You're using all the tax benefit the code currently provides, and they're really, really complex so the lawyers have a field day with those deals."

Panelists said that one of the major obstacles to renewable electricity development is transmission, since the wind farm projects usually aren't anywhere near the public utility that needs the power.

It's even more of a hurdle from a tax standpoint if public power entities are directly financing and constructing their own projects at remote locations, Sobel said.

"How do we assure that the power that's coming from the wind farm is used in the local utility's qualified service area, or otherwise not subject to private use?" he said. "The tax lawyers are getting involved in transmission issues we'd rather not know that much about."

Jim Tracy, the chief financial officer of the Sacramento Municipal Utility District, said his agency has been involved with solar and wind projects for about 20 years, though it is beginning to ramp up its use of renewables.

His experience has made him wary of some of the risks involved.

They can be dangerous in take-or-pay contracts that rely on the utility's general credit, Tracy said.

"At some point in time this stuff can come back and bite you if you haven't structured it," he said, adding that the risks are exacerbated by the still-evolving state of wind power technology.

"These are not machines that are going to last 20 years," Tracy said. "You issue your bonds, you've got to figure in what are the costs of replacing gearboxes, what are the costs of replacing blades. I just think the risks on these things are tremendous."

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