Download Financing Renewable Energy Projects

Developing Renewable Energy Projects
on DOD Land
Anita Molino
Bostonia Partners LLC
2011 ADC WINTER FORUM | PAGE 2
Bostonia Partners Introduction

Founded in the 1990s, Bostonia Partners, LLC (“Bostonia”) is a financial services
company headquartered in Boston, MA

The firm is well recognized in the industry for structuring innovative financing
solutions in structured project finance and nontraditional debt and equity placements
for energy efficiency, renewable energy and real estate projects

Bostonia established its own broker/dealer, Bostonia Global Securities, LLC (“BGS”)
in 2004

Bostonia’s principals have created numerous financing and investment programs and
structures which were the first of their kind

Bostonia has structured approximately $7.6 billion in financings
Agenda

Capital Markets Update

Renewable Energy Market


Development

Federal Incentives

Challenges and Benefits
Electricity Market


Generation
Renewable Portfolio Standards

SRECs

REC Benefits and Challenges

Value Proposition for Renewable Energy

Financing Renewable Energy

Conclusions

Q&A
Capital Markets Update
 Crisis in Middle East and economic turmoil in Europe adding volatility to
global equity, debt and commodity markets
 Safety and stellar credit quality continues reign supreme
 Spreads have tightened into Q4 2010, but have widened through
January
 Continued Positive Outlook for Investment Grade Issuers
 Investors put a large amount of capital to work in 2010
 Below investment grade lending has begun to reverse its decline
Private Placement Market 2010



Private Placement Market Profile:
 $40 billion in issuance in 2010
 Represented about 10-15% of the total corporate debt market
 Another $40 billion expected in refinancing activity over the next
two years should lead to a large increase in issuance in 2011
and 2012
Private Placement Issuer Profile:
 68% were repeat issuers
 65% were unrated by national rating agency
 50% were private companies
Private Placement Buyer Profile:
 $120 billion in demand / average deal was 3x oversubscribed
 50% of buyers looking for NAIC-3 debt
 Increased demand has reduced the premium buyers received
for private issuance.
2011 ADC WINTER FORUM | PAGE 6
Renewable Energy—The Market


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Renewables: solar, wind, biomass, landfill gas, geothermal
The market:
 $18.6 billion invested in 2009
 Over $350 billion invested by 2035
The challenge: renewable energy costs more than traditional carbonbased energy
 But, utilization of renewable energy incentives, tax incentives and
renewable energy credits makes the business case work in certain
circumstances
 Project owners can take advantage of tax incentives (private tax
payers)
7
Basic Ingredients for Renewable Energy Development

Appropriate renewable technology type(s) must be determined based upon the
availability of natural resources

Analysis of current electricity costs must be weighed in conjunction with the cost of
electricity produced from a renewable source

Siting / water requirements / permitting / and other due diligence items must be
considered

Availability of state / federal offered incentives including:

RPS Standards (29 States currently have an established RPS)

Utility Rebates

ARRA Incentives

Depreciation Incentives extended to 2012 by the Tax Relief, Unemployment
Insurance Reauthorization, and Job Creation Act of 2010

Ability to enter into long term Power Purchase Agreements (“PPAs”)

Transmission & grid considerations
Challenges and Benefits of Renewable Energy
Development
Challenges
 High upfront capital obligations, inflexible budgets
 Higher short-term cost of energy
 Long term cost and security benefits are not immediately realized
 Value proposition not readily definable
 Geographic and market constraints
Benefits
 Power Purchase Agreements (PPAs) provide for fixed long-term energy
price certainty and protection against rising energy costs – don’t require outlay of
Capital to procure
 Power contractually delivered with assured quality and in assured quantities
 Renewable Energy Credits generated from the renewable power installation can be
used for compliance with federal mandates for the DoD
2011 ADC WINTER FORUM | PAGE 9
Financing Renewable Energy Projects
•
The ability to monetize federal tax credits/incentives is the key to financing renewable energy
projects. Employing Debt and Project Equity are also be essential ingredients.
•
Tax Equity monetizes:
• Investment Tax Credit (ITC) or 1603 Cash Grant in lieu of ITC
• Production Tax Credit (PTC)
• Bonus Depreciation
• MACRS Depreciation
•
Project Equity:
• Necessary for developers to have “skin in the game”
•
Debt can serve to enhance the returns of the Equity
Renewable Energy Federal Incentives
 Menu of Federal tax incentives:
 Projects can claim one of the following:
 Production Tax Credits (PTCs): 10-year inflation adjusted credit per MWh
produced (does not apply to solar).
 Currently, $21/MWh
 Investment Tax Credit: credit on the depreciable installed cost when the
project becomes operational – does not depend on ongoing generation
of electricity
 30% for solar, fuel cell and small wind; 10% for others
 Section 1603 Grant Program: allows renewable energy developers to
qualify for a 30% Federal grant for qualified capital costs (the same
value as the ITC)
 Program was extended, now set to expire on December 31, 2011
 5-year (MACRS ) accelerated depreciation for most capital items
 100% Bonus Depreciation election available in lieu of
MACRS depreciation
11
Renewable Energy on DoD Land
 Benefits to development, power user (installation) and project
financing

Development:
 Utilizes idle and under-utilized land
 Provides jobs for the community
 Provides Energy Security for the United States
 Progress towards Renewable Energy Mandates and Goals

Power User (installation):
 Clean, secure source of power to installation at a fixed, predictable cost
 Utilize Renewable Energy Credits to meet mandate

Financing:
 Contracts with Federal Entity provide strong foundation for lowest-cost of capital
 Ability to secure low-cost capital equates to lower PPA rates for DoD
On-Base Development Considerations in Texas
Texas has largest renewable energy potential in the nation and with abundant
and multiple resources: wind, solar, biomass




Address the problem of inadequate power transmission infrastructure in Texas by
having an opportunity to sell power “inside the fence”
Sufficient and cost-effective land resources for siting renewable generation projects
Provide energy security and mitigate against threats to the utility grid by reducing
reliance on energy resources from off the base
Potentially Purchase energy at the same cost or at a lower cost through a PPA.
(~$.09/kWh Average Retail Price of Electricity as of Oct 2010)
2011 ADC WINTER FORUM | PAGE 13
Electricity Market in Context of RE

Electricity prices vary state-to-state, and are variable month-to-month

Pricing of electricity on the commercial market is non-negotiable

Price of Renewable Energy varies state-to-state, but is negotiated

Deregulated states experience higher average prices

Areas with higher rates more easily suited for RE development

Low-rate areas demand innovative approaches
Generation Market
Average Retail Price of Electricity by State (2008)
Map of Regulated and Unregulated States
Source: EIA


Deregulated states experience higher average prices
Areas with higher rates more easily suited for RE development
Generation Market



The cost of traditional energy sources is based on the price of oil, hydrocarbons
The cost of renewable energy sources is based on the price of technology
Incentives are necessary in low-rate areas: Renewable Portfolio Standards
incentivize utilities to purchase RE, broadening market; Federal tax incentives
lower development costs; Power Purchase Agreements incentivize developers and
financiers
Effects of State and Federal Incentives on
Levelized Cost
Source: Lazard, Ltd.
 Federal and state tax incentives can make energy projects affordable
 Developers and financiers must utilize incentives, lowering the levelized cost
Renewable Portfolio Standards







Many states have adopted Renewable Portfolio Standards (RPS) – vary
from state to state.
RPS requires utilities to obtain a minimum percentage of their power from
renewable sources by a mandatory date.
A utility can also satisfy the requirement by purchasing renewable energy
credits (RECs).
A REC represents the right to claim attributes and benefits of renewable
power – 1 REC = 1 MWh
Bought and sold through contractual arrangements.
Debate continues over a Federal RPS – until then, the action is at the state
level
Renewable Energy Credits can be utilized to meet DoD mandates
18
Renewable Portfolio Standards
SREC Markets

Solar Renewable Energy Credits (SRECs) necessary for enabling feasibility of
Solar projects

In SREC states, the Renewable Portfolio Standard (RPS) requires
electricity suppliers to secure a portion of their electricity from solar
generators

1 SREC = 1,000 kWh of solar electricity = 1 MWh of solar electricity
10 kW solar capacity = ~12 SRECs per year

SRECS are priced via supply and demand and sold in spot market auctions or else
through long term (3,5,10 year) contracts

The demand is determined by individual state RPS solar requirements and the Solar
Alternative Compliance Penalty (SACP) set by the state

SRECs in states with higher SACPs, like New Jersey, are worth more than states
with lower SACPs
Current SREC Markets
REC Benefits and Challenges

Benefits:

Renewable Energy Credits are critical for enabling the feasibility of RE projects
 RECs can be sold through various exchanges or directly to customers under
long term contracts


RECs can be utilized by the DoD to meet RE mandates
Challenges:

RECs sold on the spot market are not “financeable”
 RECs negotiated for sale under long term contracts are “financeable,” but must
not be overly discounted. This will jeopardize the economic feasibility of the project
 RECs are usually sold “unbundled” from PPAs under separate contracts,
adding difficultly to financing of the project
Extracting the Value Proposition for Renewable Energy
Projected Prices of
Electricty over 20 Years
Electricity Prices vs. PPAs
at Various Premiums
Projected Prices
15
15
14
14
13
13
Cents per KwH
Cents per Kwh
Projected Prices
12
11
10
10%
20%
12
11
10
9
9
2010
2014
2018
2022
2026
2010
2014
2018
Source: EIA



15%
PPAs provide protection against the rising cost of electricity
Savings are realized in the long run
PPAs are an efficient way for developers and financiers to raise capital
for RE
2022
2026
Extracting the Value Proposition for Renewable Energy
Installation Demanding 5MW / Year for 20 Years With a Fixed Price Power
Purchase Agreement (PPA) vs. Status Quo
Present Value of
Electricity Cost
Average Cost
Difference
Status Quo (No PPA)
$7,615,921.97
-
PPA with 10% Premium
$7,237,742.87
-5%
PPA with 15% Premium
$7,566,731.19
-1%
PPA with 20% Premium
$7,895,719.50
4%
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

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Procuring energy through a PPA grants energy price certainty
Based on current projected electricity prices, paying a premium today can translate to
savings over the term of the contract
Potential for greater savings if energy prices rise at a faster rate
Investment incentives and technological advancements are driving costs down, closing the
gap and increasing affordability
Renewable Energy Project
Year 1
KwH/Yr
Year 4
Year 5
5,000,000 4,975,000
4,950,125
4,925,374
4,900,748
0.1000
0.1000
0.1000
0.1000
0.1000
PPA Revenue
500,000
497,500
495,013
492,537
490,075
REC Price/ kwh
0.3000
0.3000
0.3000
0.3000
0.3000
1,500,000 1,492,500
1,485,038
1,477,612
1,470,224
0.4000
0.4000
0.4000
0.4000
2,000,000 1,990,000
1,980,050
1,970,150
1,960,299
Bundled PPA+REC Price
Total Revenue


Year 3
PPA Rate / KwH
REC Revenue


Year 2
0.4000
The REC price is the main driver of a Renewable Installation’s performance
Power and RECs fixed for a certain number of years will benefit DoD by eliminating
long-term risk of rising power prices
Attaining price certainty for RECs is essential for developers for financing needs
Bundling RECs with PPA contracts is an effective tool for ensuring project development,
strategy eliminates REC risk from developer (no longer has to sell RECs forward
or on spot market). DoD utilizes RECs for meeting mandates.
RATE
Cost of Capital: A Few Scenarios
Tax Equity
+ Project
Equity
12.00%
Tax Equity
+ Project
Equity
12.00%
50%
Project Debt
6.00%
50%
100%
Project Debt
5.50%
Cost of Capital
12.00%
75%
Tax Equity
+ Project
Equity
12.00%
Cost of Capital
10.375%
25%
Cost of Capital
9.00%
RE Financing—Key Takeaways


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Bring the financing in early
 Build a business plan with conservative assumptions yielding market –
based returns
 Understand your market – RECs, incentives, etc
Bundle PPA with REC Contract
DoD should utilize RECs to meet Federal Mandates
 Enhances financeability of project
 Documentation and structure are key drivers
Developer’s and customer’s ability to execute – complex transactions with
steep learning curves
Every project needs a champion
Only sound projects with quality participants and strong cash flow will get
done
Work with public/private mentality and remain adaptive and flexible
Conclusions

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RE development can be successful under Private development or through
EUL authority
Leverage existing underutilized assets strategically for best results
Long term PPAs and REC contracts with creditworthy off-take essential for
financing
The time is right to take advantage of stimulus benefits
EUL is ideal opportunity for installations to meet their energy goals and
achieve energy security
Developer advantages:



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Existing infrastructure and transmission lines
Inside-fence development provides additional security for the infrastructure
Single-source off-take for RECs and Power (DoD)
Contracts with Federal Entity provide strong foundation for lowest-cost of capital
Questions & Answers
THANK YOU
Anita Molino
Bostonia Partners LLC
699 Boylston Street, 7A
One Exeter Plaza
Boston, MA 02116
617.437.0150
[email protected]