Financing Incentives in the Stimulus Package Project Finance Basics Power Purchase Agreements September 2009 Florida Renewable Energy Producers Association - PowerPoint PPT Presentation

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Financing Incentives in the Stimulus Package Project Finance Basics Power Purchase Agreements September 2009 Florida Renewable Energy Producers Association

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Title: Financing Incentives in the Stimulus Package Project Finance Basics Power Purchase Agreements September 2009 Florida Renewable Energy Producers Association


1
Financing Incentives in the Stimulus
Package Project Finance Basics Power Purchase
Agreements September 2009 Florida Renewable
Energy Producers Association
Fred Greguras Palo Alto Office fred.gregras_at_klgate
s.com 650.798.6708
  • PL30726

2
Overview of the Firm
  • Over 1800 lawyers in 33 offices throughout the
    U.S., Asia and Europe. Office in Miami.
  • Project financings for cleantech clients in the
    U.S., Europe and Asia.
  • Washington, D.C. office helps clients get access
    to grants, loan guarantees and other financing
    incentives
  • One of the largest international practices in
    Asia with offices in Hong Kong, Beijing,
    Shanghai, Taipei and Singapore.

3
Overview of the Presentation
  • Stimulus Package Financing Incentives
  • Project Finance Basics
  • Power Purchase Agreements

4
Overview of Stimulus Package Financing Incentives
  • Types of Financing Incentives
  • Spending
  • Tax Incentives
  • Loan Guarantees
  • Applying the Incentives
  • Technology
  • Product
  • Project

5
Types of Financing Incentives (I)
  • Spending
  • FOAs for grants, cooperative agreements, TIAs
  • See spreadsheet handout for list
  • Research, development, pilot, demonstration,
    deployment, education, evaluation, etc.
  • ARPA-Energy concept paper (closed June 2)
  • ARPA-E next round request for information (closes
    Sept 25)
  • Unsolicited proposals
  • Large and small companies are eligible
  • Single solicitations rather than rolling
    solicitations

6
Types of Financing Incentives (II)
  • Tax Incentives
  • 30 cash grant in lieu of investment tax credit
    (spending). Funds need to continue to be paid to
    provide predictability for investors
  • 30 ITC tax credit in lieu of PTC
  • Manufacturing investment tax credit (closed
    September 16)
  • Bonus accelerated depreciation-2009 only, extend
    for 2010? (Basis is 85 of cost)
  • New Federal Loan Guarantee Program
  • Costs of program make it feasible only for
    companies with strong balance sheets
  • Investment committee of most banks will evaluate
    whether the underlying loan should be approved on
    the assumption there is no guarantee.

7
New Loan Guarantee Program (I)
  • First solicitation under Recovery Act was for
    electric transmission infrastructure projects
    deploying commercial technology (closed September
    14)
  • Additional solicitations to be for renewable
    energy systems, including incremental hydropower,
    that generate electricity or thermal energy and
    facilities that manufacture related components
    and certain leading edge biofuel projects
  • Amount available for renewable energy systems may
    be limited to 750M because of shift of funds to
    cash for clunkers program
  • Guarantees are generally limited to 80 of
    project costs. DOE may guarantee 100 of a loan
    funded by the  Federal Financing Bank which may
    be for no more than 80 of eligible project
    costs.

8
New Loan Guarantee Program (II)
  • Borrower and other principals must make a
    significant cash investment in the project.
  • DOE may determine an appropriate collateral
    package among creditors
  • Under existing guarantee program, only New or
    Significantly Improved Technology may be
    deployed and borrower must pay credit subsidy
    costs if the project is not in a Recovery Act
    category.

9
New Loan Guarantee Program (III)
  • Application fees 200K with Part I 600K with
    Part II
  • Facility fee ½ of 1 of the guaranteed amount
    due at time of signing final term sheet
  • Maintenance fees 200K 400K per year
  • DOE outside counsel and consultant fees paid by
    applicant with no cap

10
New Loan Guarantee Program (IV)
  • None of the fees are refundable or may be
    reimbursed out of guaranteed loan proceeds
  • Credit subsidy cost (approximately 10) paid out
    of Recovery Act funds
  • Fees for other types of projects must be lower
    and decision-making faster so commercial as well
    as utility scale projects can benefit.
  • Solyndra 535M loan guarantee for 500MW capacity
    manufacturing plant. Credit subsidy cost likely
    paid from Recovery Act.

11
Applying the Incentives Thin Film Concentrating
Solar Technology
  • Technology Description and Status
  • Strong technical team with credibility in solar.
    Still in development mode. Technology, scaling
    and manufacturing cost risks still being
    determined.
  • Financing Opportunities
  • ARPA-E-closed June 2 (single solicitation)
  • Other grants directly from DOE (development,
    pilot, demonstration, etc.)
  • Solar America Initiative from NREL
  • Pre-incubator-closed March 10 (single
    solicitation)
  • Full incubator-letter of interest closed July 13
    (single solicitation)
  • Angel, venture capital?
  • Company likely to be funded in China under new
    structure

12
Applying the Incentives Mobile Biodiesel
Generation Product
  • Product Description and Status
  • 500 gallons of biodiesel produced in a 24 hour
    period oil based feed stock. Enables mobile and
    distributed biodiesel generation. Product has
    been released for commercial sales. Company has
    reference customers and revenue. Needs expansion
    capital.
  • Financing Opportunities
  • Venture capital
  • Can use cash grant in lieu of ITC (30 up front)
    to help customers decide to purchase
  • Possible grant for research, development, pilot,
    demonstration of next generation of technology

13
Applying the Incentives Wind Electric Generation
Project
  • Project Description and Status
  • Site selected near high voltage lines land use
    approvals obtained for 100MW project many jobs
    will be created proven technology selected but
    unable to secure equipment financing or
    construction loan based solely on revenue
    streams.
  • Financing Opportunities
  • ITC rather than PTC 30 upfront rather than over
    10 years as energy is produced
  • Cash grant in lieu of ITC
  • New loan guarantee program
  • State incentives-feed-in tariffs
  • Venture capital?

14
Approach for Obtaining Stimulus Funding
  • Monitor FOAs-comment if published in Notice of
    Intent or RFI form so the final FOA covers your
    proposal
  • DOE press releases, FedConnect, grants.gov
  • Register with FedConnect-usually takes at least
    one week
  • Think of DOE, EPA, USDA, etc as investors
  • Case needs to be made to them as to a VC or PE
    investor
  • Job creation impact-number, timing
  • Team-credibility with funding agency

15
Project Finance Basics (I)
  • Strong sponsor with proven track record of
    execution
  • Product deployed proven commercial technology
  • Financial health of supplier
  • Field service support capability
  • Financing model-how does the math work?
  • Project financing startup and recurring (OM)
    costs vs. sufficiency of revenue and equity
    investment
  • Project developer fees
  • Debt service
  • Creditworthy off takers
  • More difficult issue for commercial distributed
    solar credit level must be investment grade or
    near investment grade
  • Regulated utilities

16
Project Finance Basics (II)
  • Loan interest rates (8,9 12) debt service
    ratios (1.35-1.45)
  • Tax benefits vs. real revenue (cash)
  • Revenue (Cash) Sources
  • Power Purchase Agreement (PPA) payments
  • Cash grant in lieu of ITC 2009-2010
  • State rebate-predictability of receipt upfront
    or spread over a period
  • Renewable Energy Certificates (RECs) Tradable
    instruments of certification that one MwH of
    electricity was generated from a renewable
    source owner of REC may claim to have purchased
    renewable energy

17
Project Finance Basics (III)
  • Tax Benefits
  • Investment tax credit not cash grant after 2010
  • Depreciation bonus for 2009 double declining
    balance
  • Bottom line for making the math work is that some
    equity investment is likely needed. Revenues may
    not be sufficient
  • Financeability (bankability) is dependent on
    predictability of receiving the revenues and
    benefits. Greater the certainty the lower the
    financing risk

18
Project Finance Basics (IV)
  • Project location
  • Land acquisition (customer or third party),
    permitting, environmental and other government
    regulation
  • More complicated for utility projects
  • Proximity to transmission lines for
    interconnection
  • More complicated for utility projects
  • Wind power strength and reliability
    (site-specific wind data)
  • Sun strength and reliability
  • Feed stock supply and cost.
  • Inability to lock in a long term supply of feed
    stock
  • Stock and transportation cost
  • Storage and supply logistics
  • Water for solar thermal
  • Rebate amount PGE vs SMUD
  • Feed-in-tariff availability

19
Project Development Structure Partnership Flip
Equity
Other Investors
Tax Investor 99
Developer/ Sponsor 1
Contractor
Special Purpose Vehicle (Project Owner)
Construction Agreement
Debt financing
Operator
Operation and Maintenance
RECs
PPA
Power Offtaker
REC Market
20
Partnership Flip (I)
  • SPV (LLC) is an investment vehicle which owns the
    REF on date it is placed into service
  • SPV equity owners are developer, tax investor,
    maybe others. Investor wants a tax advantaged
    investment developer probably cant use tax
    benefits
  • Revenues of project pay for operating expenses
    and debt service
  • Non-recourse debt which means lenders look only
    to the project revenue streams for repayment
  • Developers and investors liability is limited to
    their investment in the SPV

21
Partnership Flip (II)
  • All project agreements must be financeable
    including Site Host Lease Agreement
  • ROI for developer equity owner from appreciation,
    developer fees and possible downstream share of
    revenues.
  • Investor allocated substantially all tax
    attributes of ownership during first 5 years of
    operation
  • Term must be at least 5 years from the Commercial
    Operations Date to avoid recapture of tax
    benefits

22
Project Development Structure Sale Leaseback
Investor/ Lessor
Contractor
Solar Developer LLC/Lessee
Sale
Lease Agreement
Construction Agreement
Operator
Operation and Maintenance
PPA
Power Offtaker
23
Sale and Leaseback
  • Developer sells REF to investor which then leases
    back to the SPV. Net lease with hell or high
    water lessee obligations.
  • Lessor allocated all tax attributes of ownership
  • Ownership must be for at least 5 years from the
    Commercial Operations Date to avoid recapture of
    tax benefits.
  • Placed in service timing difference (90 days)

24
Power Purchase Agreement (PPA) Types
  • Utility projects
  • Commercial distributed solar on roof tops,
    parking lots, etc.
  • Will describe and compare provisions in both
    types
  • Utility PPA forms usually start with many excuses
    for non-payment by utility which creates
    financing risk
  • Must be financeable only a remote risk of
    non-payment to provide predictability for
    investors who may have different risk levels.

25
PPA Basics (I)
  • PPA is long term agreement for the purchase of
    electricity from the owner (SO) of a renewable
    energy facility (REF) by a host customer or
    offtaker (OT)
  • Price dependent on characteristics and location
    of OT
  • Wholesale vs. retail (utility or distributed
    commercial)
  • Feed in tariff (FIT)
  • Price fixed with annual increases based on an
    inflation factor. Provides predictable
    electricity price which is typically below
    retail price (5-10) in first year or several
    years, later increasing pursuant to a formula or
    schedule.
  • Any possible price volatility is an investor
    concern
  • Term 20-25 years 25-30 years for utility
    projects

26
PPA Basics (II)
  • Not all PPAs are the same.  Each must be
    carefully reviewed and negotiated so it is
    financeable.   Some high risk terms are apparent
    others are more subtle. 
  • Starting point for financeability is
    creditworthiness of the OT.  Purchasers current
    credit rating, financial analysis and legal
    considerations because of the 20 year payments
    under a PPA. 
  • If OTs credit is later downgraded, PPA requires a
    credit enhancement for the payment obligation by
    cash escrow, letter of credit or other security.

27
Key PPA Provisions (Effective Date/ COD)
  • Effective Date date PPA is signed and SO is
    obligated to construct REF
  • OT may require credit enhancement if construction
    milestones missed or REF is not commercially
    operational by specified date
  • SO has obligation to construct, install, operate
    and maintain
  • Commercial Operations Date date the SO has met
    all conditions required to deliver electricity to
    OT
  • Certification by SO, independent professional
    engineer, REF acceptance by utility
  • PPA term begins and REF placed into service

28
Key PPA Provisions (REF Specifications)
  • REF Specifications
  • Size and expected production (Watts DC and AC).
    More rigid requirements by utility OT.
  • Modules, inverters, BOS proven technology with
    track record
  • Metering capabilities at point of delivery (POD)

29
Key PPA Provisions (Quiet Enjoyment/Expiration)
  • Quiet Enjoyment
  • Customer premises or third party property
  • REF is property of SO not OT fixtures.
  • OT will defend SO from any and all claims by
    third party landlords or creditors.
  • Expiration of PPA Term
  • Renewal term
  • OT purchase REF at fair market value
  • SO remove REF

30
PPA Basics (Purchase Option)
  • Offtakers REF purchase option driven by tax
    requirements
  • Five year recapture period for tax credit
    benefits
  • Periodic (at pre-determined times not continuous)
    after 5 years of being placed in service and at
    end of term
  • Purchase price must be at least FMV

31
Key PPA Provisions (Default)
  • Default provisions are detailed
  • Risk allocation from REF to point of delivery
    (POD)
  • Risk allocation related to transmission access
    and cost of transmission upgrades
  • Material misrepresentation or material failure of
    either party to meet its obligations
  • Cross default on site host lease agreement
  • Many default conditions have a notice and cure
    period so parties can discuss and try to resolve
    before termination becomes effective
  • Upon SO failure to perform. investor may want
    step-in rights to assume project control and
    correct default before termination

32
Key PPA Provisions (OT Default)
  • SO Rights upon OT Default
  • Cure period for failure to pay should be no more
    than 10 days
  • Termination payment obligation for default or
    convenience must be at least present value of SO
    losses and adequate to cover debt service
    obligations
  • SO may remove the REF upon OT termination
  • No election of remedies

33
Key PPA Provisions (OM/Tax/Insurance)
  • Operations and Maintenance
  • SO must operate and maintain the REF in good
    working order
  • OM costs must be part of the financing math
  • Sales tax on power purchase paid by OT
  • Property tax for REF itself paid by SO but may be
    exemption under state law
  • Insurance Requirements
  • Commercial general liability, property and
    casualty, builders risk, business disruption. SO
    listed as an insured on OTs property and casualty
    insurance on premises
  • Performance warranty insurance
  • Investors requirements

34
Key PPA Provisions (Indemnification/
Consequential Damages)
  • Indemnification
  • Mutual indemnification for damages to third
    parties for breach of contract and material
    misrepresentations
  • Consequential Damages Disclaimer
  • Neither party subject to consequential damages
    resulting from a breach on its part even if aware
    of the possibility of such damages
  • Damage caps

35
Key PPA Provisions (Curtailment)
  • Curtailment utility stops purchases because of
    grid load balancing, transmission system issues
    or emergency conditions. Financing issue is risk
    allocation for continuing payment during such
    periods.
  • Strongest position for being financeable is OT
    pays SO for the electricity the facility could
    have delivered to the point of delivery (POD) but
    for an ordered curtailment (Take or Pay).  Risk
    beyond POD is often allocated to OT although
    this allocation is not likely to be offered and
    will have to be negotiated.  
  • In a proposed PPA, curtailment may only provide
    an excuse for SO non-delivery of
    electricity without any corresponding obligation
    for OT to pay SO during the curtailment.
     Definition is key when OT must continue to pay
    SO during a curtailment. If outside the
    definition, SO may have an excuse to avoid a
    default  but OT would not have to pay SO

36
Key PPA Provisions (Force Majeure and Assignment)
  • Force majeure when a party cannot meet its
    obligations as a result of a cause not within its
    reasonable control (Acts of God). No standard
    definition so needs to be carefully defined to
    minimize payment uncertainty
  • Third party supplier acts or omissions (biomass,
    no water, etc)
  • Economic hardships, labor problems, land use
    problems, rising costs
  • Assignment/REF Transfer Limitations
  • SO may assign for financing, portfolio sale,
    other reasons
  • OT may assign in sale of business provided
    assignee credit rating is satisfactory and
    assignee expressly assumes all PPA obligations

37
Summary
  • Project financeability depends on reducing the
    circumstances that may create uncertainty in
    payment
  • Predictability (certainty) of receiving project
    revenues and benefits is key to the financing
    math
  • There is no such thing as a standard PPA
  • Utility PPAs will have stronger requirements for
    meeting schedules, production output and other
    performance standards from construction through
    operation
  • Bottom line for making the project math work is
    that some equity investment is likely needed
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