PV Project Financing: Utility, Federal & State Initiatives Designed to Support Development

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- Which developers and projects are able to attract financing?
- Will loss of 1603 Treasury Grants disrupt the market?
- Is the Tax Equity market back?
- Are REC markets making a different?

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PV Project Financing: Utility, Federal & State Initiatives Designed to Support Development

  1. 1. PV Project Financing: Federal & State Initiatives Designed to Support Development Photovoltaics 2011 Scottsdale, AZ January 20, 2011 Michael Mendelsohn Senior Financial Analyst Strategic Energy Analysis CenterNREL is a national laboratory of the U.S. Department of Energy Office of Energy Efficiency and Renewable Energy operated by the Alliance for Sustainable Energy, LLC
  2. 2. Agenda • NREL Finance Team activities • Market Developments • Federal Initiatives • Tax Extenders bill • Treasury Grants • BLM Solar Study Areas • DOE Loan Guarantees • State Initiatives • Financing OptionsNational Renewable Energy Laboratory 2 Innovation for Our Energy Future
  3. 3. NREL’s Strategic Energy Analysis Center (SEAC) Finance TeamNational Renewable Energy Laboratory 3 Innovation for Our Energy Future
  4. 4. Tools - System Advisor ModelNational Renewable Energy Laboratory 4 Innovation for Our Energy Future
  5. 5. Tools, cont’d. – CREST modelNational Renewable Energy Laboratory 5 Innovation for Our Energy Future
  6. 6. RE Finance Tracking Initiative (REFTI) Form of Depreciation Taken MACRS depreciation applied in  roughly half of projects reported  (32 participants responding)  National Renewable Energy Laboratory 6 Innovation for Our Energy Future
  7. 7. FIT Policies and Proposals in the U.S. 2010 2010 Sacramento 2010 2010 2009 Rhode Island 2010 2008 (2008) 2009 Gainesville San Antonio 2010 3 states enacted FIT policies based on RE project cost (VT, HI, ME (but with a rigid payment level cap)) 1 state/ 1 federal agency enacted FIT policies based on avoided cost (CA, Tennessee Valley Authority) 10 states proposed FIT legislation based on RE project cost (CA, FL, IL, IN, MI, MN, NY, RI, WA, WI) (Year last proposed) Solar FIT policies approved by municipal utilities Source: Adapted from Gipe 2010, Oregon PUC 2010.National Renewable Energy Laboratory 7 Innovation for Our Energy Future
  8. 8. Financial Information PortalNational Renewable Energy Laboratory 8 Innovation for Our Energy Future
  9. 9. So Financing Matters? $1/W at diff. financing scenarios Differences driven by project financing innovations, investor risk perception and market forces. Cash purchase unlikely due to opportunity cost of capitalCommon assumptions include: 2,000 kW dc nameplate capacity;18.5% net capacity factor in year one; 77% DC-to-AC conversion efficiency; 0.5% annualproduction degradation; 20 year useful life; $6.50/kW-yr dc O&M expense; $0.235/Watt dc inverter replacement in year 10; no ITC, 30% cash grant, orstate incentives; 97.5% of costs depreciated using 5-year MACRS, 1.2 minimum DSCR; 1.45 average DSCR. High financing costs include: 40% debt;60% equity; 10% debt interest rate; 18% after-tax equity rate; 10-year debt tenor; 3% lenders fee. Low financing costs include: 50% debt; 50% equity; 6%debt interest rate; 10% after-tax equity rate; 18-year debt tenor; 1% lenders fee. No discounting of cash flows or energy in no financing scenario. Sourceof capital cost structure assumptions (debt to equity ratio, debt interest rate, and equity rate) is California Energy Commission’s “Comparative Costs ofCalifornia Central Station Electricity Generation,” at: http://www.energy.ca.gov/2009publications/CEC-200-2009-017/CEC-200-2009-017-SD.PDF 9
  10. 10. MARKETSNational Renewable Energy Laboratory 10 Innovation for Our Energy Future
  11. 11. Markets - DevelopmentNational Renewable Energy Laboratory 11 Innovation for Our Energy Future
  12. 12. Markets - Financing (as of Q3 2010) • Tax “Equity” (16 active participants) • But some are only interested in financing the cash grant • Close in annual $ value to the $5.4 billion from 2007 • Debt • Banks (30 participants) • Lower rates (3.25 – 4.5%) • But shorter durations • mini-perms starting at 8 years out to 15 years • Plus lenders fee (can be up to 3% of debt amount) • Institutional (insurance cos.) • Higher rates (5.5% - 6.0%) • But longer terms – up to 25 years (crystalline), 15 years (CdTe) • as long as covered by the PPA • And no lenders fee • But… early payoff “make whole” penalty Sources: Chadbourne, Parke; REFTINational Renewable Energy Laboratory 12 Innovation for Our Energy Future
  13. 13. “Tax Extenders” Bill • 1603 – 1 year extension – 30% of eligible plant costs (consult your tax lawyer!) • For plant that falls under 5 year MACRS definition • Default value for solar CREST – 94% falls under 5 yr. MACRS • 30% * 94% = 28.2% • New Markets Tax Credit – 2 year extension, $5.3 billion per year – Recently announced 2010 awardees • Bonus depreciation – 100% (85% if you take 1603/ITC) – From 9/8/2010 – 12/31/2011 – Valued at $0.045 - $0.18 cents per dollar of capital costs* – But can tax equity investors take advantage of it? – 50% bonus depreciation thru 12/31/12 * Source: Chadbourne & Parke (2011)National Renewable Energy Laboratory 13 Innovation for Our Energy Future
  14. 14. Tax Equity • How will 100% bonus depreciation impact TE requirement? • Fully usable by TE investor? • 1603 does not eliminate TE requirement ass. with ITC / PTC • Still have to get through construction • 1603 awarded 60 days after commercial operation • Developers still go to “tax equity” market for bridge finance until 1603 grant received • TE associated with 1603 less expensive than ITC or PTC. Late in 2010, rates were roughly: • 8.25% - TE 1603 bridge finance • 9.25% - TE ass. w. ITC • 9.50% - TE ass. w. PTC • Project level debt will increase these #s by approx. 200 bpNational Renewable Energy Laboratory 14 Innovation for Our Energy Future
  15. 15. Tax Equity Required – back of envelope 2009  Total  Value of  Potential  Installed  Installed  Invested    Federal  Tax Equity  Capacity  Cost  ($  Govt.  Required ($  RE Technology (MW) ($/kW) billions) Benefits billions) Wind 10,010  1,906  $19.08  56% $10.68  Solar (elec only) 481  6,332  $3.05  56% $1.71  Biomass 739  1,860  $1.37  56% $0.77  Geothermal 175  4,051  $0.71  56% $0.40  Total 11,405  $24.21  $13.56  Based on ‘09 investment level, TE market could reach $13+ billion. Significantly higher as state RPS requirements increaseNational Renewable Energy Laboratory 15 Innovation for Our Energy Future
  16. 16. Federal InitiativesNational Renewable Energy Laboratory 16 Innovation for Our Energy Future
  17. 17. 1603 Treasury Grants Total as of January 3rd, 2011: $5.795 billion awarded 1,650 projects. Assuming 1603 covers 28% of total plant, TGs supporting $20.5 billion of investment Source: Treasury Dept.National Renewable Energy Laboratory 17 Innovation for Our Energy Future
  18. 18. 1603 – Awards & Avg. Grant Size by Technology as of 1/3/11 Source: Treasury Dept.National Renewable Energy Laboratory 18 Innovation for Our Energy Future
  19. 19. 1603 – Awarded $ by State (top 20) As of 1/3/11 Source: Treasury Dept.National Renewable Energy Laboratory 19 Innovation for Our Energy Future
  20. 20. BLM - Solar Programmatic EIS • Identified solar energy zones on public in six western states deemed “most suitable” for utility-scale development • Covers 677,000 acres for solar energy zones and 22 million acres for right of way applications – BLM manages 120 million acres in these 6 states – 104 solar applications that would cover 1,000,000 acres representing 60,000 MWs have been made – under Preferred Alternative – not yet finalizedNational Renewable Energy Laboratory 20 Innovation for Our Energy Future
  21. 21. BLM Solar Energy Study AreasNational Renewable Energy Laboratory 21 Innovation for Our Energy Future
  22. 22. DOE Loan Guarantees – 8 Solicitations ** currently open 1) August 6, 2006 Innovative Technologies • October 4, 2007 - Invites 16 Pre-Applicants to Submit Applications for Federal Support • Included Solyndra, Tesla, Beacon Power 2 – 4) June 30, 2008 - Three Solicitations 2) Innovative EE, RE, and Advanced T&D 3) Nuclear 4) “Front-end” nuclear 5) September 22, 2008 – Innovative Clean Coal 6 – 7) July 29, 2009 – Two Solicitations 6) Innovative EE, RE, and Advanced T&D ** 7) Transmission 8) October 7, 2009 Financial Institution Partnership Program (FIPP) ** Source: DOENational Renewable Energy Laboratory 22 Innovation for Our Energy Future
  23. 23. RE Loan Guarantees (all 1705) Award Awarded or Loan Guarantee Announce Loan Amount Conditionally Awardee Date ($millions) Offered Description Offered 3/20/09 For manufacture of cylindrical solar PV Solyndra, Inc. $535 Awarded Awarded panels 9/4/09 Nordic Windpower, Conditionally For manufacture of two-bladed wind 7/02/09 $16 USA offered turbines Conditionally 3 utility-scale solar CSP plants at BrightSource Energy 2/22/10 $1,370 Offered Ivanpah (392 MW total) First Wind - Kahuku 30 MW wind generation facility and 3/5/10 $117 Awarded Wind Power, LLC battery storage system Conditionally U.S. Geothermal 6/10/10 $102 22 MW geothermal generation facility offered Nevada Geothermal 49.5 MW geothermal generation facility 6/15/10 $98.5 Awarded Power at Blue Mountain - first FIPP award 250 MW Solana CSP solar facility (+ 6 Abengoa Solar 7/3/10 $1,450 Awarded hours thermal storage) For manufacture of CdTe thin-film solar Abound Solar 7/3/10 $400 Awarded panels in Longmont, CO and Tipton, IN Guarantee on For 845 MW Shepherd Flats, OR Caithness 10/10/10 80% of $1.3 Awarded generation facility billion loan Source: DOE 2010a – DOE 2010gNational Renewable Energy Laboratory 23 Innovation for Our Energy Future
  24. 24. STATE INCENTIVESNational Renewable Energy Laboratory 24 Innovation for Our Energy Future
  25. 25. State RPSNational Renewable Energy Laboratory 25 Innovation for Our Energy Future
  26. 26. 3rd Party PPAsNational Renewable Energy Laboratory 26 Innovation for Our Energy Future
  27. 27. Rebates – State / Utility / Both Source: Treasury Dept.National Renewable Energy Laboratory 27 Innovation for Our Energy Future
  28. 28. FINANCING OPTIONSNational Renewable Energy Laboratory 28 Innovation for Our Energy Future
  29. 29. Project Financing Options: Utility-Scale (Developer perspective) All-Equity Partnership Flip • TE investor provides a majority (e.g., 60%) of equity. Allocations specific to project. • Pre-Flip Point, there are bi-furcated allocations: • Cash: initially 100% to developer (for either fixed duration or until return of investment); then 100% to TI until flip target reached • Tax Benefits: 99% to TI from COD until flip target reached • After Flip Point is reached, virtually all allocations go to developer. Leveraged Partnership Flip • Requires very small sponsor investment • Pro rata sharing of tax benefits and cash to equity investors • Improves return and lowers costs via leverage • But debt has senior lien on property – makes TE investors nervous • Also, requires bigger, more secure deals to include debt Source: Deacon Harbor Financial 29
  30. 30. Project Financing Options, Utility-scale, cont’d. (Developer perspective) Sale-Leaseback • Structure unique in that lessor and lessee have very different interests (as opposed to sharing benefits in other structures) • Developer constructs project and sells 100% to Tax Investor. • Developer (Lessee) leases the project back from Tax Investor (Lessor). • Lessee operates the project and pays Lessor an annual lease payment. Lease payment sized to provide Lessor with target return. • Lessee retains free cash flow after lease payments and operating costs. Single Owner • One equity owner; project level debt (if obtained by owner). • 100% of each benefit stream flows to Owner: • Distributable cash • Tax Benefits: (a) taxable losses and gains, and (b) ITC/Cash Grant • With just one Owner, there is no “flip” in the allocation of cash and Tax Benefits Source: Deacon Harbor Financial 30
  31. 31. Solar Financing Structures 1)Single Developer / 2)Equity Partnerships, 3)Leases Investor w/ or w/o debt Corporate / Flip Structures Sale Leaseback Balance Sheet Senior Lender Develop er Develop Tax Leaseback Sale er Investor Tax Corporate Owner Project Owner Investor & OwnerPower & REC sales Power & REC sales Power & REC sales Power Power Power Purchaser Purchaser PurchaserNational Renewable Energy Laboratory 31 Innovation for Our Energy Future
  32. 32. Thank you Michael Mendelsohn National Renewable Energy Lab michael.mendelsohn@nrel.gov 303/384-7363National Renewable Energy Laboratory 32 Innovation for Our Energy Future

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