2University of California, Berkeley School of Law Center for Law, Energy & the EnvironmentTable of ContentsAbout REFF-West, ACORE, andBerkeley Law’s Center for Law,Energy & the EnvironmentOpening Keynote: Mary NicholsSetting the Scene: Understanding theContext of Renewable EnergyFinancing Smaller DealsThe Military:A Major New Customerfor Renewable EnergyEmerging CommercialTechnologiesSecond Day Keynotes: Michael Peevey&YiawayYehEast Meets West: Investment BankingPerspectivesRenewable Energy Project FinanceDevelopers’Viewpoints:What’sHappening on the Ground?Broadening the Debate: NewFinancial Structures for the FutureAcknowledgments.............................................................................3.............................................................................4.............................................................................5.............................................................................7.............................................................................9...........................................................................12...........................................................................14...........................................................................16...........................................................................18...........................................................................20...........................................................................22...........................................................................24
3University of California, Berkeley School of Law Center for Law, Energy & the EnvironmentAboutREFF-WestREFF-West has been uniting senior financiers, investors, and clean en-ergy executives from across the U.S. since 2008. Topics at REFF-Westinclude project finance, venture capital, renewable power generation,emerging commercial technologies, financing smaller projects, equityfinancing, and established technologies. The conference also offers anunparalleled networking opportunity, allowing senior representativesfrom across the energy and financial sectors to meet. REFF-West is co-organized by the American Council On Renewable Energy (ACORE)and Euromoney Energy Events.ACOREACORE, a 501(c)(3) non-profit membership organization, is dedicat-ed to building a secure and prosperous America with clean, renew-able energy. ACORE provides a common educational platform for awide range of interests in the renewable energy community, focusingon technology,finance and policy. ACORE convenes thought leadershipforums and creates energy industry partnerships to communicate theeconomic, security and environmental benefits of renewable energy.CLEEThe U.C. Berkeley School of Law’s Center for Law, Energy & the Envi-ronment (CLEE) works with government, business, and the nonprofitsector to help solve urgent environmental and energy problems.Draw-ing on the combined expertise of faculty and students across U.C.Berkeley,CLEE conducts influential research and provides public accessto reliable data on such complex issues as climate change, conversionto clean energy, and water scarcity. Berkeley Law’s Energy and CleanTechnology Law Program prepares the next generation of renewableenergy leaders by offering courses and research opportunities in en-ergy project finance, regulation, economics, and policy.EUROMONEY ENERGY EVENTSEuromoney Energy Events produces high-profile events for energy pro-fessionals worldwide. Euromoney’s diverse range of conferences ad-dress topical issues in the energy sector, with a focus on financial andcommercial aspects,in a portfolio that ranges across Renewable Energy,Waste, Power and Carbon Finance.
Opening Keynote 4University of California, Berkeley School of Law Center for Law, Energy & the EnvironmentIn opening the REFF-West conference, MaryNichols delivered a key-note speech establish-ing the renewable en-ergy policy backdrop inCalifornia.“This is truly a pivotaltime.” In the past ten years,the renewable energyindustry has made greattechnological and financialinnovations. The nexttwo to three years will bethe time to fully harnessinnovation for greaterenvironmental good.California’s cap and tradeprogram (AB32) buildsupon the success of exist-ing policies that promoteincreased air quality. These policies includeenergy efficiency standards in appliances andbuilding codes, the renewable portfolio stan-dard (RPS), the low-carbon fuel standard, ac-counting for carbon emissions in land-use andtransportation planning, and distributed gen-eration mandates.AB32 will achieve the lowest-cost emissionreductions of all considered alternatives. Theprogram is set to begin on January 1, 2013,with the first phase covering 600 facilities and85 percent of California’s emissions. The sec-ond phase, which will begin in 2015, will coverthe transportation sector. Although the pro-gram was originally expected to link to otherjurisdictions in the Western Climate Initiative,presently Quebec is the only other participantready to follow. The program will initially giveaway 90 percent of allowances while graduallyphasing in an auction. By studying other mar-kets and building in safeguards against carbonleakages into other regions, California aims toachieve the lowest-cost emissions reductionspossible through its landmark program.Full realization of environmental goals will re-quire further private sector investment in ad-dition to public sector mandates and support.The Golden State’s cap and trade program isonly one step toward mitigating climate change.Reducing California’s carbon footprint will re-quire accelerating energy efficiency retrofits,lowering the cost of renewable energy, com-mercializing fossil fuel alternatives in transpor-tation, and developing new technologies. Theprivate sector has a critically important role toplay in this transformation.Opening KeynoteMary Nichols, Chairman of CARB, opens REFF-Westwith a review of California’s renewable energy leadership.
Setting the SceneThe opening panel at REFF-West alloweda variety of speakers to lay out their viewof the renewable energy landscape in2012. The audience heard the perspec-tives of a federal policymaker, a stateregulator, a natural gas industry repre-sentative, a solar project developer, anda financier.The Obama Administration believes in—andis implementing—an “all of the above” energystrategy. President Obama issimultaneously developing do-mestic oil reserves and investingin clean energy technologies, allwith the goal of creating jobs forthe middle class. The Obama Ad-ministration has approved the sit-ing of seventeen utility-scale solarprojects, six onshore wind proj-ects, and eight geothermal proj-ects on federal lands. Throughthe Federal Leadership in Envi-ronmental, Energy, and EconomicPerformance Order (ExecutiveOrder No. 13514), the presidenthas called for the federal government to reduceits greenhouse gas emissions by 28 percent by2020. Lastly, the Department of Defense hasinitiated an unprecedented shift toward renew-able energy generation, with overseven billion dollars planned forrenewable energy power pur-chase agreements (PPAs).The natural gas, renewable en-ergy, and energy efficiency indus-tries can partner to form a “radi-cal center,” creating a renaissancein U.S. manufacturing. Technologychanges have enabled access toabundant natural gas resourcesin the United States. Low gasprices are being projected intothe future, yet two things remaincritical to the natural gas indus-try’s future: (1) creating and re-habilitating infrastructure and (2)forming local partnerships.In California, utilities are on theirway to complying with the Re-newable Portfolio Standard (RPS)of 33% renewables by 2020—with solar technologies in thelead. In the past, utilities weremeeting their RPS obligations pri-marily by procuring solar thermaland wind power, but recently so-lar photovoltaic (PV) projects have dominatedSetting the Scene:Understanding the Context ofRenewable Energy5University of California, Berkeley School of Law Center for Law, Energy & the EnvironmentMODERATOR• Nancy Floyd, Managing Director, Nth PowerPANELISTS• Jonathan Powers, Federal Environmental Executive,White House Council onEnvironmental Quality• Paula Gant, SeniorVice President, Policy & Planning,American Gas Association• Nancy Ryan, Deputy Executive Director, California Public Utilities Commission• Paul Detering, CEO,Tioga Energy• Nat Kreamer, CEO, Clean Power Finance Photo: Jean-Max ChuNancy Ryan, DeputyExecutive Director, CaliforniaPublic Utilities CommissionPaula Gant,Vice President of Policy,American Gas AssociationJonathan Powers, FederalEnvironmental Executive,White House Council onEnvironmental Quality
Setting the Scene 6University of California, Berkeley School of Law Center for Law, Energy & the Environmentthe California RPS procurement pro-cess. PV’s relative increase is supportedby the expansion and development ofCalifornia’s distributed generation poli-cies, such as the California Solar Initia-tive and the new feed-in-tariff (SB32).Asnew projects come online and mature,the California Public Utilities Commis-sion (CPUC) must ensure the reliabil-ity of the overall system, weighing thecosts,risks, and benefits of bringing newprojects to the grid. Decarbonizing thetransportation sector is the next stepto meeting California’s environmentalgoals.Distributed generationsolar is poised to reachgrid parity as federal andstate incentives expire in2016. The investment tax credit(ITC) for solar projects will ex-pire in 2016, and the AmericanRecovery and Reinvestment Act’s(ARRA) Section 1603 Cash GrantProgram has already ceased ac-cepting new applicants. Not onlyis a renewal of the ITC before2016 uncertain, but Section 1603 grantees arefacing the threat of receiving lessof an incentive than expected be-cause of the potential 2013 fed-eral budget sequester.To date, state-level policies forsolar PV have been uneven. WhileNew Jersey’s SREC program cre-ated a PV oversupply, California’sSolar Initiative has worked betterdue to its performance-based in-centive design. Solar panel pric-es are currently 70 to 90 centsper watt, and system costs are in the $2.00-3.00 range, while prices continue to fall. At thisrate, solar PV will reach grid parity soon. Non-traditional sources of capital have noted thisopportunity and are interested in working withdevelopers who are involved in commercial andresidential markets.As the solar industry matures, firms are re-thinking the role that debt and other sources offinancing play in their businesses. Downstreamsolar entities conduct four main activities: sales,installation, procurement, and finance. As themarketplace becomes more volatile, firms willneed to focus on their core businesses. Therenewable energy industry presents an op-portunity to utilize structured debt, owing toprojects’ low capital expenditures and high cashflow. The industry is therefore currently reas-sessing the role of debt and addressing its inter-action with tax equity.“What we see is a tremendous opportunity—building on natural gas, renewables, and energy efficiency.”-Paula Gant, SeniorVice President, Policy & Planning,American Gas AssociationPaul Detering,CEO, Tioga EnergyNat Kreamer,CEO, Clean Power Finance
Financing Smaller Deals 7While developers arebringing an increasing num-ber of 5 MW and smallerprojects before financeproviders, these projectsoften need significant workbefore they can be consid-ered bankable.Many developers are doing small projects, butonly a minority of the projects are “bankable.”There is a large volume of small projects seek-ing funding in the market, particularly in solar.However,according to DarrenVan’t Hof,for ev-ery one hundred deals, only five are bankable.Often it is the PPA that is not completely vet-ted. For some developers, it is their very firstdeal. Chris Diaz recommended picking part-ners and sticking with them to gain efficienciesdown the road.Choosing competent and expe-rienced partners might mean a more expensivefirst deal, but later deals will benefit from theinter-team relationship and ability to avoid sig-nificantly changing project documents. Accord-ing to Tony Grappone, cost reductions of 33 to66 percent are possible with repeat business,ashis firm spends a lot of time educating develop-ers up-front.While panelists agreed that previous projectdevelopment experience and strong sponsorbalance sheets are important considerationsfor lenders to smaller projects, their views var-ied on the relative significance of other factorsin determining the bankability of a project. Thespeakers noted that decisions regarding smallerdeals are often relationship-oriented. Even if itis a developer’s first deal, if they are honest andopen to suggestions, a lender may work withthem to make the deal financeable. The credit-worthiness of the offtaker is naturally anotherimportant consideration. The panelists notedthe following considerations about a developerwith varying levels of emphasis:• Have they built infrastructure?• Have they tried to raise capital?• Do they have insurance and letters of cred-it?• Do they have a website?• Where is the deal located?• Who is the EPC contractor? Do they haveUniversity of California, Berkeley School of Law Center for Law, Energy & the EnvironmentFinancing Smaller DealsMODERATORS• Ed Feo, Managing Director, US Renewables Group (USRG)• Edward W. Zaelke, Partner,Akin Gump Straus Hauer & Feld LLPPANELISTS• Chris Diaz, SeniorVice President, Seminole Financial Services• Dick Rai, Manager, PNC Energy Capital• Rodney Eckhardt, Managing Partner, RoundRock Partners• Tony Grappone, Partner, Novogradac & Company LLP• DarrenVan’t Hof, Director of Renewable Energy Investment, US Bank
Financing Smaller Deals 8University of California, Berkeley School of Law Center for Law, Energy & the Environmentexperience? Is there a payment and perfor-mance bond?• What solar panels and inverters are beingused?Smaller players can succeed in this market, butthey need to clearly demonstrate what skillsthey bring to the table. Dick Rai stated that heseeks developers with experience and $10-15million in liquidity. As a result, smaller playersmay need to team up with larger companiesto merit consideration. Insuch a case, the smaller playerwould need to be clear onwhat value they add to thedeal, whether it is hardwaresupply, PPA origination, EPC,or another role. Smaller play-ers need to identify wherethey fit in this segmentationand team up with players thathave complementary skills.“No-cash” deals do not exist.Some inexperienced smallerplayers hold misconceptionsof how much equity the spon-sor should invest in a deal,notrecognizing that “no-cash”deals are not a possibility.Smaller players need to firstraise sponsor equity, con-struction financing, and termdebt. Bringing in the tax eq-uity is the final piece.Deals requiring fancy financialengineering are unlikely to dowell. The panelists discussed in detail the im-plications of the Third Circuit’s recent ruling inHistoric Boardwalk Hall, LLC v. Commissioner.Tony Grappone explained the “sandwich lease”structure involved in the case. A lease pass-through employed two special purpose vehicle(SPV) partnerships: one to own real estate anda separate one to operate the project. Theminimal economic commitment from the taxequity investor led the Third Circuit to holdthat it was not a bona fide partner to the proj-ect. In light of the ruling, Mr. Grappone adviseddevelopers to make sure tax equity investorshold a perceived upside or downside risk in aproject.“Time is your enemy.The more organized you are, the more you save money.”-Christopher Diaz, SeniorVice President, Seminole Financial ServicesPanelists engage with conference-goers after thediscussion of smaller renewable energy projects.
The Military 9The U.S. military aims to procure one gigawattof renewable energy each for the Army, theNavy, and the Air Force by 2020. The Army iscurrently lining up developers of future projectsthrough a Multiple AwardTask Order Contract(MATOC). It has also established a centralizedtask force to meet with industry representa-tives and hear their concerns regarding stateand local regulations, Department of Defensebureaucracy, and federal contracting issues. Inpursuing the tremendous opportunity present-ed by military procurement of renewable en-ergy, developers and lenders need to be mind-ful of unique benefits and risks associated withcontracting with the armed forces.The military is procuring renewable energy toimprove combat effectiveness and operationalefficiency. As ACORE President—and retiredVice Admiral—Dennis McGinn stated, the mili-tary is not pursuing renewable energy proj-ects to win an “EPA green technology award,”but rather to improve its bottom line. In thearmed forces, the bottomline means combat effec-tiveness and operationalefficiency. David Belote,former commander ofthe Nellis Air Force Base,reinforced this sentiment,stating that renewable energy gives base com-manders energy security—the ability to keepoperations going “no matter what.” Kathy Ahs-ing stressed that the entire senior leadershipof the armed forces is behind these efforts, asdemonstrated by the Department of Defense’sgoal of procuring three gigawatts of renew-able energy for the Navy, the Army, and the AirForce by 2020.The military presents unique advantages as anoff-taker of renewable energy. First, the U.S.military presents a lower credit risk than otheroff-takers, which means a lower cost of capitalfor developers. Second, the Army is seeking tolimit risk by reducing project interference andensuring that projects are completed. As StanLee with the Army Corps of Engineers stated,theArmy is“going to make sure that the projectgets built,” and “will only do inspections to theextent that it safeguards theArmy’s liability [for]safety violations.” Third, military installmentshave the authority to sign 20 to 30-year powerUniversity of California, Berkeley School of Law Center for Law, Energy & the EnvironmentThe Military:A Major NewCustomer For Renewable EnergyMODERATOR• Vice Adm. DennisV. McGinn (USN, Retired), President,ACOREPANELISTS• David Belote,Vice President for Federal Business,ApexWind Energy,Inc.• Lawson (Stan) Lee, P.E., Senior Program Manager, Energy Division, U.S.Army Engineering Center, Huntsville,AL• Karen Butterfield, Director of Federal Programs, SunPower• Kathleen Ahsing, Director of Federal Programs, U.S.Army Energy Initia-tives Task Force
The Military 10University of California, Berkeley School of Law Center for Law, Energy & the Environmentpurchase agreements(PPAs),providing a longterm revenue streamto project owners andlenders. Fourth, on acase-by-case basis, themilitary is willing to al-low multiple off-takersif a project generatesmore electricity thanthe military installa-tion requires. Lastly,the Army is seekingto standardize projectdocuments and workwith other servicesto streamline the pro-curement process andachieve greater conti-nuity throughout thearmed forces.Developers must bemindful of the uniquecontracting needs ofthe U.S.military. KarenButterfield outlinedseveral contracting issues SunPower overcameto develop solar projects at military sites. First,military bases require a termination-for-con-venience clause to allow for the possibility ofa base closure or a national security exigency.Kathy Ahsing noted that the Army will agreeto make a company whole for losses resultingfrom a termination for convenience or a baseclosure, yet it remains unclear if these contrac-tual assurances will ease the concerns of po-tential lenders. Second, the military may notbe comfortable with allowing assignment ornovation of a project owner’s rights and obli-gations under a PPA. As Butterfield explained,the military generally does not want a bidder tosell a project after winning a contract. The EITFand the Army Corps of Engineers recognizethis issue, however, and they are taking stepsto accommodate traditional project financingstructures. Third, the military retains the rightto restrict site access. Similar to its treatmentof losses from a base closure, the military willagree to make a company whole for losses re-sulting from restricted site access. Fourth, thegovernment does not sign take-or-pay agree-ments. In an effort to replicate the certaintythat a project owner obtains through a take-or-pay arrangement, SunPower has required that amilitary base off-taker guarantee that it will takea certain amount of energy from the project.“The Department of Defense and all the military services said‘We want to diversify our energy portfolio’... not to win an EPA ‘green technol-ogy award’... but rather because it is all about improving the bottom line...”-Vice Adm. DennisV. McGinn (USN, Retired), President,ACOREStan Lee and Kathy Ahsing discussedthe Army’s renewable energy procurementefforts prior to their panel discussion.
The Military 11University of California, Berkeley School of Law Center for Law, Energy & the Environment“One of the real upsides to the financier in a federal contract isthat the credit risk is quite good.”-Karen Butterfield, Director of Federal Programs, SunPowerLastly, the military isuncomfortable withsolar easementsbecause base com-manders want toretain the right tobuild structures onthe base as needsarise. As an alterna-tive, Butterfield saidthat a project ownermay agree to forgo asolar easement yetrequire that the mili-tary make the proj-ect owner whole ifit prevents access tosunlight.The Army has estab-lished a centralizedtaskforce to evalu-ate and work withfirms boasting solidconstruction, devel-opment, and projectoperations and maintenance (O&M) experi-ence. Recognizing that contracting with thefederal government is complicated, the Secre-tary of the Army established the Energy Initia-tives Task Force (EITF) to streamline the bid-ding process. EITF is responsible for executinglarge-scale (10 MW and greater) energy proj-ects across the country. Exercising its authorityto reach all the way down to the local projectlevel, EITF is helping developers navigate mili-tary, state, and local bureaucracy. The taskforceis also able to affect higher-level DoD policiesthat might pose a barrier to project execution.To better understand private industry concerns,EITF meets with industry weekly.David Belote, Vice President for Federal Business,Apex Wind Energy, Inc.
Emerging CommercialTechnologies 12The commercializationof a new energy tech-nology requires a strongand diverse team focus-ing on breakthroughtechnology development rather than manufac-turing capacity. Once a breakthrough technol-ogy is in hand,start-ups can partner with estab-lished corporate leaders to commercialize anddeploy technology. Government investmentthroughout the research, development, dem-onstration, and deployment (RDD&D) processis critical to sustaining American innovation inenergy technology.The technology itself, as opposed to the abilityto manufacture it, is the key to commercializ-ing new energy technologies. Bill Watkins ofBridgelux warned that too many start-ups areovereager to build manufacturing capacity. Thisinclination is intensified by investors who like toinvest in things—machines, widgets, warehous-es, etc.—rather than in innovation. The key tosuccess, Watkins argued, is to focus squarelyon developing the technology. Once a start-up has developed game-changing technology,it may work with a larger entity with existingmanufacturing capacity and expertise to com-mercialize the start-up’s innovation. Watkinsoffered Toshiba and Chevron as examples ofmajor companies he had worked with to com-mercialize a start-up’s technology. Eric McAffeealso emphasized the importance of a corporate“big brother” to help younger technology com-panies through the “valley of death.”The national laboratories offer start-ups an af-fordable way to develop and test energy tech-nologies. Paul Alivisatos, Director of the Law-rence Berkeley National Laboratory (LBNL),explained that if a firm agrees to keep its tech-nology open to the public, there is no chargefor use of the national labs. If, on the otherhand, a firm wishes to keep the technology itdevelops proprietary, then the labs charge a feethat Alivisatos emphasized the labs work hardto keep low. Alivisatos shared that LBNL is de-veloping a new facility with controlled lightingand HVAC to allow for the testing of windowsand other technologies. LBNL is also workingwith U.C. Berkeley, Stanford, the National Re-newable Energy Laboratory (NREL), and a con-sortium of 40 solar companies to try to solvetechnological challenges that are common tomany players in the solar industry. AlivisatosUniversity of California, Berkeley School of Law Center for Law, Energy & the EnvironmentEmergingCommercialTechnologiesMODERATOR• Ira Ehrenpreis, General Partner,Technology PartnersPANELISTS• Arun Majumdar, First Head of ARPA-E, U.S. Department of Energy• BillWatkins,CEO,Bridgelux,Board Member at Flextronics and Maxim Semi• Eric McAfee, Chairman, McAfee Capital• Paul Alivisatos, Director, Lawrence Berkeley National LaboratoryPhoto:Arne Krueger“The key to this is not the manufacturing.The key is the technology.”-Bill Watkins, CEO, Bridgelux
Emerging CommercialTechnologies 13University of California, Berkeley School of Law Center for Law, Energy & the Environment“We have to recognize...that at the end of the day it’s [about] carbon.”-Arun Majumdar, First Head of ARPA-E, U.S. Department of Energyexplained that different compa-nies can take advantage of thenational labs in different ways,and he encouraged entrepre-neurs to reach out to him.Energy innovation must be sus-tained by an increasing budgetfor RDD&D at the federal level.Moderator Ira Ehrenpreis di-rected the audience to a recentreport by the BreakthroughInstitute that detailed the De-partment of Energy’s long termsupport for hydraulic fracturingnatural gas drilling technologies.This type of support helped facil-itate the recent boom in Ameri-can natural gas production andillustrates the level of sustainedcommitment from the U.S. gov-ernment that is necessary for energy innova-tion. Arun Majumdar extolled the examples ofAmerican innovation he witnessed while lead-ing ARPA-E. Majumdar emphasized there weresignificantly more projects that deserved in-vestment than ARPA-E had dollars to allocate.Other federal policy changes would foster en-ergy innovation, but they have varying or un-clear levels of political support. Arun Majum-dar described a bipartisan bill currently in thelegislative process that would allow renewableenergy and other clean technology firms toform master limited partnerships (MLPs) forRDD&D purposes. The MLP structure is cur-rently only available to players in the oil, gas,and coal industries, and it allows considerabletax benefits. Making the MLP structure avail-able to renewable energy and clean technol-ogy firms would afford lower costs of capitalfor technology development. Bill Watkins ar-gued that adjustments to immigration policythat would facilitate the employment of for-eign PhD holders would also foster innovation.Majumdar stressed that ultimately our nationneeds to again recognize that the rationalefor renewable energy and clean technologiesultimately comes down to carbon. Majumdaragreed with Bill Gates’ analysis that the UnitedStates does not need to put a carbon price inplace today;merely the establishment of a pric-ing system that would take effect in the futurewould be enough to start driving investment.On a positive note, Alivisatos reminded theaudience that California’s carbon market willopen in November 2012. Revenue from the ini-tial auctions,Alivisatos argued, could be a greatsource of support for the energy technologyindustry in California.
Emerging CommercialTechnologies 14University of California, Berkeley School of Law Center for Law, Energy & the EnvironmentSecond Day KeynotesMICHAEL PEEVEYMichael Peevey opened the second day ofthe conference by discussing the CaliforniaPublic Utilities Commission’s (CPUC) effortsto support the state’s statutory RPS goals.The CPUC is working with investor-ownedutilities (IOUs) to ensure they generate 33percent of their electricity from renewablesources by 2020.The RPS program supports the state’s goalof reducing greenhouse gas emissions tocombat climate change. Peevey expressedconfidence that the state would meet itsRPS goals, remarking that progress has beenrapid. In 2011, the IOUs—including South-ern California Edison, San Diego Gas & Elec-tric, and Pacific Gas & Electric—collectivelyobtained 21 percent of their electricity fromrenewable sources, a sharp increase fromjust 13 percent in 2008. The RPS programis divided into three compliance periods; thesecond compliance period from 2014-2016is already over-procured.The CPUC is driving a number of regulatoryefforts to support small renewable energyprojects. The California Solar Initiative is acustomer-side solar rebate program that hasresulted in 1,000 MW of installed solar inIOU territories by reducing the upfront cost ofprojects. As the program funding winds down,the private sector will need to step in and bringcosts down.The CPUC also has utility-side programs tosupport the RPS program. One program calledthe Renewable Auction Mechanism (RAM) istailored to projects that are less than 20 MWand greater than 3 MW. The program reducesthe transaction cost of negotiating contractsby setting up a reverse auction for RPS-eligi-ble technologies. RAM also recognizes thestrengths of different technology types by cat-egorizing projects as baseload, peaking as avail-able, and non-peaking as available. The latestRAM auction in May of 2012 proved successfulat obtaining competitive prices as developersbid in ten times the amount of capacity thatwould ultimately be procured through the auc-tion.Michael Peevey andYiawayYeh
Emerging CommercialTechnologies 15University of California, Berkeley School of Law Center for Law, Energy & the EnvironmentLastly, Peevey noted that California’s Feed-in-Tariff (FiT) is available for renewable energyprojects up to 3 MW in capacity. Unlike FiTsin other countries and states, the Californiaprogram relies on the competitive market. Theprogram features a self-adjusting tariff. It startswith prices drawn from RAM results, but theFiT adjusts those prices automatically in re-sponse to demand. Utilities establish a queueon a first-come, first-served basis, and the pricemay increase or decrease depending on wheth-er projects accept the FiT price or not.YIAWAYYEHMayor Yiaway Yeh followed President Peeveywith an introduction to the Palo Alto municipalutility, Palo Alto Electric, which serves 65,000residents and businesses. Mayor Yeh describedPalo Alto’s multi-faceted efforts to provide re-newable energy to consumers at low prices.In 2007, Palo Alto adopted an aggressive goalof obtaining 33 percent of its electricity fromrenewable resources by 2015 with no greaterthan half a cent per kilowatt hour rate impact.The city has additionally created a solar rebateprogram that has led to installation of 3.5 MWfrom 435 systems.Palo Alto also experimented with a FiT pro-gram by offering an avoided-cost rate of 14cents per kilowatt hour to commercial custom-ers for solar energy. The new program did nothave any subscribers. This was a hard lesson tolearn, Mayor Yeh lamented, but the city councilcontinues to learn from and build upon theseattempts. Palo Alto is pioneering another pro-gram labeled “Palo Alto Green,” which is a vol-untary program offering an electricity mix fromwind and solar energy. So far, 21 percent ofratepayers are participating,which makes it oneof the most highly-subscribed and most activevoluntary programs in the country.MayorYeh lastly discussed funding choices fromthe perspective of a municipality. He noted thatcities currently have the ability to issue tax-ex-empt bonds,but congressional efforts to reducethe budget deficit threaten the future existenceof the tax-exempt municipal bond structure—aprospect that concerns many mayors.
Investment Banking PerspectivesIn this session, a panel of investment bankersfrom JP Morgan, Wells Fargo, Morgan Stanley,and Credit Suisse discussed the current finan-cial landscape for renewable energy projectsand companies and their banks’ recent areas offocus and deal flow.“It was the best of times, and the worst oftimes.” Julia Pettit of Stoel Rives opened withthis famous quote from A Tale of Two Cities todescribe the current state of renewable energyfinance. While costs continue to become moreand more competitive in many markets, all thepanelists agreed that a number of critical fac-tors are poised to alter the financing environ-ment going forward, including:• Expiration of the Section 1603 Cash GrantProgram and imminent sunset of the Pro-duction Tax Credit;• Conclusion of the Department of Energy’sLoan Guarantee Program; and• Continued shakeout and consolidation inthe renewable energy industry.Characteristics of attractive deals that each ofthe panelists’ institu-tions sought were con-sistent across the banks,including:• A sponsor with a track record in the space.Panelists agreed that a developer with “skinin the game” and the potential for repeatbusiness were ideal characteristics. As Ka-minsky noted,if it’s going to be a 20-year re-lationship, it very much matters who you’redoing business with.• A 15-20 year PPA with an investment-gradecounterparty. As of today, there has beenvirtually no appetite for non-recourse fi-nancing of merchant projects.• A pro-forma demonstrating that flip termsand coverage ratios can survive stress test-ing and sensitivities. Several panelists notedthe different traits of solar and wind proj-ects. Where solar production is less vari-able and thus enables more stable cover-age ratios, wind is more amenable to flipstructures that allow the parties to respondto low output by simply extending the flipterm.• Size. The representatives of these large fi-nancial institutions agreed that they are ide-ally looking for scale—meaning preferencefor the opportunity to get $50-60 millionUniversity of California, Berkeley School of Law Center for Law, Energy & the EnvironmentEast Meets West:Investment Banking PerspectivesMODERATORS• Conor McKenna, CFA,Vice President, Reznick Capital Markets, LLC• Julia R. Pettit, Of Counsel, Stoel Rives LLPSPEAKERS• Paul Leggett, Executive Director, Morgan Stanley• Christopher Radtke, Director, Credit Suisse• Jason Kaminsky, Vice President, Environmental Finance,Wells Fargo• Mit Buchanan, Managing Director, Energy Investments, JP MorganPhoto: J. Pellgen16
Investment Banking Perspectives 17University of California, Berkeley School of Law Center for Law, Energy & the Environmentout of the door at one time, rather thanfunding a series of smaller projects.The IPO market is closed, but M&A oppor-tunities exist. Panelists agreed that the IPOmarket was effectively closed at this point forclean tech companies. They drew attention tothe current “risk off” environment in the pub-lic capital market with an empha-sis on valuing yield and certaintyversus risk and reward. However,the panelists agreed that the IPOmarket will return. In anticipa-tion of this return, companiesshould be investing today in pre-IPO roadshows to familiarize in-vestors with their businesses andmanagement teams.With adversity comes opportu-nity. A cold IPO market leavesroom for M&A opportunitiesaccording to several of the pan-elists. Because of firms’ inabil-ity to access capital in the publicmarkets, firms will need strategicinvestors to come to the table.With strong distribution chan-nels, technical know-how, andengineering resources, strategicbuyers have the ability to incubate technolo-gies and deploy them in markets at scale morequickly. Because of these synergies, the M&Aenvironment is healthier and may not be drivenby as much distress going forward, supportingvaluations for clean tech companies that cannotbe justified elsewhere in the current environ-ment.Cash equity is out there. The expiration ofthe Section 1603 Cash Grant Program in 2012means sponsors will need to utilize relation-ships and demonstrate increased skills to exe-cute in a tax-equity only environment. Despitethe increased pressures on the developmentside, panelists agreed that the tax equity mar-ket remains competitive on the investor side,too. Paul Leggett, Executive Director of Mor-gan Stanley, mentioned that if he had beenasked one year ago what 2012 would look like,he would have predicted more distressed as-sets in solar and wind than exist today. To thecontrary, there appear to be a healthy numberof buyers for projects in the market, support-ing asset prices for projects that are distressedbut not fundamentally flawed. Mit Buchanan ofJP Morgan agreed, noting fair amounts of cashequity available in the market to acquire as-sets, which has led her to caution some clientsagainst offering purchase prices that are toolow. In summary,Christopher Radtke,Directorof Credit Suisse, said a deep market of buyersexists. However, projects that are far from thecompletion stage, and thus pose permitting andofftake uncertainty, face a drastically smallersupply of capital.
Renewable Energy Project Finance 18Financiers of renewable energy proj-ects foresee a challenging year ahead, but theyare optimistic about the market’s long-termprospects due to industry participants’ increas-ing ability to allocate risks effectively and uti-lize new financing vehicles. Panelists agreedthat project sponsors will need to demonstrateflexibility and adaptability to thrive in the pres-ent environment of political uncertainty andchanging market dynamics.Demand for tax equity will exceed supply inthe wake of the Cash Grant Program. Panelistsagreed that demand for tax equity will increaseas the Section 1603 Cash Grant Program windsdown. Tax equity investors, however, are inshort supply, and the panelists were uncertainwhether existing players will be able to fill thegap left by the expiration of the Cash GrantProgram.Certain characteristics of tax equity invest-ments have hindered the entrance of new in-vestors. First, few potential investors have suf-ficient tax liability that can be offset by the taxcredits associated with renewable energy proj-ects. Second, new entrants often lack sufficientknowledge of project finance and tax regula-tions necessary to participate in deals involvingcomplex renewable energy assets. Finally, someinvestors are hesitant to originate an investmentthat will require management over an extendedperiod of time due to tax credit recapture rulesgoverning transferability. Despite these barriersto attracting new tax equity investors, the pan-elists cited the success stories of non-financialcorporate players liked Google and Chevron.High tax equity returns are expected to staystable. Heightened demand for tax equity isdriving a significant return for investors, withpanelists estimating unlevered annual returns ofseven to nine percent. Prudential Capital’s RicAbel explained that the market is thus “a littleupside down” because presently a tax equityinvestor can earn more return than a cash eq-uity investor.Institutional investors may become more activeplayers in renewable energy project finance.Several panelists noted that solar project in-vestments appear particularly well suited forinsurance companies and pension funds, whichseek low-risk, stable assets to match the dura-tion of their long-term liabilities. Panelists alsodiscussed MidAmerican Energy Holdings’ issu-ance of $850 million in investment grade cor-porate bonds to finance the utility-scale TopazSolar Farm in California. Ric Abel noted thatUniversity of California, Berkeley School of Law Center for Law, Energy & the EnvironmentRenewable EnergyProject FinanceMODERATORS• Michael Butler, CEO, Cascadia Capital• Don Weaver, Partner, SNR DentonSPEAKERS• Jeetu Balchandani, Head, Structured Tax and RenewableEnergy Investments, MetLife• Lance Markowitz, SeniorVice President, Union Bank• Barney Schauble, Managing Principal, Nephila Advisors• Ric Abel, Managing Director, Prudential Capital Group• Terry Grant, Managing Director, Marathon CapitalPhoto:Tracy Olson
Renewable Energy Project Finance 19institutional investors like Prudential arewilling to offer construction and term fi-nancing as well.New financing mechanisms could open the re-newable energy sector to a larger investor base.Panelists discussed the promise of high-liquidity,tax-advantaged vehicles like the Master LimitedPartnership (MLP) and Real Estate InvestmentTrust (REIT) for lowering the cost of capital forrenewable energy projects.Previously active EU banks have scaled back re-newable energy project financing. Panelists not-ed that European banks have decreased long-term lending to U.S. renewable energy projectsdue to the Eurozone’s ongoing credit crisis.They also expect the upcoming implementa-tion of the Basel III financial regulations to fur-ther reduce the availability of long-term debtfinance, increasing the cost and decreasing thelength of project finance debt. In contrast, RicAbel of Prudential Capital pointed to Japaneseand Canadian banks as well-funded institutionsthat are still able to offer longer tenors.Despite disruptions in the debt markets, amplefinancing remains available for “good projects.”Ric Abel of Prudential Capital expressed thecommon sentiment that “good projects stillget financed.” Noting that “debt is extraordi-narily cheap,” Union Bank’s Lance Markowitzexplained that—because expiring federal in-centives have reduced the number of availablerenewable energy project investments—banksare willing to be “fairly aggressive” in order toretain market share. Interestingly, while somepanelists noted that today’s low-priced powermarket is harming renewable energy project at-tractiveness, MetLife’s Jeetu Balchandani statedthat he views low PPA prices as a credit posi-tive because highly priced PPAs are riskier if theofftaker experiences financial difficulty.The use of insurance to unbundle and allocaterenewable energy project risks is “a sign of ahealthy market.” Barney Schauble explainedthat Nephila Capital is offering project own-ers weather-linked insurance coverageto hedge cash flow volatility resulting fromless-than-expected resource volume (e.g. lesswind, sunlight, or water flow). Panelists agreedwith his assessment that such insurance prod-ucts are “a sign of a healthy market” becausethey play a critical role in obtaining better fi-nancing terms and protecting against futurelosses.Closing Thoughts. To close out the discussion,each panelist was asked to share a “provocativeprediction” for the renewable power sector.• Jeetu Balchandani of MetLife optimisticallyforecasted an extension of the PTC due toits crucial role in facilitating U.S. wind proj-ect financing.• Lance Markowitz of Union Bank predictedthat even with a PTC extension, solar dealswould outshine wind financings in 2013. Healso forecasted—with tongue in cheek—that people will realize “that tax equity guysare really the good people.”• Ric Abel of Prudential Capital also predict-ed a PTC extension, but he stated it willnot solve the problem of low PPA prices.To overcome that challenge, the renewableenergy industry will need to wait for newlyconstructed gas-fired projects to increasedemand for natural gas and drive more fa-vorable PPA pricing across the board.• Barney Schauble of Nephila Capital offereda silver lining prediction that while removalof key policy incentives may seem like “badnews,” the disappearance of these incen-tives may spur increased cooperation withnatural gas players, with the potential forcombined natural gas and renewable energyprojects that would pose significant advan-tages to the grid.• Terry Grant of Marathon Capital expressedthe potential entry of “some very sophisti-cated,probably internationally-oriented” in-vestors into the renewable energy projectmarket “who love the yield” offered by U.S.solar assets.University of California, Berkeley School of Law Center for Law, Energy & the Environment
DevelopersViewpoints 20West Coast developers gave their perspectiveson the latest trends in financing and transmis-sion development. They also discussed the bestpolicies to mitigate technology risk and sustainrenewable energy project investment.The limited availability of tax equity will con-tinue to challenge the financing of renewableenergy projects. Over the past few years, taxequity has comprised a smaller part of a proj-ect’s investment. It will occupy an increasinglylarger portion, however, as the Section 1603Cash Grant Program wanes. Bob Powell notedthat, despite developer demand for more part-ners with significant tax appetite, the list of taxequity investors is relatively static.Cash equity is becoming more prevalent, espe-cially in solar. Arno Harris and Jim Rice pointedout that there have been many more cash equi-ty investors coming into the market, especiallydownstream.Stable fed-eral incentiveswould bringgreater certain-ty to renewableenergy projectinvestment, andnew legislation could foster more robust indus-try and project development. The developers’wish list for upcoming federal government ac-tion included extension of the production taxcredit and defense of the investment tax credit.Arno Harris argued that the best case scenariowould be a price on carbon. Jonathan Weisgallnoted that a carbon price would be potentiallypolitically viable because it has both liberal andconservative supporters. Mr.Weisgall addition-ally expressed hope for comprehensive tax re-form that could offer options other than taxequity to structure deals. Bob Powell support-ed this and mentioned Master Limited Partner-ships as one example of a vehicle that couldspur investment in renewables. A.G. Kawamurastated the need for multiple agencies to worktogether on innovation grants, obtain publicsupport,and to get buy-in for new technologies.Bigger projects are more viable than smallerprojects. The biggest risks with project devel-opment are interconnection and permittingUniversity of California, Berkeley School of Law Center for Law, Energy & the EnvironmentDevelopers’Viewpoints:What’s Happening on the Ground?MODERATOR• Nancy Hartsoch, SVP, Marketing and Sales, SolFocus Inc.SPEAKERS• Bob Powell, Chief Financial Officer, NRG Solar• Jim Rice, CEO, Nautilus Solar• Jonathan Weisgall, VP, Legislative & Regulatory Affairs, MidAmericanEnergy Holdings Company• A.G. Kawamura, Former Secretary, California Department of Food and Agricul-ture• Arno Harris, CEO & Chairman, Recurrent Energy;Board Chair, Solar Energy Industry Association (SEIA)Photo:Thomas Ormston
DevelopersViewpoints 21University of California, Berkeley School of Law Center for Law, Energy & the Environmentrequirements. Both requireconsiderable time and money,sometimes making smallerprojects unaffordable. Forbehind-the-meter projects,there is very little margin forerror. Bob Powell stated thatdeveloping distributed gener-ation projects was like “vacu-uming nickels.”The industry is averse to try-ing lesser known technolo-gies. New technologies makeproject developers worrywhether the manufacturerwill last beyond the life ofthe PPA. Jim Rice said thathis company was simply notin the business of trying any-thing new. The consensusview was that commercial-ization of new technologiespresents too many challenges.Taking a technology out of a lab, ramping it up,and having a revolutionary effect on prices is anillusory goal for many developers. Nancy Hart-soch commented on a technology-investmentdisconnect: technologies are expected to lasttwenty to thirty years and often need to beproven in just two to three years.The public sector plays an important role incommercializing technologies. Jonathan Weis-gall and A.G. Kawamura cited examples such asgovernment loan guarantees and public-privatepartnerships with universities that createdcommercialization platforms.Panelists disagreed about the need for ad-ditional transmission in California. JonathanWeisgall noted that only about 40 percent ofthe transmission that is needed for Californiato meet its Renewable Portfolio Standard (RPS)goals is currently available. Arno Harris andBob Powell stated that it is less clear wheth-er California has enough transmission or not.While there are congestion spots with projectstying up the queue, many of those projects areactually non-viable. Conclusions over the po-tential lack of transmission, therefore, could bepremature. Arno Harris noted that there is amismatch between the priorities of the utilities,which prioritize projects based on a “least cost,best fit” analysis, and those of the California In-dependent System Operator (CAISO), whichuses a first-come, first-served system to rankprojects. Though the CAISO and the CPUCcan be bureaucratic, they are making progress;they recently created guidelines that harmonizeprocurement and prioritize deliverability.“You really need to think about how to build yourbulletproof project as we get to 2016 or 2017 because we’re going tolose the level of subsidies we’ve had.”-Bob Powell, CFO, NRG Solar
Broadening the Debate 22In this session, a diverse setof panelists discussed newareas of innovation in ener-gy financial structures,theirfirms’ activities to date,and their perspectives onpotential future developments. Financial struc-tures covered included Master Limited Part-nerships (MLPs), Real Estate Investment Trusts(REITs), and On-Bill Financing for investing inand funding renewable energy and energy ef-ficiency projects.Opportunities exist in new financial structures.The panelists discussed a variety of new fi-nancial structures that offer the potential forexpanded access to capital and lower costs ofcapital. Rick Needham,Director of Green Busi-ness Operations at Google, highlighted the po-tential of utilizing Master Limited Partnerships(MLPs) for renewable energy. MLPs are a tax-preferential investment vehicle used widely inthe oil and natural gas industry. Current law,however, excludes renewable energy projectsfrom eligibility for MLP classification. Needhamurged that “it just makes sense” to make theMLP classification available to renewable ener-gy investments. Brad Copithorne, Director ofFinancial Innovation at the Environmental De-fense Fund, provided an overview of the prom-ise of On-Bill Repayment, which would enablebuilding owners and renters to fund energyefficiency upgrades and renewable electricitygeneration projects with bank or other privateloans that are repaid through their utility bills.John Bohn, CEO of Renewable Energy Trust,laid out the core reasons for his firm’s pursuitof a new REIT model for residential solar, citingthe benefits of its simplicity and lower dividendrequirements as compared to MLPs. Despitethe range of innovative structures being cham-pioned, all panelists agreed that the objectivewas to help expand access to cost-effectivecapital and increase investor participation in re-newable energy projects.Funding of renewable energy projects must bedemocratized. The panelists highlighted thecurrent gap in the market for retail investors.Despite having an interest in renewable en-ergy and capital to invest, the average personstill cannot effectively invest in renewable en-ergy infrastructure,with current financial struc-tures limiting opportunities to large corpora-tions and investment funds. As Google’s RickUniversity of California, Berkeley School of Law Center for Law, Energy & the EnvironmentBroadening the Debate:New Financial Structures for the FuturePhoto: SophiaMODERATOR• Dan Adler, President, California Clean Energy Fund (CalCEF)PANELISTS• Luka Erceg, Founder, President & CEO, Simbol Materials• Rick Needham, Director of Green Business Operations, Google Inc.• Alex Keros, Senior Project Engineer, General Motors• John Bohn, CEO, Renewable Energy Trust Capital• Brad Copithorne, Director of Financial Innovation, Energy Program,Environmental Defense Fund (EDF)
Broadening the Debate 23University of California, Berkeley School of Law Center for Law, Energy & the Environment“If an average install for an electric vehicle charging station isa thousand bucks, and we sold 100,000 cars, that’s 100 million dollars of revenue.You’re telling me someone here can’t figure out a way to make money out of it?”-Bob Powell, CFO, NRG SolarNeedham said, “Every time we makean investment, I wish I could do it, too,but I can’t. These projects would dobetter than our 401(k) the last coupleyears and you’d know you’re investingin something you really can support.”John Bonn added, “There is no way atthis point for a retail investor, no mat-ter how enthusiastic he or she is, to in-vest directly in this industry[...] yet thepublic market is the gateway to lowercosts of capital and expanded publicdemand.” The panelists shared a senseof promise for vehicles that open upinvestment channels to retail investors.California remains the hub for innova-tion. Panelists shared their reasons forincubating their ideas in California. RickNeedham of Google said the company’sobjective is to keep its pulse on newinnovations, citing Google’s commercialinstallation of a new fuel cell technolo-gy, which may not have happened if thestart-up fuel cell company had not beenjust a five-minute drive down the road.John Bohn of RET pointed out that inthe Bay Area,“Small is OK.” Unlike onWall Street,where a multi-hundred mil-lion or billion dollar deal is the startingpoint for a meeting, small is acceptablearound the Bay Area and allows firmsto get a start and develop markets.The scale of the renewable energy and cleantech market promises further financial innova-tion. Where new financial structures had notbeen identified, panelists cited the sheer size ofthe market as promising for future innovation.For example, Alex Keros of GM trumpetedthe sale of 100,000 electric vehicles per yearand average charging station installation costsof $1,000 as a $100 million revenue oppor-tunity. “Someone will make that an opportu-nity,” he said. Rick Needham highlighted thecurrent constraints around financing transmis-sion, where developers must pay for upgradesup front. Specifically he saw an opportunity forfinancing a large scale network of high-voltagedirect current (DC) transmission.“The key to this is not themanufacturing.The key is the technology.”-BillWatkins, CEO, Bridgelux
24University of California, Berkeley School of Law Center for Law, Energy & the EnvironmentContributorsTim CroninJ.D. Candidate, May 2014U.C. Berkeley School of Lawtim.firstname.lastname@example.orgGrace HsuJ.D. Candidate, May 2014U.C. Berkeley School of Lawgrace.email@example.comCarol LuMaster in Public AffairsPrinceton Universitycarollu@alumni.princeton.eduRohan MaM.B.A. Candidate, May 2013U.C. Berkeley, Haas School of Businessrohan_ma@mba.berkeley.eduHimani PhadkeM.A., Stanford UniversityCOO, REwiRE LLChphadke@rewireworldwide.comEmily SangiJ.D. Candidate, December 2012U.C. Berkeley, School of Lawemily.firstname.lastname@example.orgAri van SchilfgaardeJ.D. Candidate, May 2015U.C. Berkeley, School of Lawarivs@berkeley.eduAcknowledgmentsEditorTim CroninJ.D. Candidate, May 2014U.C. Berkeley School of Lawtim.email@example.comLayoutKyle Halvorsonkylejhalvorson@gmail.com