Community Energy Model G.Andersen(Da)


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Discussion of the financial structures appropriate for community wind investment in Pennsylvania and the impact of the ITC. Description of the REC\'s investment analysis tool and how it can be used to assess investment structures, project assumptions, and policy impacts.

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  • Then we can model each of the six structures we discussed and see the impact on Returns to the tax investor (IRR and NPV) Returns to the developer (IRR and NPV) Total Revenue
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  • Community Energy Model G.Andersen(Da)

    1. 1. 1<br />Financial Structures for Community Wind Development in Pennsylvania<br />Gwen Andersen<br />Director<br /><br />814-472-2872<br />Our thanks to the Penelec Sustainable Energy Fund of the Community Foundation for the Alleghenies  and the Pennsylvania Department of Environmental Protection for funding the development of this tool. The tool was developed by Mark Bolinger and Matthew Karcher. <br />
    2. 2. 2<br />Presentation Outline<br />ARRA Incentives<br />Overview of Financial Structures<br />Description of Financial “Pro Forma” Model<br />Demonstration of Model Capabilities<br /><ul><li>Policy Analysis of 30% ITC and Cash Grant</li></ul>Questions?<br />
    3. 3. 3<br />Community Wind Remains a Small Part of the Overall US Market…<br /><ul><li>479 MW of community wind projects installed in the US at the end of 2008
    4. 4. 2% of total installed wind capacity in the US</li></li></ul><li>4<br />…But Holds Significant Importance<br />Impact of community wind extends beyond its market penetration<br /><ul><li>Studies show greater local economic development benefits than commercial wind
    5. 5. Technology acceptance for later commercial projects</li></ul>Community wind is poised for growth…<br /><ul><li>U.S. wind rush since 2005 has frustrated construction schedules, leading to a backlog of community wind projects
    6. 6. 2008 finance-induced slowdown in broader wind market provides an opportunity
    7. 7. States implementing incentive programs to help community wind
    8. 8. Federal stimulus may benefit community wind disproportionately</li></li></ul><li>5<br />Federal Incentives for Wind Power<br />Prior to 2009:<br /><ul><li>Production Tax Credit (PTC)
    9. 9. Accelerated Tax Depreciation (5-Year MACRS)
    10. 10. USDA Grants (REAP)
    11. 11. Clean Renewable Energy Bonds (CREBs)</li></ul>Post “Recovery and Reinvestment Act of 2009” (“ARRA”):<br />Same as above, except that wind projects can now choose between the PTC, a 30% investment tax credit (ITC), or an equivalent 30% cash grant - but ends in December 2012<br />This choice is a HUGE deal for community wind in particular….<br />
    12. 12. 6<br />At Face Value, the 30% ITC and Grant Are Obviously Good For Community Wind<br />Relative to the PTC (which is production-based), both the ITC and cash grant (which are investment-based) provide more value to projects that cost more and/or generate less<br /><ul><li>Many community wind projects fit this description: too small to capture economies of scale, resource-constrained by landowner sites
    13. 13. For a $2500/kW project with a 30% capacity factor, the present value of tax benefits (credits + depreciation) comes to ~51% of installed costs for the ITC/grant versus ~44% for the PTC</li></ul>The cash grant is easier to use than the PTC or ITC<br /><ul><li>Cash is more fungible than tax credits
    14. 14. Community wind projects often have a hard time making use of tax credits, and may be too small to attract tax equity investors</li></li></ul><li>Not As Obvious, the 30% ITC and Grant Also Provide Additional Benefits<br />Alternative Minimum Tax (AMT): PTC exempt for first 4 (out of 10) years; ITC/grant are fully exempt<br />“Haircut” for Government Grants: PTC reduced by all grants applied to capital costs; ITC/grant only reduced by non-taxable grants<br />“Haircut” for Subsidized Energy Financing: PTC reduced by government-subsidized loans; ITC/grant is not<br />Power Sale Requirement: Power must be sold to unrelated party to qualify for the PTC; no such requirement for ITC/grant<br />Owner/Operator Requirement: For PTC, owner and operator must be same (rules out leasing); not so for ITC/grant<br />Passive Credit Limitations: Passive investors (individuals) can only use PTC and ITC against passive income; not so for 30% grant<br />Performance Risk: PTC dependent on generation, ITC/grant dependent only on investment<br />SEC Regulations: Cash grant reduces amount of LT equity – and therefore perhaps the number of equity investors – required (fly under the radar)<br />
    15. 15. 8<br />Pennsylvania State Policies and Incentives for Community Wind<br />Net Metering Policy:<br /><ul><li>Non-residential systems up to 3 MW (5 MW in some cases)
    16. 16. System size not limited by customer load
    17. 17. Annual NEG compensated at utility “price to compare” (G&T, not D)</li></ul>State-Level Grants:(presumably taxable, and cause a PTC haircut)<br /><ul><li>Energy Harvest ($500k limit)
    18. 18. PEDA Grants ($1.5 million limit)
    19. 19. DCED Wind and Geothermal Incentives Program ($1 million limit)</li></ul>Alternative Energy Production Tax Credit:<br /><ul><li>15% investment tax credit, $1 million cap per project
    20. 20. Statewide dollar cap starting at $5 million and increasing to $10 million (by 2014)</li></ul>Regional Public Benefits Funds: May support community wind at times<br />
    21. 21. 9<br />Financing Structures Suitable for Community Wind in Pennsylvania<br />Private Sector Structures:<br /><ul><li>Strategic Investor Partnership Flip
    22. 22. Institutional Investor Partnership Flip
    23. 23. Sale/Leaseback
    24. 24. Cooperative LLC</li></ul>Public Sector Structures:<br /><ul><li>Municipal Bond Finance
    25. 25. Clean Renewable Energy Bond (CREB) Finance</li></ul>First three require tax equity investors<br />
    26. 26. 10<br />Private Sector Structure:Strategic Investor Partnership Flip<br />Local Investor(s)<br />(1% of equity)<br />Tax Equity Investor<br />(99% of equity)<br />Most-used community wind structure in US<br />Tax investor is a “strategic” investor e.g., John Deere, Edison Mission) <br />Tax Investor provides almost all the equity <br />Pre-flip cash and tax allocations are proportional to equity investment<br />Post-flip allocations favor local investor(s)<br />Grant 1<br />(USDA REAP)<br />Lender<br />(debt)<br />Project Company<br />(equity + debt + grants)<br />Grant 2<br />(State Agency)<br />Power (and REC) Sales<br />30% Federal Cash Grant<br />Cash Revenue<br />99% <br /> 1%<br />less<br />Operating Expenses<br />less<br />Tax-Deductible Expenses<br />(including MACRS and interest on debt)<br />less<br />Debt Service<br />equals<br />Taxable Losses/Gains<br />(which result in<br />Tax Benefits/Liabilities)<br />99% / 10% <br /> 1% / 90%<br />equals<br />Distributable Cash<br /> 1% / 90%<br />99% / 10% <br />
    27. 27. 11<br />
    28. 28. 12<br />
    29. 29. 13<br />
    30. 30. 14<br />
    31. 31. 15<br />Private Sector Structure:Institutional Investor Partnership Flip<br />Local Investor(s)<br />(30% of equity)<br />Tax Equity Investor<br />(70% of equity)<br />Similar to Strategic Investor Flip, EXCEPT:<br /><ul><li>Tax Investor is an “institutional” investor (e.g., a bank)
    32. 32. Tax Investor provides less equity (~70%)
    33. 33. All cash initially goes to local investors, until investment recovered
    34. 34. Typically no project-level debt</li></ul>Not as suitable for community wind as the Strategic Investor Flip<br />Grant 1<br />(USDA REAP)<br />Project Company<br />(equity + debt + grants)<br />Grant 2<br />(State Agency)<br />Power (and REC) Sales<br />30% Federal Cash Grant<br />Cash Revenue<br />99% <br /> 1%<br />less<br />Operating Expenses<br />less<br />Tax-Deductible Expenses<br />(including MACRS and interest on debt)<br />equals<br />Taxable Losses/Gains<br />(which result in<br />Tax Benefits/Liabilities)<br />99% / 10% <br /> 1% / 90%<br />equals<br />Distributable Cash<br />0% / 100% / 10% <br />100% / 0% / 90%<br />
    35. 35. 16<br />Private Sector Structure:Sale/Leaseback<br /><ul><li>Locals develop/build project, sell it to a tax equity investor (the lessor), and then lease it back (as lessee)
    36. 36. Lessee operates the project, receives all cash revenue, and makes regular lease payments (regardless of how well the project performs)
    37. 37. Lessor receives lease payments and takes all tax benefits
    38. 38. Lessee can buy out lessor at end of lease term
    39. 39. Pros:
    40. 40. Provides 100% financing (lessor owns entire project)
    41. 41. Most efficient tax credit monetization (100%)
    42. 42. Leases are familiar to banks – may broaden tax investor base
    43. 43. Cons:
    44. 44. Lessee must pay full FMV to buyout lessor (no prior “flip” down)
    45. 45. New structure for wind (only viable since ARRA)</li></li></ul><li>17<br />Private Sector Structure:Cooperative LLC<br /><ul><li>Like the “Minwind” projects in Minnesota
    46. 46. No tax equity investor
    47. 47. No “flip” in cash or tax allocations
    48. 48. Very pure and simple structure
    49. 49. Must adhere to SEC regulations when raising equity
    50. 50. Much more viable under the 30% cash grant than it was under the PTC</li></ul>Local Investors<br />(100% of equity)<br />Grant 1<br />(USDA REAP)<br />Lender<br />(debt)<br />Project Company (LLC)<br />(equity + debt + grants)<br />Grant 2<br />(State Agency)<br />Power (and REC) Sales<br />30% Federal Cash Grant<br />Cash Revenue<br />less<br />Operating<br />Expenses<br />less<br />Tax-Deductible Expenses<br />(including MACRS<br />and interest on debt)<br />less<br />Debt Service<br />equals<br />Taxable Losses/Gains<br />(which result in<br />Tax Benefits/Liabilities)<br />equals<br />Distributable Cash<br />
    51. 51. 18<br />Public Sector Structures:Municipal Bonds and CREBs<br /><ul><li>Primarily used for behind-the-meter projects, as grid supply projects may violate “private use” rules
    52. 52. No tax equity investors
    53. 53. Town invests small amount of equity, finances remainder with either municipal bond or CREB
    54. 54. Muni Bonds: Longer terms (15-20 years), higher interest rates, lower issuance cost (than CREBs)
    55. 55. CREBs: Shorter terms (12-15 years), lower interest rates (0% in theory), higher issuance cost, must apply for an allocation</li></li></ul><li>19<br />High-Level Model Description (I)<br /><ul><li>Excel workbook designed to model a community wind project under all six viable financing structures simultaneously
    56. 56. “General Project Assumptions” worksheet contains assumptions that are common to all six financing structures
    57. 57. Project capacity, capacity factor, hard costs, O&M costs, incentives, depreciation schedules, etc.
    58. 58. “Structure-Specific Assumptions” worksheet contains those assumptions that might vary by structure
    59. 59. Construction and term financing, soft costs, revenue, allocations, etc.
    60. 60. This worksheet also contains modeling results
    61. 61. Five additional worksheets, one for each financing structure (muni bonds and CREBs are modeled on same worksheet)</li></li></ul><li>20<br />High-Level Model Description (II)<br />Model can be run either “forwards” or “backwards”<br /><ul><li>Forwards: User specifies the revenue available to the project, and the model calculates the financial return to project investors
    62. 62. Must be run manually in this direction
    63. 63. Must take care that other modeling elements also make sense (i.e., that flip dates do not happen too early, etc.)
    64. 64. Backwards: User specifies the financial return required by project investors, and the model solves for the amount of revenue required to generate that return
    65. 65. Model uses Excel’s “Solver” (simple linear program) to iterate to a solution; simple macro calls Solver function
    66. 66. Other model elements (flip dates, etc.) specified as constraints within Solver, so less need to monitor them</li></li></ul><li>21<br />Benchmarking Modeling Assumptions: Installed Costs of PA Wind<br /><ul><li>Installed costs of commercial wind in PA have risen above $2000/kW
    67. 67. We should not expect community wind to do better (in fact, maybe worse)</li></li></ul><li>22<br />Benchmarking Modeling Assumptions: Capacity Factor of PA Wind<br /><ul><li>Most commercial wind projects in PA averaging 25-30% capacity factor
    68. 68. We should not expect community wind to do better (in fact, maybe worse)</li></li></ul><li>23<br />Benchmarking Modeling Assumptions: Selling Price of PA Wind<br /><ul><li>Recent commercial wind projects in PA selling power at $65-$75/MWh
    69. 69. We should not expect community wind to do better (in fact, maybe worse)</li></li></ul><li>24<br />Structure Specific Modeling Results<br />
    70. 70. 25<br />Policy Analysis:Calculating the Value of the 30% ITC/Grant<br />Tool: Financial pro forma model that can analyze a community wind project under both the old (PTC) and new (30% ITC or cash grant) incentive regimes and under various financing structures<br />Value Metric: Levelized 20-year PPA price (or LCOE) required to generate a target after-tax return for relevant investors<br />Approach: Start with a fully constrained project under the PTC, and relax each individual constraint one by one in transitioning from the PTC to the 30% ITC to the 30% cash grant. Note the impact on the levelized PPA price at each step along the way.<br />
    71. 71. 26<br />Policy Analysis:Generic Project Specifications<br /><ul><li>COD: January 1, 2011
    72. 72. Nameplate Capacity: 10.5 MW
    73. 73. Installed Cost: ~$2,500/kW ($2,200/kW hard cost)
    74. 74. Capacity Factor: 30% net
    75. 75. O&M Costs: $20/kW-year (fixed) plus $7.50/MWh (variable)
    76. 76. Depreciation: 90% 5-yr MACRS, 5% 15-yr MACRS
    77. 77. Income Tax Rates: 35% federal, 8% state
    78. 78. Debt: 10-yr term, 1.45 minimum DSCR (interest rate varies)
    79. 79. Grants: $500k USDA REAP, $500k state grant ($1m total)
    80. 80. 2 Financing Structures: Strategic Flip and Cooperative LLC
    81. 81. After-Tax IRR Target: 10% (Flip), 15% (Cooperative LLC)</li></li></ul><li>27<br />
    82. 82. 28<br />
    83. 83. 29<br />
    84. 84. 30<br />
    85. 85. 31<br />
    86. 86. 32<br />
    87. 87. 33<br />Conclusions<br /><ul><li>Policy is everything
    88. 88. Tax policy is everything
    89. 89. The details can have huge impact
    90. 90. Financial creativity is necessary to get a project to fruition </li></li></ul><li>34<br />Thank you<br />Gwen Andersen<br /><br />814-472-2873<br /><br /><br />LinkedIn: Community Wind Network<br />