Financial Opportunities And Constraints For Hydropower Development 021010

Financial Opportunities and
Constraints for Hydropower
Development

Ditch and Reservoir Company Alliance
(DARCA) Annual Conference
Doubletree Hotel
Durango, Colorado

February 10, 2010
by: Ron Miller, P.E.

Discussion Topics
• Introduction
• Market Drivers
• Site-Specific Issues
• Cash Flow Analysis Example
• Project Feasibility Steps
• Financing Alternatives

Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution to
the copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 2

How Hydro-generation Works
Typical Hydroelectric Dam
Reservoir

Powerhouse

Generator Power Lines

Intake
Penstock Turbine
Outflow
River


Hydro-generation Advantages
• Well-understood technology
• Continued technical
improvements
• Reasonable rate of return on
projects
• Hydro energy production
coincides with most summer-peaking
utilities’ heaviest demand period


Market Drivers
• Existing dams and reservoirs without
hydrogeneration capacity
82,600 dams in U.S. – only 3% generate energy
DOE estimates 30,000 megawatts of potential energy
at 5,677 undeveloped sites, more than half of which
already have dams
• Renewable Portfolio Standards (RPS) are
driving renewable energy generation with
renewable energy credit (REC) payments
• Federal tax incentives
• Low-cost financing alternatives

Renewable Portfolio Standards
• Colorado RPS requires 2 largest
utilities to derive 20% of their
total energy sales from renewable
energy sources by 2020
• Municipalities and co-ops must derive 10% of
sales by 2020
• Of the 20%, 4% of all renewable energy must
come from solar; the remaining 96% can
come from hydro, wind, and biomass sources


Renewable Portfolio Standards,
cont’d.
• Utilities must purchase RECs on a 20-year
basis to satisfy RPS compliance
• REC sales are a new revenue source for hydro
projects
• Federal legislation is moving to ensure that
10% of the nation's electricity comes from
renewable sources by 2012, 25% by 2025
• Federal legislation has already been enacted
to provide tax incentives for renewable
energy

Federal Tax Incentives
• Tax credits in general - project owner must
have tax liability; not applicable for tax-
exempt, non-profit entities
• Production tax credits (PTC)
Tax credit to offset tax liability on $ for $ basis
Tax credit, not tax write-off
Paid to project owner on a $/kilowatt-hour basis as
renewable energy is produced
• Investment tax credits (ITC)
30% tax credit of the renewable energy project
installed capital cost
Paid to project owner as project first year tax returns
filed

Site-Specific Issues


Site-Specific Issues
• Head & flow rate
Determines size (kilowatts) of generating unit
• Reservoir / watershed / inflow volume
Determines length of generating hours each day,
generating days in month
• Energy generation
Evaluate amount of energy produced under different
hydrologic conditions
• Water release strategy
Follows inflow volume daily
Align with utility needs

Site-Specific Issues, cont’d.
• Distribution / Transmission Line Connection
Single-phase service to existing non-hydrogenerating
dams for SCADA, lighting
Single-phase distribution line limits energy generation
capacity at dam to harness the potential energy from
head, flow rate, and size of reservoir
Upgrade of single-phase to 3-phase service requires
additional capital to be expended, but provides
opportunity to capture increased energy from project
• Equipment Selection
Frances or Kaplan turbines
Horizontal or vertical installation


Financial Issues
• Project capital requirements
Includes powerhouse, power generating equipment,
distribution upgrades
• Available revenue streams
Sale of energy to utility
Sale of RECs to utility or other entity
ITC, PTC for tax-paying entities only
• Summer or winter peaking utility


Financial Issues, cont’d.
• Long-term energy sale to utility
Power Purchase Agreement (PPA),
provides project revenue stream and
collateral
• Long term sale of RECs to utility
or other entity
Provides additional revenue stream
for project
• Energy pricing by local utility


Energy Pricing
• Flat rate in dollars per metered kilowatt-hour
(kWh)
• Blended rate combining the following:
Energy charge in dollars per metered kWh
Demand charge in dollars per highest or peak kilowatt
(kW) demand


Cash Flow Analysis
Assumptions
• Single-phase distribution service
• 2 MW of installed capacity
• Average hydrologic scenario
• 4% per year inflation
• Loan term of 20 years at 2.5% annual rate
• Revenue from sale of energy and RECs
• Non-tax paying entity is owner


Cash Flow Analysis Results
• 100% equity, 0% debt
20-year after-tax rate of return: 4.2%
Payback: 15 years
• 20% equity, 80% debt
20-year after tax rate of return: 13.5%
Payback: 9 years
• Impact of leveraging with debt
Rate of return triples
Low cost debt and ability to finance 80%
of project capital


Cash Flow Analysis ($000)
100% Equity
Revenue From Revenue From O&M Insurance Property Tax Cumul.
Project Sale of Energy Sale of RECs Expense Expense Expense Cash Flow Cash Flow
Year ($000) ($000) ($000) ($000) ($000) ($000) ($000)
0 (6,123) (6,123)
1 - - - -
2 537 74 75 24 26 338 338
3 555 74 78 24 25 354 692
4 574 74 81 24 24 372 1,064
5 594 74 84 24 23 389 1,453
6 615 74 88 24 22 408 1,861
7 637 74 91 24 21 427 2,288
8 659 74 95 24 20 447 2,735
9 683 74 99 24 19 468 3,203
10 707 74 103 24 18 489 3,692
11 733 74 107 24 17 511 4,204
12 759 74 111 24 16 534 4,738
13 786 74 115 24 15 558 5,297
14 815 74 120 24 14 583 5,880
15 844 74 125 24 13 609 6,489
16 875 74 130 24 11 636 7,125
17 907 74 135 24 10 664 7,789
18 941 74 140 24 9 693 8,482
19 975 74 146 24 8 723 9,206
20 1,011 74 152 24 7 754 9,960

Cash Flow Analysis ($000)
20% Equity / 80% Debt
Revenue From Revenue From O&M Insurance Loan Cash Cumul.
Project Sale of Energy Sale of RECs Expense Expense Property Tax Pay. Interest Flow Cash Flow
Year ($000) ($000) ($000) ($000) Expense ($000) ($000) ($000) ($000) ($000)
0 (1,225) (1,225)
1 - - - - - - - -
2 463 74 75 24 26 314 122 98 98
3 481 74 78 24 25 314 118 114 212
4 500 74 81 24 24 314 113 131 344
5 520 74 84 24 23 314 108 149 493
6 541 74 88 24 22 314 103 168 661
7 563 74 91 24 21 314 97 187 847
8 585 74 95 24 20 314 92 207 1,054
9 609 74 99 24 19 314 86 228 1,282
10 633 74 103 24 18 314 81 249 1,531
11 658 74 107 24 17 314 75 271 1,802
12 685 74 111 24 16 314 69 294 2,096
13 712 74 115 24 15 314 63 318 2,415
14 741 74 120 24 14 314 56 343 2,758
15 770 74 125 24 13 314 50 369 3,127
16 801 74 130 24 11 314 43 396 3,523
17 833 74 135 24 10 314 36 424 3,947
18 866 74 140 24 9 314 30 453 4,400
19 901 74 146 24 8 314 22 483 4,883
20 937 74 152 24 7 314 15 514 5,397


Feasibility Study Steps
• Data collection and review
• Define power potential and estimate
energy output
• Develop alternatives
• Assess market potential
• Preliminary cost estimate
• Economic analysis and alternative
selection


Financing Alternatives
• Colorado Water Conservation Board (CWCB)
• Colorado Water Resources & Power
Development Authority (CWRPDA)


Colorado Water
Conservation Board (CWCB)


Program Eligibility
Raw water projects only
• Reservoirs/dam rehabilitation
• River diversion structures
• Irrigation ditches
• Wells and pipelines
• Water rights acquisitions
• Flood control
• Hydroelectric facilities

Special thanks to CWCB’s Kirk Russell and Anna Mauss for
their contributions and slides to this presentation


Project Financing Terms
• 90% of total project cost
• $100,000 minimum loan
• FY2009 rates (30-year) *
Agricultural 2.75%
Municipal 4.00-5.25%
Commercial 6.25%
• 1% loan service fee

* reduced if < 20 years


Loan Approval Schedule
• Loan request UNDER $10 million
Accepted 6 times per year
Approved at CWCB bi-monthly meetings
Apply by 1st of month (i.e. April 1st for May meeting
Allow 5 months for loan approval & loan
contracting


Loan Approval Schedule,
cont’d.
• Loan requests OVER $10 Million
Accepted once a year (Apply by August 1st)
Loan Approval at November CWCB meeting
Project included in Annual Construction Fund Bill
Funding available July 1, with contract in place


CWCB Loan Program Process
Application Board Contracting Design & Loan
Approval Construction Repayment

Initial Contact
Prepare Contract

Substantial
Staff Review Completion
Interest Due
Establish Deadlines
Contract Signing*

Board Presentation Repayment
Application & Loan (Loans over FUNDS
Feasibility Study $10M go to AVAILABLE
Submittal Legislature)
Progress Payments
* With Conservation Plan in Place

Loan Feasibility Study
• Prepare by Engineer/consultant and/or Project
Sponsor
• Provides documentation of project:
Need (water supply problem and solution)
Technical feasibility (selected project alternative)
Impacts (social and environmental)
Economic, financial, institutional feasibility
Financial program – loan repayment capacity and
security

CWCB Website: http//cwcb.state.co.us/

Colorado Water Resources
& Power Development
Authority (CWRPDA)


Small Hydropower Loan
Program
• $10 million of unrestricted funds available
• 5 megawatts or less
• Loan limit of $2 million per governmental agency
• Interest rate: 2% per year
• Term: 20 years
• Eligibility: Colorado cities, towns, counties, water districts,
water and sanitation districts, metropolitan districts, water
conservancy districts, water conservation districts,
irrigation districts, and any enterprise created by the
foregoing
• New hydropower facilities (turbines, mechanical and
electrical), pipelines, necessary remodel/reconfiguration of
the building housing the facilities and transmission lines

Loan Program Conditions
• A FERC or BOR exemption or permit is required
• The governmental agency must have a contract to
sell or a plan to use within its system the energy
produced from the hydropower project
• All required project funds are in place
• Final design and costs are available with construction
contract imminent
• Governmental agency must demonstrate an ability to
repay the Small Hydropower loan (feasibility study or
a financial/cash flow statement)
• Security for the loan (hydropower revenues or utility
system revenues) is in place

Project Evaluation Funding
• $150,000 (up to $15,000 each project) of
matching grant funds for the evaluation and
development of small (5 megawatts or less)
hydropower projects for 2010
• Applications for the Matching Feasibility
Grants are due to the Authority not later
than March 19, 2010.

CWRPDA Website: http://www.cwrpda.com/


Contact Information
Ron Miller, P.E.

Ron URS Corporation
Miller, P.E.
8181 E. Tufts Avenue
303-723-5465 80237
Denver, CO
303-748-3441 cell
Direct: 303-796-4731
ronmiller74@comcast.net
Cell: 303-475-0775

Ronald_L_Miller@urscorp.com


Thank You

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Financial Opportunities And Constraints For Hydropower Development 021010

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