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Project Finance Trends
Power Purchase Agreement Basics
German American Business Association
Cleantech Financing for the Future
November 10, 2009
Global Renewable Energy Team
Yujing Shu – Beijing
Ivan Chiang – Shanghai
Kevin Murphy – Singapore
Paul de Cordova – Dubai
Christian Hullmann – Berlin
Dirk Michels - Palo Alto
PL31677
James Chen – Taipei
Choo Lye Tan – Hong Kong
Pallavi Mehta Wahi – India
Owen Waft – London
Eric Freedman – Seattle
Fred Greguras - Palo Alto
Maria Cull - London
Steve Rhyne – North Carolina
James O’Hare - Boston
David Brown – Austin
Mark Fleisher - Miami
Timothy Weston - Harrisburg
Kevin Burnett - Portland
Elizabeth Thomas - Seattle
Fred Greguras
Palo Alto Office
[email protected]
650.798.6708
Project Finance Basics (I)
Deployment of proven commercial technology rather than development of
technology
Independent development of 2 MW rooftop solar project for a large business campus
in Southern California. Campus owner to buy the electricity under a power purchase
agreement (PPA) for 20 years.
Project finance is having adequate project revenue streams (plus equity) to cover
project costs plus an acceptable ROI for an investor(s)
Developer with proven track record of execution
Product deployed – proven commercial technology
Creditworthy offtakers (customer that buys the electricity)
Most difficult issue for commercial distributed solar – credit level must be
investment grade or near investment grade
Regulated utilities
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Project Finance Basics (II)
Financing model-how does the math work?
Project startup and recurring (O&M) costs vs. sufficiency of revenue and equity
investment
Project developer fees
Debt service
Revenue Sources
Stimulus incentives, PPA payments, PBI rebate
Feed-in-tariff, Renewable Energy Certificates (RECs)
Financeability (bankability) is dependent on predictability of receiving the revenues
and benefits. Greater the certainty the lower the financing risk
Bottom line for making the math work is that some equity investment is likely
needed. Debt coverage and 30% cash grant are not likely sufficient
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PPA Basics
No standard PPA; each has to be carefully reviewed for financeability
Agreement terms must have only a remote risk of non-payment to provide
predictability for investors who may have different risk tolerance levels.
Any possible price volatility is an investor concern
Starting point for financeability is creditworthiness of the offtaker.
Price dependent on characteristics and location of offtaker
Wholesale vs. retail (utility or distributed commercial)
Feed in tariff (paid by utility)
Term – 20-25 years; 25-30 years for utility projects
3
Federal Cash Grant in Lieu of Investment Tax Credits
30% cash as opposed to investment tax credit available in 2009-2010
Continuing track record of payout (over $1B) is starting to provide some
predictability for financeability for project finance.
Payment is to be made within 60 days after the later of when a complete
application is received or the project is placed in service.
Applications may be submitted as soon as a facility is under construction.
This should be done in order to receive the fastest payment.
“Under construction” generally means that at least 5% of the total cost
of the facility has been incurred.
Must be “under construction” by December 2010
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Financial Institutions Partnership Program (FIPP)
DOE Loan Guarantee Program
Banks are the applicants for projects. Lending committee of most
banks will evaluate whether the underlying loan should be approved
assuming there is no guarantee
Value of the guarantee is to reduce the cost of credit and make the
financing math work better
Guarantees not likely implemented until 3rd quarter 2010
Guarantees are generally limited to 80% of project costs.
Borrower and other principals must make a significant cash
investment in the project.
DOE may determine an appropriate collateral package among
creditors.
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Commercial Distributed Solar
Electricity Generation Project
Independent development of 2 MW rooftop solar project for a large business campus
in Southern California. Campus owner to buy the electricity under a power purchase
agreement (PPA).
PPA is a 20 year agreement for the purchase of electricity
Developer owns the solar facility which is on the rooftops of several buildings
Initial purchase price of $0.15 per kWh
California PBI rebate of $0.22 per kWh (not paid in utility project)
Deployment of proven, commercialized solar technology
$10.5M installed cost
Business campus owner has a BBB credit rating
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Sources of Project Revenue and Financing
PPA payments for electricity
Federal 30% cash grant in lieu of ITC
State PBI rebate
Bonus depreciation for 2009 (not cash)
Loan guarantee program?
Venture capital?
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Sources of Project Financing
Project developer
Vertically integrated manufacturer
Sponsor equity
investment
Bank Debt
Cash grant in
lieu of ITC
20% - 30 %
40% - 50%
30%
7 year loan
8-9% Interest rate
Supplier to carry
module costs until
this payment is
received
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Summary
Predictability (certainty) of receiving project revenues and benefits is key to
the financing math
The predictability of the federal 30% cash grant is starting to help the
financeability of renewable energy projects.
Bonus depreciation should be extended through 2010 so it has time to be a
financing tool.
The FIPP loan guarantee program could eventually help get projects
funded by reducing the cost of credit.
Bottom line for making the project math work is that some equity
investment is very likely needed
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