RENEWABLE FINANCING CONSIDERATIONS. Bond Buyer 2011 CA Public Finance Renewable Panel

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1 RENEWABLE FINANCING CONSIDERATIONS Panel

2 Federal and State Proposals and Regulations Issue Background and Status Effects Clean Water Act (CWA) Section 316(b) requires that the location, design, construction and capacity of cooling water intake structures reflect the best technology available. California State Water Resources Control Board adopted an OTC policy that requires power plants to reduce marine impacts by installing closed-cycle cooling or employing other technologies by Once-Through Cooling (OTC) for Coastal Power Plants California Global Warming Solutions Act (AB32) SB2 (x1) California Renewables Portfolio Standard Program (RPS) North American Electric Reliability Corporation (NERC) and Western Electric Coordinating Council (WECC) Reliability Standards Federal and State Proposals/ Regulations and Impacts on Public Power AB32, which was enacted in 2006, mandated that greenhouse gas (GHG) emissions in California be reduced to 1990 levels by The cap and trade program is scheduled to begin in 2013 (originally 2012) for the electric sector and large industrial facilities. SB 2 (x1) was a special session bill that was expedited through the legislature without considering any amendments. This new RPS law requires all utilities, including Publicly Owned Utilities (POUs), to achieve a 20% RPS from 2011 through 2013, 25% by 2016 and 33% by Congress enacted the Energy Policy Act of 2005 (EPAct). With respect to reliability, EPAct created an Electric Reliability Organization (ERO) that was to establish and enforce reliability standards with oversight by FERC. FERC has approved more than 100 National Reliability Standards applicable to the Bulk Power System (100 kv and above) and regional (WECC) reliability standards. Owner/ operators will need to retrofit the units with closed cycle cooling according to varying schedules Utilities have increased renewable project development to avoid additional costs Utilities will continue to increase renewable project development to avoid penalties These standards and their associated compliance criteria may expose utilities to hundreds of thousands of dollars per year in violation penalties if found noncompliant. 2

3 Federal and State Proposals and Regulations Issue Background and Status Effects SB 1368 Emissions of Green House Gases Federal and State Proposals/ Regulations and Impacts on Public Power California Greenhouse Gas Emissions Performance Standard Act (SB 1368), prohibits California utilities from importing new power that exceeds the GHG emissions performance standard. GHG emissions level must be equal, or below, that of a gas-fired combined cycle units (i.e., 1,100 lbs. per MWh). This standard also applies to existing power plants for any life extension investments or contractual extensions. California utilities have been developing strategies to achieve SB 1368 compliance, including use of emerging technologies. SB 17 Smart Grid System Dodd-Frank Wall Street Reform and Consumer Protection Act Publicly-Owned Utilities with more than 100,000 service connections must develop a smart grid deployment plan, consistent with federal law. Smart grid deployment involves renewable energy integration, advanced metering infrastructure (AMI), demand response programs, cyber security, and other elements. Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd- Frank Act) calls for swaps to be traded on exchanges, and guarantees by clearing houses to reduce the settlement risks. Based on this law, public power entities may need to take certain actions to comply with new reporting, record keeping and other regulatory mandates. Expenditures under the smart grid development could create significant costs. Under the Dodd-Frank Act, some utilities would be classified as a swap dealer. 3

4 Renewable Financing Subsidy Programs Over the past several years a number of programs have facilitated the development and financing of renewable energy projects. Many are scheduled to sunset, which will bring pressure on the pricing of renewable projects. Year 2010 Production Tax Credits Federal Subsidy Program Expiration Dates Investment Tax Credits Grant in Lieu of ITC Build America Bonds Clean Renewable Energy Bonds Qualified Energy Concervatio n Bonds : Wind 2013: Others 2012: Wind 2013: Others 4

5 Sample of Recent CA Muni Renewable Projects Renewable projects recently completed in California have effectively all utilized some form of subsidy program. Select Recent California Renewable Projects Owner Project/Resource MW Transaction Type LADWP Solar and Wind Project Expansion - CREBs/ QECBs NCPA Geothermal and Solar 5 Project Enhancements SCPPA Milford I Project (Wind) 200 Prepayment w/ buyout option SCPPA Linden Wind Project (Wind) 50 Asset Purchase SCPPA Milford II Project (Wind) 102 Prepayment w/ buyout option SCPPA Windy Point Project (Wind) 262 Prepayment w/ buyout option SCPPA Tieton Hydropower Project 14 Asset Purchase SCPPA Ormat (Geothermal) 20 Power Sales SCPPA Pebble Springs (Wind) 99 Power Sales SMUD Solano Wind Project 102 Project Financing SMUD Solar Photovoltaic 5 Project Financing TID Tuolomne Wind Project 137 Asset Purchase Many California renewable projects are actually located outside the State, necessitating transmission resources and other considerations. 5

6 Renewable Energy Project Financing Options Tax-Equity with Prepayment Straight Municipal Ownership Power Purchase Benefit: Lowest all-in power cost to municipality Tax-exempt financing of energy prepayment Municipality can structure the PPA to include a purchase option at the expiration of the tax credits Considerations: Tax equity yields have increased due to: shrinking investor universe, risk of buyout price, lack of outright ownership, complexity of the transaction Assuming a take or pay PPA, municipality is still subjected to operational risk in the event that the Benefit: Provides outright ownership and cost certainty to municipality Considerations: Higher all-in power cost resulting from loss of tax incentives, increased leverage on balance sheet Municipality is subject to operational risk Tax Credit Bonds (CREBs / QECBs), if available, could further reduce overall financing cost of this option 1 Benefit: Typically structured on a take-and-pay basis Cost certainty and all operating risk lies with project owner/operator Municipality can structure the PPA to include a purchase option at the expiration of the tax credits Consideration: Not consistent with municipality s ownership goal Can be relatively expensive PPA can be structured with a buy-out option if municipality can find a willing developer Bond plant Buyer doesn t perform 2011 CA Public Finance Renewable 6

7 Ownership Considerations with Prepayments The PPA/Prepayment structure does not preclude ownership. Economic considerations and tax considerations limit the options for buy-out options but it is generally possible to allow for the project ownership after the full vesting of tax credits. Milford Wind Corridor Phase II Cash Grants) Prepayment Power Purchase First Lien Mortgage Interest AND OPTION TO PURCHASE SCPPA retains the option to purchase the project at various times starting six years after the initial prepayment. Bond Proceeds Power Sales Bond Holders 7

8 Managing Risks in Prepayment Transactions Using SCPPA s Milford I project as an example, a myriad of project agreements limit risk to SCPPA and its participants. Participant s O&M Agreemen t Power Sales s Turbine Warrantie s Power Purchase Agreemen t Transmissio n Services s IPA/IPP Prepay Agreemen t Leases and Property s Landowners and DNR Insurance Policy All-Risks Insurer 8

9 Managing Risks with Prepayment Structures Contract and documentation structures effectively manage risk. Risk Description Operating Risk: SCPPA / participants assume the operating risk under this structure. Prepayment Risk / Plant Underperformance: Plant underperforms and does not produce sufficient power that SCPPA already prepaid. Default Risk: Counterparty defaulting on its obligation. Long-term Facility Up-keep: Tax owner not maintaining and operating the facility with high standards of care. Repurchase Price Risk: A high fair market value, due to temporary external factors, at the time of EBO will reduce the benefit of the transaction. Force Majeure Risk: causing a counterparty to miss its obligations. Risk Management and Mitigation for Prepayments Mitigation The Seller is required to make up any shortfall in delivered energy failing which replacement energy will be provided or reimbursed by the Seller within 180 days. Funding sufficient operating and liquidity reserves for working capital needs. A production tracking account mechanism will be established to ensure SCPPA receives all prepaid power before it pays for any excess production and prepayment term is automatically extended until the entire prepaid energy is delivered to SCPPA. Prepayment amount represents only P99 energy. Defaulting party will be required to make a termination payment that will make whole the nondefaulting party and shall be the sole and exclusive remedy for the non-defaulting party. Termination Payment includes Remaining Prepayment Amount (corresponding to future energy delivery obligations that were not met by Seller) that would be offset or increased by the aggregation of Gains, Losses and Costs attributable to Excess Energy and Environmental Attributes. Seller obligated to pay Remaining Prepayment Amount to SCPPA even in event of SCPPA default. Careful operation and maintenance provisions in the O&M, with regular rights by SCPPA to review the performance of the operator, with clear and material penalties for nonperformance. SCPPA has an option to buy the Facility and all related assets on the tenth anniversary of the commercial operation date at Fair Market Value (FMV). The FMV is subject to a specified floor and ceiling price. If SCPPA does not exercise this option, it has an option to purchase the Facility at FMV at expiration of the term of the Power Purchase Any purchase would terminate the Power Purchase. Force Majeure excuses all defaults, except payment default 9