Analyzing the Value of Renewable Energy Projects Under Multiple Third Party Financing Options

Transcription

1 Analyzing the Value of Renewable Energy Projects Under Multiple Third Party Financing Options 12 May 2011

2 Table of Contents The Need for Third Party Financing of Renewable Energy Projects The Realization of Energy Goals While Meeting Budgetary Needs The Third Party Financial Valuation of Energy (TP5) Calculator The Benefits of Third Party Financing 1

3 The Need for Third Party Financing of Renewable Energy Projects Different executive orders blur the unified energy vision Appropriated funding for large projects doesn t exist Enterprise-wide management of projects is critical Limited O&M funding Government processes don t align with industry best practices No formal training on third party financing and installation energy options Limited understanding in the complexity of third party financing 2

4 A set of evolving energy policies are creating an ever widening gap between target levels and actual levels Energy Policy Act of 2005 Energy Independence and Security Act of 2007 Executive Order NDAA 2009 and 2010 Executive Order Portfolio of renewable energy by 2020/2025 Energy intensity reduction of 30% vs baseline by 2015 Meter all facilities Audit facilities for energy efficiency each year 25% renewable of facility energy use must be from renewable sources; includes thermal and electrical Reduce greenhouse gas emissions by 2020 Energy security still needs to be defined 3

5 % Energy Demand Reduction % Energy Demand Reduction Third party financing can help DoD achieve significant energy savings Various DoD branches have seen negative trends in energy demand goals Projected Energy Savings Current Energy Savings Goal Gap 30 GOAL (EISA 07) As a result, the initial investments to reach these goals require much more capital; beyond the reach of DoD s current budget EO GHG Goal Third party financing enables: DoD agencies to invest in projects that meet their goals today DoD agencies to reach their energy goals, and provide a surplus in their budget through cash revenue and in-kind consideration Private entities to capture tax credits that DoD is ineligible for, creating a more financially viable project Note: Example data taken from a FY10 Energy Management Report 30% 25% 20% 15% 21% 19% 16% 17% 14% 12% 10% 8% 10% 7% 5% 5% 0% 0% Note: Historic data taken from the DoD FY09 Energy Management Report 4

6 Table of Contents The Need for Third Party Financing of Renewable Energy Projects The Realization of Energy Goals While Meeting Budgetary Needs The Third Party Financial Valuation of Energy (TP5) Calculator The Benefits of Third Party Financing 5

7 Third party financing contracts allow Federal agencies to construct projects without the need for self funding Enhanced Use Lease (EUL) Permits non-excess property to be leased out to interested parties. The government can receive cash or in-kind consideration as payment. Power Purchase Agreement (PPA) Allows a private entity to finance power construction and/or generation. The federal agency purchases the electricity through a long-term contract. Energy Savings Performance Contract (ESPC) An energy savings company (ESCO) upgrades/installs energy efficiencies and small renewables. The savings over a period of time are used to pay back the initial financing. The annual energy savings are guaranteed. Utility Energy Service Contract (UESC) Similar to an ESPC, but the utility provides the upgrades Annual savings are not guaranteed 6

8 Energy Security has become increasingly important to conducting missions in the U.S. and overseas DoD Facilities energy security encompasses sufficiency, surety, and sustainability Energy sufficiency means having adequate power to conduct critical missions for the duration of that mission Large scale renewable energy projects are extremely capital-intensive, well beyond the scope of appropriated funding Energy surety is ensuring resilient and redundant energy supplies Allowing for large scale projects through third party financing creates excess supply if needed Energy sustainability must present the lowest life cycle cost, while considering all statutory and executive order requirements Third party funding can provide in-kind consideration of cost-avoidance measures to ensure sustainability 7

9 Table of Contents The Need for Third Party Financing of Renewable Energy Projects The Realization of Energy Goals While Meeting Budgetary Needs The Third Party Financial Valuation of Energy (TP5) Calculator The Benefits of Third Party Financing 8

10 The TP5 serves a variety of functions to objectively compare financing vehicles by incorporating a corporate infrastructure decision making process Inputs Inputs range from variable cost of the facility to the debt-equity ratio of the financing of the project. Major inputs include: Process Capacity Factor O&M costs (fixed and variable) Selling Price of Power Size of Plant Capital Cost Negotiated Prices Land Size Revenue Recognition Type Annual Base Consumption Receives a variety of inputs, computes both the developer s and client s cash inflows and outflows, and outputs multiple financial metrics, calculating the value of assets such as Fair Market Value of Land Value of Electricity Energy Security Outputs Provides apples to apples comparison for all project and financing vehicles. These outputs include: Levelized Cost of Electricity Developer s Net Present Value Client s Net Present Value ROI Developer s IRR Client s IRR 9

11 The TP5 can calculate an NPV with only a few primary inputs, allowing for a quick side by side comparison of multiple vehicles 10

12 Currently, the calculator displays financial results for EULs, PPAs, an EUL-PPA hybrid, ESPCs, and UESCs ESPC/UESC portion displays a dynamic what-if graphic allowing clients to see what the contract would provide compare to what current orders and mandates demand 11

13 Results for clients and developers can be seen side-by-side, along with multiple sensitivity factors 12

14 Table of Contents The Need for Third Party Financing of Renewable Energy Projects The Realization of Energy Goals While Meeting Budgetary Needs The Third Party Financial Valuation of Energy (TP5) Calculator The Benefits of Third Party Financing 13

15 Why third party financing is important to Federal agencies Impact to Agency: Achieve strategic, project and program goals and mandates Deliver quantifiable results to key stakeholders Objectively identify a property s highest and best use to our clients Analyze funds and financing vehicles to meet their mission Reduce financial risk Respond swiftly to rapid changes in the energy policies, federal and local tax credits, and potential feed-in-tariffs Better understand how ESCOs are performing, as well as how each ESCO is benefiting from the deal 14

16 Back Up

17 Third party financing contracts allow Federal agencies to construct projects without the need for self funding Enhanced Use Lease (EUL) Permits non-excess property to be leased out to interested parties. The government can receive cash or in-kind consideration as payment. Power Purchase Agreement (PPA) Allows a private entity to finance power construction and/or generation. The federal agency purchases the electricity through a long-term contract. Energy Savings Performance Contract (ESPC) An energy savings company (ESCO) upgrades/installs energy efficiencies and small renewables. The savings over a period of time are used to pay back the initial financing. The annual energy savings are guaranteed. Utility Energy Service Contract (UESC) Similar to an ESPC, but the utility provides the upgrades Annual savings are not guaranteed 16

18 Third party financing has been evaluated on an ad hoc basis, not in comparison to all financing vehicles Objectively compares highest and best use of the limited resources (land and capital) Takes into account highest mission priority (energy security, revenue streams/cost savings, meeting federal goals and mandates, Net-Zero) Energy projects deemed unfeasible could be sized to take advantage of economies of scale. Current projects might not be reaching their full potential Energy savings performance contracts have traditionally been bad deals. Savings are not being properly measured and verified (lack of installation skill sets/resources) Flexible modeling encompasses multiple clients within DoD and other federal agencies 17

19 Comparison of Third Party Financing/Funding Vehicles BENEFITS ESPC UESC PPA EUL Utilities Privatization Flexible contract Understanding Real and Allows agencies and of energy usage personal to focus on procurement property primary processes maintenance operations cost avoidance Life cycle cost savings Updated equipment with minimal upfront costs Updated equipment with minimal upfront costs Receive power at discounted rates Provides developer guaranteed power sales Minimal upfront costs independence from power grids (security) Stable energy pricing Provides revenue stream from previously non-excess properties Modernizes agency assets RISKS Implementation Time Lack of Stakeholder Knowledge Extensive measurement and verification procedures Implementation Time Financing of project based on utility cash flows Transaction Costs Term Limits Limited Contract Term Lengths Transaction Costs Implementation Time For distribution systems, not generation systems 18

20 Enhanced Use Leasing (EUL) Description Enhanced Use Leases (EUL) allow the Federal agencies to lease Federal lands in exchange for Fair Market Value (FMV) rental payments to achieve energy requirements. An EUL is a partnership between Federal agencies and private developers where the developer leases non-excess lands to construct commercial real estate and energy developments. Developers are selected through a competitive process based on development concepts, experience, and rental payments to the Federal agency. Rental payments will be provided in the form of cash or In-Kind Consideration (IKC) and can be utilized for the construction of facilities, utility services, or real property maintenance services. At the end of the contract the agency has the ability to extend the contract, revert the property to its prior condition, or assume control of the commercial or energy developments. Contract terms up to 50 years are allowed. Benefits Real and personal property maintenance cost avoidance Assists Federal agencies in meeting mandated energy requirements through IKC Provides a revenue stream from previously non-excess property to support mission critical activities Ph 1 SOV Beddown Process BCA Development EBS Begins Industry Day RFQ Refinement EBS Proposal Complete Received NEPA Begins Negotiations Complete Congressional Notification Lease complete Signed Enhanced Use Lease Process COS SOV BCA Approved Draft RFQ Congressional Notification Begins Congressional Notification Complete RFQ Posted HRO Selected Kickoff Congressional NEPA Negotiations Notification Complete Begins 19

21 Power Purchase Agreements (PPA) Description Benefits Power Purchase Agreements (PPA) allow a third-party developer to construct power generating facilities on Federal lands without up-front capital costs. A PPA is an agreement between Federal agencies and third-party developers who install a renewable energy facility on Federal property under an agreement that the agency will purchase the power generated by the system. The agency pays for the system through power payments and the value of Renewable Energy Credits (RECs) over the life of the contract. After installation, the developer owns, operates, maintains the system for the life of the contract, and monitors energy production. At the end of the contract, the agency has the ability to extend the contract, revert the property to its prior condition, or assume control of the power generating assets. Contract terms are between 5-25 years in length. Federal agencies can receive power at discounted rates Federal agencies acquire energy security via independence from exterior power grid PPAs provide developers at least one guaranteed power customer Assist the Government in meeting mandated energy requirements Limited or no Government capital investment 20

22 Energy Service Performance Contracts (ESPCs) Description Energy Savings Performance Contracts (ESPCs) allow Federal agencies to accomplish energy savings projects without up-front capital costs and without special Congressional appropriations. An ESPC is a partnership between a Federal agency and an energy service company (ESCO). The ESCO conducts a comprehensive energy audit for the Federal facility and identifies improvements to save energy. In consultation with the Federal agency, the ESCO designs and constructs a project that meets the agency's needs and arranges the necessary financing. The ESCO guarantees that the improvements will generate energy cost savings sufficient to pay for the project over the term of the contract. After the contract ends, all additional cost savings accrue to the agency. Contract terms up to 25 years are allowed. Department of Energy (DOE) energy savings performance contracts are indefinite-delivery, indefinite-quantity (IDIQ) contracts designed to make ESPCs as practical and cost-effective as possible for Federal agencies. The Department of Energy (DOE) awarded these "umbrella" contracts to ESCOs based on their ability to meet terms and conditions established in IDIQ contracts. DOE ESPCs can be used for any Federally-owned facility worldwide. Benefits Access to privatesector expertise in energy efficiency, renewable energy, water conservation, and reduced emissions Flexible, practical contract and procurement processes Finances energy improvements without relying on special Congressional appropriations Guarantees energy and related operation and maintenance cost savings Enhances the ability to plan and budget energy, operation, and maintenance accounts 21

23 Utility Energy Services Contracts (UESCs) Description Utility Energy Service Contracts (UESC) are agreements between utility service providers and Federal agencies to install performance-enhancing, energy-efficient equipment on installations. Utility companies assume the capital cost of installing energy and water conservation equipment and renewable energy systems, while the Federal agency makes monthly payments using the cost savings from infrastructure improvements. UESC s can be executed utilizing three different contract types, Area Wide Contracts (AWC), Basic Ordering Agreements (BOA), and Separate Contracts. AWC s outline general terms and authorize agencies within a utility s service area to place delivery orders. BOA s are not contracts, but establish general terms for future contracts. BOA s can be established between any Federal agency and its utility. Similar to BOA s, separate contracts can be initiated between any Federal agency and its utility. This type of contract is utilized in the absence of a AWC. Typical terms for any of the above contracts are for the length of no longer than 25 years. Additionally, these contracts are exempt from the Competition in Contracting Act (CICA), allowing agencies to sole source to any utility within their area. Benefits Utilities have access to Federal agencies energy information understanding of usage habits Utilities have similar goals as Federal agencies Flexible contracts and performance assurance Allow implementation of energy efficient projects without using direct appropriations Reduces time and resources required to implement energy projects 22

24 Percent Complete The Energy Financial Valuation Service Offering affects multiple parts of the generic EUL/PPA timeline 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Incentives Resource Land Off-Take Agreement Stakeholders Processing Permitting Financing Construction Phase 1: Initial Validation Phase 2: Project Identification Phase 3: Project Definition & Acquisition Days From Project Start Phase 4: Lease Negotiation & Closing Denotes EFV SO applicable 23

25 Energy Financial Services Contact Information: Carol Bell, Principal (210) Scott Thigpen, Senior Associate (210) David Swanson, Lead Associate (210) Joseph Offutt, Consultant (210)