RI Commercial PV Financing Julian Dash Principal Clean Economy Development, LLC

Transcription

1 RI Commercial PV Financing Julian Dash Principal Clean Economy Development, LLC

2 Presentation Overview: RI Commercial PV Financing Project Financing: General, Monetization, Structures and Incentives RI Incentive Program: Distributed Generation Contracts Other components to Project Financing: People and the Transaction Project Finance Capital Stack (Sources) Capital Providers Summary

3 Clean Economy Development, LLC ( CED) CED provides financing, development and advisory services for clients seeking to pursue renewable energy and energy efficiency projects. Expertise: Complex transactions for small business, non-profits and governments Focus: Clean energy projects that enhance long-term energy & economic value to clients. Approach: Energy Environment Economics Employment Equity

4 Project Financing General Project financing: The establishment and utilization of Special Purpose Entities ( SPE ) whose sole organizational purpose is to invest in a distinct Projects (or set of projects). SPE allows provides the vehicles Developers and Investors need to monetzie Incentives (ie: Tax Credits) into Cash. The SPE has a very defined set of assets The Solar project. Developer/Investor exposure is limited to these assets and not (generally) the assets of the Project host, sponsor, etc. SPE s use Projects assets and future values (cash flow, credits) to raise Debt & Equity from 3 rd party investors. SPE provides opportunities for investors finance Projects, while limiting capital outlays by hosts/sponsors.

5 Project Financing: The goal is to Monetize incentives The economics supporting Solar PV relies on State & Federal Incentives working together Incentives only ATTRACT Capital, they do not PROVIDE Capital This is where Project Finance and Monetization comes in Monetization is the process of turning non-cash incentives into up-front Project Cash Summary of Solar PV Incentives: State and Federal Type of Incentive Direct Capital Provided How Monetized Federal Tax Credit Tax NO Developers sell/transfer value of credits to 3 rd party investors (Equity) Federal Modified Depreciation Tax NO Developers include Depreciation in Tax Credit value calculation State Distributed Generation Contracts LT Payments NO Developers pledge long-term energy payments against up-front debt/equity Solar Project Financing requires coordination and monetization of Federal/State incentives RI State Incentives compliment Federal Incentives and provides direct means for Project Finance monetization

6 RI Project Finance involve the most common Project Finance Strategies SPE s are the vehicles of Project Finance State Incentives compliment Federal Incentives and common Project Finance structures Most common Project Finance Structures in RI Solar Transactions Partnership Flip: SPE majority owned by a tax equity investor/ minority owned by General Partner SPE adds to project financing with long-term project debt against energy contracts Developer constructs project at Host site Host receives energy value, Investors receive tax credits, depreciation, cash, etc. At end of investor period, ownership interests Flip from majority to minority Sale Leaseback: Developer constructs solar project PIS (3 months) sells it to Investors Commensurate with sale, Developer leases the project from Investor At end of lease, Developer usually buys back the Project s assets

7 Project Financing Structure - Example

8 Distributed Generation Contracts RI Incentive driving Project Finance and Development DGC Summary: Feed-In-Tariff for new systems, up to 5MW each/40mw total Eligible Technologies include: Solar, Wind, Wave, Hydro, Biomass, and certain Fuel Cell DGC enrollments will be broken into varied technologies and classes (sizes). Program Administration: RIPUC, National Grid and RI DGC Board Contracts include purchase of all Assets: Energy/Capacity/REC s Current Pricing: Class Size Target Capacity Ceiling Price (per kwh) Solar PV: KW 10% $ Solar PV: KW 20% $ Solar PV: % $ Wind: Up to 1.5MW 30% $ Large projects need to Bid at/under ceiling price. Small projects automatically receive ceiling price. Contracts are for ALL assets and is not separate and above from net metering (unlike SREC)

9 RI Project Financing Core: Distributed Generation Contracts DGC developed with market based mechanisms that help make it a strong capital program: Designed to have consistency, clarity and predictability Pricing and Contracts developed to achieve: A price attractive enough to entice project development A contracting process that was uniform and streamlined Other components of DGC that are complimentary to Capital Markets Completed due diligence required (Feasibility, Interconnection, etc) Long-Term fixed contract and revenues Revenue rates that provide market returns Standardized program and contracts Limited technology risk Limited program/governmental risk

10 RI Project Financing & Distributed Generation Contracts: Points of Caution The Distributed Generation Contracts Program is a new program, which brings about: Learning curve for Project Developers, Financiers, etc. Identification in programmatic kinks Some of these points of caution include: DGC Application process (and related activities) DGC Contract (and its potential impact on Project Financing)

11 RI Project Financing & Distributed Generation Contracts: Applying Completed Utility Feasibility study and Interconnection study Application Submission of DGC application form, including such information: System design; Feasibility study (if applicable) and Equipment specifications Site plan and control; Electrical One-Line; Zoning and Permitting Plan; Capacity factor; Hourly Output and Expected Annual Energy Delivery Management/Development/Financing team expertise Direct Economic Benefits to Rhode Island At RFP Award: Developer has approximately 30 days to execute contract At Contract Execution: Developer must submit a performance guarantee payment of: Small Projects: $15.00 per annual RECs generated under the contract; Large Projects: $25.00 per annual RECs generated under the contract; Minimum Payment: $500 Maximum Payment: $75,000 Accurate and detailed completion of the application goes and in hand with the ability to finance the Project.

12 RI Project Financing & Distributed Generation Contracts: Potential Impacts Financing DGC Standard Contract provides for: Fixed, non-negotiable contract language Fixed Term(s) Fixed Rates Standardization is attractive to Project Financiers (reduced transactions, reduced credit) The DGC is an page document with details that impact Financing: Output test: Prove hourly energy generation (4 hours) as expressed in application rate ISO-RE: Registration, Agreements, Approval, Rules and Practices Written Notice: Often Qualified the Facility as Eligible under RI Law Payments: Monthly invoice and payments (could effect cash flow and repayments) Excess Energy Defaults, Breaches and Remedies The Contract has many items that Developer need to fully understand both for Financing and for Financial Operations

13 Project Financing requires more than securing incentives it needs the coordination of People and Components and Risk reduction People Developer Integrators/Contractors Utility Regulators Investors Host Legal Accounting Management Transaction Utility long-term contract Feasibility Studies Financial Analysis Construction Contracts In-Place Leases Warranty and Operations Plan Loan and Accounting Administrative Greater coordination/verification of the above, significantly reduces Risk Reduced Risk results in greater likelihood of Project Finance success * While all components are required in Project Finance, these areas are most critical for monetizing Incentives into Cash

14 Project Financing Predevelopment Coordination to source capital With the following in place, Project Finance is ready to be sourced Project Identification (Site Analysis, Host (w/ lease), System Layout, etc.) Development Team (Manager, EPC, Finance, Accounting, Etc. Construction and Services contracts in place Initial coordination with Utility Predevelopment Feasibility Studies Zoning, Permitting, Environmental Plan Long-term administrative, operations, maintenance and warranty plan Submission of Utility Feasibility and Interconnection Plans Validation of availability and preparation of Incentive program applications Completion of Financial Analysis with Cash Flow and Investor Returns

15 Project Financing Capital Stack RI Project Financing is most often structured in the following manner Capital Source % of Project Equity: Project Sponsor/Developer 8-10% 10%-15% Equity: Tax Credit Equity 48%-52% 12%-17% Expected Returns Debt: Project Debt 42%-48% 6.50%-8.00%

16 Project Financing Capital Providers While a good deal structure can be identified, actual Investors need to be in the deal Investor Type Debt: Large Banks Debt: Smaller/Regional Banks Equity: Corporate Institutional Equity: Individual (HNW) Equity: Utilities and Other Equity: Other Investor Involvement Familiar with program. Interest/involved in large (3MW) projects on limited basis. Not much on small projects. Ability to have greater access to smaller Banks, and detail out a very RI specific program has attracted some to invest in Mid-Large projects. Small project TBD. From Tax Credit standpoint very familiar with structures, incentives, etc. RI represents a small market, which has been a challenge to attract traditional Institutions, but new entrants are exploring. Much interest in investing, however small projects represent high transaction costs that erode project economics; large projects often require more investment than single HNW has to offer Utilities (NOT NATIONAL GRID) have been involved in early DGC transactions. Returns on DGC projects along with limited risk profile have attracted new Investors. As program continues and more contracts are executed, expect new Investors to participate.

17 Project Financing Securing Capital Securing capital with the DGC program takes the same approach as most other projects: Identification of Projects Development Plan Predevelopment and due diligence Financial Analysis/Plan Because of the newness of the program, Developers need to be even more diligent Program expertise: Demonstrate confidence and knowledge in program Program Distinction: It is not an S-REC (or other) program so don t pitch it as one Reduce other Concerns: Have development team/predevelopment activities lined up Other incentives: DGC alone won t finance project (Federal incentives needed) Economics and Credit: Know the economics and credit of all aspects Construction and Operation of the transaction. Changing fundamental economics while seeking Financing can kill the deal.

18 RI Project Finance: Summary RI Solar Financing is very similar to most other Project Finance scenarios Requires coordination and monetization of State/Federal incentives RI s Incentive Program is driving Project Financing While a contract with the Utility is valuable, balance of the Development needs to be in place Team, Predevelopment/Feasibility activities, Financial Analysis, etc. RI is still a new and small market, and there is no go-to source as in National marketplace But, the value of DGC, w/ strong developers, is attractive to known and new Investors Because of the newness of the program, it makes it even more important to have: A thorough understanding of the program and its mechanics All other predevelopment activities and development team lined up Project Finance takes the same form and structure as in other states/projects. While Investors are still new, understanding the DGC program and demonstrating that value to potential investors will support raising Project Finance.

19 Clean Economy Development Julian Dash Principal/Founder Clean Economy Development, LLC 127 Dorrance Street, 5 th Floor Providence, RI jdash@cleaneconomydevelopment.com