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Financing Renewable Energy Projects: Issues and Opportunities

Financing Renewable Energy Projects: Issues and Opportunities. Peter Y. Flynn Bostonia Partners July, 2013. Presentation Overview. Renewable Energy Financing Basics Key Drivers of Renewable Energy Economics Importance of Long Term Authority Financing & Contracting Options

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Financing Renewable Energy Projects: Issues and Opportunities

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  1. Financing Renewable Energy Projects: Issues and Opportunities Peter Y. Flynn Bostonia Partners July, 2013
  2. Presentation Overview Renewable Energy Financing Basics Key Drivers of Renewable Energy Economics Importance of Long Term Authority Financing & Contracting Options Discussion of Capital Stack and Developer Returns Critical Issues – Financing Perspective Conclusions
  3. Bostonia Introduction Founded in 1998, Bostonia Partners is a full-service investment bank with primary market focus in energy and real estate, and additional services in structured finance and advisory – over $5B in Federal projects Bostonia Global Securities, the broker/dealer affiliate, provides direct access to investors and daily participation in the capital markets Bostonia ranks 7th among all banks for domestic private placements in 2009 – 2012
  4. Renewable Energy (RE) Financing Basics Renewable Energy financing is “project finance” Cash flow driven Non-recourse Projects are capital intensive (low cash flows vs. high project costs) with important requirements Investment grade developer and Power Purchase Agreement counterparty Large projects required to justify tax equity structure / achieve economies of scale Proven Technologies Capital stack typically consist of various sources Debt (supported by PPA revenue and contracted RECs) Tax equity Sponsor equity
  5. Key Drivers of RE Economics Generation Market with electricity prices to support Power Purchase Agreement at “grid parity” with or without escalators Renewable Portfolio Standard – Renewable Energy Credits (RECs) Federal and State Tax Incentives RPS Policies Average Price per kWh
  6. The Importance of a Long-Term PPA PPAs efficient way to secure energy at an installation, and for developers and financiers to raise capital for RE projects PPAs provide fixed long-term energy price certainty and protection against rising energy costs Revenues generated from PPAs drive debt and equity returns; long term PPA necessary to secure financing No initial outlay of capital to procure energy
  7. The Importance of Long-Term Authority Based on 10 MW Solar Project @ 2.50 / watt All-in Cost ESPC w/ Tax Equity ESPC – no incentives PPA – EUL 5% Sponsor Equity Tax Equity – ITC and Depreciation Monetization 40% Tax Equity - ITC and Depreciation Monetization 40% Debt 4.5% yield 100% Debt 4.5% Yield Debt 5.75% Yield 60% 55% 9.5 cents / KWh -- 25 year PPA 8.5 cents / KWh – 25 year PPA 12.5 cents / KWh – 25 year PPA
  8. The Importance of Long-Term Authority Based on 10 MW Solar Project @ 2.50 / watt All-in Cost ESPC w/ Tax Equity ESPC – no incentives PPA – EUL 5% Sponsor Equity Tax Equity – ITC and Depreciation Monetization 40% Tax Equity - ITC and Depreciation Monetization 40% Debt 4.5% yield 100% Debt 4.5% Yield Debt 5.75% Yield 60% 55% 9.5 cents / KWh - 25 year PPA 24 cents / KWh – 10 year PPA 12.5 cents / KWh – 25 year PPA 30 cents / KWh – 10 year PPA 8.5 cents / KWh – 25 year PPA 20 cents / KWh – 10 year PPA
  9. Financing and Contracting Options EUL PPA UESC / ESPC
  10. Capital Stack Across Stages of Development Development Stages of a Typical 10MW Project Shovel Ready COD
  11. Operating Returns of the Project Owner
  12. Assumptions Development Assumptions: Project Size: 10MW EPC Cost per Watt: $2.50 Additional Development Costs: Interconnection, Site Work, Legal Fees, Financing Fees, Construction Interest, Independent Engineer PPA Price: $0.10/KwH SREC Price: $150/MwH x 9 years Operations Expenses: O&M, Insurance, Property Tax, Administration Financing Assumptions: 85% Construction Loan to EPC Cost 10 Year Senior Loan, LIBOR swap + 350bps at a 1.35x Debt Service Coverage Ratio (48% of Capital Stack) 10 Year Debt Service and O&M working capital facility Tax Equity investment for 99% of benefits (ITC + MACRS Depreciation) and 2% preferred cash return over 5 years (40% of Capital Stack). Buyout is sized to approximately 10% of initial investment. Long Term Equity 20 year hurdle rate of 15% IRR (12% of Capital Stack)
  13. Critical Issues – Government Government Risk Due diligence/pre-procurement work by agency/installation Project selection, size and technologies sought Essentiality of the installation Track record of the Agency and facility/installation Every project needs a “champion”
  14. Critical Issues – Developer/Contractor Developer/Contractor Risk Experience with technology Track record for on-time, on-budget performance Guarantees for construction and operation Financial Strength to cover delays Experience with Federal procurement
  15. Conclusions Long-term contracting authority is essential for financing Efficient way to raise capital and keep energy pricing low ESPC is an important tool for meeting Federal energy goals and achieving energy security RE projects are complex with steep learning curves Important to assemble the team early – including the financing Projects need a “champion” at the installation Work with a public/private mentality and remain adaptive and flexible Markets, incentives, and technologies drive projects Important to understand federal and state incentives, standards, and energy prices in order to determine complete revenue picture Important to determine what technologies are best suited to specific geographic conditions
  16. Contact Information Peter Y. Flynn Executive Vice President 617.226.8103 Direct 617.437.0150 Main pflynn@bostonia.com This information has been prepared solely for information purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any trading strategy. No representation or warranty can be given with respect to the accuracy or completeness of the information, or that any future offer of securities, if any, will conform to the terms hereof. Bostonia disclaims any and all liability relating to this information, including without limitation, any express or implied representations or warranties for, statements contained in, and omissions from, this information.
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