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Markets and Financing PV Power Plants 2009 - USA December 10, 2009

Markets and Financing PV Power Plants 2009 - USA December 10, 2009. PL31963-v2. Global Renewable Energy Team Maria Cull - London Steve Rhyne – North Carolina Yujing Shu – Beijing James Chen – Taipei James O’Hare - Boston

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Markets and Financing PV Power Plants 2009 - USA December 10, 2009

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  1. Markets and FinancingPV Power Plants 2009 - USADecember 10, 2009 PL31963-v2 Global Renewable Energy Team Maria Cull - London Steve Rhyne – North Carolina Yujing Shu – Beijing James Chen – Taipei James O’Hare - Boston Ivan Chiang – Shanghai Choo Lye Tan – Hong Kong David Brown – Austin Kevin Murphy – Singapore Pallavi Mehta Wahi – India Mark Fleisher - Miami Paul de Cordova – Dubai Owen Waft – London Timothy Weston - Harrisburg Christian Hullmann – Berlin Eric Freedman – Seattle Kevin Burnett - Portland Dirk Michels - Palo Alto Fred Greguras - Palo Alto Elizabeth Thomas - Seattle Fred Greguras Palo Alto Office fred.greguras@klgates.com 650.798.6708

  2. Overview • Financing Policies in the U.S. • Financing Structures in the U.S. • RPS Policies in the U.S. • China Market and Policies • India Market and Policies • Other Markets

  3. U. S. MarketFinancing Polices and Sources of Project Revenue • No single federal or state policy is sufficient; a financing tool kit of policies is needed that are available at the same time • U.S. has a comprehensive set of financing policies but is not a homogeneous market • Feed-in-tariffs (state) • Clean Renewable Energy Bonds (CREBs) • Federal 30% cash grant in lieu of investment tax credit or ITC • Bonus depreciation for 2009 (not cash) • Loan guarantee program • Renewable Energy Certificates • Power purchase agreement payments (project revenue) • PBI rebate (California) – commercial sales only not sales to utilities • Renewable Portfolio Standards (state)

  4. Clean Renewable Energy Bonds • $2.2B in bond issuances approved in October, 2009 by U.S. Treasury for qualified issuers such as local utilities, electric coops, etc. • Could help move many public sector solar projects into construction. • Federal tax credit to the investor in lieu of payment of a portion of interest on the bonds. • 42% solar – about $900M in allocations. Many small installations under 1MW; largest solar project about 6MW • Buy American provisions not applicable • Press release and list of projects authorized for issuances at http://www.ustreas.gov/press/releases/tg333.htm   and at the links in the press release.

  5. Federal Cash Grant in Lieu of Investment Tax Credit (I) 30% cash as opposed to investment tax credit available in 2009-2010; thereafter reverts to ITC only unless cash grant is extended by Congress. The simpler ITC may be acceptable to investors with tax liability Investor owned utilities are eligible Payments by Treasury (over $1B) is starting to provide some predictability for financeability for project finance but not yet much pay out for solar projects Payment is to be made by Treasury within 60 days after the later of when a complete application is received or the project is placed in service. Current processing time is more than 60 days.

  6. Federal Cash Grant in Lieu of Investment Tax Credit (II) 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

  7. Federal Bonus Depreciation • Bonus depreciation of 50% applies only through 12/31/2009 unless extended by Congress. This should be extended at least through 2010 so it has time to be a financing tool • Deduction reduces taxable income; not a cash rebate • Solar energy project property is in the Modified Accelerated Cost-Recovery System (MACRS) 5 year class • 85% of the basis may be depreciated • 5 MW, $25M facility will have more than $12M in depreciation in year one. Cash savings of about $5M in California where combined federal and state corporate tax rate is 40.7%.

  8. DOE Financial Institutions Partnership Program Loan Guarantee Program • Banks are the applicants. Lending committee of banks will evaluate whether the underlying loan should be approved assuming there is no guarantee • Not all banks will participate • Guarantees not likely implemented until 3rd quarter 2010 • Value is to reduce the cost of credit and make the financing math work better but cost of complicated application process may offset • 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.

  9. Financing Structures (I) • Utility financed and owned • Rate payer base limitations • PPA with buyout option • Purchase and sale agreement (Turn-key ownership) • Joint development • Module manufacturer financed • Financial statement limitations • PPA with or without buyout option • Purchase and sale agreement (Turn-key ownership) • Joint development

  10. Financing Structures (II) • Project developer project finance • Working capital limitations • PPA with and without buyout option • Purchase and sale agreement (Turn-key ownership) • Joint development • NRG Energy/First Solar take out model • 21MW solar project in Blythe, California • “Largest utility scale PV solar generation facility” in California • NRG’s first solar facility but others in the pipeline • Large energy output, late stage of development; lower risk • First Solar will operate and maintain the facility

  11. RPS Policy in the United States North Dakota, South Dakota, Utah, Vermont, Virginia and West Virginia are goals Source: www.dsireusa.org

  12. RPS Impact on Solar Project Financing • RPS growing at the state level; national level RPS still in discussion stage • RPS by itself will not enable financing because consequences for failure to meet RPS are not meaningful • Key factors in achieving RPS targets that states can influence • Meaningful feed-in-tariff for large projects • More financing friendly standard PPAs – What will banks finance? • Transmission line improvements • Faster and lower cost interconnect process • Expedited permitting approvals

  13. PG&E’s New “Hybrid” PV Program • 5-Year program starting in January 2010 • 500 MW of 1 to 20MW photovoltaic distributed generation installations in northern and central California • Up to 250MW utility-owned generation, with an anticipated capital cost of $1.45B • Up to 250MW of PPAs with renewable resource developers • Projects developed and owned by PG&E would be built on land already owned by the utility or near its substations to minimize the cost and delays of interconnecting them to the power grid • The terms and pricing of the PPAs will be pre-approved by the CPUC • Developer will execute the form contract with streamlined regulatory review, avoiding the need for negotiations, and immediately commence development Source: PG&E

  14. Project-level Issues Financial crisis Project financing difficulties Lack of appetite for tax credits Technology risk Developer performance Transmission upgrades Need upgrades that can be identified, approved and developed by PPA operations date Project permitting Need expedited permitting approvals for contracted projects Portfolio-level Issues Large-scale transmission lines need to reach remote areas System integration of intermittent resources Competition for renewable projects from other utilities/states/countries Challenges to Meeting Current and Future California RPS Goals Source: PG&E

  15. Feed-in-Tariff Basics • Payment per kWh • Impact on ratepayer price • Project limit • Aggregate limit under the program • Length of guaranteed payment • Application process – simplicity, timing • kWh price itself under FIT can make a project financeable by PPA revenue but FIT is not sufficient in the U.S.

  16. Feed-in Tariffs in the United States • Limited impact on utility scale projects to date • Examples • California $0.15 – .17 per kWh (project limit 3MW) • Florida $0.26-.32 Gainesville RU; aggregate annual limit of 4MW • Wisconsin Several utilities with aggregate limit of up to 1MW • Vermont Green Mountain IOU project limit of 250kWh • Washington Project payout limited to $2K per year • Oregon $0.12 Eugene WEB; no project limit

  17. China, India, Other Markets China * RPS: Likely target of 20GW by 2020 * FIT: US $0.16 – 0.22KWh (projected). Utility scale projects permitted * Participation by joint venture – Duke Energy (technology development), First Solar (2GW MOU with Ordos City) * Government subsidized financing up to 50% in some cases India * RPS: 20GW by 2020 * Titan Energy “first utility scale solar power plant” of 1MW * No government subsidized financing yet; FIT under discussion Japan * RPS: 14GW PV by 2020 * FIT: only for surplus from homes or businesses Canada * RPS: Phase out coal generated electricity by 2014 (Ontario PA) * FIT: $CG.443 to 0.539 (project size up to 10MW) * Domestic content requirement Brazil * Yingli Solar – MPX joint venture model

  18. Summary • No single U.S government policy is sufficient; a financing tool kit of policies is needed that can be applied at the same time • The federal 30% cash grant is the single most important policy incentive in the U.S. but is not sufficient by itself • Utility scale project FITs in the U.S. will develop cautiously because of the concern over the pricing impact on ratepayers • There will be more utility financed and owned projects as well as projects financed by module manufacturers but ratepayer and financial statement impacts will require other financing structures • Solar projects need to be larger in order for RPS requirements to be met and to attract a buyer like NRG Energy • Independent project developers need some equity investment in order to make the project math work • Consequences of failing to meet RPS need to be more severe in order to have a meaningful impact on financing

  19. Sources • Database of State Incentives for Renewables and Efficiency (www.dsireusa.org) • DB Climate Change Advisors, Global Climate Change Policy Tracker: An Investors Assessment (October 2009) • Ontario Power Authority web site (fit.powerauthority.on.ca) • Volume 2, Renewable Power, A Blueprint for Green Energy in the Americas, 2009 (prepared by Garten Rothkopf) gartenrothkopf.com/publications,asp • Couture and Cary, State Renewable Energy Policies, Analysis Project: An Analysis of Renewable Energy Tariffs in the U.S. (June 2009) (sti.gov/bridge) • Doris, McLaren, Healey and Hockett, State of the States 2009: Renewable Energy Development and the Role of Policy, NREL Technical Report, October 2009 (nrel.gov/features/20091120_states.html)

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