Moore Mid Atlantic SERWI Presentation FINAL

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Published on November 19, 2009

Author: tennesseewind

Source: authorstream.com

Community Wind Financing “Start to Finish”:  Community Wind Financing “Start to Finish” John N. Moore Senior Attorney Environmental Law & Policy Center Mid-Atlantic/Southeast Regional Wind Energy Institute Meeting November 17, 2009 • Baltimore, Maryland Environmental Law & Policy Center • FarmEnergy.org Slide2:  Overview Wind Project Development Considerations/Structures Show Me the Money Summary of Federal Incentives (light touch on states) Drilling down on the Treasury Grant program Impact of different business structures Other Treasury and USDA incentives Closing Thoughts Slide3:  Initial Project Questions What’s the Project vision? Who will own it? Where will it be? What is the planned size? Will community support it, and at what level? Answers to these questions will influence financing decisions Slide4:  Project Economic Considerations Slide5:  Project Design Influences Financing (pre-Treasury Grant) Slide6:  Some Common Business Structures Flip Structure Most-used community wind structure in US Tax investor provides almost all the equity, returns project to local investors after recovering project’s rate of return (expiration of PTCs) Pre-flip cash and tax allocations proportional to equity investment Post-flip allocations favor local investor(s) Capital structure could look like: 0.5% local equity (often for pre-development costs) 20% tax equity 30% cash grant 45% debt 4.5% other grants Flip Project: Crosswind Energy, Iowa:  Residents in Palo Alto County, Iowa developed 21 MW project. Investor “flip” financing; Edison Mission Energy is partner in 10 LLCs. EME ownership will phase out after approximately 10 years of operation. Partially funded with USDA grants. Flip Project: Crosswind Energy, Iowa Slide8:  Common Private Business Structures Cooperative LLC Like the “Minwind” projects in Minnesota Simple structure No tax equity investors No “flip” in cash or tax allocations Capital structure might be roughly: 15% local equity (private securities offering, etc.) 30% cash grant 50% debt 5% other grants Slide9:  Common Private Business Structures Sale-Leaseback Traditional secured financing approach made attractive through the ITC and Treasury Grant incentives. Project developers/local investors sell project to a tax equity investor, who leases project back to developer, passing through part of the value in the (lower) rent it charges the developer and other contractual provisions. Rent payment obligation secured through PPA and other revenues. The developer must pay full value at the end of the lease if it wants to keep the project. Slide10:  Raising Money Need to cover the capital cost of each project. Impossible in the current market to raise all the capital from a single source. Stack capital from cheapest to most expensive until you cover the full capital cost. Timing also matters – Most incentives change/expire over time. Slide11:  2009 Recovery Act Treasury Incentives Production tax credit (PTC) extended though 2012 (production-based) no non-profits, hard for most of us to benefit Bonus 50% first year MACRS depreciation extended through 2009 Most wind equipment qualifies Recoups about 30% of equipment cost Elective 30% investment tax credit (ITC) Elective Treasury Grant in lieu of 30% ITC Good for those with no tax appetite Clean Energy Renewable Bonds – first deadline passed Coops, muni, public power Qualified Energy Conservation Bonds – ongoing Munis with some possibility for others Slide12:  Other Federal/State Incentives Department of Energy Loan Guarantees – recently-announced Financial Institutions Partnership Program (FIPP) Applications now through January 2011 Department of Agriculture Rural Utility Service Mostly for RECs Rural Energy for America Program (REAP) For ag producers and rural businesses – loan guarantees to $25 million each; max $500,000 grant, most somewhat lower Business & Industry loan guarantees States Tax credits, grants, C-BED (MN, NE) and feed-in tariffs, RECs, other. Slide13:  Treasury Grant Program – Big $$ Only the portion of project placed into service by 2013 is eligible (except 100kW and less – 2017) For property placed in service in 2009 or 2010 Applications must be submitted after the property has been placed in service. For property placed in service thereafter, but for which construction began in 2009 or 2010 Applications must be submitted after construction commences but before October 1, 2011. Applicant then requests payment after project placed in service. Treasury will pay within 60 days. Slide14:  ITC and Grant Are Better Than PTC Relative to the PTC (which is production-based), the ITC and cash grant (which are investment-based) provide more value to projects that cost more $$ and/or generate less power. Many community wind projects fit this description: too small to capture economies of scale, resource-constrained by landowner sites. For a $2500/kW project with a 30% capacity factor, the present value of tax benefits (credits + depreciation) comes to ~51% of installed costs for the ITC/grant versus ~44% for the PTC. The cash grant is easier to use than the PTC or ITC. Cash is more fungible than a tax credit. Community wind projects have harder time than many others in using the credit, and have harder time attracting outside equity. Slide15:  Other Benefits of ITC/Grant Slide16:  Cooperative Versus Flip Structure Lawrence Berkeley Lab financial analysis concludes that: ITC may be fine for active tax equity flip investors Only 5% of the value provided to the Flip structure comes from having a 30% cash grant instead of a 30% ITC. Investors in Flip structures have interests that are more closely aligned with commercial wind – i.e., they like the 30% ITC/grant and prefer cash, but don’t absolutely need it. But the Grant is critical for Cooperative LLC investors 69% of the value provided to Cooperative LLC only accrues once the project chooses the 30% cash grant, thereby avoiding the passive income limitations of the ITC. Slide17:  Treasury Bond Options Qualified Energy Conservation Bonds (QECBs) Clean Renewable Energy Bonds (CREBs) Build America Bonds (BABs) – watch for something like them for Coops Qualified Energy Conservation Bonds:  Qualified Energy Conservation Bonds Tax credit bond - Recovery Act authorizes a total of $3.2 billion in QECBs – allocated to states based on population. Theoretically issued with a 0% effective interest rate. The borrower pays back only the principal of the bond, and the bondholder receives federal tax credits in lieu of the traditional bond interest. May be issued only by state and large local governments to finance a range of energy conservation and renewable energy purposes. Opportunity for private developers: Up to 30% may be used for private activity bonds through conduit financing for capital costs of renewable energy projects. Treasury issued guidance earlier this year, mainly for states. Check with state energy offices for more information! QECBs – Top 10 States:  QECBs – Top 10 States Clean Renewable Energy Bonds (CREBs):  Clean Renewable Energy Bonds (CREBs) Bond purchaser receives annual tax credit in lieu of interest payment; tax-exempt borrower receives a low interest loan. “New CREBs” created in 2008; Recovery Act expanded size to $2.4 billion, allocated among public power, governments and co-ops. Funds many different renewable energy projects. Complications/considerations: Deadline passed on August 4 – but possible for Congress/Treasury to revise/new allocation. A number of factors reduce value of bonds to purchaser. Tax credit is taxable Small transactions Relatively new bond Strong applicant interest in CREBs in 2009 from muni and public power sectors. 10-27-09 Slide21:  USDA Programs Slide22:  Rural Energy for America Program (REAP) Formerly known as the “Section 9006” program. Offers grants and loan guarantees to farmers and rural “small” businesses for clean energy project construction costs. New for 2009: grants to pay for feasibility studies. $100 million total funding FY10. REAP Fundamentals:  REAP Fundamentals Grants Up to 25% of project’s cost, up to $500,000 per project. Possible to create separate LLCs for each turbine in larger projects, assuming different owners; challenging accounting. Awarded after owner uses matching share of funds; USDA withholds 10% until after project completion. Loan Guarantees Up to $25 million guarantee per project. 1% loan origination fee, 0.25% annual renewal fee. Can apply for both grant and loan guarantees – up to 75% of the project’s costs. REAP Wind Projects: 2009 and Cumulative:  REAP Wind Projects: 2009 and Cumulative 2009 117 projects - $8,340,000 in grants, $17,408,300 in LGs. Mix of large and small turbine projects, including several $500,000 grants to wind projects. 23 feasibility studies for wind totaling $679,000. 2003-2008 244 projects - $44,863,000 in grants, $681,000 in LGs. $183,900 average grant size. Other USDA Rural Business Programs:  Other USDA Rural Business Programs USDA’s Rural Business Enterprise and Rural Business Opportunity grant programs, especially for feasibility studies. USDA’s Business and Industry loan guarantee program - $2.6 billion in guarantees available for many USDA Rural Development purposes. Check FarmEnergy.org for more information! 2009 Rural Utilities Service Loan Programs:  2009 Rural Utilities Service Loan Programs Federal Financing Bank’s loan program is most popular and well-funded program (USDA is FFB agent). $6.5 billion in 2009 loan authority funded through Federal Financing Bank (USDA is agent), plus other underfunded loan programs. $6.5 billion in 2010. Combo loan and guarantee awards. Demand exceeds available financing by healthy margin. Key RUS Loan Considerations:  Key RUS Loan Considerations Cost is current Treasury rate plus one-eighth of 1%. Need sufficient security for loan. Meeting “rural” requirement – not more than 20,000 residents in any given census area. USDA has a $200 million annual policy preference for renewable energy; Congressional intent for up to $1 billion. Consider partnership with cooperative, which could provide startup financing, possibly through RUS. Questions to Ask About Incentives:  Questions to Ask About Incentives Which option offers most for the project? Is one option better suited for local participation? Can investors fully utilize tax incentives of – a. Production or investment credit? b. Depreciation deduction? c. Is construction period financing available? Can the project be finished in time to qualify Final Thoughts:  Final Thoughts Understand all the costs to develop (firm and contingent) Optimal ownership structure should reflect the needs and objectives of the developer/landowner Bankers, accountants and lawyers are your friends Well executed financing begins with appropriate and realistic project level returns If project is too difficult to organize as a stand-alone project, are other options available? (piggy-back, REC partnership). For Additional Information . . .:  For Additional Information . . . Contact John Moore at jmoore@elpc.org, or 312-795-3706. Visit FarmEnergy.org. 10-28-09 Slide31:  ELPC Small/Community Wind Successes Farm Bill REAP and related energy programs. State RPS standards. State interconnection/net metering rules. Leading the drive for low carbon ag energy in Climate Bill. New version of Community Wind Financing Handbook is available!

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