Overview of Rooftop Solar PV Green Bank Financing Model

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1 Overview of Rooftop Solar PV Green Bank Financing Model Sponsored by The Connecticut Clean Energy Finance and Investment Authority and The Coalition for Green Capital Developed by Bob Mudge & Ann Murray, The Brattle Group January 17, 2013 Copyright 2011 The Brattle Group, Inc. Antitrust/Competition Commercial Damages Environmental Litigation and Regulation Forensic Economics Intellectual Property International Arbitration International Trade Product Liability Regulatory Finance and Accounting Risk Management Securities Tax Utility Regulatory Policy and Ratemaking Valuation Electric Power Financial Institutions Natural Gas Petroleum Pharmaceuticals, Medical Devices, and Biotechnology Telecommunications and Media Transportation

2 Disclaimer Disclaimer: As further described in the explanatory notes, this Excel financial model (the Model ) was developed by The Brattle Group, Inc. under the auspices of the Connecticut Clean Energy Finance and Investment Authority ( CEFIA ) to highlight the potential impact of capital inputs and public incentives on the cost of behind the meter solar photovoltaic installations at a conceptual level. The Model is being released to third party users ( Users ) to facilitate calculations by such Users based strictly on their own stipulated assumptions. The Model is provided as is without warranty of any kind, either express or implied, including but not limited to the implied warranties of merchantability and fitness for a particular purpose, and shall be used by Users at their own risk. Although the Model presents a framework for performing Users calculations, it is not intended, and should not be used as the basis for investment decisions. No User should rely on the Model s results as a prediction of future outcomes; actual events may differ significantly from those produced by the Model. Neither CEFIA or The Brattle Group, Inc. accept any duty of care to Users, including any responsibility for any User s use of the Model. Although neither CEFIA nor The Brattle Group, Inc. are under any obligation to provide updates to the Model, CEFIA retains the right to change/amend the Model without notice to Users. In no event shall CGC, CEFIA and/or The Brattle Group, Inc. be liable for any damages whatsoever, including but not limited to direct, indirect, incidental consequential, loss of business profits, or special damages, regardless of the form of action, whether in contract, tort, or otherwise. 2

3 Contents 1. Background 2. Illustrative Base Case 3. Model Mechanics 4. Potential Impact of Green Bank Debt 3

4 1. Background Focus on incremental benefits of Green Bank funding at project level Based on illustrative specifications provided by CT Clean Energy Finance and Investment Authority (CEFIA) and the Coalition for Green Capital (CGC) Model derives key metrics for behind-the-meter solar: Specifications including: Installed costs Regional capacity factors [a] State policies and incentives [a] Capital structure including Green Bank Debt [a] Initially shown for Connecticut. Key metrics: Retail cost [b] Equity returns Installed capacity per dollar of Green Bank Debt [b] In the form of a 2013 levelized cost of electricity, net of state incentives and RECs. 4

5 1. Background (Contd.) 5

6 2. Illustrative Base Case Key Assumptions: Aggregate portfolio of 20MW Installed cost of $4.5/ Watt 25-year underlying project life Regional capacity factors applied per NREL data Operating costs $27/ kw-year Annual degradation modeled at 0.5% State incentives modeled at $0.225/ kwh for 6 years Renewable Energy Credits (RECs) modeled at $0.030/ kwh under financeable 15-year contract 6

7 2. Illustrative Base Case (Contd.) 3 rd party ownership (target return = 15%) Reliance on Tax Equity (target return = 12%) Utility REC Market Behind the Meter Host(s) Project Owner ( Fund ) CAPITALIZATION State Govt. Tax incentives, grants* Federal Govt. Precedent of CT Solar Lease Program Expectation of debt securitization (interest modeled at 6%) Equity Project Sponsor Commercial Lenders (emerging) Tax Equity Investors Potential Backleverage ITC * Subject to funding, legislation * Assumed Structure Before Green Bank Loans 7

8 2. Illustrative Base Case (Contd.) 100% Percentage Cost Components % of Capital Costs 80% 60% 40% 20% 0% 40% 42% 48% 12% Upfront Capitalization 13% 44% Lifetime Cost (25 Years) Commercial Debt Green Bank Loans Tax Equity Developer Equity 8

9 2. Illustrative Base Case (Contd.) Utility REC Market OPERATIONS Behind the State Govt. Meter Host(s) Project Owner ( Fund ) 1. O&M PPA/ Lease 2. Debt Service 3. Capex/Rsvs. 4. Tax Equity Allocation 5. Cash Equity Allocation Debt service Performance Based Incentives Commercial Lenders (emerging) Tax Equity Investors Federal Govt. ITC and accelerated depreciation Project Sponsor Potential Backleverage 9

10 2. Illustrative Base Case (Contd.) Under above assumptions, reliance on: Derivation of Retail Cost (over 25 Year Life) Operations Tax Equity State Incentives RECs would hold retail costs at $0.210/ kwh (without Green Bank Debt) $ per kwh (2013$) State Incent. RECs Commercial Debt Green Bank Loans Tax Equity Developer Equity Net Retail Cost Avg Residential Price (CT) Avg Commercial Price (CT) 10

11 3. Model Mechanics Users can stipulate financing cost assumptions Base Case before adding Green Bank Debt is shown below: Project Capital Structure State Subsidies 0% Debt % Maturity Target Returns 11 (AT) 9.0% ($/ kwh) Min Avg 2013$ Commercial (not < 0) 40% 6 6.0% Green Bank: KEY FINANCING INPUTS KEY OUTPUTS Total DSCR Levelized Costs Subordinated 0% % - Tax Equity 48% 12.0% Developer Equity 12% 15.0% Total 100% 0.286

12 3. Model Mechanics (Contd.) Users can stipulate revenue source assumptions: Project Revenue Sources ($/ MWh) % 2013 $/ MWh Escalation Levelized Costs ($/ kwh) 2013$ Capital Operations Gross Less State Incentives N Less RECs 30.0 N Net PPA/ Lease Y Basic model calculation sets net PPA/ Lease rate sufficient to satisfy capital cost requirements. 12

13 3. Model Mechanics (Contd.) Base Case Cash Flow Summary ($M; Nominal Basis) To Year 25 IRR Invest Inflation Index PPA/ Lease $/kwh Elec. Sales GWh PPA/ Lease Revs. $M State Incentives $M RECs $M Total Revenues $M Operations $M EBITDA $M Debt Service $M 6% (36.4) Tax Equity 12 Pre-Tax $M (43.7) Tax Impact $M (0.0) (0.2) (0.1) (0.1) (0.1) (0.1) (0.1) (0.1) (0.1) (0.1) (0.1) (0.1) 14 After tax $M 12% (16.7) Developer Equity 16 Pre-Tax $M (10.9) Tax Impact $M (1.7) (2.1) (2.1) (2.1) (2.2) (2.2) (2.2) (2.3) (2.3) (2.4) 18 After tax $M 15% (10.9)

14 3. Model Mechanics (Contd.) Under forgoing assumptions, Green Bank Debt could complement commercial debt Project Capital Structure State Subsidies 0% Debt % Maturity Target Returns (AT) 9.0% ($/ kwh) Min Avg 2013$ Commercial (not < 0) 20% 6 6.0% Green Bank: KEY FINANCING INPUTS KEY OUTPUTS Total DSCR Levelized Costs Subordinated 20% % Tax Equity 48% 12.0% Developer Equity 12% 15.0% Total 100%

15 3. Model Mechanics (Contd.) with significant reduction in retail cost: Project Revenue Sources ($/ MWh) % 2013 $/ MWh Escalation Levelized Costs ($/ kwh) 2013$ Capital Operations Gross Less State Incentives N Less RECs 30.0 N Net PPA/ Lease Y

16 3. Model Mechanics (Contd.) 20% Green Bank Debt Case Cash Flow Summary ($M; Nominal Basis) To Year 25 IRR Invest Inflation Index PPA/ Lease $/kwh Elec. Sales GWh PPA/ Lease Revs. $M State Incentives $M RECs $M Total Revenues $M Operations $M EBITDA $M Debt Service $M 3% (18.1) Tax Equity 12 Pre-Tax $M (43.6) Tax Impact $M (0.1) (0.1) (0.1) (0.1) (0.1) (0.1) (0.1) (0.1) (0.1) (0.1) 14 After tax $M 12% (16.6) Developer Equity 16 Pre-Tax $M (10.9) Tax Impact $M (1.3) (1.6) (1.6) (1.7) (1.7) (1.7) (1.7) (1.8) (1.8) (1.8) 18 After tax $M 15% (10.9)

17 4. Potential Impact of Green Bank Debt For Illustration, Green Bank Scenarios defined per capital structure scenarios shown below: Percent of Capital Capital Structure 120% 100% 80% 60% 40% 20% 0% 0% 10% 20% 30% 40% Green Bank Debt as a Percentage of Capital Commercial Debt Green Bank Debt Tax Equity Developer Equity 17

18 4. Potential Impact of Green Bank Debt (Contd.) Base Case $0.210/ kwh retail cost shown at upper left in table below Alone, or with help from reductions in installed costs, Green Bank Debt could achieve parity with retail rates: Retail Cost ($/kwh) as a Function of Green Bank Debt and Installed Cost % Green Bank Debt in Capital Structure Other Assumptions: 0% 10% 20% 30% 40% Developer equity return: 15% Tax equity return: 12% Installed Cost ($/W) NA Total leverage: 40% NA Commercial debt int.: 6% NA 15-Year RECs: $0.030/ kwh 6-Year State incentives: $0.225/ kwh Cells with retail cost < average 2011 CT retail price escalated to 2013 ($0.190/ kwh) are shaded 18

19 4. Potential Impact of Green Bank Debt (Contd.) Green Bank Debt could help take pressure off State incentives Retail Cost ($/kwh) as a Function of Green Bank Debt and State Incentives % Green Bank Debt in Capital Structure Other Assumptions: 0% 10% 20% 30% 40% Installed cost: $4.5/W State Incentives per kwh NA Developer equity return: 15% Tax equity return: 12% NA Total leverage: 40% NA NA Commercial debt int.: 6% 15-Year RECs: $0.030/ kwh Cells with retail cost < average 2011 CT retail price escalated to 2013 ($0.190/ kwh) are shaded 19

20 4. Potential Impact of Green Bank Debt (Contd.) as well as REC prices: Retail Cost ($/kwh) as a Function of Green Bank Debt and REC Prices % Green Bank Debt in Capital Structure Other Assumptions: 0% 10% 20% 30% 40% Installed cost: $4.5/W Developer equity return: 15% REC Prices per kwh Tax equity return: 12% Total leverage: 40% Commercial debt int.: 6% 6-Year State incentives: $0.225/ kwh Cells with retail cost < average 2011 CT retail price escalated to 2013 ($0.190/ kwh) are shaded 20

21 4. Potential Impact of Green Bank Debt (Contd.) At given levels of retail cost, Green Bank Debt can help developers achieve target returns: Developer Return (%) as a Function of Green Bank Debt and Retail Cost % Green Bank Debt in Capital Structure Other Assumptions: 0% 10% 20% 30% 40% Installed cost: $4.5/W % 20.2% 24.7% 30.8% 38.6% Tax equity return: 12% Retail Cost per kwh % 14.2% 17.4% 22.4% 29.5% Total leverage: 40% NA 8.1% 9.9% 12.9% 18.5% Commercial debt int.: 6% NA NA NA NA NA 15-Year RECs: $0.030/ kwh 6-Year State incentives: $0.225/ kwh Cells with developer return > assumed target (15%) are shaded 21

22 4. Potential Impact of Green Bank Debt (Contd.) Depending on dollars deployed and role in capital structure, Green Bank Debt could support significant MWs of solar pv installation: MWs Installed as a Function of Green Bank Debt Deployed % Green Bank Debt in Capital Structure Other Assumptions: 0% 10% 20% 30% 40% Installed cost: $4.5/W Retail Cost Developer equity return: 15% Green Bank Debt Deployed ($M) Tax equity return: 12% Total leverage: 40% Commercial debt int.: 6% Year RECs: $0.030/ kwh 6-Year State incentives: $0.225/ kwh Cells with retail cost < average 2011 CT retail price escalated to 2013 ($0.190/ kwh) are shaded 22

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