DOE OFFICE OF INDIAN ENERGY Getting Private Money Into Rural Energy Projects Through Tax Credit Financing. Paul Schwabe, NREL

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1 DOE OFFICE OF INDIAN ENERGY Getting Private Money Into Rural Energy Projects Through Tax Credit Financing Paul Schwabe, NREL

2 People don't always think of Alaska as pioneering and innovative. What they don't understand is that we innovate because our alternatives are not acceptable. Just saying that we're going to rely on costly diesel is not a path to sustainability. It's not a path that helps our families. - Senator Lisa Murkowski Senate Energy and Natural Resources Chairwoman, February 15,

3 Concept: Using non-competitive, economically valuable federal tax incentives to introduce private capital to rural Alaska to reduce the costs of renewable electricity generation in Alaska, which include: - Investment Tax Credit, or - Production Tax Credit & - Depreciation 3

4 Why Seek Tax Incentive Based Financing? - Tax incentives (ITC/PTC and Depreciation) can represent up to half the project value, or reduce project s capital costs by ~40-50% - Quick recovery of capital by financier 5 or 6 years - Tribal ownership can be contractually structured as soon as year Project Capital Costs Tax Incentives ~40% or more cost reduction 3rd Party Owned Tribe Owned (w/o Partner) 4

5 Investment Tax Credit (ITC) One-time federal tax credit worth either 30% or 10% of project s eligible tax basis (by technology) 30% ITC available for solar, wind less than 100kW; Property must be placed in service before 1/1/2022 to qualify for full ITC value Example: 150 kw solar project costing $1 M Tax Credit = $300,000 recovered in year 1 of project For more information on the investment tax credit, see: 5

6 Production Tax Credit (PTC) 2.3 per kwh for wind, geothermal for 10 years 1.1 /kwh for other technologies (i.e. tidal, 150 kw+) and biomass Available for 10-years after project is built Wind project must start construction before 1/1/2019 to qualify for full PTC value Non-wind technologies placed in service by 12/31/16 Example: 200 kw wind = ~$12k annually for $120k total after 10 years 6

7 Public Funding vs. Private Tax Equity Financing Grant-based funding: Primary Benefit: Energy/Cost Savings Tax Equity Partnership Primary Benefits: Energy / Cost Savings, and Valuable Tax Benefits Tribal Village / Utility Company / Native or Village Corp Tribal Village / Utility Company / Native or Village Corp. Private Capital Tax Investor (Exits after 5 years) Public Funding Source Limited Liability Corporation Energy Project Energy Project Energy (kwh) Energy (kwh) Tax Credits & Depreciation National Renewable Energy Laboratory 7

8 Where to Seek out Private Capital Partners? Native Corps Financial Services Telecommunications Transportation / Logistics Tourism L48 Companies 8

9 What Do Private Investors Want to See in A Proposed Project 1. Rock solid business plan project typically needs to pencil economically 2. Customers who is buying your power? 3. Customer credit do they have the ability to pay? 4. Is the technology commercially financeable (not first of a kind)? 5. Experience of the team can the deliver the project on time / budget? 6. Project size Not too big not too small, needs to be just right 9

10 Ideas for scaling up project sizes to attract private money Village aggregation: One project agreement developed across 3-5 villages Renewable energy and Storage (batteries) More grid friendly Complicating project economics, still possible Community / remote systems Larger systems ($1M+) developed on hub villages or even outside of region

11 Challenges of Tax Credits and Tax-Equity Finance 1. Tax credits cannot be used efficiently by entities without significant tax liability 2. Transaction costs can be high particularly at first 3. Need to find a tax equity partner 4. Investors generally want large projects or portfolio of projects ($1-2 M min) 11

12 More Information

13 Depreciation Modified Accelerated Cost Recovery System (MACRS) Allows for depreciation of assets over 5 years (instead of lifetime) Allows owner to write off business expenses such as an energy project from taxable income Available to all ITC or PTC eligible technologies MACRS Depreciation is IN ADDITION to ITC or PTC Example: 150 kw solar project costing $1 M Tax Credit = ~ $200,000 recovered in year 1 of project For more information see 13