Economics of Solar Forum

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1 Economics of Solar Forum November 14, Clay Street, Suite 1000, Oakland, CA phone fax A Division of Zions First National Bank

2 Overview Financing methods for renewable energy projects Power Purchase Agreement (PPA) Self-financing: cash and bonds Self-financing: equipment lease / third party lease Case Studies: Contra Costa County Coroner Project and San Jose USD Solar Buy-out Special Programs to Reduce Financing Costs Clean Renewable Energy Bonds (CREBs) Qualified Energy Conservation Bonds (QECBs) Economics of Solar Forum page 1

3 Financing Methods for Renewable Energy Projects Power Purchase Agreement (PPA) Self Financing: Direct Purchase Cash, Bonds Self Financing: Equipment Lease / Third Party Lease Purchase Asset at Start of Project? No Contractual agreement to purchase power supplied by a third party. Yes, the government agency purchases the power generating equipment and receives the power generated by that equipment. No, the government agency leases the power generating equipment and receives the power generated by that equipment. Responsibilities Upfront Cost? No, developer owns the equipment; however, any upfront payment will result in lower cost of power. Yes, government agency owns the power generating equipment. No, developer owns the power generating equipment. Responsibilities O&M? No Yes, unless operating and maintenance contract with developer. Yes, unless operating and maintenance contract with developer. Responsibilities Financing Payments? No, only make payments if power supplied. Yes, must make debt service payments regardless of power production. Yes, make lease payments regardless of power production. Financial Benefits? Fixed price per kwh with known range of escalation. Typically savings expected to increase over time. Provider or Customer can keep SRECs. Buyout options. Fixed debt service and low operating costs, effectively capping electricity costs. Typically savings expected to increase over time. Customer retains SRECs. Customer receives federal, state and local incentives and rebates. However, difficult to realize tax benefits. Low savings or higher energy costs in early years and significant savings in later years. Customer typically retains SRECs. Customer typically receives state and local incentives and rebates. Buyout options. Source: Optony and National Renewable Energy Laboratory, US Department of Energy Economics of Solar Forum page 2

4 Power Purchase Agreements Power Purchase Agreements (PPA) Agreement between a provider and a customer to purchase power at a fixed long-term rate for a specific period of time. Typically the provider installs, operates and maintains renewable energy project on the facilities of the customer. The agreement is designed to provide clean renewable power to the customer at lower rates than they would otherwise pay to their utility provider. Key considerations include: PPA providers are able to take advantage of the 30% Federal Solar Tax Credit as well as other federal, state and local support. However, PPA agreements cannot guarantee economic savings -- that is entirely dependent on what utility rates the customer otherwise would pay in the future. Typically requires easements on property. There are costs associated with PPA agreements including legal fees, title search fees, engineering fees and fees to secure some incentives. A typical term for a PPA is 20 years with an option to buy the system at a predetermined price or at fair market value after five to seven years. Economics of Solar Forum page 3

5 The Structure of PPAs Can Vary Shifting Risk For a traditional PPA, the government entity only pays for power that it receives. The vendor assumes all financing, construction and operating risk. The vendor builds these costs into its charges for power. The financial strength of the vendor will directly impact the financing they can arrange; and accordingly, a stronger vendor will have lower financing costs. Non-traditional PPAs can be structured to shift risk to the government entity, potentially lowering the PPA rates. In some cases, the government agency is asked to provide taxable financing for the project, typically at a lower cost of financing than the vendor. However, if power is not provided then the government entity will still be responsible for paying the taxable financing debt service. Also, if the government agency is considering providing financing, then it should consider a non-ppa self-financing option, where tax-exempt bonds are possible. Economics of Solar Forum page 4

6 Self Financing Cash, Debt and Lease Financing Self-financing methods include: Cash Direct Purchase Non-Voter Approved Bonds - Lease Revenue Bonds / Certificates Of Participation Voter Approved Bonds - General Obligation Bonds, Sales Tax Revenue Bonds Equipment and Third-Party Leases Economics of Solar Forum page 5

7 Non-Voter Approved Bonds Lease Revenue Bonds / Certificates of Participation Backed by its General Fund, a public entity may finance one or more capital assets by entering into a series of leases with a JPA or non-profit public agency and issuing Lease Revenue Bonds/COPs. Investors purchase a share of the rent paid under the lease and receive payment from the issuing entity over the term of the lease. Key Features Include: Essentiality, useful life and value of pledged asset Asset substitution Capitalized interest Insurance coverage of asset Public Sale Versus Direct Purchase / Private Placement Factors include final maturity, costs of issuance, disclosure and interest rate. Economics of Solar Forum page 6

8 Equipment Leases / 3 rd Party Leases Frequently renewable energy project vendors can provide one or more lease providers which are comfortable with the credit risks associated with the project. Typically, the stronger the financial strength of the vendor the better the terms of the lease providers. Government entities can utilize the vendor associated lease providers or utilize other lease providers. The equipment serves as the leased asset and lease rates may be tax-exempt. The final maturity of equipment leases is typically shorter than that possible through bonds. Economics of Solar Forum page 7

9 Case Studies

10 Case Studies Overview Purpose: To illustrate the methodology to analyze the economics of direct purchase (cash or debt) and PPA. Cash Flow Model Inputs: Technical consultants provide an estimate of energy bill savings, construction cost, annual O&M cost and PPA rate and escalation. Financial consultant layers-in forecasted debt service for self financing based on the Participating Agency s credit and then calculates forecasted annual savings. Net present value (NPV) calculation of annual savings allows for comparison of options with differing terms and final maturity of financing. Assumes no residual value at the end of each financing option. Economics of Solar Forum page 9

11 Contra Costa County - Coroner s Department Project The Project: 1960 Muir Road Parking Shade Structure System Size: Operations and Maintenance: Construction Costs: $1,652,805* County Lease Rating: 385 kw* Utility escalation rate is 4.0% per year Annual payment that starts at $3,966 and escalates at 3%.* A1 / AA- by Moody s / S&P. Financing Options: 1) Cash Purchase 2) PPA (Typical Structure) 3) Private Placement Lease Financing 4) Public Offering Lease Financing PPA Assumptions: *Provided by technical consultant. $0.14 per kwh* Escalation is 3.0% per year Economics of Solar Forum page 10

12 Financing Parameters Option: Private Placement (<$5 Million Par Amount) Public Offering (>$5 Million Par Amount) Structure: Debt Service Schedule: -Abatement lease structure -Solar equipment secures lease (asset transfer is possible) -No debt service reserve fund -Capitalized interest possible (none assumed for this analysis) -Rate lock available -Level debt service -Semi-annual principal and interest payments (can be monthly or annual) -Lease Revenue Bonds or Certificates of Participation -Asset transfer -Fully funded debt service reserve fund -Capitalized interest possible (none assumed in this analysis) -Rate lock not available -Level debt service -Annual principal and semi-annual interest payments Interest Rate: -Preliminary indicative fixed rate of 2.95%* -2.9% to 3.0% fixed rate for both A and AA Rating* -Preliminary indicative rates are AA rating MMD COP Index on 5/3/2013 plus 0.25%. All-In TIC is 3.9%.* Term: -Final maturity of 16.5 years. -Final maturity of 25 years (expected life of assets) -Longer maturities are possible. Costs of Issuance: Process: -$10,000 to $20,000 for banks legal costs -$20,000 to $60,000 for other costs -Financing process takes 2 to 3 months -No rating required -Reduced legal and disclosure documentation -Reduced continuing disclosure burden -$200,000 to $300,000 -Underwriter s discount estimated at $10 per bond -Financing process takes 3 to 4 months -Legal and disclosure documentation -Continuing disclosure required *Does not include Federal CREBs/QECB subsidy. Economics of Solar Forum page 11

13 Cash Flow - Savings Before Financing Economics of Solar Forum page 12

14 Cash Flow - Savings After Financing, Annual O&M Economics of Solar Forum page 13

15 Cash Flow - Savings (Annual O&M) Economics of Solar Forum page 14

16 Savings Summary Economics of Solar Forum page 15

17 Case Study Observations Savings analysis is highly dependent on forecasted EPC construction cost, technical assumptions, PPA rates and energy offsets. The NPV of savings under the different financing methods will vary depending on the project. Equipment life and warranty assumed to be 25-years. Public offerings are typically the most economic for $4 million to $5 million par amounts or greater unless combined with other projects. Twenty-five year final maturity should not be problematic. Private placements are typically economic for par amounts less than $4 million to $5 million and are typically limited to a final maturity of 15 years or less. The 15 year final maturity (compared to longer final maturities) causes greater principal amortization in early years, which results in back-end loaded savings and greater sensitivity to NPV calculations Savings are negative in early years. For vendor-provided financing, final maturity is typically less than 10 years, which causes the negative savings in early years to be higher. Economics of Solar Forum page 16

18 Case Study San Jose USD Buy-Out of a Solar PPA - San Jose Unified School District originally entered into two PPAs with BAL Solar (subsidiary of BofA) in 2007 and Currently, the District is working through an early buyout of the PPA using GO Bond proceeds. - The District 2012 GO Bonds approved energy efficient projects as part of the authorized project list. - The District recognizes there is potential for small negative savings however is focused on switching the source of payment from lease payments paid out of General Fund to GO debt service paid by taxpayers. - Additionally, terminating the PPA provides the District with more flexibility to upgrade/modify the solar facilities to the extent there is perceived value. Economics of Solar Forum page 17

19 Special Programs to Reduce Borrowing Costs

20 CREBs / QECBs Energy Related Subsidy Bonds Borrowers issue taxable bonds and then receive a subsidy from the US Treasury for 70% of the qualified tax credit bond rate. Clean Renewable Energy Bonds (CREBs) Qualified Energy Conservation Bonds (QECBs) For a recently issued Napa County CREB financing, the County paid a net interest rate of 1.38% for a 16 year final maturity. Unfortunately, allocations of the above are not currently available. Economics of Solar Forum page 19

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