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Introduction to Facility and Community Scale Project Financing

Introduction to Facility and Community Scale Project Financing. Jason Coughlin National Renewable Energy Lab August 27, 2014. Agenda. Energy Efficiency First Motivation: Why develop a renewable energy project? Levelized Cost of Energy (LCOE)

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Introduction to Facility and Community Scale Project Financing

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  1. Introduction to Facility and Community Scale Project Financing Jason Coughlin National Renewable Energy Lab August 27, 2014

  2. Agenda • Energy Efficiency First • Motivation: Why develop a renewable energy project? • Levelized Cost of Energy (LCOE) • Introduction to Financing: Facility and Community Scale

  3. WHY Energy Efficiency First ? 3

  4. Energy Efficiency First • Comprehensive energy projects should consider energy efficiency first • Energy efficiency can • Significantly lower energy costs • Increase comfort level in a given building • Reduce air pollution • Mitigate climate change • Improve energy reliability • Why install renewables when the weather is leaking in? • Only solid structures are ready for renewables • Energy efficiency can often cost less and save more than renewables. • Tribal energy efficiency pays • Energy efficiency should be the first step in meeting tribal energy policy goals. • Homes and buildings consume 40% of the energy used in the U.S. and 20% of that can be saved by reducing waste with cost-effective, off-the-shelf solutions.* *Source: “Energy-Saving Homes, Buildings & Manufacturing” Sept 2012 http://www1.eere.energy.gov/office_eere/pdfs/55297.pdf

  5. WHY DEVELOP A RENEWABLE ENERGY Project? 5

  6. Why Complete a Renewable Energy Project? • Economic • Jobs • Income • Cost Savings • Cost Stabilization • Tax Revenue • Industry Exposure • Social • Energy Reliability (Diversification) • Greater Energy Independence • Tribal Capacity Building • Community and Stakeholder Participation • Environment • Climate Change • Mitigation • Adaptation • Resiliency Benefits vary based on the type and scale of projects

  7. Determining Project Scale: What is the Goal? Goal Examples: • Offset costs • Become more energy self-sufficient • Generate revenue • Facility • Savings opportunity • Increase energy self-sufficiency • Utility interconnection • 1 month to a year to develop • Community • Savings opportunity • Increase energy self-sufficiency • Utility interconnection • 6 months to 2 years to develop • Commercial • Competing power price • Off-taker options • Transmission options • 3 to 5 years to develop

  8. Terminology: Project Scale Facility Definition: single building system Primary purpose: offset building energy use Community Definition: multiple buildings, campus Primary purpose: offset community energy costs, greater energy self- sufficiency Commercial Definition: stand-alone project Primary purpose: sale of power generation, financial benefits Photo credits: (top to bottom): NC Solar Center, NREL 09373; Orange County Convention Center, NREL 18077; Tucson Electric Power, NREL 13327

  9. Why Elect to Do a Facility-Scale Project? • Available, Tribe-controlled, appropriate location and ownership options • Lower capital investment/lower overall risk (than a larger-scale facility) • Gain experience with renewablesbefore doing a larger-scale project • Increase self-sufficiency, offsetutility electricity costs • Provide cost certainty • Provide visual impact and green image • Reduce environmental impact • Diversify energy supply with local,renewable sources Photo by Joe Ryan, NREL 19717

  10. Why Elect to Do a Community-Scale Project? • Available, Tribe-controlled,appropriate location and ownership • Greater scale increases impact on community (good or bad) • Offset electricity costs for community (primary use ison-site) • Minimize environmental impact • Diversify energy supply with local, renewable sources • Reduce energy off-taker complexities • Smaller capital requirements than a commercial scale facility • Job development (construction and maintenance) • Self-sufficiency, pride Photo from Native Energy, Inc., NREL 17589

  11. Levelized Cost of Energy (LCOE) 11

  12. Levelized Cost of Energy (LCOE) Critical to making an informed decision to proceed with development of a facility or community energy project. • Measures lifetime costs divided by energy production, captured in $/MWh or ¢/kWh • Calculates present value of the total cost of a) building and b) operating a power plant over an assumed lifetime • Allows the comparison of different technologies (e.g., wind, solar, natural gas) of unequal life spans, project size, different capital cost, risk, return, and capacities

  13. LCOE Concept Adapted from European Wind Energy Association, “Economics of Wind Energy,” http://www.ewea.org/fileadmin/ewea_documents/documents/00_POLICY_document/Economics_of_Wind_Energy__March_2009_.pdf Energy System Site Characteristics/ Resources Initial Costs Including Financing × $$$ Annual Expenses $ Annual Energy Production Annual Cost Per Year LCOE ($/MWh) $

  14. Using LCOE Calculating and comparing LCOE can: • Measure value across the longer term, showing probable life-cycle costs • Highlight opportunities for Tribes to develop different scales of projects (facilityor community) • Informs decision to pursue projects on an economic basis, compared to utility rates • Most renewable energy projects have zero fuel costs (with biomass being the possible exception)

  15. LCOE How does these LCOEs compare to current and future utility rates?

  16. Project Financing Options 16

  17. Ownership and Financing Options Direct ownership • Available cash • Grants • Other Incentives • Debt Third party financed • Power Purchase Agreement (PPA) • Tribe is the off-taker or purchaser of electricity • Energy savings performance contracts (ESPCs) • Option to combine renewable energy and energy efficiency Hybrid options

  18. Direct Ownership Structure Primarily for facility and community-scale projects Tribe purchases a renewable energy system with its own funding and other sources of capital Over time, investment recouped from utility bill savings and incentives, if available. Project Payments Tribe and Electricity Users Utility Remaining Energy Needs The Tribe is the owner in this structure and self-generates its electricity 18

  19. Advantages Challenges Direct Ownership • Advantages Challenges • Maximum reduction in electricity bills • Lower finance costs (or none depending on source) • Full control over a project: design, operations, and risks • Own renewable energy credits (RECs) and can choose to retain or monetize • Might be only option forsmall projects • Need the resources to payfor the project • Don’t benefit from available tax incentives given tax-exempt status • Responsibilities of ownership (operations & maintenance)

  20. Grants • Do not need to be repaid • Must be used for specific purpose • Grantee must meet eligibility requirements • Typically funded by state or federal government

  21. Grants – State, Local, Utility, & Private Sponsored

  22. Grants – Federal Government Sponsored 22

  23. Incentives – Rebates

  24. Debt – Government Sponsored Loan Programs 24

  25. Third Party Power Purchase Agreement (PPA) Utility The Tribe is the host in this structure and agrees to buy electricity generated by the renewable energy system. Tax- Equity Investor Corporations Energy $ Project Company/Pass-Through Entity Fixed price Electricity (PPA) Tax Equity Tribe: Host and Purchase Tribal Role Site Access, $ Purchase Output Project Cash flow Developer Equity Investment Tax benefits Equity Investment Payments Lender Lends $ to the Project

  26. PPA Considerations to Weigh Disadvantages Advantages

  27. Energy Savings Performance Contracting (ESPCs) An ESPC is a no up-front cost contracting mechanism between a site customer and an energy service company (ESCO). Energy conservation measures and on-site generation are financed and implemented by an ESCO, which is repaid through energy savings. Thiswould be done as a PPA, in conjunction with energy efficiency, to bring costs down. ESCO andFinancial Partner Site Customer Over 90 DOE-Qualified ESCOs, including: ESPC Partnership Ameresco • McKinstry • Chevron • Siemens Honeywell • Tetra Tech • Johnson Controls • Trane For full DOE Listing: http://www1.eere.energy.gov/femp/financing/espcs_qualifiedescos.html

  28. New Market Tax Credits NMTC Investor • 39% tax break • 5% in first 3 years • 6% in last 4 years • Net value: 20% due to financing complexity, number of parties • CDE can market credits to investors • Renewable energy project must be aligned with CDE mission • CDEs take time to establish • Renewable examples • 1 MW PV City of Denver's buildings1 • 1.65 MW PV in Salt Lake City2 Qualified Equity Investment (QEI) NMTCs Preferred Return Equity Repayment NMTC Allocation Community Development Entity (CDE) CDFI Fund Equity/Loan (QLICI) Repayment Qualified Low Income Community Business (QLICB) Sources: 1http://www.nrel.gov/docs/fy10osti/49056.pdf 2 http://nationaldevelopmentcouncil.org/blog/?p=2242

  29. Thank you

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