09. belmonte 30
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diego presentationTRANSCRIPT
Confidential – Not for Distribution Purposes
Developing & Funding Renewable projects
Diego Belmonte [email protected] www.esoundenergy.com Tph: + 1 202 510 1348
Confidential – Not for Distribution Purposes
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Who we are… Esound’s Highlights
• Young, innovative and highly motivated Renewable Energy & Energy Efficiency company
• Project development & investment activities in RE & EE projects worldwide • Provides boutique strategic advising for those players entering into renewable
energy markets in the US and other international emerging markets...
Confidential – Not for Distribution Purposes
Brief on World Market…
Confidential – Not for Distribution Purposes
Renewable Energy Markets • Over a USD $1 trillion electricity global market (aprox. 3,700 Gw)
• Global market expected to double by 2025
• Renewable energy share > 2% – Wind > 1% – Solar > 0,1%
• Drivers Markets : Higher electricity rates, need for security of supply, better for environment, stronger regulation, job creation, etc.
• Renewable technologies are closer to mass-market cost effectiveness
Renewable Energy: most important economic opportunity of our times
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The World Electricity Market… Renewable Energy will increase 6X by 2030
Renewable energies –non hydro- will play a larger role in the energy mix, going from 2% to 7%
World Electricity Installed Capacity 2008 - 2030
2008 2030
Other renewable
Hydroelectric
Nuclear
Oil
Gas
Coal
30%
24%35%
12%6%10% 5%
22% 17%
30%
7%2%
2008 2030
Annual 2002-2030
Coal 2,3 89,9Gas 3,8 187,1Oil 0,0 0,0Nuclear 0,2 4,7Hydroelectric 1,5 51,8Other renewables 7,2 600,0Average 2,4 96,4
Growth %Source
Source: IEA (Reference scenario)
Quota %
3.719
7.303
Gw
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Cost of Renewable Energy: Significant cost reduction expected
Change in renewable Cost of Capital 2001 - 2030
Cost of most renewable sources will go below current cost of hydro. Installed capacity will drive the cost reduction curve in each technology
01,0002,0003,0004,0005,0006,0007,000
Hydro conventio
nal
Bioenerg
y
Wind onshore
Wind offsh
ore
Geotherm
al
Solar P
V
Solar T
hermal
Tide/ w
ave
2001 2030 Referencce Scenario 2030 Alternative ScenarioSource: IEA
($/K
w)
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Traditional Country Selection Criteria: Tariff scheme and overall government support
Source: Austrian Energy Agency (2007)
Europe (UE) Asia
Americas
Feed
-in ta
riff
RPS
Capi
tal s
ubsid
ies
Inve
stm
ent T
ax C
redi
ts
Rene
wabl
e En
ergy
Cre
dits
Publ
ic in
vest
men
t
Japan √ √ √ √Korea √ √ √ √India (*) (*) √ √Indonesia √Philippines √ √ √Thailand √ √ √
Feed
-in ta
riff
RPS
Capi
tal s
ubsid
ies
Inve
stm
ent T
ax C
redi
ts
Rene
wabl
e En
ergy
Cre
dits
Publ
ic in
vest
men
t
USA (*) √ √ √ (*)Canada (*) (*) √ √ √ √Brazil √ √Argentina √ √Chile √Costa Rica √Ecuador √ √Mexico √ Source: Renewables 2007. Global status report
(*) only in some states
Feed
-in ta
riff
RPS
Capi
tal s
ubsid
ies
Inve
stm
ent T
ax C
redi
ts
Rene
wabl
e En
ergy
Cre
dits
Publ
ic in
vest
men
t
Algeria √ √ √Morocco √South Africa √Tunisia √ √Turkey √ √Australia √ √ √
Africa and others
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Market Size
•Growth prospects
Attractiveness •Resource: irradiation •Legal framework:
Regulations, PPA, etc
Financing •Long term debt and grants •Mitigate country / exchange
risk
Synergies/Access •Reach grid parity
•Competition growing
Southern & Eastern Europe
North America
1st Tier
2nd Tier
Gulf countries and India
Australia
Northern Africa
LATIN AMERICA
ASIA
Clear World market opportunity
South Africa
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Differences found in the USA: No Feed-In tariffs…
DEVELOPMENT ASPECTS
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Project Cycle in the USA
Technology
Development
Equipment Supply
Financing
Construction
O & M
Ownership
Bankable technology choices
Own development – PPA + REC
Choose well-respected & relievable suppliers
Project finance & tax equity: RFP and contracts
EPC Contract: RFP and supervision
Monitoring & Asset Management; O&M Contracting
Experienced project team must manages risk through development, construction and operation to achieve long-term success
Sale of power and RECs to utility or other offtaker
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Market Structure / Players
• Developer is the main player in the structure • Revenues from development fee : this is the most important revenues source for the developer. • Property of the plant : Developer / Customer : The customer usually has a buy back option.
Dev
elop
er
Equity/Tax Equity Banks
Equity Debt
EPC Contract EPC
Customers
Equipments Suppliers
-Utilities -Non-Residential
Utilities REC´s
PPA
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Positioning in the value chain
Traditional Manufacturing & EPC Space
Traditional Financier, owner & operator Space
Traditional Designer & Developer Space
Components Supply
Technology
supply
Planning
and Desig
n
Project Develop
ment
O&M
IPP/Investment Funds
Utilities
Immature markets = inefficient chain leads to a vertical integration of segments
This yields: different risk profiles, higher investment requirements, higher needs for knowledge and specialized expertise, greater overhead costs, etc.
Good examples of these are found in the United States…
Construction
(EPC)
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Evolution of Renewable Energy Financing in the U.S.
1) Self-financed 2) Capital equipment leasing 3) Third party ownership for commercial-scale and
utility-scale systems with Power Purchase Agreement
4) New financing models for residential systems
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A good Solution: Power Purchase Agreement
The PPA is a contract in which the customer, rather than buying and operating
the solar system, just buys the power following a pre-set price schedule. SYSTEM OWNER RESPONSIBILITIES CUSTOMER RESPONSIBILITIES
Buy electricity - pay only for the power produced
10-25 year contract term
Host the system (for retail systems) Enter into a long term site lease
Develop & finance system Permitting Design Financing Procurement Installation Own & operate system Operations Maintenance Insurance
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Power Purchase Agreement Value Proposition
• Retail market shifting to Power Purchase Agreement (PPA) model because of its customer value proposition – Capital conservation: no up-front capital expenditure – Immediate savings compared to utility rates – Long-term hedge on utility rates – Limited operational risk
• PV PPA model started for non-residential systems; now being modified for residential systems
• Attractiveness of PPA model has accelerated installation of PV in the
U.S.
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Features of the PV PPA in the U.S.
• “Behind the Meter”: systems are intended to offset retail customer’s electricity demand, with excess power sold into grid
• Electricity prices are fixed for term of contract, with predetermined escalation/steps tailored to customer
• Performance based: customer only pays for the power produced
• System purchase option available anytime after the 6th year of operation
• Renewable Energy Certificates (RECs) can be included in PPA, or
sold separately
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A Typical U.S. Solar PPA Transaction
• Customer – Facilities: warehouse, office building, big-box retail, light manufacturing, etc. – Companies: socially responsible, sensitive to energy costs – Public institutions: federal/state/local government, military, school/university
• Location
– Primarily in states with incentive programs, supporting policies, higher electricity rates, and good sun
• Size and Technology
– >300 kWp – Rooftop or ground-mounted tracker
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Customer, Supplier, and Developer Point of View
Solar System & PPA Solar System & PPA
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19
Third Party Capital Point of View
System & PPA Tip of Iceberg
Warranty
Cash Flow Risk
Tax Monetization
Production Risk
Project Timing
Rebate Risk
Installer Track Record
Financial Structure
Technology
Customer Credit Risk
Whole Iceberg
Much HARDER than it
appears…
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US Market Developing Around Strong Sponsors
DEVELOPER Financing Risk
Implementation Risk EPC Risk
Real Estate Risk Regulatory/Rebate
INVESTOR Maintenance Risks Operating Expense
Credit Risk Regulatory Risk Production Risk
CUSTOMER Implementation Risk
Relationship Risk Regulatory/Rebate Risk
Industry must understand and manage risks
Industry needs a successful track
record
DEVELOPER
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FINANCING ASPECTS IN DEVELOPMENT
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Financing RE: The Solar Case
• Capital providers seek predictable cash flow with controlled risk – Long term, fixed price contracts – Creditworthy counterparts – Predictable policy regimes – Proven technology – Track record
• Capital providers
– Lenders – Equity Investors – Tax & Cash Equity Investors
Bolthouse Farms, Palmdale, CA
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Developing and Financing Projects
• Projects need – Land – Interconnection – Champion within customer organization
• Project financiers need
– Technology - bankable – Customer - investment grade – Developer - strong track record
• MW in operations • In-house technical teams • Experience with large projects
– Seek to minimize risk for the long term
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Project Financing Process
1) Form limited recourse project company 2) Development financing
– Developer / financer typically uses owns balance sheet or does Project Financing
3) Construction financing: models
– Typically debt with PV system as collateral and perhaps with guarantee from financer,
– Developer / financer uses own balance sheet or Project Financing – Development fund – levered cash equity development financing
4) Ownership
– Project sold to equity infrastructure fund with long term debt (15-20 years) – General partner provides some cash equity financing to provide assurance to
tax equity and debt providers
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Meeting Investor Needs - Equity
• Equity Investors Interested in Solar – Investors coming from three sectors – direct subsidies/incentives, tax driven, energy focused, capital
leasing – Focused on higher yields – Main investors are large institutions
• Diverse Financial Products
– Aggregated Fund of smaller solar projects – diversification of risk – Leveraged structure with senior debt at the project level – Majority of benefits come from tax benefits (investment tax credits /accelerated depreciation) – Partnership structures usually preferred – not a lease, although need to be able to do leases as well
• Exit for Investor
– Exit path needs to be clear, and under what terms, impact to overall deal
• Yields – Depends fund level risk, amount of leverage, and credit protection coming from sponsor, customer or
system integrator
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Meeting Investor Needs - Equity
• Review of underlying contracts (traditional project finance diligence), accounting, and tax issues; the solar requires much more focus on accounting issues than investors are initially aware of
• Earnings impact is not trivial and deals need to be highly structured
• Diligence requirements or conditions precedent for smaller deals are not relaxed, need to instill the same rigor typical as for larger projects
• Residual value needs to be managed carefully
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Meeting Lender Needs: BANKS
• System production estimates require careful validation
• Tax equity needs to understand tax credit dynamics and recapture risks
• Debt service coverage ratio need to account for variability in production
• How, when, and if to value Renewable Energy Credits in the cash flow analysis
• Need strong familiarity with the energy sector and knowledge of utility credits a real plus; many contracts in the sector are driven by RPS requirements and a familiarity with REC contracts or RPS requirements is essential (risk identification)
• Shift to CO2 markets a challenge
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Balancing the Participants
Sponsor
• Bringing Capital • Area Expertise • Pipeline • Ready the
Project for final Investment
Equity
• New Entrants • Relatively
Passive • Highly risk
averse • Experienced
investors
Lenders
• Very experienced • Detailed due
diligence • Traditional rights
and remedies
The final return to each group is a function of the allocation of risk across the parties; since each deal
is unique, the risk/return profile differs with each financing
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Key Issues for Customers and Project Hosts
RELIABILITY of Technology CREDITWORTHY
And EXPERIENCED
PPA Provider
MANAGING “Change of Law”
Risk
UNDERSTANDING Ongoing PPA Obligations
CONFIDENCE in PPA Provider to Manage Project
Construction
RELIABILITY of PPA Provider
KEY ISSUES FOR CUSTOMERS
AND PROJECT HOSTS
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Key Issues for Developers and Project Investors
RELIABILITY of Technology
CREDITWORTHY Power Purchaser
MANAGING “Change of Law”
Risk
UNDERSTANDING REC Markets
CONFIDENCE in PPA Provider to
Manage Relationships
RELIABILITY of PPA Provider
KEY ISSUES FOR DEVELOPERS AND PROJECT
INVESTORS
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Key Factors to consider when assessing investment opportunities in emerging markets
• Incentive stability – Governments are accelerating reassessments of feed-in tariffs as project
development interest exceeds expectations • Can lead to rapid decreases in out-year tariffs
• Permitting and regulatory processes – Processes and procedures of other governments are often unclear or
require on-the-ground knowledge • Can be mitigated by identifying an experienced local partner/EPC
provider – Attractive feed-in tariffs can be paired with unwieldy regulatory hurdles
• Spain, for example, is known for its inefficiency in project siting and construction processes
• Existence of experienced potential partners – Germany’s project developer and installer networks are dominating other
European markets, so having experienced partners is important
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Summary and Final Thoughts
• Market is still in its infancy in the World. In the U.S.: – No long-term Federal policy is established – Dissimilar state to state policies and programs – Fragmented marketplace
• The U.S. -- one of the most promising market in the world today
• Sponsor and third-party capital necessary for growth of the industry -- smart money = smart growth
• Identification, mitigation, and allocation of risk key to closing deals
• Equity and Debt moving quickly up learning curve – standards are more known and more rigid
• Step function in learning curve (for new technologies)
• Lower costs & economies of scale will be needed to maintain momentum
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EXAMPLES OF CONSTRUCTED PROJECTS
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Large Systems: Nellis Air Force Base Solar Power System
PRIVATELY FINANCED, OWNED, AND OPERATED
• ≈ $100MM project on Nellis Air Force Base • 14.2 MW with sun tracking system
– 140 acres with 75,000 modules – First Large solar PV plant in North
America
• Electricity sold to U.S. Air Force under 20 year PPA
• RECs (portfolio credits) sold to NV Energy utility
– Helps them meet their renewable portfolio standard obligation
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PRIVATE FINANCED, OWNED, AND OPERATED
~$8M project on California State University (CSU) property in Fresno, CA
1,173 KW shaded parking structure
— Schott Solar modules
Electricity sold to CSU Fresno under 25 year Power Purchase Agreement (PPA)
CSU Fresno charges additional for parking under cover
Renewable Energy Certificates (RECs) sold to voluntary CA market
California State University: Fresno
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Denver International Airport
PRIVATELY FINANCED, OWNED, AND OPERATED
~$13M project on Denver International Airport (DIA) property in Denver, CO
1,998 KW ground-trackers
— APS Tracker with Sharp modules
Electricity sold to DIA under 20 year PPA and provides enough power to run the internal rail system
RECs (portfolio credits) sold to Xcel under a 20 year agreement
— Helps them meet their renewable portfolio standard obligation
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Roche Molecular, New Jersey
PRIVATELY FINANCED, OWNED, AND OPERATED
~$6M project on office complex roof in Branchburg, NJ
914 KW roof structure
— SunPower modules
Electricity sold to Roche Molecular under 20 year PPA
RECs sold to PPL Corporation — Helps them meet their renewable
portfolio standard obligation
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Name: Belmar Location: Lakewood, California Area: 200,000 square feet Nameplate capacity: 1,741 kW System type: Parking System Annual output: 1,250,000 kWh CO2 savings: 2,016, 289 lbs/year
Belmar Office & Retail Complex
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Name: Happy Valley School
Location: Anderson, California
Area: 2 schools
Nameplate capacity: 253 kW
System type: Roof Mount
Annual output: 371,485 kWh
CO2 savings: 413,170 lbs/year
Happy Valley School & Family Center, California
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Name: Lowe’s Store
Location: Kona, Hawaii
Area: 35,800square feet
Nameplate capacity: 392 kW
System type: Roof Mount
Annual output: 598,466 kWh
CO2 savings: 919,000 lbs/year
Lowe’s Store, Hawaii
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Name: Santa Rosa City Schools
Location: Santa Rosa, California
Area: 85,000 square feet
Nameplate capacity: 830 kW
System type: Roof Mount
Annual output: 1,177,530 kWh
CO2 savings: 1,261,800 lbs/year
Santa Rosa City Schools
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Colorado Convention Center
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Macy’s, San Jose, CA
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California State University, Fresno
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Macy’s, Temecula, CA
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East Los Angeles Community College
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Macy’s, Newpark, CA
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University of California, San Francisco
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Yuba City Wastewater Treatment Facility