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Confidential – Not for Distribution Purposes Developing & Funding Renewable projects Diego Belmonte [email protected] www.esoundenergy.com Tph: + 1 202 510 1348

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Page 1: 09. belmonte 30

Confidential – Not for Distribution Purposes

Developing & Funding Renewable projects

Diego Belmonte [email protected] www.esoundenergy.com Tph: + 1 202 510 1348

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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...

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Brief on World Market…

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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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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