Stellar  Energy  GP,  Inc.  1500  Valley  House  Drive,  Suite  210  

Rohnert  Park,  CA    94928  

Overview  of  Solar  Power  Purchase  Agreements  (PPAs)  Presented  by  MaO  Lugar,  Vice  President  of  Sales,  Stellar  Energy  

for  the  Center  for  Sustainable  Energy  

May  10,  2010  1

•  Introduc*on  •  A  brief  history  of  Renewable  Energy  (RE)  Finance  •  Financial  structures  available  for  solar  projects  •  Focus  on  Power  Purchase  Agreements  (PPAs)  

–  Opportunity  /  Host  Qualifica*on  –  PPA    General  Terms  and  “Anatomy”  of  the  PPA  

–  The  “Value  of  Solar  Energy”  –  Solar  PPAs  versus  “The  Grid”  –  Financial  Analysis  

2

Agenda  

About  Stellar  Energy  General  IntroducQon  •  Founded  in  2004  

•  Headquartered  in  Rohnert  Park,  California  

•  EPC  contractor  (Engineering,  Procurement,  Construc*on),  licensed  in  mul*ple  states  

•  Specializing  in  commercial  and  u*lity  grade  solar  energy  plants  

•  Clients  include  municipal,  agriculture,  manufacturing,  mining  and  commercial  opera*ons  

•  In  2008,  completed  the  largest  solar  installa*on  on  a  winery  in  the  U.S.  for  Foster’s  Wine  Estates  Americas  

•  Top  15  EPC  provider  in  2008  and  2009  on  California  Solar  Ini*a*ve  (CSI)  list  

•  Acquired  by  ITOCHU  Interna*onal  in  2009,  a  Global  500  company  with  over  $36  billion  in  revenues  

3

IntroducQon  What  can  solar  energy  do  for  organizaQons?  

•  Save  money  o  Solar  energy  offsets  more  expensive  u*lity  rates  during  peak  hours  of  

the  day…  net  metering  credits  

•  Hedge  energy  costs  o  The  “fuel”  from  sunlight  is  free  unlike  tradi*onal  fuels  such  as  coal,  

natural  gas  and  nuclear…  opera*ng  costs  do  not  fluctuate  over  *me  

•  Predictable  opera*ng  costs  o  You  know  what  you  are  paying  for  your  solar  energy  kWh  from  day  one  

through  the  life  of  the  system…  easier  for  budget  planning  

•  Improve  corporate  “green”  or  sustainable  image  o  The  “green  revolu*on”  is  real  o  Huge  marke*ng  dollars  are  being  spent  by  organiza*ons  going  “green”  o  Solar  allows  you  to  be  “green”  and  save  “green”  at  the  same  *me  

4

•  2000  –  Solar  incen*ves  become  prolific  in  CA  and  some  other  states  soon  to  follow  

•  2000  to  2003  –  Solar  projects  s*ll  rela*vely  small  but  growing…  banks  become  more  interested  as  project  size  increases  with  aggressive  developers  

•  2004  –  Launch  of  the  early  “giants”  of  solar  PPAs  who  pioneered  the  model  with  both  customers  and  the  banks  behind  the  transac*ons  

•  2007  –  Wave  of  venture  backed  solar  financing  start-­‐ups  hits  the  US  •  2007  to  2008  –  Hyper-­‐compe**on  is  rampant…  many  un-­‐bankable  deals  

•  2009  –  Global  financial  crisis  sends  large  commercial  solar  project  financing  into  a  tailspin…  weathering  the  storm  is  difficult  

•  2010  –  Financial  markets  are  sojening  again,  and  PPAs  and  leases  return  to  the  forefront  of  commercial  solar  PV  systems  

•  Beyond  2010  –  Projects  will  con*nue  to  get  larger…  wholesale  PPAs  (provider  direct  to  u*lity)  will  become  more  common…  more  strict  credit  constraints  for  DG  hosts     5

Brief  History  of  RE  Finance    Timeline  

Brief  History  of  RE  Finance    Global  Asset  Financing  for  New  Clean  Energy  Assets  ($B)  

Brief  History  of  RE  Finance    2007  to  Present  

Financial  Structures  Available  for  Solar  Primary  Types  of  Financial  Structures  •  Capital  Purchase  (Cash)  

o  Use  your  corporate  liquid  capital  or  loans  (on  balance  sheet)  to  install  solar  o  You  own  and  operate/maintain  (O&M)  the  power  plant  o  Financial  analysis  centered  around  IRR  and  ROI  calcula*ons  

•  Power  Purchase  Agreement  (PPA)  o  Third  party  owns  and  operates/maintains  (O&M)  the  solar  power  plant  –  zero  

capital  outlay  for  your  organiza*on  o  You  buy  only  kilowao-­‐hours  (kWh),  similar  to  how  you  buy  energy  from  your  

electric  u*lity  o  Financial  analysis  is  centered  around  cash  flows  and  determina*on  of  

immediate  savings  poten*al  •  Lease  (Opera*ng  Leases  or  “Off  Balance  Sheet”)  

o  Third  party  owns  the  power  plant,  but  you  are  typically  responsible  for  O&M  –  zero  capital  outlay,  typically  off  balance  sheet  opera*ng  leases  

o  Typically  you  pay  a  fixed  monthly  fee  (not  *ed  to  kWh  produc*on)  for  term  of  contract  (~10  years)  

o  Financial  analysis  is  centered  around  cash  flows  and  determina*on  of  immediate  savings  poten*al  

8

Financial  Structures  Available  for  Solar  End  User  Comparison  of  Financial  Structures  CharacterisQcs   Capital  Purchase  (Cash)   PPA   Lease    

Upfront  Capital  Requirement   Yes   No   No  

System  Performance  Risk     Yes  –  The  owner  is  responsible  if  the  system  does  not  perform  

No  –  PPA  provider  has  ongoing  responsibility  to  ensure  the  system  con*nues  to  operate  as  required    

Yes  –  The  lessee  /  host  is  responsible  if  the  system  does  not  perform  

Ongoing  Payments   Fixed  monthly  fee  if  financed  through  a  loan  

Ongoing  payments  *ed  to  electricity  produced  by  the  facility  

Fixed  monthly  fee  -­‐    the  lessee  bears  the  increased  cost  of  electricity  in  a  poor  solar  month  

OpQmize  Tax  Benefits   No  –  Owner  may  not  get  full  benefit  if  unable  to  reduce  taxable  income  or  if  government  or  not-­‐for  profit    

Yes   Yes  

Ongoing  Cost   Opera*ons,  maintenance  and  insurance  costs  

No   Opera*ons,  maintenance  and  insurance  costs  

Guarantees/Liens  Required   Probably  if  financed   No  (assuming  host  has  sufficient  credit  ra*ng)  

Probably  

Length  of  Contract   N/A   20  –  25  years   7  –  10  years  

Buyout  price  at  the  end  of  contract   N/A   Fair  Market  Value   Fair  Market  Value    

Early  Buyout     N/A   Yes  –  ajer  year  7   Yes  –  ajer  year  7  

OpQon  to  renew     N/A   Yes   No  

9

Includes,  but  not  limited  to:  

•  Geographic  loca*on…  financial  incen*ves  cri*cal  •  Poten*al  customer  must  have  enough  physical  space  (roof/

ground/other)  to  accommodate  enough  PV  for  their  historical  electrical  load  

•  If  Capital  Purchase,  does  the  poten*al  customer  have  enough  tax  appe*te  to  mone*ze  the  ITC  (if  installa*on  begins  ajer  2010)?  

PPAs  (and  most  leases)  •  Must  have  3  years  of  audited  financial  statements  available  

for  review…  non-­‐starter  if  statements  are  not  audited  

•  Should  have  about  4  to  5  *mes  the  EPC  value  of  the  solar  project  in  their  Current  Assets,  less  inventories,  on  their  audited  financial  statements  (not  in  Total  Assets)  

•  Should  have  Current  Assets  greater  than  Total  Liabili*es  (eg.  a  “strong”  Current  Ra*o  greater  than  1).    The  higher  the  Current  Ra*o,  the  beoer.  

•  S&P  ra*ng  of  BBB-­‐  or  beoer,  if  available  

10

Customer  QualificaQon  ConsideraQons  for  All  Medium  to  Large  Scale  Solar  Projects  

www.dsireusa.org  

•  Providers’  primary  goal  is  to  deliver  solar  electricity  at  rates  lower  than  the  incumbent  u*lity  

•  Solar  PPA  provider  and  EPC  contractor,  together,  handle  all  details  for  the  host  customer  –  Design  and  engineering  –  Construc*on  and  maintenance  –  Financing  and  RECs  –  Rebates  and  incen*ves  

–  Energy  metering  and  billing  

•  Predictable  electricity  rates  guaranteed  for  life  of  contract  

•  LEED  points,  if  applicable  

11

Focus  on  PPAs  Value  ProposiQon  for  the  Solar  PPA  

  Solar  PPA  provider  typically  proposes  20  year  PPA  terms…  15  or  25  years  some*mes  possible,  depending  on  source  of  funds  

  Early  purchase  or  buyout  op*ons  typically  star*ng  at  7th  anniversary  of  commercial  opera*on  of  facility    Banks/investors  need  about  6  years  to  mone*ze  all  incen*ves  

  Greater  of  Fair  market  Value  (FMV)  or  terminal  value  

  Fixed  Annual  Escalator  (eg.  4.5%  per  year)  

or  7th  Year  “Step”  

  End-­‐of-­‐term  Op*ons    Renew  the  agreement  for  a  second  term  

  Purchase  the  system  outright  from  PPA  provider  at  the  Fair  Market  Value  price  

  Have  the  system  removed  at  PPA  provider’s  expense  

12

Focus  on  PPAs  Standard  PPA  Terms  

13

Focus  on  PPAs  Solar  Renewable  Energy  CerQficates  (SRECs)    Also  known  as  Green  tags,  Renewable  Energy  Credits,  Renewable  

Electricity  Cer*ficates,  or  Tradable  Renewable  Cer*ficates  (TRCs)  

  Tradable,  non-­‐tangible  energy  commodi*es  in  the  United  States  that  represent  proof  that  1  megawao-­‐hour  (MWh)  of  electricity  was  generated  from  an  eligible  renewable  energy  resource  (renewable  electricity)  

  Can  be  sold,  traded  or  bartered  

  Owner  of  the  SRECs  can  claim  to  have  purchased  green,  renewable  energy  

  In  considera*on  of  PPAs,  ownership  of  the  SREC  represents  about  $0.01/kWh  (+/-­‐  $0.005/kWh)  on  the  PPA  start  rate  in  CA  

  SRECs  in  CA  are  much  lower  value  than  in  NJ,  for  example  (eg.  $15  to  $50/SREC  in  CA  vs.  $693+/SREC  in  NJ)  

14

Focus  on  PPAs  OperaQons  &  Maintenance  /  System  Performance  Monitoring  

•  PPA  provider  responsible  for  all  O&M  for  en*re  term  of  contract  

•  If  system  not  opera*ng,  PPA  provider  will  lose  revenue  expected…  huge  mo*va*on  to  keep  system  opera*ng  at  peak  performance  

•  Typical  O&M  services:  •  Panel  cleanings  (with  or  without  water)…  2x  per  year  in  most  parts  of  CA  

•  Torque  sewngs  in  inverter  and  combiner  boxes  

•  Security    

•  PPA  providers  use  same  performance  monitoring  equipment  as  specified  when  customer  purchasing  with  cash  /  capital,  such  as:  •  Energy  Recommerce  

•  Fat  Spaniel  

•  Draker  Labs  

PPAs,  Com.  Op.  

PPA  Provider  Integrated  

Turnkey  EPC  

Equip. Vendors

Design Engineer

Sub Contractors

O  &  M  Contracts  

Construc*on  Contracts   PPAs,  Ini*al  Phase  

Master  Lease  Agreement  

Construc*on  Financing  Agreement  

Project  Sale  Lease  Backs  Insurance

Construc*on  Loans  

Parent  Company  Guarantee    

15

Anatomy  of  the  PPA  View  from  PPA  Provider  

Solar  PPA  contract    

16

Anatomy  of  the  PPA  View  from  Host  Customer  

•  This  is  a  founda*onal  concept  to  understand  

•  Average  Cost  of  Energy  =      Total  Dollars  Spent  /  Total  kWh  Consumed  

•  Value  of  Solar  kWh  (a.k.a.  avoided  cost)  =      Factor  of  Time  of  Use  (TOU)  rates  versus  Solar  Array  kWh  Produc*on  and  Net  Metering…  Savings  /  Solar  kWh  Produc*on  

•  Under  net  metering,  the  u*lity  credits  the  host  customer  for  energy  generated  by  solar  arrays  at  retail  rates  

•  Because  peak  TOU  rates  are  always  highest  during  the  day,  and  solar  energy  is  produced  during  this  most  expensive  *me  during  the  day,  the  host  realizes  CREDITS  from  the  u*lity  at  their  highest  rates  thus  driving  the  Value  of  Solar  kWh  higher  than  the  Average  Cost  of  Energy  

Focus  on  PPAs  Value  of  Solar  kWh  vs.  Average  Cost  of  Energy  

Typical Commercial Load Profile

Solar Array Production Profile

18

Focus  on  PPAs  The  Value  of  Solar  kWh  or  JusQficaQon  of  PPA  Rate  

From  LBNL  report,  “The  Impact  of  Retail  Rate  Structures  on  the  Economics  of  Commercial  Photovoltaic  Systems  in  California”,  July  2007  

Focus  on  PPAs  JusQficaQon  of  Annual  Escalator  

$0.00

$0.02

$0.04

$0.06

$0.08

$0.10

$0.12

$0.14

1970 1975 1980 1985 1990 1995 2000 2005

$/kW

h

Year

Average Electricity Price in Key Solar PPA States

U.S.  Government  Energy  Informa*on  Administra*on,  official  energy  sta*s*cs.  State  energy  consump*on,  price  and  expenditure  es*mates  (SEDS).  Complete  2005  data,  released  February  29,  2008.  hop://www.eia.doe.gov/emeu/states/_seds.html  

(CA, NJ, AZ, PA, CO, NV, MA, CT)

20

Focus  on  PPAs  JusQficaQon  of  Annual  Escalator  

22

Focus  on  PPAs  JusQficaQon  of  Annual  Escalator  

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

1970 1975 1980 1985 1990 1995 2000 2005

Perc

ent C

hang

e

Year

Average Price Change Electricity in Key Solar PPA States

U.S.  Government  Energy  Informa*on  Administra*on,  official  energy  sta*s*cs.  State  energy  consump*on,  price  and  expenditure  es*mates  (SEDS).  Complete  2005  data,  released  February  29,  2008.  hop://www.eia.doe.gov/emeu/states/_seds.html  

23

Focus  on  PPAs  Hedging  Against  VolaQlity  

Focus  on  PPAs  Financial  Analysis  –  25  year  term,  fixed  annual  escalator  

Focus  on  PPAs  Financial  Analysis  –  25  year  term,  7th  year  “step”  escalator  

Per  Unit  Energy  Cost  Comparison  25  Years,  No  Solar  vs.  With  Solar  

QuesQons?  

Stellar  Energy  has  delivered  safe,  reliable,  clean  energy  to  a  diverse  range  of  businesses  and  ins9tu9ons  including  industrial  complexes,  government  facili9es,  mines,  distribu9on  warehouses,  wineries,  offices,  and  food  processing  facili9es.  

MaO  Lugar,  Vice  President  of  Sales  

Stellar  Energy  GP,  Inc.  1500  Valley  House  Drive  Suite  210  Rohnert  Park,  California  94928  

mao.lugar@stellarenegy.com,  email  (707)  992-­‐3208,  direct  work  (650)  833-­‐9008,  mobile    

Thank  you.