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Third Party Financing Lessons Learned from Solar Water Heating James Critchfield U.S. Environmental Protection Agency at Northeast Biomass Heating Expo 2013 Innovations in Finance of Biomass Heating Systems Agenda • Brief History... • Benefits of 3rd party financing structures • Overview of financing models • The solar water heating model • gy Common Contractual Elements of Energy Purchase Agreements • Critical factors for thermal applications • Opportunities for industry focus g • Background information History of PPAs and 3rd party financing • Historically, PPAs were a vehicle for utilities to purchase energy (electricity) from one another • Later, the Public Utility Regulatory Policy Act (1978) stipulated that utilities had to purchase from Qualifying Facilities (QFs) • This opened the door for utility PPAs with independent generators (owners This opened the door for utility PPAs with independent generators (owners of QFs) – Recent FERC orders have since diminished this approach in practice In 2006, the PPA model was tested in the deployment of distributed • In 2006 the PPA model was tested in the deployment of distributed renewable generation (e.g. solar PV) – The model addressed several critical market barriers (e.g. upfront cost, risk ) etc.) – Today an estimated 90% of solar PV capacity is done through 3rd party financing g y p • The solar water heating industry took notice and several companies have developed business models using similar 3rd party financing structures Benefits of 3rd party financing structures • Third party financing structures address specific technology adoption barriers: adoption barriers: – Capital intensity and access requirements – Performance and operational risk – Investment risk – Transaction costs – Institutional barriers Financing structures place risk on stakeholders who are • Financing structures place risk on stakeholders who are uniquely qualified to assume the risk Overview of 3rd Party Financing Structures • Energy Purchase Agreement (PPA) Model – Focuses on creditworthy commercial customers; success hinges on accurate load assessment and metering of system output; can be difficult to compete against natural gas in today’s market; 10 to 20 year contract terms are typical and often include buyout options – Projects often leverage asset‐based bank, 3rd party investor, low‐cost public or internal ojects o te e e age asset based ba , 3 pa ty esto , o cost pub c o te a financing to make projects work; rate setting is a primary challenge and involves fixed, fixed plus an escalator, and price‐indexed energy cost approaches • ESCO Model j d l fb d f li f “ i ” i ii – Project development as part of broader portfolio of “energy saving” activities – Project viability is determined by quick returns on investment; many renewable heating projects require bundling with other energy improvements to pass ROI thresholds • Leasing Model (relatively unproven in solar thermal world) Leasing Model (relatively unproven in solar thermal world) – Creditworthy customers can develop projects with little or no upfront investment; banking partner sees less risk because the lease approach focuses on equipment and does not rely on the bankability of long term off‐take agreement Involves a set monthly fee (lease payment) with escalator; long contract terms (10‐20 – I l t thl f (l t) ith l t l t tt (10 20 years) with buyout; some limitations for non‐taxable hosts; requires some scale to be profitable for investors Solar Water Heating Model Common Contractual Elements of Energy Purchase Agreements Energy Purchase Agreements • Rate (D) • System Access (S) • C t tT (D) Contract Term (D) • Damage to System/Insurance (S) D t S t /I (S) • System Components (D) • Credit Requirements (D) • Configuration (D) • Default (S) • g( ) Permitting (S) • g ( ) Change in Law (S) • System Construction & Testing (Both) • Force Majeure (S) • Measurement & Monitoring (S) • Succession and Assignment (S) • Purchase of All Energy Produced or • Intra‐term Purchase Options (D) Consumed (S) Consumed (S) • End of Contract Options (D) End‐of Contract Options (D) • Invoicing (S) • Site Real Estate Rights (S) • Minimum System Performance (D) • Real Estate Mortgage Liens (S) • Environmental Attributes (D) • Other Standard Language (e.g. • ( ) Taxes (S) bl notice, severability, entirety, • Operations & Maintenance (S) confidentiality, dispute resolution, indemnification, warranties, applicable law) (S) (D) – Dynamic (S) ‐ Static Critical Factors for Thermal Project Applications Thermal Project Applications • Creditworthy counterparties • Bankable cash flows – long‐term contracts, monetization of environmental benefits • Project size – right sized to load, minimum investor requirements, aggregation opportunities, etc. • Competitiveness with alternative fuels – natural gas, propane, etc. • Uncertainties – policies, feed stock, etc. • Contract terms – rates, end of contract options, etc. • Energy Load – time of day and seasonal variations • Metering ifi bilit t d d t – accuracy, verifiability, standards, etc. • Monitoring – anticipate performance problems, reduce performance and operational risk Opportunities for Industry Focus pp p • Support the development of a U.S. Heat Meter Standard – ASTM E44.25 Subcommittee on Heat Metering • Develop an industry annotated Energy Purchase Agreement – f t d th i l for your customers and their lawyers • Develop industry‐level project portfolio that speaks to the gy p j investor need for technology and project risk evaluation • Explore project aggregation models that leverage various third‐party investment structures – particularly to scale ll j i i smaller projects to meet investor requirements • Improve recognition of “renewable heating and cooling” as a consolidated sector for policy makers; coordinate with other consolidated sector for policy makers; coordinate with other technologies on shared challenges Background Info Source: SEPA Source: https://epa.connectsolutions.com/thirdpartycontracts/ ttps //epa co ectso ut o s co /t dpa tyco t acts/ Source: https://epa.connectsolutions.com/shcfinancingslides/ For additional info on EPA Resources contact, email@example.com James Critchfield Director, Renewable Energy Technologies Market Development U.S. Environmental Protection Agency firstname.lastname@example.org 202-343-9442 Chair, ASTM E44.25 Heat Metering Subcommittee www.astm.org/COMMITTEE/E44.htm Thank you QUESTIONS?