Slide 1 - Energy Efficiency and Renewable Energy

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					                                                The Parker Ranch installation in Hawaii

                            Challenges and Opportunities of
Financing Program Support    Public-Private Partnerships –
                                   Private Ownership
for ARRA Recipients
                                      July 14, 2010

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           Robert McKinstry
           Ballard Spahr

           Dr. John Byrne
           Director, Center for Energy and Environmental Policy,
           University of Delaware

           Kimi Barnett
           Environmental Coordinator, Salt Lake County

           Darin Lowder
           Ballard Spahr

 • Why efficiency? The rationale and justification for
   renewable energy and energy efficiency
 • Salt Lake County Case Study: a public-private
   partnership for commercial-scale solar installation
 • It’s Hard but Worth It (We hope!): Challenges of
   Implementing public-private green power projects
 • What’s a Sustainable Energy Utility? Alternative
   financing structures for collaborative public-private
 • An introduction to the webinar series
Why Efficiency?
Climbing Conventional Energy
Prices in US


                            275%              NG
 Energy Price Increases

                            250%              Gasoline
                                              Heating Oil
                            225%              Electricity





                          Yr 2000
                                2000   2002   2004       2006   2008   2010   2012       2014       2016       2018      2020

                                                                          Source: U.S. EIA database and Annual Energy Outlook (2010)
The “Negawatt” is the
Cheapest Energy Available
     The costs of energy efficiency improvements are significantly less than electricity rates throughout the
The costs of energy efficiency improvements are significantly less than electricity rates throughout the U.S. U.S.

                                    Cost per kWh vs. Cost per nWh
Comparative Risk/Return of
Typical Investments
 Average Return Index

                        Risk Index
                        Source: “The Size of the US Energy Efficiency Market: Generating a More Complete
                                  Picture”, Karen Ehrhard-Martinez and John A. Laitner (ACEEE), May 2008
Renewables – Approaching
                                    Distributed Energy              LCOE with US Incentives
                                (competes in Retail Market)         LCOE w/o Incentives
  Levelized Cost per kWh

         (US cents)

                           25          U.S. Average
                                   Retail Electricity Price

                                                              Data Source: Lazard 2008-09; CEEP (2009)
Seizing the Energy Efficiency &
Distributed Renewables Potential
Investment needs are staggering

                                                                 Source: McKinsey Global Institute, The Case for Investing in Productivity;
                      Berkeley National Laboratory, A Survey of the US ESCO Industry: Market Growth and Development from 2000 to 2008
   Salt Lake County
A collaborative approach
Salt Lake?
Governmental Incentives

 • State Renewable Portfolio Standards (in 29+ states)
    – RPS require utilities to purchase a fixed percentage of their electricity
      from renewables
    – Many states allow for trading of Renewable Energy Credits (RECs)

 • Federal tax provisions
    – Accelerated depreciation – 5 years (50% bonus in 2009)
    – Investment tax credit – 30% of value placed in service in taxable year
    – 30% ITC may be claimed as cash grant rather than credit
State Renewable Energy

  Program                                              Number of
  Personal income tax deduction or credit               19 states
  Production Incentive                                  24 states
  Corporate tax deduction or credit                     25 states
  State, local, or utility-based renewable rebate       39 states
  program                                              (246 programs)

  State, local, utility, or private loan program        37 states
  Energy efficiency/renewable bond provisions            3 states

Incentives’ Availability to

            Incentive                Available to Non-    When Available?
State Rebate                               Yes           At Project Completion

State Tax Credit                            No           At Project Completion
Federal 30% Investment Tax                  No           At Project Completion
Federal Accelerated                         No            Over First 5 Years
Value of Electricity (low or high)         Yes              Life of Project

State Solar REC                            Yes              Life of project
SLC: Levelized Net Costs* of
Each Financing Option - Solar PV

Financing Options                        Construction Cost per watt installed

                                         Base Case**             Lower-cost             Lowest-cost
                                         ($8.50 / watt)          $7.00 / watt           $6.00 / watt

CREBs                                    $0.29 / kWh             $0.22 / kWh            $0.17 / kWh
Tax-exempt financing                     $0.38                   $0.29                  $0.23
Private owner with ITC                   $0.23                   $0.17                  $0.13
NMTC – no ITC (3.75% debt)               $0.29                   $0.22                  $0.17
NMTC – with ITC                          $0.19                   $0.13                  $0.10
*These costs represent the additional levelized net costs of power per kilowatt-hour over the expected life
of the system (above current electricity costs), incorporating the value of future carbon credits, costs of
personal property taxes, the value of solar RECs (a value of zero is assumed for Utah solar RECs
because Utah currently has no mandatory RECs market), a 10% state renewable corporate tax credit
capped at $50,000, and power cost savings, assuming that utility rates increase at 3.5% per year.
**At a cost of $8.50 per installed watt, installing a 1 MW system would cost roughly $8.5 million.
Impact of Utility Rate
Increase on System Cost

                                                                                        S alt L ake C o u n ty P V
                                                                           Net Cos t of Pow er f r om PV v s . Utility Es c alation Rates
                                                                       C A S E 6: N M TC W ITH ITC , W ITH P R O P E R TY TA X
  L eveliz ed N et Po w er C o st ( $/kW h )





                                                ( $0.10)

                                                ( $0.20)

                                                ( $0.30)
                                                       3.5%        4.5%        5.5%           6.5%             7.5%             8.5%         9.5%         10.5%       11.5%
                                                                                             A n n u al u t ilit y e s calat io n r at e

                                                                                         $6000/kW              $7000/kW                $8500/kW     Sy s tem c os t

                                               Note: Due to cost savings, the costs or benefits of each project is sensitive to utility rate increases.
Private Ownership – Need to
Monetize Tax Benefits

 • To take advantage of the value of the investment tax credit for
   renewable energy property or the 1603 Grant, and the
   accelerated depreciation benefits, the owner of the solar
   project must be a taxpayer.

 • Project developers generally have low levels of net income
   during the first few years of the project’s life, when the tax
   benefits are usable.

 • To fully monetize the tax benefits, project developers typically
   receive equity investments from a tax investor.
Illustrative Example of Solar
Project Value
                                 Value of 10 kW Solar Project
                 $60,000                                                         Value of State Incentives
                                                                                 (Rebates, High value
                                                                                 Value of 30% Federal ITC

                 $30,000                                                         Value of Federal
                                                                                 Imputed electricity cost
                 $10,000                                                         (below $0.10/kWh)

   *This assumes a $65,000 total installed cost for a 10 kW system ($6,500 /kW). The chart represents the financial
   value of various benefits and incentives related to a solar project. State incentives in the Mid-Atlantic region typically
   include either solar renewable energy certificates (with high pricing in NJ, MD, PA), state tax credits, or rebates, or
   some combination of these. A 10 kW system would require approximately 2,000 square feet of roof space and would
   be expected to generate 200,000 kWh over 20 years. The figures above includes a mix of state rebates and
Salt Lake County
Decisions, Decisions…

          Funding Source A                                        Funding Source B

       Department of Energy                                        EECBG Funding
   Congressionally Directed Funds

                                     Funding Purpose
                                    Solar PV installation

       Installation Option A                                   Installation Option B
 Public Service Commission (PSC)                            Rocky Mountain Power Altered
               Ruling                                       Qualifying Facilities Agreement

             Note: Based on studies conducted by SLCo consultants it was
             determined that the most cost-effective model to accomplish a solar
             installation would be a Power Purchase Agreement (PPA). A PPA is a
             financial arrangement in which a third-party solar investor owns the
             solar PV system and sells the power to SLCo at a pre-determined
             price. However, this arrangement is not currently allowed under Utah
             Statute. As we continue to try and resolve this, SLCo consultants have
             been in negotiations with RMP on an altered agreement which would
             not be as cost-effective as a PPA but would be currently allowed.
More Decisions…

  Option A: Background Information                                       Option B: Background Information
  ►In November 2009, SLCo submitted                                      ►SLCo consultants have been in
  comments to the PSC in favor of third-                                 negotiations with RMP on an Altered
  party owned systems                                                    Qualifying Facilities Agreement
                                                                         ►This would not be as cost-effective as a
  ►The Commission has indicated it will                                  PPA, however, would be the best
  make no significant decision on this issue                             alternative option to achieve our solar
  in the near future.                                                    installation in a timely manner
                                                                         ►Currently there are still some issues which
                                                                         would need to be worked out before the
                                                                         County could agree to this arrangement

      Commission Decision Option A           Installation Option
   1. Decides issue is not within the                 C
   Commissions reach                           HB145 is passed
   2. Addresses issue and rules against        ►This legislation would
                                                 allow PPAs in Utah

     Commission Decision Option B
   1. Rule in favor of third-party owned
   systems OR                                   SLCo Consultants
                                                    Draft RFP
                                           Note: Additional funding for            Negotiations with RMP
                                           our consultants’ work will                  are successful
   2. Rule in favor of third-party         not be available until
   owned systems on a case by case         February 2010
                                                RFP is Issued and
   Submit County’s 800 kW                       Partner is Chosen
   installation to Commission for
   review and approval                     Solar Installations Begin
Combined Financing Structure:

                                         Loan Proceeds                 SPE
                                                               INVESTMENT FUND                Equity             NMTC TAX CREDIT
     LENDER - $3.7 mm
                                            Loan              Sole Member: Investor         Investment                INVESTOR
 (Includes $1.8 mm Grants
                                        Repayment per         $4.9 mm (3.7 mm loan                                ($1.2 mm) in cash
      & $1.9 mm QECB)                    partnership
                                          agreement             + $1.2 mm equity)
                                                                              New Markets Tax Credits
  “Loan” of                                              Qualified Equity
   $1.9 mm      Loan           “Loan” of $1.8 mm           Investment
              Repayment           from Grant                                  Distributions (used by
 from QECB                                                    (QEI)           Investment Fund to repay
  proceeds                         proceeds
                                                                              Leveraged Loan)

         COUNTY                                                                              Small Capital
Power Purchaser & Lender                                                                                            GENERAL PARTNER
                                                            QUALIFIED COMMUNITY              Contribution
 (w/ FMV purchase option                                                                    NMTC Allocation               CDE
                                                            DEVELOPMENT ENTITY
      from year 7-25)                                                                                                     with
                                                                                            Return on Capital,      NMTC ALLOCATION

                                    Power Purchase           Favorable        Loan
                                    Agreement (“PPA”)        Term Loan      Repayment
                                                               of ($4.9

             Power Sale                                                                         Tax Benefits (30%
          Revenue (offset by                                  QUALIFIED ACTIVE                    ITC or grant /       TAX EQUITY INVESTOR
          Loan payment for                                LOW-INCOME COMMUNITY                      MACRS)
                                                                                                                    ($1.1 mm-$4.1 mm Developer
           “Grant” & QECB
               loans)                                         BUSINESS (QALICB)                                         Equity - supported by
                                                           System Owner, includes               Developer Equity       30% ITC Grant/MACRS)
                                                         tax equity investor as partner         Cash Contribution
Sustainable Energy Utilities
Sustainable Energy Utility

  • Sustainable Energy Utility
     – VT, DE, DC, and NJ models
     – Use Municipal Authority

  • SEU Functions
     – Financing mechanisms for county, municipal, non-profit and private
       energy efficiency/conservation and alternative energy projects
     – Facilitate public-private partnerships to take advantage of tax credits
       and accelerated depreciation
     – Cumulating projects to achieve scale for development and financing
     – Provide mechanisms for exploiting new opportunities for stimulus
       money and tax exempt financing
     – Create center of expertise and connections for projects
Revenues – Incentives

  • Alternative Energy                • Energy Efficiency
     – Electric Sales                    – Cost savings
     – RECs                              – Tax credits – federal
     – Tax credits – federal and         – Grants
       state                             – RGGI Offsets or carbon credits
     – Grants                              in voluntary market; federal
     – No carbon credits but with          value of savings increases
       cap and trade electricity or
       heating/cooling value
       increases                      • Sequestration
                                         – Offsets
                                         – Possibility of multiple credits;
                                           monetization of ecosystem
                                           services, such as stormwater
SEU Functions –
Tax Exempt Financing
  • Tax Exempt ESCO
     – Provides financing
     – Hires ESCOs as contractors
     – Contracts for repayment from energy cost savings and carbon credits
       (e.g. PA Act 70)
     – If energy generation - repayment from revenues, RECs and carbon

  • Municipal Financing Techniques
     – Traditional tax exempt financing
     – Clean Renewable Energy Bonds (CREBs) – private and public
     – Economic stimulus mechanisms
     – State money

  • Public Private Partnerships
     – Private ownership reaps tax benefits
Example – City SEU Benefits

  • Municipalities are creatures of state law – limited powers

  • Aggregates properties to make attractive to developer

  • Runs RFP or prequalifies contractors (smart purchasing)
     – May have more flexible procurement standards than city

  • Contractual intermediary with city and private parties
     – e.g., solar: leases roofs and subleases to developer
     – Can also act as long-term power purchaser
     – Avoids city restrictions on long term contracts

  • Finances on a project finance basis
     – Avoids city debt limits

  • Aggregates and Sells RECs and Carbon Credits
     – Avoids restrictions on sale of city property

    Send feedback & requests for technical assistance to:
           Bret Kadison –

           Resource Portal for Financing Programs

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