Community Energy Model G.Andersen(Da)

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Financial Structures for Community Wind Development in Pennsylvania

Gwen AndersenDirector

www.francis.edu/rec.htm814-472-2872

Our thanks to the Penelec Sustainable Energy Fund of the Community Foundation for the Alleghenies and the Pennsylvania

Department of Environmental Protection for funding the development of this tool. The tool was developed by Mark Bolinger

and Matthew Karcher.

http://www.francis.edu/rec.htm

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Presentation Outline1) ARRA Incentives

2) Overview of Financial Structures

3) Description of Financial “Pro Forma” Model

4) Demonstration of Model Capabilities

• Policy Analysis of 30% ITC and Cash Grant

5) Questions?

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Community Wind Remains a Small Part of the Overall US Market…

• 479 MW of community wind projects installed in the US at the end of 2008• 2% of total installed wind capacity in the US

02468

101214161820222426

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Cum

ulat

ive

Inst

alle

d C

apac

ity (

GW

)

Community

Publicly Owned Utility (POU)

Investor-Owned Utility (IOU)

Independent Power Producer (IPP)

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…But Holds Significant ImportanceImpact of community wind extends beyond its market penetration

• Studies show greater local economic development benefits than commercial wind

• Technology acceptance for later commercial projects

Community wind is poised for growth…• U.S. wind rush since 2005 has frustrated construction schedules, leading

to a backlog of community wind projects• 2008 finance-induced slowdown in broader wind market provides an

opportunity • States implementing incentive programs to help community wind• Federal stimulus may benefit community wind disproportionately

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Federal Incentives for Wind PowerPrior to 2009:

• Production Tax Credit (PTC)

• Accelerated Tax Depreciation (5-Year MACRS)

• USDA Grants (REAP)

• Clean Renewable Energy Bonds (CREBs)

Post “Recovery and Reinvestment Act of 2009” (“ARRA”):

1) Same as above, except that wind projects can now choose between the PTC, a 30% investment tax credit (ITC), or an equivalent 30% cash grant - but ends in December 2012

2) This choice is a HUGE deal for community wind in particular….

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At Face Value, the 30% ITC and Grant Are Obviously Good For Community Wind

Relative to the PTC (which is production-based), both the ITC and cash grant (which are investment-based) provide more value to projects that cost more and/or generate less• Many community wind projects fit this description: too small to capture

economies of scale, resource-constrained by landowner sites

• For a $2500/kW project with a 30% capacity factor, the present value of tax benefits (credits + depreciation) comes to ~51% of installed costs for the ITC/grant versus ~44% for the PTC

The cash grant is easier to use than the PTC or ITC• Cash is more fungible than tax credits

• Community wind projects often have a hard time making use of tax credits, and may be too small to attract tax equity investors

Not As Obvious, the 30% ITC and Grant Also Provide Additional Benefits

Alternative Minimum Tax (AMT): PTC exempt for first 4 (out of 10) years; ITC/grant are fully exempt

“Haircut” for Government Grants: PTC reduced by all grants applied to capital costs; ITC/grant only reduced by non-taxable grants

“Haircut” for Subsidized Energy Financing: PTC reduced by government-subsidized loans; ITC/grant is not

Power Sale Requirement: Power must be sold to unrelated party to qualify for the PTC; no such requirement for ITC/grant

Owner/Operator Requirement: For PTC, owner and operator must be same (rules out leasing); not so for ITC/grant

Passive Credit Limitations: Passive investors (individuals) can only use PTC and ITC against passive income; not so for 30% grant

Performance Risk: PTC dependent on generation, ITC/grant dependent only on investment

SEC Regulations: Cash grant reduces amount of LT equity – and therefore perhaps the number of equity investors – required (fly under the radar)

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Pennsylvania State Policies and Incentives for Community Wind

Net Metering Policy:

• Non-residential systems up to 3 MW (5 MW in some cases)

• System size not limited by customer load

• Annual NEG compensated at utility “price to compare” (G&T, not D)

State-Level Grants: (presumably taxable, and cause a PTC haircut)

• Energy Harvest ($500k limit)

• PEDA Grants ($1.5 million limit)

• DCED Wind and Geothermal Incentives Program ($1 million limit)

Alternative Energy Production Tax Credit:

• 15% investment tax credit, $1 million cap per project

• Statewide dollar cap starting at $5 million and increasing to $10 million (by 2014)

Regional Public Benefits Funds: May support community wind at times

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Financing Structures Suitable for Community Wind in Pennsylvania

Private Sector Structures:

• Strategic Investor Partnership Flip

• Institutional Investor Partnership Flip

• Sale/Leaseback

• Cooperative LLC

Public Sector Structures:

• Municipal Bond Finance

• Clean Renewable Energy Bond (CREB) Finance

First three require tax equity investors

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Private Sector Structure:Strategic Investor Partnership Flip

• Most-used community wind structure in US

• Tax investor is a “strategic” investor e.g., John Deere, Edison Mission)

• Tax Investor provides almost all the equity

• Pre-flip cash and tax allocations are proportional to equity investment

• Post-flip allocations favor local investor(s)

Lender(debt)

Project Company(equity + debt + grants)

Power (and REC) Sales

Cash Revenue30% Federal Cash Grant

lessOperating Expenses

lessTax-Deductible Expenses

(including MACRS and interest on debt)

equalsDistributable Cash

equalsTaxable Losses/Gains

(which result inTax Benefits/Liabilities)

Local Investor(s)(1% of equity)

Grant 1(USDA REAP)

Grant 2(State Agency)

lessDebt Service

Tax Equity Investor(99% of equity)

1% / 90% 99% / 10%

99% 1%

99% / 10% 1% / 90%

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Private Sector Structure:Institutional Investor Partnership Flip

Similar to Strategic Investor Flip, EXCEPT:• Tax Investor is an

“institutional” investor (e.g., a bank)

• Tax Investor provides less equity (~70%)

• All cash initially goes to local investors, until investment recovered

• Typically no project-level debt

Not as suitable for community wind as the Strategic Investor Flip

Project Company(equity + debt + grants)


Cash Revenue30% Federal Cash Grant

lessOperating Expenses


(including MACRS and interest on debt)




Local Investor(s)(30% of equity)

Grant 1(USDA REAP)


Tax Equity Investor(70% of equity)

99% 1%

99% / 10% 1% / 90%

0% / 100% / 10% 100% / 0% / 90%

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Private Sector Structure:Sale/Leaseback

• Locals develop/build project, sell it to a tax equity investor (the lessor), and then lease it back (as lessee)

• Lessee operates the project, receives all cash revenue, and makes regular lease payments (regardless of how well the project performs)

• Lessor receives lease payments and takes all tax benefits• Lessee can buy out lessor at end of lease term• Pros:

Provides 100% financing (lessor owns entire project) Most efficient tax credit monetization (100%) Leases are familiar to banks – may broaden tax investor base

• Cons: Lessee must pay full FMV to buyout lessor (no prior “flip” down) New structure for wind (only viable since ARRA)

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Private Sector Structure:Cooperative LLC

• Like the “Minwind” projects in Minnesota

• No tax equity investor• No “flip” in cash or tax

allocations• Very pure and simple

structure• Must adhere to SEC

regulations when raising equity

• Much more viable under the 30% cash grant than it was under the PTC

Lender(debt)

Project Company (LLC)(equity + debt + grants)


Cash Revenue

30% Federal Cash Grant

lessOperatingExpenses


(including MACRSand interest on debt)




Local Investors(100% of equity)

Grant 1(USDA REAP)


lessDebt Service

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Public Sector Structures:Municipal Bonds and CREBs

• Primarily used for behind-the-meter projects, as grid supply projects may violate “private use” rules

• No tax equity investors

• Town invests small amount of equity, finances remainder with either municipal bond or CREB

• Muni Bonds: Longer terms (15-20 years), higher interest rates, lower issuance cost (than CREBs)

• CREBs: Shorter terms (12-15 years), lower interest rates (0% in theory), higher issuance cost, must apply for an allocation

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High-Level Model Description (I)• Excel workbook designed to model a community wind project under all

six viable financing structures simultaneously

• “General Project Assumptions” worksheet contains assumptions that are common to all six financing structures

Project capacity, capacity factor, hard costs, O&M costs, incentives, depreciation schedules, etc.

• “Structure-Specific Assumptions” worksheet contains those assumptions that might vary by structure

Construction and term financing, soft costs, revenue, allocations, etc.

This worksheet also contains modeling results

• Five additional worksheets, one for each financing structure (muni bonds and CREBs are modeled on same worksheet)

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High-Level Model Description (II)Model can be run either “forwards” or “backwards”

• Forwards: User specifies the revenue available to the project, and the model calculates the financial return to project investors Must be run manually in this direction Must take care that other modeling elements also make sense

(i.e., that flip dates do not happen too early, etc.)

• Backwards: User specifies the financial return required by project investors, and the model solves for the amount of revenue required to generate that return Model uses Excel’s “Solver” (simple linear program) to iterate to a

solution; simple macro calls Solver function Other model elements (flip dates, etc.) specified as constraints

within Solver, so less need to monitor them

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Benchmarking Modeling Assumptions: Installed Costs of PA Wind

0

500

1000

1500

2000

2500

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Capacity-Weighted Average Installed Cost Individual Project Installed Cost Polynomial Trend Line

Inst

alle

d P

roje

ct C

ost

(200

8 $/

kW)

Commercial Operation Year

• Installed costs of commercial wind in PA have risen above $2000/kW

• We should not expect community wind to do better (in fact, maybe worse)

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Benchmarking Modeling Assumptions: Capacity Factor of PA Wind

• Most commercial wind projects in PA averaging 25-30% capacity factor


0%

5%

10%

15%

20%

25%

30%

35%

GreenMountain

Somerset Mill Run Waymart Meyersdale LocustRidge

AlleghenyRidge

Casselman

2008 Capacity Factor

Cumulative Capacity Factor20

01-

2008

200

2-20

08

200

2-20

08

200

4-20

08

200

4-20

08

200

7-20

08

200

8 on

ly

200

8 on

lyCap

acity

Fac

tor

(%)

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Benchmarking Modeling Assumptions: Selling Price of PA Wind

• Recent commercial wind projects in PA selling power at $65-$75/MWh


0

10

20

30

40

50

60

70

80

2000COD

2001COD

2001COD

2003COD

2003COD

2006COD

2007COD

2007COD

2008COD

2009COD

2009

Win

d P

ower

Pric

e (2

009

$/M

Wh)

up to

$1

49.5

0/M

Wh

~$20/MWh step up in price from projects built in 2001-2003to those built in 2006-2008

Gre

en M

ount

ain

Som

erse

t

Mill

Run

Way

mar

t

Mey

ersd

ale

Locu

st R

idge

Alle

ghen

y R

idge

Cas

selm

an

For

war

d

Nor

th A

llegh

eny

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Structure Specific Modeling Results

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Policy Analysis:Calculating the Value of the 30% ITC/Grant

Tool: Financial pro forma model that can analyze a community wind project under both the old (PTC) and new (30% ITC or cash grant) incentive regimes and under various financing structures

Value Metric: Levelized 20-year PPA price (or LCOE) required to generate a target after-tax return for relevant investors

Approach: Start with a fully constrained project under the PTC, and relax each individual constraint one by one in transitioning from the PTC to the 30% ITC to the 30% cash grant. Note the impact on the levelized PPA price at each step along the way.

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Policy Analysis:Generic Project Specifications

• COD: January 1, 2011• Nameplate Capacity: 10.5 MW• Installed Cost: ~$2,500/kW ($2,200/kW hard cost)• Capacity Factor: 30% net• O&M Costs: $20/kW-year (fixed) plus $7.50/MWh (variable)• Depreciation: 90% 5-yr MACRS, 5% 15-yr MACRS• Income Tax Rates: 35% federal, 8% state• Debt: 10-yr term, 1.45 minimum DSCR (interest rate varies)• Grants: $500k USDA REAP, $500k state grant ($1m total)• 2 Financing Structures: Strategic Flip and Cooperative LLC• After-Tax IRR Target: 10% (Flip), 15% (Cooperative LLC)

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Conclusions• Policy is everything

• Tax policy is everything

• The details can have huge impact

• Financial creativity is necessary to get a project to fruition

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Thank you

Gwen [email protected]

814-472-2873www.Francis.edu/REC.htmhttp://www.facebook.com/RenewableEnergyCenter

LinkedIn: Community Wind Network

http://www.facebook.com/RenewableEnergyCenter



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