1. Session 24 (R) Utility Scale Solar Development Financing Utility PV April 06, 2014

2. Learning Outcomes A review of the financing options for utility- scale PV 2

3. Value to participants A review of the complicated financing approaches to utility scale PV 3

4. Grid-Connected Utility-Scale PV Systems Federal Economic Recovery Policies 1.The Energy Policy Act of 2005 increased the investment tax credit (ITC) for solar energy systems from 10% to 30% of eligible solar property. 2.The Emergency Economic Stabilization Act of 2008 (EESA) extended the 30% ITC for solar and other qualifying renewable technologies through December 31, 2016. EESA expanded the ITC use by making it available to public utilities (investor-owned utilities). 3.The American Recovery and Reinvestment Act (ARRA), passed in February 2009, further expanded the availability and usability of various tax credits, depreciation opportunities, loan guarantees, and other mechanisms designed to encourage private investment in renewable energy and energy efficiency projects. Specifically, the Recovery Act enabled ITC-eligible projects to receive a grant of equivalent value in lieu of the tax credit. 4.The Consolidated Appropriations Act of 2015 extended the ITC at 30% through 2019, ramping down incrementally through 2021, and to remain at 10 percent permanently beginning in 2022 4

5. Utility Scale PV Systems Section 1603 – Payments in lieu of Tax Credits http://www.seia.org/policy/finance-tax/1603- treasury-program 5

6. Utility Scale PV Systems Financing Issues Resources A.Fong and J.Tippett, Project Development in the Solar Industry, CRC Press, 2013, Chapter 11 (M.Mendelsohn) NREL report (2012a), Federal and State Structures to Support Financing Utility-Scale Solar Projects and the Business Models Designed to Utilize Them http://www.nrel.gov/docs/fy12osti/48685.pdf NREL report (2012b), The Impact of Financial Structure on the Cost of Solar Energy http://www.nrel.gov/docs/fy12osti/53086.pdf USPREF white paper (2011), Tax Credits, Tax Equity, and Alternatives for Clean Energy Financing http://www.uspref.org/white-papers/23-estimate-of-renewable- energy-jobs-created-by-section-1603-grant-2 6

7. Grid-Connected Utility-Scale PV Systems Financial Capital to develop utility scale PV comes in three primary types Debt Banks and other public sources Lowest-cost source of capital Not easily obtained and lenders require higher yield, debt service coverage ratios, or shorter terms In 2011, MidAmerican Energy raised $1.3 billion with debt financing for the Topaz solar facility, without government guarantees or credit enhancements 7

8. Grid-Connected Utility-Scale PV Systems Financial Capital to develop utility scale PV comes in three primary types, cont. Equity Provided by private sources, developers “Mezzanine” finance Tax equity – used to monetize tax benefits 8

9. Grid-Connected Utility-Scale PV Systems Mendelsohn’s classification (F&T, ch11) 9

10. Grid-Connected Utility-Scale PV Systems Specific Financing Structures 1.Single owner (balance sheet finance) 2.Partnership flip 3.Leases, including sale-leaseback and inverted lease 1.Utility prepay 10

11. Grid-Connected Utility-Scale PV Systems Single Owner Single owner finance represents the direct investment by a developer into a project asset using developing entity’s general source of funds, or balance sheet. This is different from “project finance” where there is limited liability to the developer because the investment and cash flow are specific to the project Utility-scale solar projects can be balance-sheet financed in one of two ways: (1) utility-owned generation and (2) developer balance sheet. 11

12. Grid-Connected Utility-Scale PV Systems Utility-Owned Generation 12

13. Grid-Connected Utility-Scale PV Systems Utility-Owned Generation 1.Utilities can directly finance, own, and operate solar energy projects a.PG&E, SCE do this through the CA Solar Power Initiative. Investments recovered through base rates 2.Utilities can invest through developer subsidiaries or affiliates. a.MidAmerican Energy purchased Topaz and 49% of Agua Caliente 13

14. Grid-Connected Utility-Scale PV Systems Utility-Owned Generation 3.Utilities can use ratepayer tax appetite to support investment by a third party. a.SDG&E invested tax equity into the Rim Rock Wind facility located in northern Montana. SDG&E purchases the energy and RECs, although the energy will not be delivered to the utility 4.Utilities can invest shareholder tax appetite into a third-party project. a.Subsidiaries of PG&E have invested tax equity in SolarCity and SunRun, enabling these entities to develop residential and commercial solar systems. The funds were provided purely as shareholder funds and were not incorporated in rates. 14

15. Grid-Connected Utility-Scale PV Systems Partnership Flip The project developer partners with a tax equity investor to fully use a project’s tax benefits. In the leveraged partnership flip, where capital is provided as equity and debt, the flip structure is generally designed to provide the tax equity investor a pre-negotiated return in a set number of years. After that design goal is met, the annual stream of benefits (including tax benefits and cash) is reallocated, or “flips”, to the sponsor to reward the risk taken and work invested. There is another version called an all-equity partnership flip 15

16. Grid-Connected Utility-Scale PV Systems Partnership Flip 16

17. Grid-Connected Utility-Scale PV Systems Partnership Flip – Numerical Example http://greenzu.com/solar-tax-equity-investor- returns 17

18. Grid-Connected Utility-Scale PV Systems Sale-Leaseback In sale-leaseback financing, a project developer sells the project assets for cash and simultaneously signs a long- term lease with the investor. The financial transaction is accomplished by conveying the title of the asset, at an agreed upon value, to an investor in exchange for a lump-sum payment to the developer. The developer then makes lease payments to the investor in exchange for the cash injection. The developer, in turn, arranges a PPA with the power purchaser, which becomes the primary revenue stream used to pay the lease payments. The developer (the lessee in this structure) is obligated to pay a fixed rent to the investor (the lessor) for the term of the lease regardless of how the system performs or if force majeure events occur. 18

19. Grid-Connected Utility-Scale PV Systems Sale-Leaseback 19

20. Grid-Connected Utility-Scale PV Systems Utility Prepay Utility prepay (sometimes referred to as hybrid financing) uses a utility’s low-cost capital to directly finance a renewable energy project Under the structure, a utility will prepay for the energy to be delivered under a contract. In turn, the prepayment provides a massive down payment enabling the termination of the construction financing debt The utility indirectly applies its access to low-cost capital to finance the facility and receives beneficially priced power in return 20

21. Grid-Connected Utility-Scale PV Systems Utility Prepay 21

22. Grid-Connected Utility-Scale PV Systems Final Thoughts To take full advantage of depreciation benefits and other tax incentives, the industry relies on complex financial arrangements, which include various forms of partnerships and lease structures These financial arrangements are designed to allocate risk and reward among the developer and a specialized tax equity investor that can specifically take advantage of the various tax incentives made available at the federal and state level The perceived risk of utility-scale solar projects is still quite high and market acceptance remains elusive in this era of tight credit markets. For the immediate future, utility-scale solar development will remain dependent on the array of government incentives designed to support project financing This will likely be true until solar technologies can provide energy at grid-parity (i.e., on par financially with competing technologies) 22