ppa overview_5.10.2010
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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 $36 billion in revenues
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IntroducQon What can solar energy do for organizaQons?
• Save money o Solar energy offsets more expensive u*lity rates during peak hours of
the day… net metering credits
• Hedge energy costs o The “fuel” from sunlight is free unlike tradi*onal fuels such as coal,
natural gas and nuclear… opera*ng costs do not fluctuate over *me
• Predictable opera*ng costs o You know what you are paying for your solar energy kWh from day one
through the life of the system… easier for budget planning
• Improve corporate “green” or sustainable image o The “green revolu*on” is real o Huge marke*ng dollars are being spent by organiza*ons going “green” o Solar allows you to be “green” and save “green” at the same *me
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• 2000 – Solar incen*ves become prolific in CA and some other states soon to follow
• 2000 to 2003 – Solar projects s*ll rela*vely small but growing… banks become more interested as project size increases with aggressive developers
• 2004 – Launch of the early “giants” of solar PPAs who pioneered the model with both customers and the banks behind the transac*ons
• 2007 – Wave of venture backed solar financing start-‐ups hits the US • 2007 to 2008 – Hyper-‐compe**on is rampant… many un-‐bankable deals
• 2009 – Global financial crisis sends large commercial solar project financing into a tailspin… weathering the storm is difficult
• 2010 – Financial markets are sojening again, and PPAs and leases return to the forefront of commercial solar PV systems
• Beyond 2010 – Projects will con*nue to get larger… wholesale PPAs (provider direct to u*lity) will become more common… more strict credit constraints for DG hosts 5
Brief History of RE Finance Timeline
Brief History of RE Finance Global Asset Financing for New Clean Energy Assets ($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
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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
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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
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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
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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
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Focus on PPAs Standard PPA Terms
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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)
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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
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Anatomy of the PPA View from PPA Provider
Solar PPA contract
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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
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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)
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Focus on PPAs JusQficaQon of Annual Escalator
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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
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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
[email protected], email (707) 992-‐3208, direct work (650) 833-‐9008, mobile
Thank you.