Darin Lowder / Sheri StrailyEnergy & Project Finance

Ballard Spahr Andrews & Ingersoll LLP

Renewable Energy Projects On Existing Properties:Drivers and Obstacles

October 28, 2008

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Who’s Doing On-site Renewables?

• Over 150 MW of solar PV was installed at 25,000 locations in the U.S. in 2007*.

• Kohl’s Department Stores has converted 43 locations to solar power and will add another 85 sites (out of 1,004 stores). Capacity on California stores may total 25 MW.

• Macy’s, which has solar panels on 18 stores, will install them on 40 more by the end of 2008.

• Safeway plans a pilot project to put panels on 23 stores.

• Wal-Mart has installed solar panels on 17 stores or distribution centers as part of a pilot project.

Solar panels installed on a Kohl's Department store.

*U.S. Solar Market Trends 2007, August 2008, IREC. This figure

includes an 8.3 MW system installed in Alamosa, Colorado.

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Examples of Solar PV Applications

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Challenges to On-site Renewable Energy

• Project Drivers / Cost

• Site Owner Real Estate Issues

– Liability / Ownership / Space / Security

• Local Regulatory Issues

– Definition of Public Utility

– Third-party ownership allowed?

• Navigating Local & Federal Incentives

– Eligibility for multiple incentives

• Financing Options

– Public / Private

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Renewable Energy Project Drivers

• Large, predictable energy needs

– High electricity prices from utility providers

– High natural gas prices

• Federal tax incentives (value is dependent on large tax appetite)

• State regulatory structure

– Renewable portfolio standards (RPS)

• Cost of money

– Creditworthiness of power purchaser for financing

• Geographical Factors

– Substantial rooftop space, parking lots, or open fields for on-site, distributed generation projects (solar, biomass)

– solar radiation, proximity to biomass supplies, wind resources

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Is Renewable Energy Too Expensive?

• Solar PV systems have a high capital cost but no fuel cost, almost zero operating cost, and a life of 20 – 30 years

• Many U.S. Companies installing solar electric are beating the price of electricity from the local utility, and sometimes selling power back to the utility

• Third parties with appetite for tax credits provide the capital (e.g., Wells Fargo, GE, Morgan Stanley)

• Wind energy is nearly cost-competitive with non-renewable energy alternatives (gas, peak power)

• Biomass can provide cost-effective power if fuel source is affordable, in close proximity

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Electricity Consumption/Costs

9 centsColorado

14 centsNew Jersey

28 centsHawaii

10 centsU.S. Average

19-20 centsLos Angeles, CA*

Cost / kWhState

Average Commercial Electricity Costs

Source: U.S. Department of Energy, May 2008*Southern California Edison Tariff, 2008

• Solar power results in electric power rate savings attributed to reductions in demand

charges (peak power capacity charges) in addition to displaced power usage.

• One proposed solar power project at an industrial site in Northern California was estimated to displace extremely expensive power ($0.32/kWh utility power cost displaced during the time of day of expected solar project output).

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Real Estate Owner Concerns in Solar PV Deal

• Site Lease vs. Site License

• Zoning

• Building Code

• Solar Easements

• Private property restrictions

• Approvals from lenders

• Sufficient space

• Security measures/theft and vandalism prevention

• Liability / Insurance

• Structural Engineering / Roofing Warranties

• Appearance/Esthetics

• Environmental Attributes

• Promotional Rights

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Local Regulatory Issues

• The sale of electricity is regulated at both the federal and state level

• The definition of a public utility varies among states

– Renewable power sales may inadvertently result in public utilitydesignation

• Interconnection and net metering issues

• States or localities may have restrictions on:

– Ownership or sale of RECs separate from electricity

– Executing site leases for renewable facilities on public property

– Third-party ownership of renewable facilities

– Entering into long-term power purchase agreements (PPAs)

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Top States for Solar PV / Solar Hot Water Projects

Solar Hot Water

Solar PV

Solar PV & Hot Water

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State Goal

☼ PA: 18%** by 2020

☼ NJ: 22.5% by 2021

CT: 23% by 2020

MA: 15% by 2020 +1% annual increase

(Class I Renewables)

WI: requirement varies by

utility; 10% by 2015 goal

IA: 105 MW

MN: 25% by 2025(Xcel: 30% by 2020)

TX: 5,880 MW by 2015

☼ AZ: 15% by 2025

CA: 20% by 2010

☼ *NV: 20% by 2015

ME: 30% by 200010% by 2017 - new RE

State RPSHI: 20% by 2020

RI: 16% by 2020

☼ CO: 20% by 2020 (IOUs)

*10% by 2020 (co-ops & large munis)

☼ DC: 11% by 2022

☼ NY: 24% by 2013

MT: 15% by 2015

IL: 25% by 2025

VT: (1) RE meets any increase in retail sales by 2012; (2) 20% by 2017

Solar water heating eligible

*WA: 15% by 2020

☼ MD: 20% by 2022

☼ NH: 23.8% in 2025

OR: 25% by 2025 (large utilities)5% - 10% by 2025 (smaller utilities)

*VA: 12% by 2022

MO: 11% by 2020

☼ *DE: 20% by 2019

☼ NM: 20% by 2020 (IOUs)

10% by 2020 (co-ops)

☼ NC: 12.5% by 2021 (IOUs)

10% by 2018 (co-ops & munis)

ND: 10% by 2015

SD: 10% by 2015

*UT: 20% by 2025

☼ OH: 25%** by 2025

☼Minimum solar or customer-sited RE requirement

* Increased credit for solar or customer-sited RE

**Includes separate tier of non-renewable “alternative” energy resources

DSIRE: www.dsireusa.org August 2008

Renewable Portfolio Standards

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Colorado Renewable / Solar Incentives

1. Colorado Renewable Energy Standard

a) Renewable energy, recycled energy or RECs of 5% by 2008 up to 20% in 2020

b) Specific solar electric and on-site solar requirement

c) Extra credit given for Colorado-based generation

2. Rebates provided by utilities (recovered through rates)

a) For small & medium systems, rebates are equal to about 20-35% of total costs

3. Property Tax / Sales Tax Exemptions

4. Other Local Initiatives

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Sample of Ownership / Financing Options

Public Ownership (tax-preferred financing)1. Low-interest tax-exempt financing available if eligible

2. Zero-interest rate Clean Renewable Energy Bonds (CREBs) financing under IRS allocation

Third-party Ownership (private owner utilizes tax benefits)

1. Energy user signs power purchase agreement (PPA)

2. Financing pre-paid energy contracts with tax-exempt financing

3. Other tax credits: New Markets Tax Credit (encourages investment in low-income areas), Low-Income Housing Tax Credit

4. Direct subsidies, preferred loans, revolving funds

Combination of Public and Private Ownership Options

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Parties to On-site Renewable Energy Projects

1. Building Owner

2. Building Tenant

3. System Developer

4. System Supplier / Installer

5. PV System Operator

6. PV System Owner

7. Power Purchaser

8. Lenders

9. Tax Investors

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Possible Roles for Various Parties

Parties Building Owner Building Tenant

System Developer

Other Parties

Possible Roles

System Developer / Operator

System Developer / Operator

System Developer / Operator

Lenders

System Owner

System Owner

Tax Investors

PV Site Landlord PV Site Landlord

Power Purchaser Power Purchaser

Other Power Purchaser

Tax Investor Tax Investor Tax Investor System Supplier / Installer

Building tenant could be system developer and/or owner rather than building owner if lease terms allow tenant use of rooftop for PV system. Tax provisions confer benefits on the system owner, not necessarily the owner of the real property on which the system resides.

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Agreements underlying a Solar PV Deal

• Cost (increases), term & liability caps• Operator easily replaceable?

• System Owner• Operator

Operation & Maintenance Agreement

Agreement Parties Key Issues

Solar Power Purchase Agreement

• Power Provider• Power Purchaser

• Solar easements (insolation)• Permits & rebate approvals, etc.• Ownership of environmental attributes• Promotional rights & system physical security

Site Lease for PV System

• PV Site Landlord• PV Site Tenant

• Rooftop rights / liability• Equipment liability

System Purchase Agreement / Construction Agreement

• System Owner• System Supplier

• Delivery date• Geographical site of project• Design-build or EPC

Tax Investor Equity Agreement

• Tax Investor• System Developer• System Owner• Other Investors

• Deal structure (leveraged lease, flip structure)• Terms of the deal (ownership percentage, etc)

Financing Documents • Lender• Borrower(s)

• General market liquidity issues• Power Purchaser credit risk• Hardware, regulatory risk