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Financial Opportunities and Constraints for Hydropower
Development
Ditch and Reservoir Company Alliance (DARCA) Annual Conference
Doubletree Hotel
Durango, Colorado
February 10, 2010
by: Ron Miller, P.E.
Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution tothe copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 2
Discussion Topics
• Introduction
• Market Drivers
• Site-Specific Issues
• Cash Flow Analysis Example
• Project Feasibility Steps
• Financing Alternatives
Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution tothe copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 3
How Hydro-generation Works
Typical Hydroelectric Dam
Reservoir
IntakePenstock
Generator
Powerhouse
Power Lines
Outflow River
Turbine
Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution tothe copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 4
Hydro-generation Advantages
• Well-understood technology
• Continued technical
improvements
• Reasonable rate of return on
projects
• Hydro energy production
coincides with most summer-peaking utilities’ heaviest demand period
Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution tothe copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 5
Market Drivers
• Existing dams and reservoirs without hydrogeneration capacity� 82,600 dams in U.S. – only 3% generate energy
� DOE estimates 30,000 megawatts of potential energy at 5,677 undeveloped sites, more than half of which already have dams
• Renewable Portfolio Standards (RPS) are driving renewable energy generation with renewable energy credit (REC) payments
• Federal tax incentives
• Low-cost financing alternatives
Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution tothe copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 6
Renewable Portfolio Standards
• Colorado RPS requires 2 largest
utilities to derive 20% of their
total energy sales from renewable
energy sources by 2020
• Municipalities and co-ops must derive 10% of sales by 2020
• Of the 20%, 4% of all renewable energy must come from solar; the remaining 96% can come from hydro, wind, and biomass sources
Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution tothe copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 7
Renewable Portfolio Standards, cont’d.
• Utilities must purchase RECs on a 20-year basis to satisfy RPS compliance
• REC sales are a new revenue source for hydro projects
• Federal legislation is moving to ensure that 10% of the nation's electricity comes from renewable sources by 2012, 25% by 2025
• Federal legislation has already been enacted to provide tax incentives for renewable energy
Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution tothe copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 8
Federal Tax Incentives
• Tax credits in general - project owner must have tax liability; not applicable for tax-exempt, non-profit entities
• Production tax credits (PTC)� Tax credit to offset tax liability on $ for $ basis
� Tax credit, not tax write-off
� Paid to project owner on a $/kilowatt-hour basis as renewable energy is produced
• Investment tax credits (ITC)� 30% tax credit of the renewable energy project
installed capital cost
� Paid to project owner as project first year tax returns filed
Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution tothe copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 9
Site-Specific Issues
Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution tothe copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 10
Site-Specific Issues
• Head & flow rate� Determines size (kilowatts) of generating unit
• Reservoir / watershed / inflow volume� Determines length of generating hours each day,
generating days in month
• Energy generation� Evaluate amount of energy produced under different
hydrologic conditions
• Water release strategy� Follows inflow volume daily
� Align with utility needs
Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution tothe copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 11
Site-Specific Issues, cont’d.
• Distribution / Transmission Line Connection� Single-phase service to existing non-hydrogenerating
dams for SCADA, lighting
� Single-phase distribution line limits energy generation capacity at dam to harness the potential energy from head, flow rate, and size of reservoir
� Upgrade of single-phase to 3-phase service requires additional capital to be expended, but provides opportunity to capture increased energy from project
• Equipment Selection� Frances or Kaplan turbines
� Horizontal or vertical installation
Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution tothe copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 12
Financial Issues
• Project capital requirements� Includes powerhouse, power generating equipment,
distribution upgrades
• Available revenue streams� Sale of energy to utility
� Sale of RECs to utility or other entity
� ITC, PTC for tax-paying entities only
• Summer or winter peaking utility
Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution tothe copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 13
Financial Issues, cont’d.
• Long-term energy sale to utility� Power Purchase Agreement (PPA),
provides project revenue stream and
collateral
• Long term sale of RECs to utility
or other entity� Provides additional revenue stream
for project
• Energy pricing by local utility
Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution tothe copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 14
Energy Pricing
• Flat rate in dollars per metered kilowatt-hour (kWh)
• Blended rate combining the following:� Energy charge in dollars per metered kWh
� Demand charge in dollars per highest or peak kilowatt (kW) demand
Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution tothe copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 15
Cash Flow Analysis Assumptions
• Single-phase distribution service
• 2 MW of installed capacity
• Average hydrologic scenario
• 4% per year inflation
• Loan term of 20 years at 2.5% annual rate
• Revenue from sale of energy and RECs
• Non-tax paying entity is owner
Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution tothe copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 16
Cash Flow Analysis Results
• 100% equity, 0% debt� 20-year after-tax rate of return: 4.2%
� Payback: 15 years
• 20% equity, 80% debt� 20-year after tax rate of return: 13.5%
� Payback: 9 years
• Impact of leveraging with debt� Rate of return triples
� Low cost debt and ability to finance 80% of project capital
Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution tothe copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 17
Cash Flow Analysis ($000) 100% Equity
Project
Year
Revenue From
Sale of Energy
($000)
Revenue From
Sale of RECs
($000)
O & M
Expense
($000)
Insurance
Expense
($000)
Property Tax
Expense
($000)
Cash Flow
($000)
Cumul.
Cash Flow
($000)
0 (6,123) (6,123)
1 - - - -
2 537 74 75 24 26 338 338
3 555 74 78 24 25 354 692
4 574 74 81 24 24 372 1,064
5 594 74 84 24 23 389 1,453
6 615 74 88 24 22 408 1,861
7 637 74 91 24 21 427 2,288
8 659 74 95 24 20 447 2,735
9 683 74 99 24 19 468 3,203
10 707 74 103 24 18 489 3,692
11 733 74 107 24 17 511 4,204
12 759 74 111 24 16 534 4,738
13 786 74 115 24 15 558 5,297
14 815 74 120 24 14 583 5,880
15 844 74 125 24 13 609 6,489
16 875 74 130 24 11 636 7,125
17 907 74 135 24 10 664 7,789
18 941 74 140 24 9 693 8,482
19 975 74 146 24 8 723 9,206
20 1,011 74 152 24 7 754 9,960
Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution tothe copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 18
Cash Flow Analysis ($000)20% Equity / 80% Debt
Project
Year
Revenue From
Sale of Energy
($000)
Revenue From
Sale of RECs
($000)
O & M
Expense
($000)
Insurance
Expense
($000)
Property Tax
Expense ($000)
Loan
Pay.
($000)
Interest
($000)
Cash
Flow
($000)
Cumul.
Cash Flow
($000)
0 (1,225) (1,225)
1 - - - - - - - -
2 463 74 75 24 26 314 122 98 98
3 481 74 78 24 25 314 118 114 212
4 500 74 81 24 24 314 113 131 344
5 520 74 84 24 23 314 108 149 493
6 541 74 88 24 22 314 103 168 661
7 563 74 91 24 21 314 97 187 847
8 585 74 95 24 20 314 92 207 1,054
9 609 74 99 24 19 314 86 228 1,282
10 633 74 103 24 18 314 81 249 1,531
11 658 74 107 24 17 314 75 271 1,802
12 685 74 111 24 16 314 69 294 2,096
13 712 74 115 24 15 314 63 318 2,415
14 741 74 120 24 14 314 56 343 2,758
15 770 74 125 24 13 314 50 369 3,127
16 801 74 130 24 11 314 43 396 3,523
17 833 74 135 24 10 314 36 424 3,947
18 866 74 140 24 9 314 30 453 4,400
19 901 74 146 24 8 314 22 483 4,883
20 937 74 152 24 7 314 15 514 5,397
Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution tothe copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 19
Feasibility Study Steps
• Data collection and review
• Define power potential and estimate energy output
• Develop alternatives
• Assess market potential
• Preliminary cost estimate
• Economic analysis and alternative selection
Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution tothe copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 20
Financing Alternatives
• Colorado Water Conservation Board (CWCB)
• Colorado Water Resources & Power Development Authority (CWRPDA)
Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution tothe copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 21
Colorado Water Conservation Board (CWCB)
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Program Eligibility
Raw water projects only• Reservoirs/dam rehabilitation
• River diversion structures
• Irrigation ditches
• Wells and pipelines
• Water rights acquisitions
• Flood control
• Hydroelectric facilities
Special thanks to CWCB’s Kirk Russell and Anna Mauss for their contributions and slides to this presentation
Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution tothe copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 23
Project Financing Terms
• 90% of total project cost
• $100,000 minimum loan
• FY2009 rates (30-year) *
� Agricultural 2.75%
� Municipal 4.00-5.25%
� Commercial 6.25%
• 1% loan service fee
* reduced if < 20 years
Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution tothe copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 24
Loan Approval Schedule
• Loan request UNDER $10 million
� Accepted 6 times per year
� Approved at CWCB bi-monthly meetings
� Apply by 1st of month (i.e. April 1st for May meeting
� Allow 5 months for loan approval & loan contracting
Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution tothe copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 25
• Loan requests OVER $10 Million� Accepted once a year (Apply by August 1st)
� Loan Approval at November CWCB meeting
� Project included in Annual Construction Fund Bill
� Funding available July 1, with contract in place
Loan Approval Schedule, cont’d.
Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution tothe copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 26
Application Board
Approval
Contracting Design &
Construction
Loan
Repayment
CWCB Loan Program Process
Initial Contact
Establish Deadlines
Application & Loan Feasibility Study Submittal
Staff Review
Board Presentation(Loans over $10M go to Legislature)
Prepare Contract
Contract Signing*
FUNDS AVAILABLE
Progress Payments
SubstantialCompletionInterest Due
Repayment
* With Conservation Plan in Place
Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution tothe copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 27
Loan Feasibility Study
• Prepare by Engineer/consultant and/or Project Sponsor
• Provides documentation of project:
� Need (water supply problem and solution)
� Technical feasibility (selected project alternative)
� Impacts (social and environmental)
� Economic, financial, institutional feasibility
� Financial program – loan repayment capacity and security
CWCB Website: http//cwcb.state.co.us/
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Colorado Water Resources & Power Development Authority (CWRPDA)
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Small Hydropower Loan Program• $10 million of unrestricted funds available
• 5 megawatts or less
• Loan limit of $2 million per governmental agency
• Interest rate: 2% per year
• Term: 20 years
• Eligibility: Colorado cities, towns, counties, water districts,water and sanitation districts, metropolitan districts, water conservancy districts, water conservation districts, irrigation districts, and any enterprise created by the foregoing
• New hydropower facilities (turbines, mechanical and electrical), pipelines, necessary remodel/reconfiguration of the building housing the facilities and transmission lines
Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution tothe copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 30
Loan Program Conditions
• A FERC or BOR exemption or permit is required
• The governmental agency must have a contract to sell or a plan to use within its system the energy produced from the hydropower project
• All required project funds are in place
• Final design and costs are available with construction contract imminent
• Governmental agency must demonstrate an ability to repay the Small Hydropower loan (feasibility study or a financial/cash flow statement)
• Security for the loan (hydropower revenues or utility system revenues) is in place
Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution tothe copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 31
Project Evaluation Funding
• $150,000 (up to $15,000 each project) of matching grant funds for the evaluation and development of small (5 megawatts or less) hydropower projects for 2010
• Applications for the Matching Feasibility Grants are due to the Authority not later than March 19, 2010.
CWRPDA Website: http://www.cwrpda.com/
Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution tothe copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 32
Ron Miller, P.E.
URS Corporation8181 E. Tufts AvenueDenver, CO 80237
Direct: 303-796-4731Cell: 303-475-0775
Contact Information
Ron Miller, P.E.
303-723-5465
303-748-3441 cell
Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution tothe copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 33
Thank You
Questions and Answers