presents Renewable Energy Projects: Negotiating Power Purchase Agreements presents Structuring Terms To Meet State and Federal Renewable Power Standards A Live 90-Minute Teleconference/Webinar with Interactive Q&A Today's panel features: John T. W. Mercer, Partner, Mercer Thompson, Atlanta Tom Houston, Senior Counsel, Brownstein Hyatt Farber Schreck, Los Angeles Kristen Thall Peters Partner Cooper White & Cooper San Francisco A Live 90-Minute Teleconference/Webinar with Interactive Q&A Kristen Thall Peters, Partner , Cooper White & Cooper, San Francisco Wednesday, August 4, 2010 The conference begins at: The conference begins at: 1 pm Eastern 12 pm Central 11 am Mountain 10 am Pacific 10 am Pacific You can access the audio portion of the conference on the telephone or by using your computer's speakers. Please refer to the dial in/ log in instructions emailed to registrations.
Transcript
presents
Renewable Energy Projects: Negotiating Power Purchase Agreements
presents
Structuring Terms To Meet State and Federal Renewable Power Standards
A Live 90-Minute Teleconference/Webinar with Interactive Q&AToday's panel features:
John T. W. Mercer, Partner, Mercer Thompson, AtlantaTom Houston, Senior Counsel, Brownstein Hyatt Farber Schreck, Los Angeles
Kristen Thall Peters Partner Cooper White & Cooper San Francisco
A Live 90-Minute Teleconference/Webinar with Interactive Q&A
Kristen Thall Peters, Partner, Cooper White & Cooper, San Francisco
Wednesday, August 4, 2010
The conference begins at:The conference begins at:1 pm Eastern12 pm Central
11 am Mountain10 am Pacific10 am Pacific
You can access the audio portion of the conference on the telephone or by using your computer's speakers.Please refer to the dial in/ log in instructions emailed to registrations.
For CLE purposes, please let us know how many people are listening at your location by y
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R bl E P j tRenewable Energy Projects:Power Purchase Agreements –
St t i T t M t St t d F d l R bl P St d dPRESENTED BY:John T. W. MercerMERCER THOMPSON LLC
Structuring Terms to Meet State and Federal Renewable Power Standards
191 Peachtree Street, NESuite 4410Atlanta, Georgia 30303404.577.4201jtwmercer@mercerthompson com
MERCER THOMPSON LLC
[email protected] Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any tax advice that may be contained in this communication (includingany attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any penalties under the Internal Revenue Code or (ii) promoting, marketingor recommending to another party any transaction(s) or tax-related matter(s) that may be addressed herein .
Copyright 2010 John T. W. Mercer. All rights reserved.
Fundamentals: Role of the PPA (Project Finance 101)
Most Frequently Used to Support Some Form of Project FinancingForm of Project Financing• Debt and Equity• PPA Must be “Financeable”PPA Must be Financeable
Primary Source of Revenue for Most Project Finance StructuresFinance Structures
Critical That PPA (and Revenues) Remain in Place for Contemplated Term of Financing
MERCER THOMPSON LLC5
Place for Contemplated Term of Financing
Fundamentals: Key Issues for Financeable PPAs
Credit of Offtaker Scale of Project Scale of Project
• Utility• Commercial• Residential
Ownership/Sales Structure• Seller – Project Company• Third Party• Joint Ownership Tenancy in Common
MERCER THOMPSON LLC
• Joint Ownership – Tenancy in Common• Options to Purchase
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Fundamentals: Key Issues for Financeable PPAs
Nature of Seller’s ObligationObli ti t ll d li d• Obligation to sell delivered energy
• Capacity/Availability – Applicable only in limited circumstancescircumstances
• Guaranteed energy quantities over a rolling periodQ lifi ti f REC• Qualification for RECs
Nature of Buyer’s Obligation – must take
MERCER THOMPSON LLC
and pay for energy delivered7
Fundamentals: Key Issues for Financeable PPAs
Other Key Renewable PPA Issues• Minimum and maximum delivery and purchase• Minimum and maximum delivery and purchase obligations
• Pricing methodologyg gy• Term/renewals/extensions• Completion schedule and consequences for failure to p qmeet schedule or milestones
• Environmental credits (ownership and allocation)
MERCER THOMPSON LLC• Buyer option(s) to buy facility
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Fundamentals: Key Issues for Financeable PPAs
Other Key Renewable PPA Issues (cont’d)(cont d)
• Regulation and “Reg out” provisions
• Change of lawChange of law
• Access to facility
G id d i i• Grid access and interconnection
• Transmission risk
MERCER THOMPSON LLC
• Defaults10
Fundamentals: Key Issues for Financeable PPAs
Other Key Renewable PPA Issues (cont’d)(cont d)
• Security
• Consent to assignment of PPA and facility• Consent to assignment of PPA and facility
• Step‐in rights
• Force majeure
MERCER THOMPSON LLC11
Fundamentals: Key Issues for Financeable PPAs
Resource Specific Considerations(To be covered in detail in following presentation)(To be covered in detail in following presentation)
• Biomass – capacity payment?
• Wind – stepped down commercial operation /• Wind – stepped down commercial operation / milestones for wind farms
• Solar sun risk on site owner• Solar – sun risk on site owner
• Geothermal – asset/capacity degradation over time
MERCER THOMPSON LLC12
MERCER THOMPSON LLC
M TMERCER THOMPSON LLC is a focused boutique law firm that provides top-tier transactionallegal services to companies in the electric power industry. Founded by former partners of a majorinternational law firm, our “diamond-shaped” structure provides clients with direct access topartner-level attorneys who have, for our entire careers, represented electric power and projectp y , , p p p jcompanies in their most important transactions. We are particularly focused on clean technologyand renewable energy projects, as well as nuclear energy, conventional fossil-fuel andtransmission projects. Our legal expertise includes project finance and development, Departmentf E l t f lif i j t t d it l k t fiof Energy loan guarantees for qualifying energy projects, corporate and capital markets finance, as
well as mergers, sales, acquisitions and joint ventures of power companies and projects.
MERCER THOMPSON LLC191 Peachtree Street NE
MERCER THOMPSON LLC13
191 Peachtree Street, NEAtlanta, Georgia 30303
404.577.4200www.mercerthompson.com
Renewable Energy Presented byThomas HoustonAugust 4 2010
Power Purchase Agreements –Key Provisions
August 4, 2010
y
bhfs.comBrownstein Hyatt Farber Schreck, LLP
Electricity Generation b F l Sby Fuel Source
U.S. TOTAL: 900,000 MWRenewables small butRenewables small but
growingRenewable projects require
more complicated andmore complicated and novel PPAs
bhfs.comBrownstein Hyatt Farber Schreck, LLP 15
Tax Benefits for Renewable Energy Projects
Production Tax Credit (PTC) Investment Tax Credit (ITC)Investment Tax Credit (ITC)Renewable Energy Grant ProgramState and local tax benefits
Note: Uncertainty over tax incentive legislation has caused Boom/Bust cycles for Renewable Energy ProjectsBoom/Bust cycles for Renewable Energy Projects
bhfs.comBrownstein Hyatt Farber Schreck, LLP 16
Production Tax Credit
10 year credit beginning in year project placed in service 2 1¢ per kilowatt hour for wind etc No guaranteed amount2.1¢ per kilowatt hour for wind, etc. No guaranteed amountMust be placed in service by end of 2012 (wind) or
2013 (solar and other renewables)Electricity must be sold to unrelated buyer Limitations on buy outs
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Investment Tax Credit
Credit equal to 30% of cost of renewable facility, payable in year project placed in servicep j pNon-Solar producers can make an irrevocable election to take
ITC in lieu of PTC Immediate benefit more certain but might result in lower rate of Immediate benefit, more certain, but might result in lower rate of
returnMust be placed in service by end of 2017Recapture rules if sold (or change of control) within 5 years
bhfs.comBrownstein Hyatt Farber Schreck, LLP 18
Renewable Energy Grant Program
Can apply to Treasury for direct grant in lieu of ITC 30% of the cost of a renewable facility payable within 60 days of30% of the cost of a renewable facility payable within 60 days of
being placed in serviceMust start construction in 2010 (Legislation pending to extend) Must be placed in service by 2012Must be placed in service by 2012 Impact on depreciation schedules is complicated Biomass (loop and non-loop) only 50% of ITC or Grant Grant generally stays with project owner vs ITC can beGrant generally stays with project owner vs. ITC can be
transferred to holding company or affiliate
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State and Local Tax Benefits
Property tax exemptions, exclusions and creditsState income tax creditsState income tax creditsSales tax exemptions on renewable energy equipmentState financial support
What is it?Developer agrees to provide certain amount of electricity in returnDeveloper agrees to provide certain amount of electricity in return
for payment by utility company Critical document for success of projectDrives ability to attract investors and project financingOne of the first contracts negotiated – usually the first Increasing use of “standard” PUC or Utility PPAsIncreasing use of standard PUC or Utility PPAs
Renewable Energy Project
Developer
EnergyPurchaser
PPA
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Distinguishing Characteristics of Renewable Energy Projects to be addressed in PPAs
Wind & Solar
Intermittent Resource -- not “dispatchable” (exception solar thermal?)thermal?) Incremental Project Size – can be staged and sequenced No fuel supply contracts or pass throughs to consider Customer (roof top solar and small wind) PPAs vs Utility PPAs Customer (roof top solar and small wind) PPAs vs. Utility PPAs
bhfs.comBrownstein Hyatt Farber Schreck, LLP 23
Distinguishing Characteristics of Renewable Energy Projects to be addressed in PPAs cont….
Geothermal
Non – intermittent Resource degrades over time Significant “station servicing” requirements that lower output
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Distinguishing Characteristics of Renewable Energy Projects to be addressed in PPAs cont….
Biomass
Non – intermittent Fuel storage & supply issues (risk is on seller)Fuel storage & supply issues (risk is on seller) Minor “station servicing” requirements that may lower output
bhfs.comBrownstein Hyatt Farber Schreck, LLP 25
Wind & Solar Unique PPA Provisions
Intermittent Power Payments only for energy actually delivered; no capacity paymentsy y gy y p y p y Time of day and seasonal pricing
Output requirements and guarantees Ramp ups, rolling quarterly or annual averages, annual capsp p g q y g p Importance of wind and solar intensity tests
Remote Transmission --Transmission and curtailment issues Significant transmission upgrade or connection costsg g Grid framer for intermittent power or related framing power source. Curtailment issues and transmission instability – who bears the risk
bhfs.comBrownstein Hyatt Farber Schreck, LLP 26
Wind & Solar Unique PPA Provisions cont…
Incremental Project Size Project phasing for larger projects - first wind turbines or PVProject phasing for larger projects first wind turbines or PV
arrays can produce powerWhen is “Commercial Operations Date” (COD)
COD IssuesCOD Issues No COD pre-testing. Therefore post COD guarantees
N F l S l C t t P Th hNo Fuel Supply Contracts or Pass Throughs
bhfs.comBrownstein Hyatt Farber Schreck, LLP 27
Geothermal Unique PPA Provisions
Non – Intermittent Can receive both capacity and actual energy delivered paymentsCan receive both capacity and actual energy delivered payments Annual tests to prove capacity and actual performance levels
Decline in Resource and Power Generation ability must be calculatedcalculated Large Station service requirements that reduce output
bhfs.comBrownstein Hyatt Farber Schreck, LLP 28
Biomass Unique PPA Provisions
Non – Intermittent Can receive both capacity and actual energy delivered paymentsCan receive both capacity and actual energy delivered payments Periodic tests to prove capacity and actual performance levels
Fuel Supply & Storage Issues C l f l l i Complex fuel supply issues Burdensome storage issues Risk of interrupted or reduced fuel supply on the seller
bhfs.comBrownstein Hyatt Farber Schreck, LLP 29
Key PPA Provisions for All Renewable Energy ProjectsRenewable Energy Credits (RECs)
G S C fGoverned by State Law. In CA flow to buyer along with all other environmental credits? Bundled or unbundled – can you sell them separate from the
energy?energy? Affects price paid for energy Ownership can be important to financing project
Ultimate ownership of facility – OptionsPrepayments – Discounted value of energy payments over 20
years (Windy Flats mistake)
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y ( y )
Key PPA Provisions for All Renewable Energy Projects cont Decommissioning
Title to facility Title to facility Removal of facility Ancillary facilities Removal deposit or bondp
Securing Financing – Obtaining the broadest possible rights for lenders including: Notice of default Right to take over project Cure rights for lenders
Force Majeure
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For more information on the Renewable Energy Practice at B t i H tt F b S h kBrownstein Hyatt Farber Schreck see:
For more information contact Thomas Houston at 310 500 4622 or [email protected]
bhfs.comBrownstein Hyatt Farber Schreck, LLP 32
Renewable Energy Projects:Renewable Energy Projects:Renewable Energy Projects: Renewable Energy Projects: Power Purchase AgreementsPower Purchase Agreements
Best Practices for Negotiating PPAsBest Practices for Negotiating PPAs
August 4, 2010August 4, 2010
Kristen Thall Peters, Esquire
Cooper, White & Cooper LLP
201 California Street, 17th Floor 1333 N. California Blvd, Suite 450201 California Street, 17 Floor 1333 N. California Blvd, Suite 450
San Francisco, California 94111 Walnut Creek, California 94596
LAND CONTRACTSLAND CONTRACTSLAND CONTRACTSLAND CONTRACTS
P h & S l AP h & S l A•• Purchase & Sale AgreementPurchase & Sale Agreement•• Site LeaseSite Lease
–– Real property interestReal property interest–– Ability to obtain title insurance/lender securityAbility to obtain title insurance/lender securityAbility to obtain title insurance/lender securityAbility to obtain title insurance/lender security
–– Personal property interestPersonal property interest•• Sublease or sublicenseSublease or sublicense
–– Often used for tax purposesOften used for tax purposes•• Access, ROW and Easement AgreementsAccess, ROW and Easement Agreements
typically nontypically non exclusiveexclusive–– typically nontypically non--exclusiveexclusive–– supplysupply–– operationaloperational
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SUPPLYSUPPLYSUPPLYSUPPLY
•• Solar & Wind are FreeSolar & Wind are Free–– Easement to ensure nonEasement to ensure non--interruptioninterruptionEasement to ensure nonEasement to ensure non interruptioninterruption
•• Lease or LicenseLease or License–– e.g. landfill gas, geothermale.g. landfill gas, geothermal
•• Purchase AgreementPurchase Agreementu c ase g ee e tu c ase g ee e t–– e.g. biomass, digester gase.g. biomass, digester gas
C iC i•• ConstructionConstruction•• DistributionDistribution
–– sending energy directly to utilitysending energy directly to utility–– sending energy via utility’s system to 3P off takersending energy via utility’s system to 3P off taker
•• TermTerm•• Point of Interconnection/AccessPoint of Interconnection/Access//•• Allocation of ResponsibilityAllocation of Responsibility
–– PUC guidelines/tariffPUC guidelines/tariff–– Disconnection of UnitDisconnection of Unit
•• Invoicing & PaymentInvoicing & Payment•• Governing LawGoverning Law
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PERMITSPERMITSPERMITSPERMITS
•• Building PermitsBuilding Permits•• CUPs/LUPsCUPs/LUPs•• CUPs/LUPsCUPs/LUPs•• EnvironmentalEnvironmental
–– Special Disposal RequirementsSpecial Disposal Requirements–– EmissionsEmissions
G t /USTSG t /USTS–– Generator/USTSGenerator/USTS
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STRATEGIES FOR NEGOTIATIONSTRATEGIES FOR NEGOTIATION•• What is the Market for Renewable Energy?What is the Market for Renewable Energy?
–– RPS and other Required StandardsRPS and other Required StandardsGreen Building/LEED CertificationGreen Building/LEED Certification–– Green Building/LEED CertificationGreen Building/LEED Certification
–– Voluntarily GreenVoluntarily Green
•• Initial Stage of Development vs. Established FacilityInitial Stage of Development vs. Established FacilityInitial Stage of Development vs. Established FacilityInitial Stage of Development vs. Established Facility
•• Who is the Off taker?Who is the Off taker?–– IOUIOU–– IOUIOU–– Local power companyLocal power company–– Private UserPrivate User
•• Long Term v. Short Term Long Term v. Short Term -- Guessing Future MarketsGuessing Future Markets–– REC pricesREC prices–– Energy PricesEnergy Pricesgygy
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Renewable Energy Projects:Renewable Energy Projects:Renewable Energy Projects: Renewable Energy Projects: Power Purchase AgreementsPower Purchase Agreements
Best Practices for Negotiating PPAsBest Practices for Negotiating PPAs
August 4, 2010August 4, 2010
Kristen Thall Peters, Esquire
Cooper, White & Cooper LLP
201 California Street, 17th Floor 1333 N. California Blvd, Suite 450201 California Street, 17 Floor 1333 N. California Blvd, Suite 450
San Francisco, California 94111 Walnut Creek, California 94596
