Grid Parity: The Art of Financing Renewable Energy Projects in the U.S.

627 Pages·2014·56.114 MB·English

by  Beck, Gene

Grid Parity
The Art of Financing
Renewable Energy Projects in the U.S.

Grid Parity
The Art of Financing
Renewable Energy Projects in the U.S.
Gene Beck CEM, CLP
Library of Congress Cataloging-in-Publication Data
Beck, Gene
Grid parity : the art of financing renewable energy projects in the U.S. / Gene Beck CEM, CLP.
pages cm
Includes bibliographical references and index.
ISBN 0-88173-734-8 (alk. paper) -- ISBN 0-88173-735-6 (electronic) -- ISBN 978-1-4822-4170-9
(Taylor & Francis distribution : alk. paper) 1. Renewable energy sources--United States--Finance.
2. Renewable energy sources--Government policy--United States. I. Title.
HD9502.U52B43 2014
333.79’4--dc23
2014000210

Grid parity : the art of financing renewable energy projects in the U.S. / by Gene Beck
©2014 by Gene Beck. All rights reserved. No part of this publication may be reproduced or trans-
mitted in any form or by any means, electronic or mechanical, including photocopy, recording, or
any information storage and retrieval system, without permission in writing from the publisher.
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Table of Contents
Chapter 1
Introduction to Renewable Energy Financing 1
Renewable Energy Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Financing Structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
General Project Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Renewable Energy Project Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Project Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Chapter 2
Renewable Technologies 19
Federal Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Chapter 3
Legislative Components 27
Section 1603 Treasury Grant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Section 1705 Loan Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
State Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61
Regulatory Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .67
Internal Revenue Code
Section 45 Energy Tax Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Chapter 4
External Components of the Financial Analysis 67
Other Important External Components For Renewable Energy Projects . . . . . . . . . . . . . . . . 70
Internal Components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
Chapter 5
Internal Components of the Financial Analysis 111
Finance Component Details . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
Future of Financial Reporting and Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174
Credit Decision Components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184
Capital Assets and Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189
Energy Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
Chapter 6
Energy Efficiency Components of the Financial Analysis 195
Energy Efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196
Public Sector Energy Efficiency Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202
Energy Audits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208
Tax Attributes of Energy Efficiency Projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213
Combined Heat and Power (CHP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215
Measurement and Verification (M&V) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 219
Analysis of the Project Components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229
Chapter 7
Fundamental Financial Structuring Techniques and Examples 229
Project Cash Waterfall . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233
Yields . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233
Financial Analysis Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240
Mathematical Equations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242
Project LCOE (levelized cost of energy) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243
v
Software Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246
Data Tools, Sources and Calculators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248
Financial Analysis Structuring Examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251
Administrative, Billing and Asset Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270
Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277
Historical Tax Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 277
Chapter 8
Legal Components 277
Business Entity Structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 284
Business Entity Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289
Project Documentation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291
Environmental Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 301
Environmental Audits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 305
Environmental Contract Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 306
Environmental Attributes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 309
Bankruptcy Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310
Fair Market Value (FMV) Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 313
Product Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 315
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 317
Market Disruption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 322
Subordination, Non-Disturbance and attornment . . . . . . . . . . . . . . . . . . . . . . . . . . . 323
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 324
Project Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 325
Permitting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 326
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 327
History of Carbon Emissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329
Chapter 9
Investing in Climate Change 329
History of Carbon Emissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329
Carbon Capture and Storage (CCS). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 335
Cap-and-trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 336
AB 32—California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 339
RGGI—Northeast US . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 344
Appendix 1
Sample Forms 363
Appendix 2
Software Tool Programs for Building Energy Projects 505
Appendix 3
Financial Modeling Reports 537
Appendix 4
Supporting Material 562
U.S. Renewable Energy Resource Maps (NREL) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 562
Average Retail Price of Electricity to Ultimate Customers by End-Use Sector, by State . . . . . . 565
Summary of Energy Efficiency Tax Inventives in the Energy Policy Act of 2005 . . . . . . . . . . 567
Insurance Requirements for Interconnection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 568
Residential Green and Energy Efficient Appraiser Addendum . . . . . . . . . . . . . . . . . . . . 569
Conversion Tables for Measures and Weights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 572
Sample Energy Audit Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 573
Index 595
vi
Foreword
If you are serious about mastering the skills it takes to succeed in the challenging area of financing for
renewable energy assets, this is the book for you. It truly is the definitive guide for that subject, and I can think
of no better teacher than Gene Beck.
Decades before he was known as a leading expert in renewable energy financing, Gene was already hon-
ing his skills as a finance professional. When solar and wind power, and other forms of renewable energy, be-
gan to transition from a novelty to a serious competitor for conventional energy sources, Gene was there from
the beginning.
In this book, you will get the advantage of a career’s worth of knowledge and experience, as if Gene were
right beside you, coaching you through all there is to know on this subject. And believe me, as someone who
considers Gene at the top in his field of expertise, that kind of insight and guidance will be of tremendous ben-
efit to you.
So, what sets this book apart from other books, or even seminars and classes on the subject? Maybe a good
way to explain what Grid Parity is all about is to point out what it is not. This book is not “financing 101,” and
it is not the bullet-point introduction to the subject that you will get at a weekend seminar. There are plenty of
excellent resources out there to learn about the basics. In this book, Gene goes way beyond the fundamentals
to help professionals who are already in the renewable energy business or who are looking to break into the
business fully understand how the financing and economics of these projects work.
Neither is this book a cursory overview of the subject. It’s a comprehensive, expertly explained, in-depth
study full of real-life examples, text and commentary on pertinent laws and regulations, helpful charts and
graphs, equations and other tools, and much more. Grid Parity will walk you through the financial structures
that are present in the renewable energy market today, provide valuable information on current market prac-
tices, and deepen your understanding of the topic with a number of financial models for these types of assets.
You will find, for example, indispensable financial modeling tips that provide tremendous insight into the
finer points of the economic factors that shape the success of renewable energy projects. These are not trivial
details; they are the subtleties of the process that make the economics work. Building your understanding and
expertise in these financial models can, as a result, help you increase project returns.
In fact, I think of Grid Parity as a textbook for professionals—an indispensable source of information and
guidance on all topics related to renewable energy project financing. It is a resource you will find yourself turn-
ing to again and again.
I think it is important to emphasize that I’m not just a cheerleader for Gene and the prodigious body of
knowledge he has built over his career; I’m also a student. As I have read Grid Parity—and have revisited vari-
ous sections for additional information and explanation—I have found it to be an incredibly valuable source of
information that has increased my understanding of the complex and ever-evolving field of renewable energy
asset financing. I believe you will have the same experience as you read through this outstanding volume and
apply its many lessons to your work.
Ed Feo, JD
COO, Coronal Management, LLC
Retired Co-Chair, Global Project Finance Group, Milbank, Tweed, Hadley & McCloy, LLP
Managing Director, USRG Renewable Finance
Managing Partner, Seaward Road Capital
Mr. Feo is a pioneer in energy development and finance and a respected authority on the energy industry. He leads
an ongoing dialogue on renewable energy by chairing or speaking at top industry conferences. He was named one of the
“Five Most Influential People in Renewable Energy” by Euromoney/Institutional Investor and ranked by Project Finance
magazine in “Deals of the Year” and “Top Legal Advisors” in the renewable energy industry.
Mr. Feo holds a bachelor’s degree from the University of California, Los Angeles, and earned his Juris Doctor degree
from the University of California, Los Angeles-School of Law.
vii
Disclaimer
The information contained in this publication is for general purposes only and is not intended,
and should not be construed, as legal, accounting, or tax advice or opinion provided by the author or
publisher to the reader. This material may not be applicable or suitable for the reader’s specific circum-
stances or needs. Therefore, the information should not be used as a substitute for consultation with
professional accounting, tax, legal or other competent advisors. Please contact your professional advisor
before taking any action based upon this information.
Any tax advice included in this written or electronic communication was not intended or written
to be used, and it cannot be used by a taxpayer, for the purpose of avoiding any penalties that may be
imposed on the taxpayer by any governmental taxing authority or agency.
Tax laws change frequently and therefore references to start and ending dates described in this
book are likely to be modified at any time. However, the historical context and the likelihood of similar
events occurring in the future are realistic and therefore the reader should be aware of the opportuni-
ties and limitations of past tax rules and how they may be applicable in the future to renewable energy
projects.
viii
Preface
THE “QE” FUNCTION
(MONEY RULES)
QE = E+E+E+E
QUANTUM ECONOMICS = ENERGY + ENGINEERING +
EFFICIENCY + ENVIRONMENT
ix