Deb Doncaster, Community Power Fund Thomas Haubenreisser, Community Power Capital July 18, 2012 Financing Ontario’s Community Power Co-Operatives: Addressing the Market Gaps

2 Executive Summary Community power has been identified as a priority by the Ontario Government because of the increased economic, social, and political benefits that come from community ownership of renewable energy resources. The Minister of Energy’s most recent directive (July 11, 2012) to the OPA prioritizes Aboriginal/community participation by allocating a “capacity set-aside” for projects that have 50% or more community participation. The minister’s directive has the potential to create up to 100MW of renewable energy projects sponsored by Aboriginal/community proponents by 2015 (based on 10% of the projected existing capacity of 1,000MW). Delivering on this initiative will require up to $500 mil. in project financing. All renewable energy projects have three distinct financing phases. Phase 1, which consists of feasibility and project development phase is financed, in part, by the Community Energy Partnership Program and enables community group to secure its FIT contract. Phase 2 requires short-term financing for project construction and is needed once a community is authorized by OPA to construct the project. Phase 3 represents the debt financing for the project (i.e., non-community equity ownership of the project) and requires long-term financing. Based on a detailed review of the market two financing gaps are encountered by projects after receiving the FIT contract: Phase 2 - availability of short-term financing to bring a project to commercial operation; Phase 3 - availability of appropriate long-term debt financing once a project is operational. Addressing the Financing GAPS Priority 1 Need: Short–term financing for project construction Proposed Solution: Community Power Capital Loan Fund Community Power Capital (CPC), a bridge loan fund that provides financing until the renewable energy co-operative secures permanent financing from its members and/or long-term debt lender, would finance construction activities to bring a project to commercial operation. Loan capital would be sourced by CPC from private investors but would also require a $500,000 operating grant. Priority 2 Need: Long-term financing with loan features that fit the market requirements Proposed Solution for Non-Profit Renewable Energy Co-operatives: Financing through Infrastructure Ontario Loan Program A policy solution for Ontario would be to open the eligibility of the Infrastructure Ontario Loan Program to community power projects that offer a public benefit (i.e. not-profit renewable energy co-operatives).

3 Community Renewable Energy – Policy Priority for Ontario Community power has been identified as a priority by the Ontario Government because of the increased economic, social, and political benefits that come from community ownership of renewable energy resources. When the Ontario government introduced the Green Energy Act in May 2009 it incorporated legislative changes and related programs to support the development of community-based renewable energy projects. Ontario introduced several community-based programs designed to advance “community” owned projects such as the community adder in the Feed-In-Tariff (FIT 1.0) program; the Community Energy Partnerships Program as well as amendments to the Co-operative Corporations Act that make it possible for renewable energy co-operatives to raise capital from community members to finance projects. The Minister of Energy’s most recent directive to the OPA for FIT 2.0 builds on the initial support and encourages community and aboriginal participation in renewable energy projects by: Clearly defining the scope of “community projects” as renewable energy co-operatives with 50 or more local property owners Allocating a “capacity set-aside” for projects that have at least 50% aboriginal/community equity ownership; Maintaining the price adder for projects that have 50% or more community participation; Providing a points system that encourages community projects to participate as joint venture partners with commercial developers; Providing FIT application prioritization process for projects that include any form of aboriginal/community ownership. Infrastructure Ontario As outlined in Ontario’s 2012 March budget, Ontario Infrastructure is exploring opportunities to establish partnerships with non-profit organizations in sectors where Infrastructure Ontario financing expertise can be strategically deployed and leveraged to advance the province’s priorities. As a lender for renewable energy projects for municipal energy corporations, Infrastructure Ontario is familiar with renewable energy sector and exploratory discussions commenced with the renewable energy co-operative sector to determine its financing challenges and needs.

4 Financing Phases for Community Power Projects Community Power projects have three distinct financing phases that are aligned with different phases of a renewable energy project. Phase 1, which consists of feasibility and project development phase is financed, in part, by the Community Energy Partnership Program. This phase allows a community group to complete all the preparatory work (site control, co-operative formation and incorporation, business plan) before the FIT application and necessary business requirements (e.g., supplier agreements, connectivity assessments, environmental assessments) after the FIT application to the point where the project can apply for Notice to Proceed (NTP). In order to construct a renewable energy project, all FIT projects must demonstrate equity and debt financing at the NTP stage to receive approval from Ontario Power Authority. All financing including equity/community ownership, construction financing and debt financing must be arranged for a project. Phase 2 requires short-term financing for project construction and is needed once a community is authorized by OPA to construct the project. This phase of the project can be financed by private investors, co-operative members, bridge loan financiers (e.g., Community Power Capital), or long-term debt lenders that also provide construction/project financing. Phase 3 is long-term financing and represents the debt financing for the project. This amount could represent up to 70% of project and is determined by the amount of equity or community investment in a project. Phase 1 – Project Feasibility and Planning Community Energy Partner Program Founders capital Phase 2 - Construction Financial Institution – Bridge Financing Community Power Capital Co-Operative Members Phase 3 – Commercial Operations Long-Term Debt Lender Co-Operative Members

5 Renewable Energy Co-operative Projects: Financing Requirements Notwithstanding the Ontario government’s policy support for community projects there are ONLY 8 renewable energy co-operatives incorporated in Ontario (incorporated as either for profit or non-profit co-operatives). The only renewable energy co-operative with a project in commercial operation is SolarShare (incorporated as a non-profit). The SINGLE biggest challenge for a renewable energy co-operatives is securing the capital for all three phases of a project. The following table profiles: Co-operative projects currently under development that requiring financing; Financing requirements of projects in the various stages of development (phase 1, phase 2; phase 3); Minimum co-operative member equity/investment required for each project and corresponding long-term debt required.

6 Financing GAPS for Community Power Projects TWO financing gaps limit Ontario to fully realize its policy objective of community owned renewable energy co-operatives. GAP 1: Phase 2 – Construction Financing Renewable energy projects are capital intensive projects requiring a significant amount of capital to become operational. Community projects with FIT contracts may start raising community investment once a co-operative has been incorporated. However the co- operative’s ability to raise capital is severely limited due to the following market place challenges: LIMITED COMMUNITY CAPITAL - Due to regulatory requirements a co-operative is NOT allowed to raise significant member capital (limited to $1,000 per member) until such time that the co-operative has a receipted offering statement from FSCO (Financial Services Commission of Ontario). TIMING - Marketplace experience indicates that a co-operatives can anticipate a month due diligence review from FSCO before an offering statement is receipted (by which time the co-operative may actually lose its FIT application under proposed FIT 2.0 rules for rooftop solar projects. This delay will results in significantly higher carrying costs if private capital is being used to finance the operations; BRIDGE FINANCING - The challenge for co-operatives is to access a bridge loan from a financial institution or lender without the required member equity and/or collateral. Proposed Solution: Community Power Capital Loan Fund Community Power Capital (CPC), a bridge loan fund that provides financing until the renewable energy co-operative secures permanent financing from its members and/or long-term debt lender, would finance construction activities to bring a project to commercial operation. Loan capital would be sourced by CPC from private investors but would also require a $500,000 operating grant.

7 Financing GAPS for Community Power Projects GAP 2: Phase 3 – Long-Term Debt Financing SolarShare, Ontario’s first non-profit renewable energy co-operative, has over 600kW of community owned renewable energy projects in operation (Q3/ 2011) and more than 250 co-operative members. SolarShare secured phase 2 construction financing of $3.8 mil. from private investors. SolarShare is currently seeking long-term debt financing and raising co-operative memberships to replace its bridge loan financing. SolarShare’s experience in securing long-term debt reveals the challenges renewable energy co-operatives will face even if they have fully operational projects. Market barriers include: – TIMING – SolarShare required approximately 12 months to source a lender with the terms and conditions that meet the financing requirements of the lender and the needs of SolarShare. SolarShare’s public offering statement was submitted to FSCO in March 2011 and as a of July 2012 FSCO has not yet provided a receipted offering statement which limits member investment in SolarShare bonds to $1,000 per member. As a consequence of these time delays private bridge loan lenders were required to accept lower rates to ensure SolarShare projects can continue to meet its membership obligations. – LONG-TERM FIX RATE/FIXED TERM LOAN PRODUCT - A critical success factor for renewable energy projects is matching the debt term to the asset life. Currently, Canadian banks and credit unions do not offer term loans longer than 7 years (usually only 5 years). A short-term loan product creates significant re-financing risk for community power projects. – NON-RECOURSE FINANCING – Co-operative projects have no financial history and require non-recourse debt (offered to commercial developers). Currently, Canadian banks and credit unions do not offer non-recourse lending and only lend to a corporate balance sheet or when additional collateral or financial guarantees are provided. – MARKET PLACE LIMITATIONS - Unlike their private-sector counterparts, renewable energy co-operatives cannot borrow from international banks, specialized lenders, or life insurance companies because: (1) the loan amounts are often too small to be considered, (2) the few lenders that offer these sizes of loans do not offer construction financing, which is needed for NTP, or (3) the due diligence and placement fees are excessive relative the loan amounts, which makes the effect interest rates too high and the project unviable. – LIMITATIONS FOR MUNICIPALITY/COMMUNITY COLLABORATION - Community power groups face difficulty forming partnerships with institutions who are eligible for the Infrastructure Ontario Loan Program (IOLP). For example, if a non-profit renewable energy co-operative partners with a local municipality for 50% ownership of a renewable energy project; the municipality can access the IOLP for its portion of the asset, but the community group cannot access the IOLP, nor is it able to find a second lender that will finance the community’s 50% ownership.

8 Unique Challenges Co-operatives Experience That Impact Debt Financing Unlike private sector renewable developers, community co-operatives have significantly HIGHER operating costs. In addition to ongoing project costs, renewable energy co-operatives must account for: ANNUAL FIXED overhead costs associated with the renewable energy co-operative (e.g., director insurance, accounting fees, legal fees, banking fees, share administration fees, member communication fees, AGM costs etc) estimated to be $25,000 per annum per 1,000 co-op members; and VARIABLE marketing costs associated with acquiring member equity (estimated to be 2-5% of a project’s total cost). These additional costs impact renewable co-operatives with smaller projects to a greater extent than those with larger projects; and implies that renewable energy co-operatives, like commercial developer counterparts, need significant scale to be successful. These added costs further reduce a co-operative’s ability to secure long-term debt financing since the co-operative may not have enough cash-flow to meet the debt service ratios (e.g., 1.50) for some lenders. Non-profit co-operatives carry an added cost burden since they must also incorporate fixed interest payment costs associated with the issuance of their bonds (sub-ordinate to long-term debit) that act as equity for the projects. These member debt obligations constrain the co-operative’s financial flexibility. The community adder for a renewable co-operative associated with FIT 2.0 is 1¢ per Kwh, regardless of project size or technology (with the exception of solar rooftop where no adder is offered). The adder does not sufficiently cover the added variable and fixed costs incurred by renewable energy co-operatives.

9 Financing Options in the Market The attached table profiles financing available in the market. While many financing options “appear” to be available, renewable energy co-operatives are unable find a lender that meets the financing needs of the community market (e.g., offer both construction and debt financing; finance non-profit co-operatives without collateral; long-term lending products). Market Observations: Canadian banks have the greatest selection of commercial lending product options (fixed rate/fixed term, prime based loans, lease financing); however their offerings are designed to service the needs of their existing commercial relationships. Banks and credit unions do not offer non-recourse lending; longer-term loans nor are they interested in financing renewable energy co-operatives. The most attractive source of financing comes from long-term debt lenders who specialize in renewable energy financing. In many cases they are Canadian insurance companies or subsidiaries of foreign banks with experience in renewable energy financing and require transactions to be of significant size. Arrangement fees, commitment fees, transaction fees, legal fees, engineering fees associated with securing debt financing can be significant; making the terms unattractive for smaller transactions. Conclusion/Implications Debt financing options are very limited for smaller projects (<$2.0 million); where the effective interest rate could be 8% when fees are included. Alternative financing is required for smaller projects as well as a bridge financing program that provides construction financing to access the lowest cost debt financing.

10 Policy Solution – Infrastructure Ontario Loan Program (IOLP) Opening the eligibility of the Infrastructure Ontario Loan Program to community power projects that offer a public benefit (i.e. not-for-profit co-operatives) would be an option that offers the following benefits: The current government, through Open for Business, has already committed to expanding the eligibility of the IOLP to include sub-sectors of the not-for-profit sector. Access to the IOLP will enable partnerships between institutions (e.g., municipalities) and community groups. The IOLP address all of the gaps in the marketplace faced by community power groups (term lengths, due diligence fees, loan sizes, etc) IOLP already has a track record of lending to renewable energy projects IOLP is equipped with all the of expertise and resources necessary to undertake the due diligence Potential Impact on IOLP The Ontario Ministry of Energy FIT review (March 2012) proposed that the Province should reserve a minimum of 10 per cent of the remaining FIT contract capacity for community and Aboriginal projects. Based on a technology mix profiled in Table 1 it is anticipated that the community/aboriginal sector could represent up to 100 MW or $476 mil. in renewable energy projects (assumes total capacity for all FIT projects is 1,0000 MW). Table 2 profiles the total long-term financing requirements on IOLP (assuming projects require 70% debt) for different levels of non-profit concentration of the total project mix. The maximum IOLP requirement would be approximately $333mil. and would occur if 100% of the community/aboriginal projects were non-profit renewable energy co-operatives.