Connecticut Microgrid Program – Overview April 30, 2014

Agenda ▪What is the Connecticut Microgrid Program? ▪CEFIA Overview ▪Financing Challenge for Microgrids ▪Financing Options and Tools

What is the Connecticut Microgrid Program? Department of Energy and Environmental Protection

What is the Connecticut Microgrid Program? The purpose of the Connecticut Microgrid Program is to solicit proposals to build microgrids in order to support critical facilities (as defined by Connecticut General Statutes, Section y, as modified by Public Act , Section 34) during times of electricity outages. The Program was developed in response to the recommendation of the Governor’s Two Storm Panel regarding the use of microgrids as a method for minimizing the impacts to critical facilities associated with emergencies, natural disasters, and other events when these cause the larger electricity grid to lose power.

CEFIA Overview Clean Energy Finance and Investment Authority

Who is CEFIA? Help ensure Connecticut’s energy security and community prosperity by realizing its environmental and economic opportunities through clean energy finance and investments. Support the Governor’s and legislature’s energy strategy to achieve cleaner, cheaper and more reliable sources of energy while creating jobs and supporting local economic development

CEFIA is Connecticut’s “Green Bank” …transitioning programs away from government-funded grants, rebates, and other subsidies, and towards deploying private capital …CEFIA was established in 2011 to develop programs that will leverage private sector capital to create long-term, sustainable financing for energy efficiency and clean energy to support residential, commercial, and industrial sector implementation of energy efficiency and clean energy measures.

CEFIA Structure Finance Statutory & Infrastructure Commercial & Industrial Institutional Investment Bert Hunter EVP and CIO Bryan Garcia President and CEO Residential 8 Legal IT External Relations HR Marketing

Financing Challenges for Microgrids CEFIA + Connecticut Microgrids

Financing Challenge for Microgrids ▪Microgrids are small, self-contained electricity, heat, and/or cooling distribution systems that coordinate and distribute energy supplied from one or more generation sources to a network of one or more users in a spatially defined area. ▪Existing incentives, financing tools, and rate structures for distributed, clean energy resources generally operate on an individual generator, individual customer basis. Microgrids link one or more generators to multiple users. ▪Existing incentives and financing tools for distributed, clean energy resources are designed categorically around customer building types (e.g. municipal/ commercial/ residential). Microgrids serve all customer types simultaneously.

Financing Challenge for Microgrids (cont) ▪Microgrids may confer multiple benefits to both developers and customers, including reduced energy costs, reduced GHG emissions and/or increased energy security and reliability. Some benefits, such as cleaner energy resources or enhanced energy security and reliability, may be achieved only at a cost premium. ▪Financing implies a project will earn a lender a return on investment. Microgrids are challenged where energy savings cannot carry investment and financing costs. ▪Making microgrids economical is a demand and supply side equation. Microgrid customers must in aggregate provide a demand profile that fits the operating profile of the generator(s).

CEFIA’s Role in Financing Microgrids Education / Outreach / Application Evaluation Selection / Documentation ConstructionOperation DEEP Applicant Support Application Administration Technical Feasibility Grants Milestones for Grant Disbursements Performance Reporting CEFIA Financing Support Program and Incentive Overview Financial Viability “Bankability” Financing Agreements EPC Milestones for Loan Disbursements Financial Reporting Distributions

CEFIA’s Role in Financing Microgrids Sources Uses CEFIA Direct Financing $5M Available CEFIA Programs >$100M Available DEEP Grants $15M Available EPC Cost for Generation Assets Balance of System Costs Interconnection Costs Engineering & Design Costs Private Capital

CEFIA Evaluation Criteria

Proforma Requirement (1/2) Sources DEEP grant Upfront utility incentives CEFIA debt Subordinated debt Senior debt Tax equity Developer and / or owner equity Uses Equipment & Labor Design & Engineering Fees Grid & end user integration Siting & Permitting Warranty/Insurance CEFIA will assist in developing a financing plan if desired, does not need be fully “baked”

Proforma Requirement (2/2) Project Costs ▪Ongoing –Debt –O&M –Fuel –Warranty/Insurance –Servicing Project Revenue ▪End users –Direct offset to energy purchases –“Reliable Power” payments ▪Public sources –Federal, state & local incentives –Other grants ▪Regulatory/Energy Markets –Renewable energy credits –Net metering/Virtual net metering –Demand response –Other (i.e. capacity payments, ancillary grid services, etc.) CEFIA seek projects where revenue less cost over time (max. financing period of useful life of equipment) is sufficiently valuable to attract affordable capital needed to build the microgrid

Project Finance ▪Financing strategies How is $$ coming back over time? –ESA/PPA –ESPC –C-PACE –Tax exempt lease purchase –Bonds ▪Risk How sure are the Capital Providers that the $$ will come back over time? –Performance guarantee –Equipment warranties –Other insurance –Operational history of developers, contractors, and operators –Creditworthiness of obligor(s) –PACE lien –Green bank debt, reserves or other credit enhancements

Financing Website  Links to CEFIA Financing Program Pages  Review microgrid financing Frequently Asked Questions  RFQ for Capital Providers  Schedule an appointment to meet with CEFIA about financing opportunities for your microgrid project

CEFIA Contacts Genevieve Sherman, Senior Manager, C-PACE Alexandra Lieberman, Senior Manager, Clean Energy Finance

Appendix

C-PACE Commercial & Industrial Property-Assessed Clean Energy CEFIA Programs

▪Commercial Property Assessed Clean Energy is an innovative financing structure that enables commercial, industrial, and multi-family property owners to access financing for qualified energy upgrades and repay through a benefit assessment on their property tax. Private capital provides 100% upfront, low-cost, long-term funding Repayment through property taxes A senior PACE lien is put on the property and stays regardless of ownership Financing Options & Tools: C-PACE

Benefits: ▪Existing, low cost, long-term financing tool ▪Can finance all costs, including end-user efficiency improvements, DE/microgrid ‘readiness,’ interconnection, and ‘soft costs’. ▪Financing is secured by a lien on the benefitted property (as opposed to an ESA with a customer) and is transferrable regardless of ownership. This provides microgrid developer secure recoupment of fixed costs. Challenges: ▪Each property must be individually assessed ▪Each property must have mortgage lender consent ▪Municipal facilities are not included ▪Qualifying improvements must be permanently affixed

Enabled by Public Act 12-2 (June 2012) ▪Commercial, industrial, multi-family property, & non-profit ▪Requires the consent of the existing mortgage lender ▪Requires SIR>1 ▪Permanently affixed EXCEPT district heating & cooling –Includes generator and pipe infrastructure –Potential for microgrids in FY2014 ▪Enables municipalities to opt-in ▪Enables CEFIA to administer a statewide program

C-PACE Amendment ▪(1) "Energy improvements" means (A) participation in a district heating and cooling system by qualifying commercial real property, …or (D) installation of a solar thermal or geothermal system to service qualifying commercial real property, provided such renovation, retrofit or installation described in subparagraph (B), (C) or (D) of this subdivision is permanently fixed to such qualifying commercial real property; ▪(2) "District heating and cooling system" means a local system consisting of a pipeline or network providing hot water, chilled water or steam from one or more sources to multiple buildings; ▪CEFIA recommended change in language to “ community-based clean energy systems” to include microgrid infrastructure

Potential option: C-PACE “host facility” with power sharing ▪A single qualifying facility hosts the microgrid generator ▪The host facility finances generator using C-PACE, monetizes tax credits, utility incentives, electric and thermal RECs, sales of thermal energy and power. ▪Facilities interconnected to microgrid craft ‘power sharing’ arrangement with host facility around islanding and maintaining of critical loads. 10% 40% 30%

Additional Options CEFIA Programs

Financing Options & Tools: CHP and AD PILOT PROGRAMS The CHP Pilot Program, administered by CEFIA, is a three-year $6 million dollar pilot program to provide grants & loans to CHP projects. The Anaerobic Digestion Program, administered by CEFIA, is an ongoing, $5 million dollar pilot program to provide grants & loans to AD projects. ▪Focus is on financing; potentially via C-PACE. ▪Open RFP; applications accepted on a rolling basis. ▪Cannot be used with LRECs.

Financing Options & Tools: LEAD BY EXAMPLE Lead by Example is an Energy Savings Performance Contracting program for public facilities in the State of Connecticut. ▪Implementation of energy savings measures with no upfront capital ▪The costs of energy savings measures are paid for by future guaranteed savings from utility budget ▪Municipalities can finance projects outside of capital budgets

Lead By Example provides a clear, streamlined, transparent process as well as legal, procurement, and financial confidence ▪Designed to mitigate risk for agencies and municipalities: –payment is contingent on appropriation of funds –vendor’s energy savings guarantee must be ≥ total project costs –vendor pays if there is an energy savings shortfall ▪Pre qualified vendor list, standard contracts, energy technical assistance and financing technical assistance. –Honeywell, Trane, Schneider Electric, Ameresco, ConEdison Solutions, Johnson Controls, NORESCO, Pepco, Siemens Financing Options & Tools: LEAD BY EXAMPLE

Municipalities can finance generators using ESPC CEFIA can provide advice and support on financing options, introductions to capital providers and financial institutions –Tax ‐ exempt municipal lease/loan –Conventional bank financing –Tax ‐ exempt municipal bonds (general obligation, revenue) ▪Potential to bundle microgrids into a single ESPC

Financing Options & Tools: CEFIA Microgrid Pilot CEFIA will be spearheading a Microgrid Pilot Financing Program in 2013 – 2014 for Round 2 participants. Leveraging its existing programs, CEFIA will offer: ▪Advice and support on financing options & preparing applications for CEFIA financing programs (e.g. C-PACE, CHP, Lead By Example) ▪Introductions to capital providers and financial institutions ▪Direct financing support & credit enhancements

Financing Options & Tools: Net Metering Virtual Net Metering ▪A municipal customer identifies a Host Account (behind whose distribution company meter a Class I renewable resource is installed) and designates up to 5 Beneficial Accounts (which must be accounts of the same municipal customer) to whom Virtual Net Metering credits shall be allocated –At the Host Account, during a monthly billing period, the total energy produced is netted against the total energy consumed –Resulting excess kWh produced at Host Account may be used to calculate a credit to offset the generation portion of the bills for the Beneficial Accounts On-Site Net Metering ▪Class I renewables with capacity of 2,000 kW or less and Class III renewables with capacity of 6,500kW or less can benefit from the excess power their onsite facilities produce. –Net excess generation (the amount produced less the total kWh used onsite) during a monthly billing period is carried over to the following month as a kilowatt-hour (kWh) credit until the end of the billing cycle year (March 31). –At the end of the year, the utility pays the customer for any remaining kWh credits at the wholesale rate.

Financing Options & Tools: Renewable Energy Credits ZREC/LREC ▪United Illuminating and Connecticut Light and Power conduct yearly auctions for Solar PV (ZREC) and Fuel Cell (LREC) projects for 15- year per MWh incentive payments, essentially a Feed-in-Tariff –Next round launches April 2014 NEPOOL ▪Regional market for Class I and Class III RECs. The Northeast Power Pool (NEPOOL) is comprised of CT, ME, MA, NH, RI, and VT. –States needing to meet RPS requirements can purchase, and generators can sell RECs into the pool, which NEPOOL Generation Information System (GIS) issues monthly.

Financing Options & Tools: Federal Tax Benefits ITC ▪The Federal Investment Tax Credit allows offset their taxes by taking a 30% credit of the build expenditures for Solar, Fuel Cells, small Wind and Geothermal and 10% for Microturbines and CHP plants –Reducing to 10% for projects placed in service after December 31, 2015 MACRS ▪The Modified Accelerated Cost-Recovery System allows owners of renewable equipment to take accelerated depreciation discounts. –For a solar project, the value of this tax benefit can be roughly 20-30% of the installed cost

Additional Potential Funding: U.S. DOE Energy Storage Program U.S. DOE ▪The U.S. DOE Office of Electricity Energy Storage Program supports state-sponsored electricity storage efforts, including energy storage within microgrids under the CT DEEP Microgrids Program. This support can take various forms: –Technical support (project engineering) –Financial support (project funding) –Performance support (project monitoring and analysis) To support state-sponsored energy storage deployment, the DOE/Sandia energy storage program contracts with Clean Energy States Alliance (CESA). This is accomplished through CESA’s Energy Storage Technology Advancement Partnership (ESTAP). For more information, contact Todd Olinsky-Paul at