Project Finance Trends Power Purchase Agreement Basics German American Business Association Cleantech Financing for the Future November 10, 2009 PL31677 Fred Greguras Palo Alto Office Global Renewable Energy Team Maria Cull - London Steve Rhyne – North Carolina Yujing Shu – BeijingJames Chen – TaipeiJames O’Hare - Boston Ivan Chiang – ShanghaiChoo Lye Tan – Hong KongDavid Brown – Austin Kevin Murphy – SingaporePallavi Mehta Wahi – IndiaMark Fleisher - Miami Paul de Cordova – DubaiOwen Waft – LondonTimothy Weston - Harrisburg Christian Hullmann – BerlinEric Freedman – SeattleKevin Burnett - Portland Dirk Michels - Palo AltoFred Greguras - Palo AltoElizabeth Thomas - Seattle

1 Project Finance Basics (I)  Deployment of proven commercial technology rather than development of technology  Independent development of 2 MW rooftop solar project for a large business campus in Southern California. Campus owner to buy the electricity under a power purchase agreement (PPA) for 20 years.  Project finance is having adequate project revenue streams (plus equity) to cover project costs plus an acceptable ROI for an investor(s)  Developer with proven track record of execution  Product deployed – proven commercial technology  Creditworthy offtakers (customer that buys the electricity)  Most difficult issue for commercial distributed solar – credit level must be investment grade or near investment grade  Regulated utilities

2 Project Finance Basics (II)  Financing model-how does the math work?  Project startup and recurring (O&M) costs vs. sufficiency of revenue and equity investment  Project developer fees  Debt service  Revenue Sources  Stimulus incentives, PPA payments, PBI rebate  Feed-in-tariff, Renewable Energy Certificates (RECs)  Financeability (bankability) is dependent on predictability of receiving the revenues and benefits. Greater the certainty the lower the financing risk  Bottom line for making the math work is that some equity investment is likely needed. Debt coverage and 30% cash grant are not likely sufficient

3 PPA Basics  No standard PPA; each has to be carefully reviewed for financeability  Agreement terms must have only a remote risk of non-payment to provide predictability for investors who may have different risk tolerance levels.  Any possible price volatility is an investor concern  Starting point for financeability is creditworthiness of the offtaker.  Price dependent on characteristics and location of offtaker  Wholesale vs. retail (utility or distributed commercial)  Feed in tariff (paid by utility)  Term – years; years for utility projects

4 Federal Cash Grant in Lieu of Investment Tax Credits  30% cash as opposed to investment tax credit available in  Continuing track record of payout (over $1B) is starting to provide some predictability for financeability for project finance.  Payment is to be made within 60 days after the later of when a complete application is received or the project is placed in service.  Applications may be submitted as soon as a facility is under construction. This should be done in order to receive the fastest payment.  “Under construction” generally means that at least 5% of the total cost of the facility has been incurred.  Must be “under construction” by December 2010

5 Financial Institutions Partnership Program (FIPP) DOE Loan Guarantee Program  Banks are the applicants for projects. Lending committee of most banks will evaluate whether the underlying loan should be approved assuming there is no guarantee  Value of the guarantee is to reduce the cost of credit and make the financing math work better  Guarantees not likely implemented until 3 rd quarter 2010  Guarantees are generally limited to 80% of project costs.  Borrower and other principals must make a significant cash investment in the project.  DOE may determine an appropriate collateral package among creditors.

6 Commercial Distributed Solar Electricity Generation Project  Independent development of 2 MW rooftop solar project for a large business campus in Southern California. Campus owner to buy the electricity under a power purchase agreement (PPA).  PPA is a 20 year agreement for the purchase of electricity  Developer owns the solar facility which is on the rooftops of several buildings  Initial purchase price of $0.15 per kWh  California PBI rebate of $0.22 per kWh (not paid in utility project)  Deployment of proven, commercialized solar technology  $10.5M installed cost  Business campus owner has a BBB credit rating

7 Sources of Project Revenue and Financing  PPA payments for electricity  Federal 30% cash grant in lieu of ITC  State PBI rebate  Bonus depreciation for 2009 (not cash)  Loan guarantee program?  Venture capital?

8 Sources of Project Financing Sponsor equity investment 20% - 30 % Bank Debt 40% - 50% 7 year loan 8-9% Interest rate Cash grant in lieu of ITC 30% Supplier to carry module costs until this payment is received  Project developer  Vertically integrated manufacturer

9 Summary  Predictability (certainty) of receiving project revenues and benefits is key to the financing math  The predictability of the federal 30% cash grant is starting to help the financeability of renewable energy projects.  Bonus depreciation should be extended through 2010 so it has time to be a financing tool.  The FIPP loan guarantee program could eventually help get projects funded by reducing the cost of credit.  Bottom line for making the project math work is that some equity investment is very likely needed