DOE OFFICE OF INDIAN ENERGY Key Project Development and Financing Concepts 1

Agenda Levelized Cost of Energy (LCOE) Electricity Offtakers Project Roles Tax Equity Partnerships 2

PROJECT FINANCING CONCEPTS: LEVELIZED COST OF ENERGY 3

4 Key Concept: Levelized Cost of Energy (LCOE) Measures lifetime costs divided by energy production Calculates present value of the total cost of building and operating a power plant over an assumed lifetime. Expressed in real or nominal dollars on a megawatt-hour (MWh) or kilowatt-hour (kWh) basis Allows the comparison of different technologies (e.g., wind, solar, natural gas) of unequal life spans, project size, different capital cost, risk, return, and capacities Critical to making an informed decision to proceed with development of a facility-, community-, or commercial-scale project

LCOE 5

Adapted from European Wind Energy Association, “Economics of Wind Energy,” Annual Expenses Initial Costs Including Financing Energy System Annual Cost Per Year Annual Energy Production LCOE ($/MWh) × $$$ Site Characteristics/ Resources $ Simple LCOE Concept $ 6

LCOE and Cash Flows Adapted from Black and Veatch “Levelized Cost of Energy Calculation”: Levelized Cost of Energy 7

Using LCOE Calculating and comparing LCOE can: Measure value across the longer term, showing probable life-cycle costs Highlight opportunities for Tribes to develop different scales of projects (facility, community, or commercial) Inform decisions to pursue projects on an economic basis, compared to utility rates 8 Most renewable energy projects have zero fuel costs (with biomass being the possible exception)

Wind LCOE Sensitivity: What Are the Big Drivers? Initial capital cost (ICC) and capacity factor are two critical drivers, but discount rate (financing costs) and annual operating expenses (AOE) are non-trivial. Wind LCOE example shown below: Source: Tegen et al

Tribal Community Scale Example A Tribe in Arizona has a remote facility not served by the grid. Diesel fuel is used to power generators to run 24/7. Currently, grid tie appears more expensive than diesel generators Immediate savings from new solar generation, including infrastructure Savings could total ~$20M over 20 years Calculations assumed tax equity used by third-party solar provider 10

PROJECT FINANCING CONCEPTS: OFFTAKERS 11

Potential OptionsRefinementImplementation Operations & Maintenance Step 1: Site and Project Potential Buyer MAP KEY WAPA TRANSMISSION, IN-SEVICE TSGT TRANSMISSION, PROPOSED IOU UTILIITY SERVICE AREA WAPA TRANSMISSION, PROPOSED Tribal UTILITY SERVICE AREA STATE/MUNICIPAL UTILITIY SERVICE AREA TSGT TRANSMISSION, IN-SERVICE COOPERATIVE UTILITY SERVICE AREA Identify and begin discussions with potential power purchasers in Arizona: Navopache Electric Cooperative (NEC) Salt River Project (SRP) Arizona Public Service (APS) Tucson Electric Power Navajo Tribal Utility Authority (NTUA) 12

PROJECT FINANCING CONCEPTS: TAX EQUITY PARTNERSHIP 13

Potential OptionsRefinementImplementation Operations & Maintenance Step 2: Ownership Structure Options Direct ownership Third-party power purchase agreement (PPA) – Containing a traditional land lease/royalty structure Equity investment partnering – Partnership flip – Sale leaseback – Inverted lease/lease pass-through Key Question: What viable ownership structure options are attractive to the community? 14

So Why Seek a Tax-Equity Finance Partner? Tax incentives (MACRS and either PTC or ITC) can represent up to half the project value or reduce project’s capital costs by ~50% Tax incentives can help to achieve a competitive price of power Many projects also require state-level incentives to be economically viable. 15 Third-Party-Owned Tribe-Owned (w/o Partner)

PROJECT FINANCING CONCEPTS: PROJECT ROLES 16

Tribe 17 Key Concept: Tribal Role Options Renewable Resource/Land Owner/Land Lessor* Off-taker (Power Purchaser/ User) Lender/ Debt Provider Equity Investor/ Generation Equipment Owner Project Developer Project Operator/ O&M * Also called Tribal Host

DISCUSSION: QUESTIONS AND ANSWERS 18