1. 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 fred.greguras@klgates.com 650.798.6708 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

2. 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

3. 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

4. 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 – 20-25 years; 25-30 years for utility projects

5. 4 Federal Cash Grant in Lieu of Investment Tax Credits  30% cash as opposed to investment tax credit available in 2009-2010  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

6. 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.

7. 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

8. 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?

9. 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

10. 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