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

2. 2 Key Concepts Risk and Uncertainty The Project Team Roles of the Tribe Levelized Cost of Energy (LCOE) Net Metering

3. RISK AND UNCERTAINTY 3

4. Risk Increases Relative to Project Scale Definition: Single building system Primary purpose: Offset building energy use Definition: Multiple buildings or campuses Primary purpose: Offset community energy costs, energy self-sufficiency Definition: Stand- alone project Primary purpose: Revenue generation, financial self- sufficiency 4 COMMUNITY COMMERCIAL FACILITY Photo credits: (left to right): NC Solar Center, NREL 09373; Orange County Convention Center, NREL 18077; Tucson Electric Power, NREL 13327

5. Project Uncertainty/Risk Continuum Unknowns Risk/Investment Revenue pays off invested $ Project Operation Financial Close 5 Step 1, Step 2, Step 3Step 4Step 5 ConstructionDevelopment

6. Community & Facility Project Risk 6 Sources: Adapted from Holland & Hart, RE Project Development & Finance & Infocast, Advanced RE Project Finance & Analysis Risks Development Poor or no renewable energy resource assessment Failure to identify all possible costs Unrealistic estimation of all costs Incorrect estimation of long-term “community” energy use (energy efficiency first) Utility rules and ability to offset use with centralized production Site Structural (e.g., rooftop solar, wind loading, soil conditions) Installation safety (e.g., wind tower, hazard for adjacent sites) Site control for safety/security purposes Permitting Tribally adopted codes and permitting requirements Utility interconnection requirements Finance Capital availability Incentive availability risk Construction/ Completion Engineering, procurement, and construction (EPC) difficulties Cost overruns Schedule Operating Output shortfall from expected Technology O&M

7. THE PROJECT TEAM 7

8. 8 Developer Financiers Project Legal Team EPC Contractor Landowners Utility O&M Contractors Equipment Manufacturers Insurance Developer Coordinates the Project Team

9. TitleRole Project Company Legal entity that owns the project, also called special purpose entity Resource/Land Owner Legal and/or beneficial owner of land and natural resources Sponsor/Developer Organizes all of the other parties and typically controls project development and makes an equity investment in the company or other entity that owns the project EPC Contractor Construction contractor provides design, engineering, and construction of the project Operator Provides the day-to-day O&M of the project Feedstock Supplier Provides the supply of feedstock (i.e., energy, raw materials) to the project (e.g., for a power plant, the feedstock supplier will supply fuel) Project Off-taker/Energy User Generally enters into a long-term agreement with the project company for the purchase of all the energy Lender A single financial institution or a group of financial institutions that provides a loan to the project company to develop and construct the project and that takes a security interest in all of the project assets Tribal Host Primary sovereign of project site Project Roles and Definitions 9

10. ROLES OF THE TRIBE 10

11. Tribe 11 Tribal Role Options Renewable Resource/Land Owner/Land Lessor* Off-taker or Energy User Lender/ Debt Provider Equity Investor/ Generation Equipment Owner Project Developer Project Operator/ O&M * Also called Tribal Host

12. Tribal Role Options - Descriptions 12 RoleOpportunityConstraintsComments Resource/ Land Owner Land rent/royalty, taxes. Low risk, known reward, consistent income. Limited project control. Must provide site access. Limited upside potential, limited risk Off-taker/ Energy User Tribe purchases or uses all power on-site. Could include an “on-site” provider; security. Limited investment, economic development for on-site projects Must have demand to use power; still requires utility interconnection agreement (if on the grid). Med. risk. Project Operator/ O&M Control and self- determination of project; potential for profits (and losses) is minimal Investors require experience Only consider as a new business (multiple projects in a portfolio) Tribes investing money may not want this high risk/return investment High risk, complex Tribes may be best served by outsourcing A project pipeline/portfolio mitigates some risks Lender/ Debt Provider Participate financially in project (e.g., cash or New Market Tax Credit (NMTC)) with lower risk Requires ready capital May be cost-prohibitive to document and manage a single debt transaction (multiple more cost-effective) Med. risk, more complex Requires lending knowledge Option for Tribes with limited lands, lots of $ Equity Investor/ Gen. Owner Provide cash or NMTC for project development. Less capital than commercial-scale. Higher risk than debt lending. Requires ready capital, or unique source of capital that provides market advantage (like NMTC). High risk, more complex Competes with other investments Option for Tribes with limited lands, lots of $ Project Developer Self-determination of project; potential for profits (and losses) is highest. Tribes with $ don’t need investors. Investors require experience Only consider as a new business (do multiple projects for diverse portfolio) Tribes investing money may not want this high risk/return investment High risk, complex Tribes may be best served by outsourcing A project pipeline/portfolio mitigates some risks

13. LEVELIZED COST OF ENERGY 13

14. Levelized Cost of Energy (LCOE) Measures lifetime costs divided by energy production, captured in $/MWh or ¢/kWh Calculates present value of the total cost of a) building and b) operating a power plant over an assumed lifetime 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 14 Critical to making an informed decision to proceed with development of a facility or community energy project.

15. Adapted from European Wind Energy Association, “Economics of Wind Energy,” http://www.ewea.org/fileadmin/ewea_documents/documents/00_POLICY_document/Economics_of_Wind_Energy__March_2009_.pdf http://www.ewea.org/fileadmin/ewea_documents/documents/00_POLICY_document/Economics_of_Wind_Energy__March_2009_.pdf Annual Expenses Initial Costs Including Financing Energy System Annual Cost Per Year Annual Energy Production LCOE ($/MWh) × $$$ Site Characteristics/ Resources $ LCOE Concept $ 15

16. LCOE and Cash Flows Adapted from Black and Veatch “Levelized Cost of Energy Calculation”: http://www.efchina.org/csepupfiles/report/20112844913435.70772110666485.pdf/Levelized%20Cost%20of%20Energy%20Calculation_BV_EN.pdf Levelized Cost of Energy 16

17. 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. 2012 17

18. 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 or community) Informs decision to pursue projects on an economic basis, compared to utility rates 18 Most renewable energy projects have zero fuel costs (with biomass being the possible exception)

19. LCOE 19

20. NET METERING 20

21. What is Net Metering “Net metering allows residential and commercial customers who generate their own electricity from [eligible technologies] to feed electricity they do not use back into the grid” for utility credit.  Solar Energy Industry Association. Issues and Policies: Net Metering, accessed Aug 11, 2013. http://www.seia.org/policy/distributed-solar/net-meteringhttp://www.seia.org/policy/distributed-solar/net-metering 21

22. What is Net Metering? (cont.) Simple way to encourage customers to deploy on- site, grid connected generation and maximize value Customers or third-parties own the generation Generation used by the customer is credited at the retail rate and net excess generation can be credited at the wholesale rate, retail rate or a higher incentive rate (or sometimes not credited at all) Often it can be carried over to future months; sometimes these accounts are reset annually Can improve the economics of small-scale renewable power systems; may be a critical element to determining project economic feasibility 22