1. Markets and Financing PV Power Plants 2009 - USA December 10, 2009 PL31963-v2 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 Overview  Financing Policies in the U.S.  Financing Structures in the U.S.  RPS Policies in the U.S.  China Market and Policies  India Market and Policies  Other Markets

3. 2 U. S. Market Financing Polices and Sources of Project Revenue  No single federal or state policy is sufficient; a financing tool kit of policies is needed that are available at the same time  U.S. has a comprehensive set of financing policies but is not a homogeneous market  Feed-in-tariffs (state)  Clean Renewable Energy Bonds (CREBs)  Federal 30% cash grant in lieu of investment tax credit or ITC  Bonus depreciation for 2009 (not cash)  Loan guarantee program  Renewable Energy Certificates  Power purchase agreement payments (project revenue)  PBI rebate (California) – commercial sales only not sales to utilities  Renewable Portfolio Standards (state)

4. 3 Clean Renewable Energy Bonds  $2.2B in bond issuances approved in October, 2009 by U.S. Treasury for qualified issuers such as local utilities, electric coops, etc.  Could help move many public sector solar projects into construction.  Federal tax credit to the investor in lieu of payment of a portion of interest on the bonds.  42% solar – about $900M in allocations. Many small installations under 1MW; largest solar project about 6MW  Buy American provisions not applicable  Press release and list of projects authorized for issuances at http://www.ustreas.gov/press/releases/tg333.htm and at the links in the press release. http://www.ustreas.gov/press/releases/tg333.htm

5. 4 Federal Cash Grant in Lieu of Investment Tax Credit (I)  30% cash as opposed to investment tax credit available in 2009-2010; thereafter reverts to ITC only unless cash grant is extended by Congress.  The simpler ITC may be acceptable to investors with tax liability  Investor owned utilities are eligible  Payments by Treasury (over $1B) is starting to provide some predictability for financeability for project finance but not yet much pay out for solar projects  Payment is to be made by Treasury within 60 days after the later of when a complete application is received or the project is placed in service. Current processing time is more than 60 days.

6. 5 Federal Cash Grant in Lieu of Investment Tax Credit (II)  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

7. 6 Federal Bonus Depreciation  Bonus depreciation of 50% applies only through 12/31/2009 unless extended by Congress. This should be extended at least through 2010 so it has time to be a financing tool  Deduction reduces taxable income; not a cash rebate  Solar energy project property is in the Modified Accelerated Cost-Recovery System (MACRS) 5 year class  85% of the basis may be depreciated  5 MW, $25M facility will have more than $12M in depreciation in year one. Cash savings of about $5M in California where combined federal and state corporate tax rate is 40.7%.

8. 7 DOE Financial Institutions Partnership Program Loan Guarantee Program  Banks are the applicants. Lending committee of banks will evaluate whether the underlying loan should be approved assuming there is no guarantee  Not all banks will participate  Guarantees not likely implemented until 3rd quarter 2010  Value is to reduce the cost of credit and make the financing math work better but cost of complicated application process may offset  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.

9. 8 Financing Structures (I)  Utility financed and owned  Rate payer base limitations  PPA with buyout option  Purchase and sale agreement (Turn-key ownership)  Joint development  Module manufacturer financed  Financial statement limitations  PPA with or without buyout option  Purchase and sale agreement (Turn-key ownership)  Joint development

10. 9 Financing Structures (II)  Project developer project finance  Working capital limitations  PPA with and without buyout option  Purchase and sale agreement (Turn-key ownership)  Joint development  NRG Energy/First Solar take out model  21MW solar project in Blythe, California  “Largest utility scale PV solar generation facility” in California  NRG’s first solar facility but others in the pipeline  Large energy output, late stage of development; lower risk  First Solar will operate and maintain the facility

11. 10 RPS Policy in the United States North Dakota, South Dakota, Utah, Vermont, Virginia and West Virginia are goals Source: www.dsireusa.orgwww.dsireusa.org

12. 11 RPS Impact on Solar Project Financing  RPS growing at the state level; national level RPS still in discussion stage  RPS by itself will not enable financing because consequences for failure to meet RPS are not meaningful  Key factors in achieving RPS targets that states can influence  Meaningful feed-in-tariff for large projects  More financing friendly standard PPAs – What will banks finance?  Transmission line improvements  Faster and lower cost interconnect process  Expedited permitting approvals

13. 12 PG&E’s New “Hybrid” PV Program  5-Year program starting in January 2010  500 MW of 1 to 20MW photovoltaic distributed generation installations in northern and central California  Up to 250MW utility-owned generation, with an anticipated capital cost of $1.45B  Up to 250MW of PPAs with renewable resource developers  Projects developed and owned by PG&E would be built on land already owned by the utility or near its substations to minimize the cost and delays of interconnecting them to the power grid  The terms and pricing of the PPAs will be pre-approved by the CPUC  Developer will execute the form contract with streamlined regulatory review, avoiding the need for negotiations, and immediately commence development Source: PG&E

14. 13 Challenges to Meeting Current and Future California RPS Goals Project-level Issues  Financial crisis  Project financing difficulties  Lack of appetite for tax credits  Technology risk  Developer performance  Transmission upgrades  Need upgrades that can be identified, approved and developed by PPA operations date  Project permitting  Need expedited permitting approvals for contracted projects Portfolio-level Issues  Large-scale transmission lines need to reach remote areas  System integration of intermittent resources  Competition for renewable projects from other utilities/states/countries Source: PG&E

15. 14 Feed-in-Tariff Basics  Payment per kWh  Impact on ratepayer price  Project limit  Aggregate limit under the program  Length of guaranteed payment  Application process – simplicity, timing  kWh price itself under FIT can make a project financeable by PPA revenue but FIT is not sufficient in the U.S.

16. 15 Feed-in Tariffs in the United States  Limited impact on utility scale projects to date  Examples  California$0.15 –.17 per kWh (project limit 3MW)  Florida$0.26-.32 Gainesville RU; aggregate annual limit of 4MW  WisconsinSeveral utilities with aggregate limit of up to 1MW  VermontGreen Mountain IOU project limit of 250kWh  Washington Project payout limited to $2K per year  Oregon $0.12 Eugene WEB; no project limit

17. 16 China, India, Other Markets China* RPS: Likely target of 20GW by 2020 * FIT: US $0.16 – 0.22KWh (projected). Utility scale projects permitted * Participation by joint venture – Duke Energy (technology development), First Solar (2GW MOU with Ordos City) * Government subsidized financing up to 50% in some cases India* RPS: 20GW by 2020 * Titan Energy “first utility scale solar power plant” of 1MW * No government subsidized financing yet; FIT under discussion Japan* RPS: 14GW PV by 2020 * FIT: only for surplus from homes or businesses Canada* RPS: Phase out coal generated electricity by 2014 (Ontario PA)* FIT: $CG.443 to 0.539 (project size up to 10MW) * Domestic content requirement Brazil* Yingli Solar – MPX joint venture model

18. 17 Summary  No single U.S government policy is sufficient; a financing tool kit of policies is needed that can be applied at the same time  The federal 30% cash grant is the single most important policy incentive in the U.S. but is not sufficient by itself  Utility scale project FITs in the U.S. will develop cautiously because of the concern over the pricing impact on ratepayers  There will be more utility financed and owned projects as well as projects financed by module manufacturers but ratepayer and financial statement impacts will require other financing structures  Solar projects need to be larger in order for RPS requirements to be met and to attract a buyer like NRG Energy  Independent project developers need some equity investment in order to make the project math work  Consequences of failing to meet RPS need to be more severe in order to have a meaningful impact on financing

19. 18 Sources  Database of State Incentives for Renewables and Efficiency (www.dsireusa.org)www.dsireusa.org  DB Climate Change Advisors, Global Climate Change Policy Tracker: An Investors Assessment (October 2009)  Ontario Power Authority web site (fit.powerauthority.on.ca)  Volume 2, Renewable Power, A Blueprint for Green Energy in the Americas, 2009 (prepared by Garten Rothkopf) gartenrothkopf.com/publications,asp  Couture and Cary, State Renewable Energy Policies, Analysis Project: An Analysis of Renewable Energy Tariffs in the U.S. (June 2009) (sti.gov/bridge)  Doris, McLaren, Healey and Hockett, State of the States 2009: Renewable Energy Development and the Role of Policy, NREL Technical Report, October 2009 (nrel.gov/features/20091120_states.html)