Tribal Renewable Energy Webinar Advanced Financing Models Financing
Tribal Renewable Energy Webinar: Advanced Financing Models Financing Structures for Renewable Energy Projects Presented by: Edward Zaelke, Chair of Global Project Finance Practice, Akin Gump Strauss Hauer & Feld LLP October 28, 2015 © 2015 Akin Gump Strauss Hauer & Feld LLP
Basic Facts About Renewable Energy Finance in the U. S. n. Since 1992, the Federal Government has “paid” for about 60% of the costs of renewable energy projects ● Wind Energy Production Tax Credit ● Solar Energy Production Tax Credit ● Federal MACRS Depreciation (sometimes bonus depreciation 1
Basic Facts About Renewable Energy Finance in the U. S. n. State and local incentive payments have also been available in some instances ● State tax credits ● Local “Public Benefit Incentives” (PBI) payments 2
Basic Facts About Renewable Energy Finance in the U. S. n. Federal Tax Incentives are only available to U. S. taxpayers ● Tribes cannot “own” projects that receive federal tax credits ■ Tribes can be landowners ■ Tribes can operate the facilities ■ Tribes can purchase power ■ Tribes can have the right to purchase the projects after the federal incentives have been concluded 10 years for wind project 5 years for solar projects ■ Tribes can develop and sell projects on their own lands 3
Utilizing Federal Tax Credits for Wind and Solar Typically Requires Very Highly Structured Transactions n. Wind ● Section 45 of the Internal Revenue Code Provides a 30% Production Tax Credit for Wind Projects based upon production during the wind project’s first 10 years of operation ■ Currently the PTC is $23 per MWh, subject to inflation adjustments each year ■ The party claiming the credit must both own and operate the wind project This requirement prevents wind projects from monetizing their tax credits through “sale and leaseback” or similar methods 4
Utilizing Federal Tax Credits for Wind and Solar Typically Requires Very Highly Structured Transactions n. Wind ● The most common method for monetizing the production tax credit and MACRS depreciation for wind is the “Flip Partnership” because it allows for the “own and operate” requirement to be met, while shifting the tax benefits to a tax equity investor ■ A Typical Flip Partnership may involve capital invested as follows: 40 to 50 percent developer equity 50 to 60 percent tax equity The developer may also borrow against its equity in what is typically referred to as a “back levered” loan 5
Utilizing Federal Tax Credits for Wind and Solar Typically Requires Very Highly Structured Transactions n. Wind ■ The Profit/Loss and tax sharing in a “Flip Partnership” is as follows: Years 1 to 10 (the PTC Period) § 99% of the income and tax benefits to the Tax Investor; and § 1% of the income and tax benefits to the developer/owner After year 10 (or after the tax investor has received its required IRR, so that the “flip” can occur): § 5% of the income and losses to the Tax Investor; and § 95% of the income and losses to the Developer/Owner Owner/Developer typically has the right to purchase the 5% interest from the Tax Investor at fair market value 6
Utilizing Federal Tax Credits for Wind and Solar Typically Requires Very Highly Structured Transactions n. Solar ● The Investment Tax Credit for solar does not have the same “own and operate” rule as does the PTC, so there are more alternatives for monetizing the tax credit for solar ■ The Partnership Flip ■ Sale and Leaseback Sale and leaseback may take one of several structures, with varying degrees of tax risk 7
Utilizing Federal Tax Credits for Wind and Solar Typically Requires Very Highly Structured Transactions n. Solar ● In a traditional sale and leaseback: ■ The Developer sells the project (or the project company) to a tax investor and receives cash sufficient to pay for a significant portion of the project ■ The Developer then leases the project back from the Tax Investor ■ Under the Tax Code, the Developer and Tax Investor can agreed between the two of them who should get the tax benefits from the project 8
Utilizing Federal Tax Credits for Wind and Solar Typically Requires Very Highly Structured Transactions n. Solar ● In a traditional sale and leaseback: ■ The Tax Investor receives all of the Investment Tax Credit (currently 30%), but receives a reduction in its depreciable basis equal to half of the ITC taken ■ The depreciable basis is increased to the purchase price paid by the tax equity investor ■ The Developer pays an upfront rental payment and then monthly payments necessary to repay in the tax investor and provide the tax investor a return on its investment ■ After the period of MACRS depreciation (5 years) or at other agreed intervals, the developer can repurchase the project at fair market value 9
Other Factors Affecting Renewable Energy Development and Finance That May Impact Development on Tribal Lands n. Wind projects have become much more productive ● This has increased the relative value of the PTC for those projects ● The current PTC expires for projects commenced by December 31, 2104, unless they are completed by December 31, 2016, or unless “continuous construction can be shown 10
Other Factors Affecting Renewable Energy Development and Finance That May Impact Development on Tribal Lands n. Solar Projects have become significantly cheaper ● This has decreased the importance of the ITC ● Installed Solar Projects now cost between $1. 80 and $2. 50 per watt to install (compared to about $4. 00 to $5. 00 per watt 4 to 5 years ago) ● Large Solar projects (with the 30% ITC and MACRS depreciation in place) are now selling power as low as $40 to $45 per. MWH ● The ITC for solar drops from 30% to 10% at the end of 2016 ● Many successful solar projects, including those on Tribal Lands, have relied upon local PBIs. While those continue to exist in some areas, in many other areas they are decreasing 11
Other Factors Affecting Renewable Energy Development and Finance That May Impact Development on Tribal Lands n. Cheaper capital for renewable projects continues to exist, although the “Yieldco craze” of large amounts of money chasing projects has subsided 12
Tribal Projects n. The number of wind and solar projects on Tribal Lands has increased over the past several years, although many are simply tied to the use of land. n. Financing of Projects with the end users of power as the power buyers has increased ● This has allowed Tribes with casinos or other users or power to stand as power purchasers in financeable deals ● Tribal power companies can also act as the power purchaser for purposes such as residential use or water pumping/transfer n. The lower of the unsubsidized cost of renewable power will help further development on tribal lands through tribal ownership 13
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