Discussion of the financial structures appropriate for community wind investment in Pennsylvania and the impact of the ITC. Description of the REC\'s investment analysis tool and how it can be used to assess investment structures, project assumptions, and policy impacts.
Horngren’s Cost Accounting A Managerial Emphasis, Canadian 9th edition soluti...
Community Energy Model G.Andersen(Da)
1. 1 Financial Structures for Community Wind Development in Pennsylvania Gwen Andersen Director www.francis.edu/rec.htm 814-472-2872 Our thanks to the Penelec Sustainable Energy Fund of the Community Foundation for the Alleghenies and the Pennsylvania Department of Environmental Protection for funding the development of this tool. The tool was developed by Mark Bolinger and Matthew Karcher.
11. Clean Renewable Energy Bonds (CREBs)Post “Recovery and Reinvestment Act of 2009” (“ARRA”): Same as above, except that wind projects can now choose between the PTC, a 30% investment tax credit (ITC), or an equivalent 30% cash grant - but ends in December 2012 This choice is a HUGE deal for community wind in particular….
20. Statewide dollar cap starting at $5 million and increasing to $10 million (by 2014)Regional Public Benefits Funds: May support community wind at times
26. 10 Private Sector Structure:Strategic Investor Partnership Flip Local Investor(s) (1% of equity) Tax Equity Investor (99% of equity) Most-used community wind structure in US Tax investor is a “strategic” investor e.g., John Deere, Edison Mission) Tax Investor provides almost all the equity Pre-flip cash and tax allocations are proportional to equity investment Post-flip allocations favor local investor(s) Grant 1 (USDA REAP) Lender (debt) Project Company (equity + debt + grants) Grant 2 (State Agency) Power (and REC) Sales 30% Federal Cash Grant Cash Revenue 99% 1% less Operating Expenses less Tax-Deductible Expenses (including MACRS and interest on debt) less Debt Service equals Taxable Losses/Gains (which result in Tax Benefits/Liabilities) 99% / 10% 1% / 90% equals Distributable Cash 1% / 90% 99% / 10%
34. Typically no project-level debtNot as suitable for community wind as the Strategic Investor Flip Grant 1 (USDA REAP) Project Company (equity + debt + grants) Grant 2 (State Agency) Power (and REC) Sales 30% Federal Cash Grant Cash Revenue 99% 1% less Operating Expenses less Tax-Deductible Expenses (including MACRS and interest on debt) equals Taxable Losses/Gains (which result in Tax Benefits/Liabilities) 99% / 10% 1% / 90% equals Distributable Cash 0% / 100% / 10% 100% / 0% / 90%
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36. Lessee operates the project, receives all cash revenue, and makes regular lease payments (regardless of how well the project performs)
50. Much more viable under the 30% cash grant than it was under the PTCLocal Investors (100% of equity) Grant 1 (USDA REAP) Lender (debt) Project Company (LLC) (equity + debt + grants) Grant 2 (State Agency) Power (and REC) Sales 30% Federal Cash Grant Cash Revenue less Operating Expenses less Tax-Deductible Expenses (including MACRS and interest on debt) less Debt Service equals Taxable Losses/Gains (which result in Tax Benefits/Liabilities) equals Distributable Cash
63. Must take care that other modeling elements also make sense (i.e., that flip dates do not happen too early, etc.)
64. Backwards: User specifies the financial return required by project investors, and the model solves for the amount of revenue required to generate that return
65. Model uses Excel’s “Solver” (simple linear program) to iterate to a solution; simple macro calls Solver function
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70. 25 Policy Analysis:Calculating the Value of the 30% ITC/Grant Tool: Financial pro forma model that can analyze a community wind project under both the old (PTC) and new (30% ITC or cash grant) incentive regimes and under various financing structures Value Metric: Levelized 20-year PPA price (or LCOE) required to generate a target after-tax return for relevant investors Approach: Start with a fully constrained project under the PTC, and relax each individual constraint one by one in transitioning from the PTC to the 30% ITC to the 30% cash grant. Note the impact on the levelized PPA price at each step along the way.
Then we can model each of the six structures we discussed and see the impact on Returns to the tax investor (IRR and NPV) Returns to the developer (IRR and NPV) Total Revenue