REFF West Report

September 27-28, 2012

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University of California, Berkeley School of Law Center for Law, Energy & the Environment

Table of Contents

About REFF-West, ACORE, and Berkeley Law’s Center for Law, Energy & the Environment

Opening Keynote: Mary Nichols

Setting the Scene: Understanding the Context of Renewable Energy

Financing Smaller Deals

The Military: A Major New Customer for Renewable Energy

Emerging Commercial Technologies

Second Day Keynotes: Michael Peevey & Yiaway Yeh

East Meets West: Investment Banking Perspectives

Renewable Energy Project Finance

Developers’ Viewpoints: What’s Happening on the Ground?

Broadening the Debate: New Financial Structures for the Future

Acknowledgments

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About

REFF-WestREFF-West has been uniting senior financiers, investors, and clean en-ergy executives from across the U.S. since 2008. Topics at REFF-West include project finance, venture capital, renewable power generation, emerging commercial technologies, financing smaller projects, equity financing, and established technologies. The conference also offers an unparalleled networking opportunity, allowing senior representatives from across the energy and financial sectors to meet. REFF-West is co-organized by the American Council On Renewable Energy (ACORE) and Euromoney Energy Events.

ACOREACORE, a 501(c)(3) non-profit membership organization, is dedicat-ed to building a secure and prosperous America with clean, renew-able energy. ACORE provides a common educational platform for a wide range of interests in the renewable energy community, focusing on technology, finance and policy. ACORE convenes thought leadership forums and creates energy industry partnerships to communicate the economic, security and environmental benefits of renewable energy.

CLEEThe U.C. Berkeley School of Law’s Center for Law, Energy & the Envi-ronment (CLEE) works with government, business, and the nonprofit sector to help solve urgent environmental and energy problems. Draw-ing on the combined expertise of faculty and students across U.C. Berkeley, CLEE conducts influential research and provides public access to reliable data on such complex issues as climate change, conversion to clean energy, and water scarcity. Berkeley Law’s Energy and Clean Technology Law Program prepares the next generation of renewable energy leaders by offering courses and research opportunities in en-ergy project finance, regulation, economics, and policy.

EUROMONEY ENERGY EVENTSEuromoney Energy Events produces high-profile events for energy pro-fessionals worldwide. Euromoney’s diverse range of conferences ad-dress topical issues in the energy sector, with a focus on financial and commercial aspects, in a portfolio that ranges across Renewable Energy, Waste, Power and Carbon Finance.

Opening Keynote 4


In opening the REFF-West conference, Mary Nichols delivered a key-note speech establish-ing the renewable en-ergy policy backdrop in California.

“This is truly a pivotal time.” In the past ten years, the renewable energy industry has made great technological and financial innovations. The next two to three years will be the time to fully harness innovation for greater environmental good.

California’s cap and trade program (AB32) builds upon the success of exist-ing policies that promote increased air quality. These policies include energy efficiency standards in appliances and building codes, the renewable portfolio stan-dard (RPS), the low-carbon fuel standard, ac-counting for carbon emissions in land-use and transportation planning, and distributed gen-eration mandates. AB32 will achieve the lowest-cost emission reductions of all considered alternatives. The program is set to begin on January 1, 2013, with the first phase covering 600 facilities and 85 percent of California’s emissions. The sec-ond phase, which will begin in 2015, will cover the transportation sector. Although the pro-gram was originally expected to link to other jurisdictions in the Western Climate Initiative, presently Quebec is the only other participant ready to follow. The program will initially give

away 90 percent of allowances while gradually phasing in an auction. By studying other mar-kets and building in safeguards against carbon leakages into other regions, California aims to achieve the lowest-cost emissions reductions possible through its landmark program.

Full realization of environmental goals will re-quire further private sector investment in ad-dition to public sector mandates and support. The Golden State’s cap and trade program is only one step toward mitigating climate change. Reducing California’s carbon footprint will re-quire accelerating energy efficiency retrofits, lowering the cost of renewable energy, com-mercializing fossil fuel alternatives in transpor-tation, and developing new technologies. The private sector has a critically important role to play in this transformation.

Opening Keynote

Mary Nichols, Chairman of CARB, opens REFF-West with a review of California’s renewable energy leadership.

Setting the Scene

The opening panel at REFF-West allowed a variety of speakers to lay out their view of the renewable energy landscape in 2012. The audience heard the perspec-tives of a federal policymaker, a state regulator, a natural gas industry repre-sentative, a solar project developer, and a financier.

The Obama Administration believes in—and is implementing—an “all of the above” energy

strategy. President Obama is simultaneously developing do-mestic oil reserves and investing in clean energy technologies, all with the goal of creating jobs for the middle class. The Obama Ad-ministration has approved the sit-ing of seventeen utility-scale solar projects, six onshore wind proj-ects, and eight geothermal proj-ects on federal lands. Through the Federal Leadership in Envi-ronmental, Energy, and Economic Performance Order (Executive Order No. 13514), the president

has called for the federal government to reduce its greenhouse gas emissions by 28 percent by 2020. Lastly, the Department of Defense has initiated an unprecedented shift toward renew-

able energy generation, with over seven billion dollars planned for renewable energy power pur-chase agreements (PPAs).

The natural gas, renewable en-ergy, and energy efficiency indus-tries can partner to form a “radi-cal center,” creating a renaissance in U.S. manufacturing. Technology changes have enabled access to abundant natural gas resources in the United States. Low gas prices are being projected into the future, yet two things remain critical to the natural gas indus-try’s future: (1) creating and re-habilitating infrastructure and (2) forming local partnerships.

In California, utilities are on their way to complying with the Re-newable Portfolio Standard (RPS) of 33% renewables by 2020—with solar technologies in the lead. In the past, utilities were meeting their RPS obligations pri-marily by procuring solar thermal and wind power, but recently so-lar photovoltaic (PV) projects have dominated

Setting the Scene: Understanding the Context of

Renewable Energy

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MODERATOR• Nancy Floyd, Managing Director, Nth Power

PANELISTS• Jonathan Powers, Federal Environmental Executive, White House Council on

Environmental Quality• Paula Gant, Senior Vice President, Policy & Planning, American Gas Association• Nancy Ryan, Deputy Executive Director, California Public Utilities Commission• Paul Detering, CEO, Tioga Energy• Nat Kreamer, CEO, Clean Power Finance Photo: Jean-Max Chu

Nancy Ryan, Deputy Executive Director, California Public Utilities Commission

Paula Gant, Vice President of Policy,

American Gas Association

Jonathan Powers, Federal Environmental Executive, White House Council on

Environmental Quality

Setting the Scene 6


the California RPS procurement pro-cess. PV’s relative increase is supported by the expansion and development of California’s distributed generation poli-cies, such as the California Solar Initia-tive and the new feed-in-tariff (SB32). As new projects come online and mature, the California Public Utilities Commis-sion (CPUC) must ensure the reliabil-ity of the overall system, weighing the costs, risks, and benefits of bringing new projects to the grid. Decarbonizing the transportation sector is the next step to meeting California’s environmental

goals.

Distributed generation solar is poised to reach grid parity as federal and state incentives expire in 2016. The investment tax credit (ITC) for solar projects will ex-pire in 2016, and the American Recovery and Reinvestment Act’s (ARRA) Section 1603 Cash Grant Program has already ceased ac-cepting new applicants. Not only is a renewal of the ITC before

2016 uncertain, but Section 1603 grantees are facing the threat of receiving less of an incentive than expected be-cause of the potential 2013 fed-eral budget sequester.

To date, state-level policies for solar PV have been uneven. While New Jersey’s SREC program cre-ated a PV oversupply, California’s Solar Initiative has worked better due to its performance-based in-centive design. Solar panel pric-es are currently 70 to 90 cents

per watt, and system costs are in the $2.00-3.00 range, while prices continue to fall. At this rate, solar PV will reach grid parity soon. Non- traditional sources of capital have noted this opportunity and are interested in working with developers who are involved in commercial and residential markets.

As the solar industry matures, firms are re-thinking the role that debt and other sources of financing play in their businesses. Downstream solar entities conduct four main activities: sales, installation, procurement, and finance. As the marketplace becomes more volatile, firms will need to focus on their core businesses. The renewable energy industry presents an op-portunity to utilize structured debt, owing to projects’ low capital expenditures and high cash flow. The industry is therefore currently reas-sessing the role of debt and addressing its inter-action with tax equity.

“What we see is a tremendous opportunity— building on natural gas, renewables, and energy efficiency.”

-Paula Gant, Senior Vice President, Policy & Planning, American Gas Association

Paul Detering, CEO, Tioga Energy

Nat Kreamer, CEO, Clean Power Finance

Financing Smaller Deals 7

While developers are bringing an increasing num-ber of 5 MW and smaller projects before finance providers, these projects often need significant work before they can be consid-ered bankable.

Many developers are doing small projects, but only a minority of the projects are “bankable.” There is a large volume of small projects seek-ing funding in the market, particularly in solar. However, according to Darren Van’t Hof, for ev-ery one hundred deals, only five are bankable. Often it is the PPA that is not completely vet-ted. For some developers, it is their very first deal. Chris Diaz recommended picking part-ners and sticking with them to gain efficiencies down the road. Choosing competent and expe-rienced partners might mean a more expensive first deal, but later deals will benefit from the inter-team relationship and ability to avoid sig-nificantly changing project documents. Accord-ing to Tony Grappone, cost reductions of 33 to 66 percent are possible with repeat business, as his firm spends a lot of time educating develop-ers up-front.

While panelists agreed that previous project

development experience and strong sponsor balance sheets are important considerations for lenders to smaller projects, their views var-ied on the relative significance of other factors in determining the bankability of a project. The speakers noted that decisions regarding smaller deals are often relationship-oriented. Even if it is a developer’s first deal, if they are honest and open to suggestions, a lender may work with them to make the deal financeable. The credit-worthiness of the offtaker is naturally another important consideration. The panelists noted the following considerations about a developer with varying levels of emphasis:

• Have they built infrastructure? • Have they tried to raise capital?• Do they have insurance and letters of cred-

it? • Do they have a website? • Where is the deal located? • Who is the EPC contractor? Do they have


Financing Smaller Deals

MODERATORS• Ed Feo, Managing Director, US Renewables Group (USRG)• Edward W. Zaelke, Partner, Akin Gump Straus Hauer & Feld LLP

PANELISTS• Chris Diaz, Senior Vice President, Seminole Financial Services• Dick Rai, Manager, PNC Energy Capital• Rodney Eckhardt, Managing Partner, RoundRock Partners• Tony Grappone, Partner, Novogradac & Company LLP• Darren Van’t Hof, Director of Renewable Energy Investment, US Bank

Financing Smaller Deals 8


experience? Is there a payment and perfor-mance bond?

• What solar panels and inverters are being used?

Smaller players can succeed in this market, but they need to clearly demonstrate what skills they bring to the table. Dick Rai stated that he seeks developers with experience and $10-15 million in liquidity. As a result, smaller players may need to team up with larger companies to merit consideration. In such a case, the smaller player would need to be clear on what value they add to the deal, whether it is hardware supply, PPA origination, EPC, or another role. Smaller play-ers need to identify where they fit in this segmentation and team up with players that have complementary skills.

“No-cash” deals do not exist. Some inexperienced smaller players hold misconceptions of how much equity the spon-sor should invest in a deal, not recognizing that “no-cash” deals are not a possibility. Smaller players need to first raise sponsor equity, con-struction financing, and term debt. Bringing in the tax eq-uity is the final piece.

Deals requiring fancy financial engineering are unlikely to do well. The panelists discussed in detail the im-plications of the Third Circuit’s recent ruling in Historic Boardwalk Hall, LLC v. Commissioner. Tony Grappone explained the “sandwich lease”

structure involved in the case. A lease pass-through employed two special purpose vehicle (SPV) partnerships: one to own real estate and a separate one to operate the project. The minimal economic commitment from the tax equity investor led the Third Circuit to hold that it was not a bona fide partner to the proj-ect. In light of the ruling, Mr. Grappone advised developers to make sure tax equity investors hold a perceived upside or downside risk in a project.

“Time is your enemy. The more organized you are, the more you save money.”

-Christopher Diaz, Senior Vice President, Seminole Financial Services

Panelists engage with conference-goers after the discussion of smaller renewable energy projects.

The Military 9

The U.S. military aims to procure one gigawatt of renewable energy each for the Army, the Navy, and the Air Force by 2020. The Army is currently lining up developers of future projects through a Multiple Award Task Order Contract (MATOC). It has also established a centralized task force to meet with industry representa-tives and hear their concerns regarding state and local regulations, Department of Defense bureaucracy, and federal contracting issues. In pursuing the tremendous opportunity present-ed by military procurement of renewable en-ergy, developers and lenders need to be mind-ful of unique benefits and risks associated with contracting with the armed forces.

The military is procuring renewable energy to improve combat effectiveness and operational efficiency. As ACORE President—and retired Vice Admiral—Dennis McGinn stated, the mili-tary is not pursuing renewable energy proj-ects to win an “EPA green technology award,” but rather to improve its bottom line. In the

armed forces, the bottom line means combat effec-tiveness and operational efficiency. David Belote, former commander of the Nellis Air Force Base, reinforced this sentiment,

stating that renewable energy gives base com-manders energy security—the ability to keep operations going “no matter what.” Kathy Ahs-ing stressed that the entire senior leadership of the armed forces is behind these efforts, as demonstrated by the Department of Defense’s goal of procuring three gigawatts of renew-able energy for the Navy, the Army, and the Air Force by 2020.

The military presents unique advantages as an off-taker of renewable energy. First, the U.S. military presents a lower credit risk than other off-takers, which means a lower cost of capital for developers. Second, the Army is seeking to limit risk by reducing project interference and ensuring that projects are completed. As Stan Lee with the Army Corps of Engineers stated, the Army is “going to make sure that the project gets built,” and “will only do inspections to the extent that it safeguards the Army’s liability [for] safety violations.” Third, military installments have the authority to sign 20 to 30-year power


The Military: A Major New Customer For Renewable Energy

MODERATOR• Vice Adm. Dennis V. McGinn (USN, Retired), President, ACORE

PANELISTS• David Belote, Vice President for Federal Business, Apex Wind Energy, Inc.• Lawson (Stan) Lee, P.E., Senior Program Manager, Energy Division, U.S.

Army Engineering Center, Huntsville, AL• Karen Butterfield, Director of Federal Programs, SunPower• Kathleen Ahsing, Director of Federal Programs, U.S. Army Energy Initia-

tives Task Force

The Military 10


purchase agreements (PPAs), providing a long term revenue stream to project owners and lenders. Fourth, on a case-by-case basis, the military is willing to al-low multiple off-takers if a project generates more electricity than the military installa-tion requires. Lastly, the Army is seeking to standardize project documents and work with other services to streamline the pro-curement process and achieve greater conti-nuity throughout the armed forces.

Developers must be mindful of the unique contracting needs of the U.S. military. Karen Butterfield outlined several contracting issues SunPower overcame to develop solar projects at military sites. First, military bases require a termination-for-con-venience clause to allow for the possibility of a base closure or a national security exigency. Kathy Ahsing noted that the Army will agree to make a company whole for losses resulting from a termination for convenience or a base closure, yet it remains unclear if these contrac-tual assurances will ease the concerns of po-tential lenders. Second, the military may not be comfortable with allowing assignment or novation of a project owner’s rights and obli-gations under a PPA. As Butterfield explained, the military generally does not want a bidder to

sell a project after winning a contract. The EITF and the Army Corps of Engineers recognize this issue, however, and they are taking steps to accommodate traditional project financing structures. Third, the military retains the right to restrict site access. Similar to its treatment of losses from a base closure, the military will agree to make a company whole for losses re-sulting from restricted site access. Fourth, the government does not sign take-or-pay agree-ments. In an effort to replicate the certainty that a project owner obtains through a take-or-pay arrangement, SunPower has required that a military base off-taker guarantee that it will take a certain amount of energy from the project.

“The Department of Defense and all the military services said ‘We want to diversify our energy portfolio’... not to win an EPA ‘green technol-

ogy award’... but rather because it is all about improving the bottom line...”-Vice Adm. Dennis V. McGinn (USN, Retired), President, ACORE

Stan Lee and Kathy Ahsing discussed the Army’s renewable energy procurement

efforts prior to their panel discussion.

The Military 11


“One of the real upsides to the financier in a federal contract is that the credit risk is quite good.”

-Karen Butterfield, Director of Federal Programs, SunPower

Lastly, the military is uncomfortable with solar easements because base com-manders want to retain the right to build structures on the base as needs arise. As an alterna-tive, Butterfield said that a project owner may agree to forgo a solar easement yet require that the mili-tary make the proj-ect owner whole if it prevents access to sunlight.

The Army has estab-lished a centralized taskforce to evalu-ate and work with firms boasting solid construction, devel-opment, and project operations and maintenance (O&M) experi-ence. Recognizing that contracting with the federal government is complicated, the Secre-tary of the Army established the Energy Initia-tives Task Force (EITF) to streamline the bid-ding process. EITF is responsible for executing large-scale (10 MW and greater) energy proj-ects across the country. Exercising its authority to reach all the way down to the local project level, EITF is helping developers navigate mili-tary, state, and local bureaucracy. The taskforce is also able to affect higher-level DoD policies that might pose a barrier to project execution. To better understand private industry concerns, EITF meets with industry weekly.

David Belote, Vice President for Federal Business, Apex Wind Energy, Inc.

Emerging Commercial Technologies 12

The commercialization of a new energy tech-nology requires a strong and diverse team focus-ing on breakthrough technology development rather than manufac-turing capacity. Once a breakthrough technol-ogy is in hand, start-ups can partner with estab-lished corporate leaders to commercialize and deploy technology. Government investment throughout the research, development, dem-onstration, and deployment (RDD&D) process is critical to sustaining American innovation in energy technology.

The technology itself, as opposed to the ability to manufacture it, is the key to commercializ-ing new energy technologies. Bill Watkins of Bridgelux warned that too many start-ups are overeager to build manufacturing capacity. This inclination is intensified by investors who like to invest in things—machines, widgets, warehous-es, etc.—rather than in innovation. The key to success, Watkins argued, is to focus squarely on developing the technology. Once a start-up has developed game-changing technology, it may work with a larger entity with existing manufacturing capacity and expertise to com-mercialize the start-up’s innovation. Watkins offered Toshiba and Chevron as examples of

major companies he had worked with to com-mercialize a start-up’s technology. Eric McAffee also emphasized the importance of a corporate “big brother” to help younger technology com-panies through the “valley of death.”

The national laboratories offer start-ups an af-fordable way to develop and test energy tech-nologies. Paul Alivisatos, Director of the Law-rence Berkeley National Laboratory (LBNL), explained that if a firm agrees to keep its tech-nology open to the public, there is no charge for use of the national labs. If, on the other hand, a firm wishes to keep the technology it develops proprietary, then the labs charge a fee that Alivisatos emphasized the labs work hard to keep low. Alivisatos shared that LBNL is de-veloping a new facility with controlled lighting and HVAC to allow for the testing of windows and other technologies. LBNL is also working with U.C. Berkeley, Stanford, the National Re-newable Energy Laboratory (NREL), and a con-sortium of 40 solar companies to try to solve technological challenges that are common to many players in the solar industry. Alivisatos


Emerging Commercial Technologies

MODERATOR• Ira Ehrenpreis, General Partner, Technology Partners

PANELISTS• Arun Majumdar, First Head of ARPA-E, U.S. Department of Energy• Bill Watkins, CEO, Bridgelux, Board Member at Flextronics and Maxim Semi• Eric McAfee, Chairman, McAfee Capital• Paul Alivisatos, Director, Lawrence Berkeley National Laboratory

Photo: Arne Krueger

“The key to this is not the manufacturing. The key is the technology.”

-Bill Watkins, CEO, Bridgelux



“We have to recognize... that at the end of the day it’s [about] carbon.”

-Arun Majumdar, First Head of ARPA-E, U.S. Department of Energy

explained that different compa-nies can take advantage of the national labs in different ways, and he encouraged entrepre-neurs to reach out to him.

Energy innovation must be sus-tained by an increasing budget for RDD&D at the federal level. Moderator Ira Ehrenpreis di-rected the audience to a recent report by the Breakthrough Institute that detailed the De-partment of Energy’s long term support for hydraulic fracturing natural gas drilling technologies. This type of support helped facil-itate the recent boom in Ameri-can natural gas production and illustrates the level of sustained commitment from the U.S. gov-ernment that is necessary for energy innova-tion. Arun Majumdar extolled the examples of American innovation he witnessed while lead-ing ARPA-E. Majumdar emphasized there were significantly more projects that deserved in-vestment than ARPA-E had dollars to allocate.

Other federal policy changes would foster en-ergy innovation, but they have varying or un-clear levels of political support. Arun Majum-dar described a bipartisan bill currently in the legislative process that would allow renewable energy and other clean technology firms to form master limited partnerships (MLPs) for RDD&D purposes. The MLP structure is cur-rently only available to players in the oil, gas, and coal industries, and it allows considerable tax benefits. Making the MLP structure avail-able to renewable energy and clean technol-ogy firms would afford lower costs of capital for technology development. Bill Watkins ar-

gued that adjustments to immigration policy that would facilitate the employment of for-eign PhD holders would also foster innovation. Majumdar stressed that ultimately our nation needs to again recognize that the rationale for renewable energy and clean technologies ultimately comes down to carbon. Majumdar agreed with Bill Gates’ analysis that the United States does not need to put a carbon price in place today; merely the establishment of a pric-ing system that would take effect in the future would be enough to start driving investment. On a positive note, Alivisatos reminded the audience that California’s carbon market will open in November 2012. Revenue from the ini-tial auctions, Alivisatos argued, could be a great source of support for the energy technology industry in California.



Second Day Keynotes

MICHAEL PEEVEY

Michael Peevey opened the second day of the conference by discussing the California Public Utilities Commission’s (CPUC) efforts to support the state’s statutory RPS goals. The CPUC is working with investor-owned utilities (IOUs) to ensure they generate 33 percent of their electricity from renewable sources by 2020.

The RPS program supports the state’s goal of reducing greenhouse gas emissions to combat climate change. Peevey expressed confidence that the state would meet its RPS goals, remarking that progress has been rapid. In 2011, the IOUs—including South-ern California Edison, San Diego Gas & Elec-tric, and Pacific Gas & Electric—collectively obtained 21 percent of their electricity from renewable sources, a sharp increase from just 13 percent in 2008. The RPS program is divided into three compliance periods; the second compliance period from 2014-2016 is already over-procured.

The CPUC is driving a number of regulatory efforts to support small renewable energy projects. The California Solar Initiative is a customer-side solar rebate program that has resulted in 1,000 MW of installed solar in IOU territories by reducing the upfront cost of projects. As the program funding winds down, the private sector will need to step in and bring costs down.

The CPUC also has utility-side programs to support the RPS program. One program called the Renewable Auction Mechanism (RAM) is tailored to projects that are less than 20 MW and greater than 3 MW. The program reduces the transaction cost of negotiating contracts

by setting up a reverse auction for RPS-eligi-ble technologies. RAM also recognizes the strengths of different technology types by cat-egorizing projects as baseload, peaking as avail-able, and non-peaking as available. The latest RAM auction in May of 2012 proved successful at obtaining competitive prices as developers bid in ten times the amount of capacity that would ultimately be procured through the auc-tion.

Michael Peevey and Yiaway Yeh



Lastly, Peevey noted that California’s Feed-in-Tariff (FiT) is available for renewable energy projects up to 3 MW in capacity. Unlike FiTs in other countries and states, the California program relies on the competitive market. The program features a self-adjusting tariff. It starts with prices drawn from RAM results, but the

FiT adjusts those prices automatically in re-sponse to demand. Utilities establish a queue on a first-come, first-served basis, and the price may increase or decrease depending on wheth-er projects accept the FiT price or not.

YIAWAY YEH

Mayor Yiaway Yeh followed President Peevey with an introduction to the Palo Alto municipal utility, Palo Alto Electric, which serves 65,000 residents and businesses. Mayor Yeh described Palo Alto’s multi-faceted efforts to provide re-newable energy to consumers at low prices.

In 2007, Palo Alto adopted an aggressive goal of obtaining 33 percent of its electricity from renewable resources by 2015 with no greater than half a cent per kilowatt hour rate impact. The city has additionally created a solar rebate program that has led to installation of 3.5 MW from 435 systems.

Palo Alto also experimented with a FiT pro-gram by offering an avoided-cost rate of 14 cents per kilowatt hour to commercial custom-ers for solar energy. The new program did not have any subscribers. This was a hard lesson to learn, Mayor Yeh lamented, but the city council continues to learn from and build upon these attempts. Palo Alto is pioneering another pro-gram labeled “Palo Alto Green,” which is a vol-untary program offering an electricity mix from wind and solar energy. So far, 21 percent of ratepayers are participating, which makes it one of the most highly-subscribed and most active

voluntary programs in the country.

Mayor Yeh lastly discussed funding choices from the perspective of a municipality. He noted that cities currently have the ability to issue tax-ex-empt bonds, but congressional efforts to reduce the budget deficit threaten the future existence of the tax-exempt municipal bond structure—a prospect that concerns many mayors.

Investment Banking Perspectives

In this session, a panel of investment bankers from JP Morgan, Wells Fargo, Morgan Stanley, and Credit Suisse discussed the current finan-cial landscape for renewable energy projects and companies and their banks’ recent areas of focus and deal flow.

“It was the best of times, and the worst of times.” Julia Pettit of Stoel Rives opened with this famous quote from A Tale of Two Cities to describe the current state of renewable energy finance. While costs continue to become more and more competitive in many markets, all the panelists agreed that a number of critical fac-tors are poised to alter the financing environ-ment going forward, including:

• Expiration of the Section 1603 Cash Grant Program and imminent sunset of the Pro-duction Tax Credit;

• Conclusion of the Department of Energy’s Loan Guarantee Program; and

• Continued shakeout and consolidation in the renewable energy industry.

Characteristics of attractive deals that each of

the panelists’ institu-tions sought were con-sistent across the banks, including:

• A sponsor with a track record in the space. Panelists agreed that a developer with “skin in the game” and the potential for repeat business were ideal characteristics. As Ka-minsky noted, if it’s going to be a 20-year re-lationship, it very much matters who you’re doing business with.

• A 15-20 year PPA with an investment-grade counterparty. As of today, there has been virtually no appetite for non-recourse fi-nancing of merchant projects.

• A pro-forma demonstrating that flip terms and coverage ratios can survive stress test-ing and sensitivities. Several panelists noted the different traits of solar and wind proj-ects. Where solar production is less vari-able and thus enables more stable cover-age ratios, wind is more amenable to flip structures that allow the parties to respond to low output by simply extending the flip term.

• Size. The representatives of these large fi-nancial institutions agreed that they are ide-ally looking for scale—meaning preference for the opportunity to get $50-60 million


East Meets West: Investment Banking Perspectives

MODERATORS• Conor McKenna, CFA, Vice President, Reznick Capital Markets, LLC• Julia R. Pettit, Of Counsel, Stoel Rives LLP

SPEAKERS• Paul Leggett, Executive Director, Morgan Stanley• Christopher Radtke, Director, Credit Suisse• Jason Kaminsky, Vice President, Environmental Finance, Wells Fargo• Mit Buchanan, Managing Director, Energy Investments, JP Morgan

Photo: J. Pellgen

16

Investment Banking Perspectives 17


out of the door at one time, rather than funding a series of smaller projects.

The IPO market is closed, but M&A oppor-tunities exist. Panelists agreed that the IPO market was effectively closed at this point for clean tech companies. They drew attention to the current “risk off” environment in the pub-lic capital market with an empha-sis on valuing yield and certainty versus risk and reward. However, the panelists agreed that the IPO market will return. In anticipa-tion of this return, companies should be investing today in pre-IPO roadshows to familiarize in-vestors with their businesses and management teams.

With adversity comes opportu-nity. A cold IPO market leaves room for M&A opportunities according to several of the pan-elists. Because of firms’ inabil-ity to access capital in the public markets, firms will need strategic investors to come to the table. With strong distribution chan-nels, technical know-how, and engineering resources, strategic buyers have the ability to incubate technolo-gies and deploy them in markets at scale more quickly. Because of these synergies, the M&A environment is healthier and may not be driven by as much distress going forward, supporting valuations for clean tech companies that cannot be justified elsewhere in the current environ-ment.

Cash equity is out there. The expiration of the Section 1603 Cash Grant Program in 2012 means sponsors will need to utilize relation-ships and demonstrate increased skills to exe-cute in a tax-equity only environment. Despite the increased pressures on the development

side, panelists agreed that the tax equity mar-ket remains competitive on the investor side, too. Paul Leggett, Executive Director of Mor-gan Stanley, mentioned that if he had been asked one year ago what 2012 would look like, he would have predicted more distressed as-sets in solar and wind than exist today. To the contrary, there appear to be a healthy number

of buyers for projects in the market, support-ing asset prices for projects that are distressed but not fundamentally flawed. Mit Buchanan of JP Morgan agreed, noting fair amounts of cash equity available in the market to acquire as-sets, which has led her to caution some clients against offering purchase prices that are too low. In summary, Christopher Radtke, Director of Credit Suisse, said a deep market of buyers exists. However, projects that are far from the completion stage, and thus pose permitting and offtake uncertainty, face a drastically smaller supply of capital.

Renewable Energy Project Finance 18

Financiers of renewable energy proj-ects foresee a challenging year ahead, but they are optimistic about the market’s long-term prospects due to industry participants’ increas-ing ability to allocate risks effectively and uti-lize new financing vehicles. Panelists agreed that project sponsors will need to demonstrate flexibility and adaptability to thrive in the pres-ent environment of political uncertainty and changing market dynamics.

Demand for tax equity will exceed supply in the wake of the Cash Grant Program. Panelists agreed that demand for tax equity will increase as the Section 1603 Cash Grant Program winds down. Tax equity investors, however, are in short supply, and the panelists were uncertain whether existing players will be able to fill the gap left by the expiration of the Cash Grant Program.

Certain characteristics of tax equity invest-ments have hindered the entrance of new in-vestors. First, few potential investors have suf-ficient tax liability that can be offset by the tax credits associated with renewable energy proj-ects. Second, new entrants often lack sufficient knowledge of project finance and tax regula-tions necessary to participate in deals involving complex renewable energy assets. Finally, some

investors are hesitant to originate an investment that will require management over an extended period of time due to tax credit recapture rules governing transferability. Despite these barriers to attracting new tax equity investors, the pan-elists cited the success stories of non-financial corporate players liked Google and Chevron.

High tax equity returns are expected to stay stable. Heightened demand for tax equity is driving a significant return for investors, with panelists estimating unlevered annual returns of seven to nine percent. Prudential Capital’s Ric Abel explained that the market is thus “a little upside down” because presently a tax equity investor can earn more return than a cash eq-uity investor.

Institutional investors may become more active players in renewable energy project finance. Several panelists noted that solar project in-vestments appear particularly well suited for insurance companies and pension funds, which seek low-risk, stable assets to match the dura-tion of their long-term liabilities. Panelists also discussed MidAmerican Energy Holdings’ issu-ance of $850 million in investment grade cor-porate bonds to finance the utility-scale Topaz Solar Farm in California. Ric Abel noted that


Renewable EnergyProject Finance

MODERATORS• Michael Butler, CEO, Cascadia Capital• Don Weaver, Partner, SNR Denton

SPEAKERS• Jeetu Balchandani, Head, Structured Tax and Renewable

Energy Investments, MetLife• Lance Markowitz, Senior Vice President, Union Bank• Barney Schauble, Managing Principal, Nephila Advisors• Ric Abel, Managing Director, Prudential Capital Group• Terry Grant, Managing Director, Marathon CapitalPhoto: Tracy Olson

Renewable Energy Project Finance 19

institutional investors like Prudential are willing to offer construction and term fi-

nancing as well.

New financing mechanisms could open the re-newable energy sector to a larger investor base. Panelists discussed the promise of high-liquidity, tax-advantaged vehicles like the Master Limited Partnership (MLP) and Real Estate Investment Trust (REIT) for lowering the cost of capital for renewable energy projects.

Previously active EU banks have scaled back re-newable energy project financing. Panelists not-ed that European banks have decreased long-term lending to U.S. renewable energy projects due to the Eurozone’s ongoing credit crisis. They also expect the upcoming implementa-tion of the Basel III financial regulations to fur-ther reduce the availability of long-term debt finance, increasing the cost and decreasing the length of project finance debt. In contrast, Ric Abel of Prudential Capital pointed to Japanese and Canadian banks as well-funded institutions that are still able to offer longer tenors.

Despite disruptions in the debt markets, ample financing remains available for “good projects.” Ric Abel of Prudential Capital expressed the common sentiment that “good projects still get financed.” Noting that “debt is extraordi-narily cheap,” Union Bank’s Lance Markowitz explained that—because expiring federal in-centives have reduced the number of available renewable energy project investments—banks are willing to be “fairly aggressive” in order to retain market share. Interestingly, while some panelists noted that today’s low-priced power market is harming renewable energy project at-tractiveness, MetLife’s Jeetu Balchandani stated that he views low PPA prices as a credit posi-tive because highly priced PPAs are riskier if the offtaker experiences financial difficulty.

The use of insurance to unbundle and allocate renewable energy project risks is “a sign of a healthy market.” Barney Schauble explained that Nephila Capital is offering project own-

ers weather-linked insurance coverage to hedge cash flow volatility resulting from less-than-expected resource volume (e.g. less wind, sunlight, or water flow). Panelists agreed with his assessment that such insurance prod-ucts are “a sign of a healthy market” because they play a critical role in obtaining better fi-nancing terms and protecting against future losses.

Closing Thoughts. To close out the discussion, each panelist was asked to share a “provocative prediction” for the renewable power sector.

• Jeetu Balchandani of MetLife optimistically forecasted an extension of the PTC due to its crucial role in facilitating U.S. wind proj-ect financing.

• Lance Markowitz of Union Bank predicted that even with a PTC extension, solar deals would outshine wind financings in 2013. He also forecasted—with tongue in cheek—that people will realize “that tax equity guys are really the good people.”

• Ric Abel of Prudential Capital also predict-ed a PTC extension, but he stated it will not solve the problem of low PPA prices. To overcome that challenge, the renewable energy industry will need to wait for newly constructed gas-fired projects to increase demand for natural gas and drive more fa-vorable PPA pricing across the board.

• Barney Schauble of Nephila Capital offered a silver lining prediction that while removal of key policy incentives may seem like “bad news,” the disappearance of these incen-tives may spur increased cooperation with natural gas players, with the potential for combined natural gas and renewable energy projects that would pose significant advan-tages to the grid.

• Terry Grant of Marathon Capital expressed the potential entry of “some very sophisti-cated, probably internationally-oriented” in-vestors into the renewable energy project market “who love the yield” offered by U.S. solar assets.


Developers' Viewpoints 20

West Coast developers gave their perspectives on the latest trends in financing and transmis-sion development. They also discussed the best policies to mitigate technology risk and sustain renewable energy project investment.

The limited availability of tax equity will con-tinue to challenge the financing of renewable energy projects. Over the past few years, tax equity has comprised a smaller part of a proj-ect’s investment. It will occupy an increasingly larger portion, however, as the Section 1603 Cash Grant Program wanes. Bob Powell noted that, despite developer demand for more part-ners with significant tax appetite, the list of tax equity investors is relatively static.

Cash equity is becoming more prevalent, espe-cially in solar. Arno Harris and Jim Rice pointed out that there have been many more cash equi-ty investors coming into the market, especially downstream.

Stable fed-eral incentives would bring greater certain-ty to renewable energy project investment, and

new legislation could foster more robust indus-try and project development. The developers’ wish list for upcoming federal government ac-tion included extension of the production tax credit and defense of the investment tax credit. Arno Harris argued that the best case scenario would be a price on carbon. Jonathan Weisgall noted that a carbon price would be potentially politically viable because it has both liberal and conservative supporters. Mr. Weisgall addition-ally expressed hope for comprehensive tax re-form that could offer options other than tax equity to structure deals. Bob Powell support-ed this and mentioned Master Limited Partner-ships as one example of a vehicle that could spur investment in renewables. A.G. Kawamura stated the need for multiple agencies to work together on innovation grants, obtain public support, and to get buy-in for new technologies. Bigger projects are more viable than smaller projects. The biggest risks with project devel-opment are interconnection and permitting


Developers’ Viewpoints: What’s Happening on the Ground?

MODERATOR• Nancy Hartsoch, SVP, Marketing and Sales, SolFocus Inc.

SPEAKERS• Bob Powell, Chief Financial Officer, NRG Solar• Jim Rice, CEO, Nautilus Solar• Jonathan Weisgall, VP, Legislative & Regulatory Affairs, MidAmerican

Energy Holdings Company• A.G. Kawamura, Former Secretary, California Department of Food and Agricul-

ture• Arno Harris, CEO & Chairman, Recurrent Energy;

Board Chair, Solar Energy Industry Association (SEIA)

Photo: Thomas Ormston

Developers' Viewpoints 21


requirements. Both require considerable time and money, sometimes making smaller projects unaffordable. For behind-the-meter projects, there is very little margin for error. Bob Powell stated that developing distributed gener-ation projects was like “vacu-uming nickels.”

The industry is averse to try-ing lesser known technolo-gies. New technologies make project developers worry whether the manufacturer will last beyond the life of the PPA. Jim Rice said that his company was simply not in the business of trying any-thing new. The consensus view was that commercial-ization of new technologies presents too many challenges. Taking a technology out of a lab, ramping it up, and having a revolutionary effect on prices is an illusory goal for many developers. Nancy Hart-soch commented on a technology-investment disconnect: technologies are expected to last twenty to thirty years and often need to be proven in just two to three years.

The public sector plays an important role in commercializing technologies. Jonathan Weis-gall and A.G. Kawamura cited examples such as government loan guarantees and public-private partnerships with universities that created commercialization platforms.

Panelists disagreed about the need for ad-ditional transmission in California. Jonathan Weisgall noted that only about 40 percent of

the transmission that is needed for California to meet its Renewable Portfolio Standard (RPS) goals is currently available. Arno Harris and Bob Powell stated that it is less clear wheth-er California has enough transmission or not. While there are congestion spots with projects tying up the queue, many of those projects are actually non-viable. Conclusions over the po-tential lack of transmission, therefore, could be premature. Arno Harris noted that there is a mismatch between the priorities of the utilities, which prioritize projects based on a “least cost, best fit” analysis, and those of the California In-dependent System Operator (CAISO), which uses a first-come, first-served system to rank projects. Though the CAISO and the CPUC can be bureaucratic, they are making progress; they recently created guidelines that harmonize procurement and prioritize deliverability.

“You really need to think about how to build your bulletproof project as we get to 2016 or 2017 because we’re going to

lose the level of subsidies we’ve had.”-Bob Powell, CFO, NRG Solar

Broadening the Debate 22

In this session, a diverse set of panelists discussed new areas of innovation in ener-gy financial structures, their firms’ activities to date, and their perspectives on potential future developments. Financial struc-tures covered included Master Limited Part-nerships (MLPs), Real Estate Investment Trusts (REITs), and On-Bill Financing for investing in and funding renewable energy and energy ef-ficiency projects.

Opportunities exist in new financial structures. The panelists discussed a variety of new fi-nancial structures that offer the potential for expanded access to capital and lower costs of capital. Rick Needham, Director of Green Busi-ness Operations at Google, highlighted the po-tential of utilizing Master Limited Partnerships (MLPs) for renewable energy. MLPs are a tax-preferential investment vehicle used widely in the oil and natural gas industry. Current law, however, excludes renewable energy projects from eligibility for MLP classification. Needham urged that “it just makes sense” to make the MLP classification available to renewable ener-gy investments. Brad Copithorne, Director of Financial Innovation at the Environmental De-fense Fund, provided an overview of the prom-

ise of On-Bill Repayment, which would enable building owners and renters to fund energy efficiency upgrades and renewable electricity generation projects with bank or other private loans that are repaid through their utility bills. John Bohn, CEO of Renewable Energy Trust, laid out the core reasons for his firm’s pursuit of a new REIT model for residential solar, citing the benefits of its simplicity and lower dividend requirements as compared to MLPs. Despite the range of innovative structures being cham-pioned, all panelists agreed that the objective was to help expand access to cost-effective capital and increase investor participation in re-newable energy projects.

Funding of renewable energy projects must be democratized. The panelists highlighted the current gap in the market for retail investors. Despite having an interest in renewable en-ergy and capital to invest, the average person still cannot effectively invest in renewable en-ergy infrastructure, with current financial struc-tures limiting opportunities to large corpora-tions and investment funds. As Google’s Rick


Broadening the Debate:New Financial Structures for the Future

Photo: Sophia

MODERATOR• Dan Adler, President, California Clean Energy Fund (CalCEF)

PANELISTS• Luka Erceg, Founder, President & CEO, Simbol Materials• Rick Needham, Director of Green Business Operations, Google Inc.• Alex Keros, Senior Project Engineer, General Motors• John Bohn, CEO, Renewable Energy Trust Capital• Brad Copithorne, Director of Financial Innovation, Energy Program,

Environmental Defense Fund (EDF)

Broadening the Debate 23


“If an average install for an electric vehicle charging station is a thousand bucks, and we sold 100,000 cars, that’s 100 million dollars of revenue. You’re telling me someone here can’t figure out a way to make money out of it?”

-Bob Powell, CFO, NRG Solar

Needham said, “Every time we make an investment, I wish I could do it, too, but I can’t. These projects would do better than our 401(k) the last couple years and you’d know you’re investing in something you really can support.” John Bonn added, “There is no way at this point for a retail investor, no mat-ter how enthusiastic he or she is, to in-vest directly in this industry[...] yet the public market is the gateway to lower costs of capital and expanded public demand.” The panelists shared a sense of promise for vehicles that open up investment channels to retail investors.

California remains the hub for innova-tion. Panelists shared their reasons for incubating their ideas in California. Rick Needham of Google said the company’s objective is to keep its pulse on new innovations, citing Google’s commercial installation of a new fuel cell technolo-gy, which may not have happened if the start-up fuel cell company had not been just a five-minute drive down the road. John Bohn of RET pointed out that in the Bay Area, “Small is OK.” Unlike on Wall Street, where a multi-hundred mil-lion or billion dollar deal is the starting point for a meeting, small is acceptable around the Bay Area and allows firms to get a start and develop markets.

The scale of the renewable energy and clean tech market promises further financial innova-tion. Where new financial structures had not been identified, panelists cited the sheer size of the market as promising for future innovation. For example, Alex Keros of GM trumpeted the sale of 100,000 electric vehicles per year and average charging station installation costs

of $1,000 as a $100 million revenue oppor-tunity. “Someone will make that an opportu-nity,” he said. Rick Needham highlighted the current constraints around financing transmis-sion, where developers must pay for upgrades up front. Specifically he saw an opportunity for financing a large scale network of high-voltage direct current (DC) transmission.

“The key to this is not the manufacturing.

The key is the technology.”-Bill Watkins, CEO, Bridgelux

24


ContributorsTim CroninJ.D. Candidate, May 2014U.C. Berkeley School of [email protected]

Grace HsuJ.D. Candidate, May 2014U.C. Berkeley School of [email protected]

Carol LuMaster in Public AffairsPrinceton [email protected]

Rohan MaM.B.A. Candidate, May 2013U.C. Berkeley, Haas School of [email protected]

Himani PhadkeM.A., Stanford UniversityCOO, REwiRE [email protected]

Emily SangiJ.D. Candidate, December 2012U.C. Berkeley, School of [email protected]

Ari van SchilfgaardeJ.D. Candidate, May 2015U.C. Berkeley, School of [email protected]

Acknowledgments

EditorTim CroninJ.D. Candidate, May 2014U.C. Berkeley School of [email protected]

LayoutKyle [email protected]

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