Photovoltaic Systems – Utility Scale Part 2 April 9, 2014

1. Photovoltaic Systems – Utility Scale Part 2 April 9, 2014

2. Learning Outcomes • A review of the permitting process and financing options for utility-scale PV

3. Value to participants • A review of the importance of technical vs non-technical components of utility scale projects • A review of utility scale projects both commissioned and in development

4. Grid-Connected Utility-Scale PV Systems PV has seen tremendous growth in recent years: • There are now over 13,000 MW of cumulative solar electric capacity operating in the U.S., enough to power more than 2.2 million average American homes. • There were 140,000 new solar installations in the U.S. during 2013, bringing the total to over 445,000 PV systems operating today. • The utility market led the charge again with 2,847 MW of PV and 410 MW of Concentrating Solar Power (CSP) installed in 2013.

5. Grid-Connected Utility-Scale PV Systems

6. Grid-Connected Utility-Scale PV Systems

7. Grid-Connected Utility-Scale PV Systems Falling Costs Make Solar More Affordable: • Year-over-year, the national average PV installed system price declined by 15% to $2.59/W in Q4. • The average price of a solar module has declined by 60 percent since the beginning of 2011 • While these price drops are beneficial for solar consumers, the sharp fall in prices, due in part by a global oversupply, has put a serious strain on solar manufacturers worldwide

8. Grid-Connected Utility-Scale PV Systems

9. Grid-Connected Utility-Scale PV Systems

10. Grid-Connected Utility-Scale PV Systems

11. Grid-Connected Utility-Scale PV Systems Key Findings in the YIR 2013 report • The U.S. installed 4,751 MW of solar PV in 2013, up 41% over 2012 and nearly fifteen times the amount installed in 2008. • There were 140,000 individual solar installations in the U.S. in 2013, and a total of over 440,000 systems operating in total today. • More solar has been installed in the U.S. in the last 18 months than in the 30 years prior. • The market value of all PV installations completed in 2013 was $13.7 billion. • Solar accounted for 29% of all new electricity generation capacity in 2013, up from 10% in 2012. This made solar the second-largest source of new generating capacity behind natural gas.

12. Grid-Connected Utility-Scale PV Systems Key Findings in the YIR 2013 report • Weighted average PV system prices fell 15% in 2013, reaching a new low of $2.59/W in the fourth quarter. • The U.S. installed 410 MW of concentrating solar (CSP) in 2013, increasing total CSP capacity in the U.S. more than 80% • There is now a total of 12.1 GW of PV and 918 MW of CSP operating in the U.S • We forecast 26% PV installation growth in 2014, with installations reaching nearly 6 GW. Growth will occur in all segments but will be most rapid in the residential market.

13. Grid-Connected Utility-Scale PV Systems Also in the YIR 2013 report: “Perhaps more important than the numbers,” writes Shayle Kann, Senior Vice President at GTM Research, “2013 offered the U.S. solar market the first real glimpse of its path toward mainstream status. The combination of rapid customer adoption, grassroots support for solar, improved financing terms, and public market successes displayed clear gains for solar in the eyes of both the general population and the investment community.”

14. Grid-Connected Utility-Scale PV Systems Furthermore, growth at the utility-scale has several advantages • At project size larger than 5MW, the power is almost exclusively sold to utilities, since commercial customers do not have the load to support 5MW or more. • In order for solar projects to access relatively low-cost capital, PPA contracts must be signed with a counterparty that has an excellent credit rating. Utilities are generally considered excellent counterparties due to their bonding capability and regulatory mission to provide power to their customers. • Environmental permitting, grid integration, and site control can be less burdensome at the utility-scale. • Companies are also considering development at brownfield sites, including former mining operations and other disturbed lands, which can further reduce environmental oversight of project development.

15. Grid-Connected Utility-Scale PV Systems Some important utility-scale leaders • First Solar is the clear leader among developers with 1,920 MW of capacity in the development or construction phase. This amounts to about one-fifth of the total capacity of large-sized projects under development. First Solar also has one of the largest projects under current development, the 550 MW Topaz Solar Farm, which will sell its energy to PG&E • SunPower is another player with a significant stake in the large-sized solar project space. The developer signed three PPAs with SCE in 2011 for the sale of 711 MW of power from three facilities. • Energy developer enXco recently signed an agreement with Japanese manufacturer Solar Frontier to deliver up to 150 MW of CIGS modules for use in enXco’s PPAs with SDG&E. These will be the first CIS modules deployed at utility scale in the United States.

16. Grid-Connected Utility-Scale PV Systems • Factors facilitating utility-scale solar development • The steadily dropping costs of solar modules and other PV system components • Federal and state policies that provide crucial support to the solar industry in the form of tax incentives, grants, loan guarantees, renewable energy standards, and production incentives

17. Grid-Connected Utility-Scale PV Systems Federal Economic Recovery Policies • The Energy Policy Act of 2005 increased the investment tax credit (ITC) for solar energy systems from 10% to 30% of eligible solar property. • The Emergency Economic Stabilization Act of 2008 (EESA) extended the 30% ITC for solar and other qualifying renewable technologies through December 31, 2016. EESA expanded the ITC use by making it available to public utilities (investor-owned utilities). • The American Recovery and Reinvestment Act (ARRA), passed in February 2009, further expanded the availability and usability of various tax credits, depreciation opportunities, loan guarantees, and other mechanisms designed to encourage private investment in renewable energy and energy efficiency projects. Specifically, the Recovery Act enabled ITC-eligible projects to receive a grant of equivalent value in lieu of the tax credit.

18. Grid-Connected Utility-Scale PV Systems Clean Energy Loan Guarantee Program • Section 1703: Section 1703 of Title XVII (from the Energy Policy Act of 2005) authorizes DOE to guarantee loans for projects that employ new or significantly improved energy technologies and avoid, reduce, or sequester air pollutants or greenhouse gases. • Section 1705: Section 1705 of Title XVII, added by the Recovery Act, authorizes DOE to guarantee loans for certain clean energy projects that commenced construction on or before September 30, 2011. The program was suspended after that date.

19. Grid-Connected Utility-Scale PV Systems Section 1705 loan guarantees

20. Grid-Connected Utility-Scale PV Systems Section 1705 loan guarantees

21. Grid-Connected Utility-Scale PV Systems Clean Energy Loan Guarantee Program • Loan guarantees are awarded in the form of credit subsidies. • A credit subsidy is a similar structure to a loan loss reserve, in which banks set aside money to cover defaults in their loan portfolio. • Likewise, for each loan guarantee award, the federal government sets aside a sum (the credit subsidy) in the project’s name, which acts as insurance in the case of project failure.

22. Grid-Connected Utility-Scale PV Systems Clean Energy Loan Guarantee Program Under this solicitation, DOE required that developers also partner with a private lender. DOE created the Financial Institution Partnership Program (FIPP), which specifies debt cannot exceed 80% of total capital. FIPP was designed for simple project finance structures without complex tax equity arrangements.

23. Grid-Connected Utility-Scale PV Systems Modified Accelerated Cost Recovery System Depreciation

24. Grid-Connected Utility-Scale PV Systems Renewable Portfolio Standard Policies • As of January 2012, 29 states, D.C., and Puerto Rico have established mandatory RPS policies and eight more have established non-binding renewable portfolio goals (RPGs). • Mandatory state RPS policies have been particularly successful at advancing new renewable energy development in a number of states. Renewable energy goals are non-binding targets either established by legislation or executive order.

25. Grid-Connected Utility-Scale PV Systems State and Regional Renewable Energy Certificate (REC) Markets • RECsrepresent a quantifiable mechanism by which to reward renewable energy projects through an additional revenue stream. • These certificates represent the environmental, social, and other non-power attributes of renewable electricity generation • To comply with RPS policies, utilities or Load Serving Entities (LSEs) can directly own renewable energy generation, purchase renewable electricity bundled with RECs through PPAs, and/or purchase unbundled RECs separately. • To show compliance, utilities or LSEs can, in many states, purchase unbundled RECs through long- or short-term contracts or on the spot market (usually to true-up the amount of renewable electricity procured in a given year).

26. Grid-Connected Utility-Scale PV Systems Financing Mechanisms to Develop Utility-Scale Solar • Many of the policies supporting renewable energy employ tax incentives. • However, renewable energy projects and their developers generally do not have enough tax liability, also known as “tax appetite”. • A number of financial structures have been developed to take advantage of the tax credits at their highest value. • These structures generally require an equity investment from a firm with sufficient tax appetite to utilize the tax credits; this is referred to as a tax equity investment. • Such investments, and the financial structures that build upon them, are designed to maximize the value of federal, state, local, and utility-based incentives

27. Grid-Connected Utility-Scale PV Systems Specific Financing Structures • Singleowner (balance sheet finance) • Leases, including sale-leaseback and inverted lease • Partnershipflip • Utilityprepay

28. Grid-Connected Utility-Scale PV Systems Single Owner Single owner finance represents the direct investment by a developer into a project asset using the balance sheet (as opposed to project finance) of the developing entity. Utility-scale solar projects can be balance-sheet financed in one of two ways: (1) utility-owned generation and (2) developer balance sheet.

29. Grid-Connected Utility-Scale PV Systems Utility-Owned Generation

30. Grid-Connected Utility-Scale PV Systems Utility-Owned Generation • Utilities can directly finance, own, and operate solar energy projects • PG&E, SCE do this through the CA Solar Power Initiative. Investments recovered through base rates • Utilities can invest through developer subsidiaries or affiliates. • MidAmerican Energy purchased Topaz and 49% of Agua Caliente • Utilities can use ratepayer tax appetite to support investment by a third party.

31. Grid-Connected Utility-Scale PV Systems Utility-Owned Generation • Utilities can use ratepayer tax appetite to support investment by a third party. • SDG&E invested tax equity into the Rim Rock Wind facility located in northern Montana. SDG&E will purchase the energy and RECs, although the energy will not be delivered to the utility • Utilities can invest shareholder tax appetite into a third-party project. • Subsidiaries of PG&E have invested tax equity in SolarCity and SunRun, enabling these entities to develop residential and commercial solar systems. The funds were provided purely as shareholder funds and will not be incorporated in rates.

32. Grid-Connected Utility-Scale PV Systems Partnership Flip The project developer partners with a tax equity investor to fully use a project’s tax benefits. In the leveraged partnership flip, where capital is provided as equity and debt, the flip structure is generally designed to provide the tax equity investor a pre-negotiated return in a set number of years. After that design goal is met, the annual stream of benefits (including tax benefits and cash) is reallocated, or “flips”, to the sponsor to reward the risk taken and work invested.

33. Grid-Connected Utility-Scale PV Systems Partnership Flip

34. Grid-Connected Utility-Scale PV Systems Sale-Leaseback In sale-leaseback financing, a project developer sells the project assets for cash and simultaneously signs a long-term lease with the investor. The financial transaction is accomplished by conveying the title of the asset, at an agreed upon value, to an investor in exchange for a lump-sum payment to the developer. The developer then makes lease payments to the investor in exchange for the cash injection. The developer, in turn, arranges a PPA with the power purchaser, which becomes the primary revenue stream used to pay the lease payments. The developer (the lessee in this structure) is obligated to pay a fixed rent to the investor (the lessor) for the term of the lease regardless of how the system performs or if force majeure events occur.

35. Grid-Connected Utility-Scale PV Systems Sale-Leaseback

36. Grid-Connected Utility-Scale PV Systems Utility Prepay Utility prepay (sometimes referred to as hybrid financing) uses a utility’s low-cost capital to directly finance a renewable energy project. Under the structure, a utility will prepay for the energy to be delivered under a contract. In turn, the prepayment provides a massive down payment enabling the termination of the construction financing debt. The utility indirectly applies its access to low-cost capital to finance the facility and receives beneficially priced power in return.

37. Grid-Connected Utility-Scale PV Systems Utility Prepay

38. Grid-Connected Utility-Scale PV Systems Final Thoughts • To take full advantage of depreciation benefits and other tax incentives, the industry relies on complex financial arrangements, which include various forms of partnerships and lease structures. These financial arrangements are designed to allocate risk and reward among the developer and a specialized tax equity investor that can specifically take advantage of the various tax incentives made available at the federal and state level. • The perceived risk of utility-scale solar projects is still quite high and market acceptance remains elusive in this era of tight credit markets. For the immediate future, utility-scale solar development will remain dependent on the array of government incentives designed to support project financing. This will likely be true until solar technologies can provide energy at grid-parity (i.e., on par financially with competing technologies).