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Financing and Capital Market Update

Financing and Capital Market Update . Seth Kirshenberg. Primary DOD Legal Authorities to Acquire Power. 2922a DOD Authority – (10 U.S.C. 2922a) – Up to 30 years Appropriated Funding – Pay for it upfront Power Purchase Agreements – (40 U.S.C. 501 / FAR Part 41 ) -- Up to 10 years

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Financing and Capital Market Update

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  1. Financing and Capital Market Update Seth Kirshenberg

  2. Primary DOD Legal Authorities to Acquire Power • 2922a DOD Authority– (10 U.S.C. 2922a) – Up to 30 years • Appropriated Funding – Pay for it upfront • Power Purchase Agreements– (40 U.S.C. 501 / FAR Part 41) --Up to 10 years • “Enhanced Use Leasing” – (10 U.S.C. 2667) • Authorizes the Service Secretaries to lease non-excess property. • An EUL cannot be developed primarily for government use. • Energy Savings Performance Contract (ESPC) – (42 U.S.C. 8287) • Contracts for the sole purpose of achieving energy savings and benefits ancillary to that purpose. Period not to exceed 25 years. • Energy Service Agreements (ESA) • ESPCs can incorporate the purchase of on-site renewable energy, if the result is lower energy consumption and costs. ESPCs with an ESA, requires Office of Management and Budget (OMB) review as per a Aug 16, 2011 memo. • Utility Energy Service Contract (UESC)– (10 U.S.C. 2913) • DoD may enter into UESCs for up to 10 years. • Utility Privatization– (10 U.S.C. 2688) • Enables a Secretary of a military department to convey a utility system, or part of a utility system, under the jurisdiction of the Secretary to a municipal, private, regional, district, or cooperative utility company or other entity. (up to 50 years). Other - (10 USC 2916, 10 USC 2917, 10 USC 2662, 40 USC 591, DoD Instruction 4170.11, DoDI4165.70, etc.)

  3. 10 U.S.C. §2922a (a) Subject to subsection (b), the Secretary of a military department may enter into contracts for periods of up to 30 years – (1) under section 2917 of this title; and (2) for the provision and operation of energy production facilities on real property under the Secretary’s jurisdiction or on private property and the purchase of energy produced from such facilities. (b) A contract may be made under subsection (a) only after the approval of the proposed contract by the Secretary of Defense. (c) The costs of contracts under this section for any year may bepaid from annual appropriations for that year. See: Financing of Renewable Energy Projects Policy, dated Nov 9, 2012, from DUSD(I&E)

  4. Recent History of DOD Financing P3 Projects • Military Housing • Utilities • EUL • Renovation of Facilities • New Facilities • Energy Efficiency • Renewable Energy • Exchanges • Etc. Market Evolved where DOD/Private Sector created a Market Decreased Cost of Borrowing Project Proceeds Increased More could be built BENEFIT DOD

  5. DOD’s Issues Interest at Base for Renewable Energy Project? Mission Impact Term of Contract Budgetary Scoring Long-term Cost - Unstable Project Economics Expiration of Federal Subsidies Expiration of State Subsidies REC Markets NEPA CERCLA Politics Withdrawn Land Complexities – Interagency Agreements Limited Transmission Line Access Long Project Lead Times Market History DOD’s long-term commitment Transactions are Not Easy -- Yet

  6. Investors seek assets that are: Liquid Tradable Clear Transaction Supported by DOD (Purchaser) Priced by the market, and Where risk and performance are easily measured Understandable And Make Sense Financially

  7. “Get your facts straight first, then you can distort them as you please.” –Mark Twain

  8. Why Ratings Matter Lower cost of Funds Larger Investment Pool of Investors Third Party Independent Input on deal S&P Rating Criteria ‘AAA’—Extremely strong capacity to meet financial commitments. Highest Rating.‘AA’—Very strong capacity to meet financial commitments.‘A’—Strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances.‘BBB’—Adequate capacity to meet financial commitments, but more subject to adverse economic conditions.‘BBB-‘—Considered lowest investment grade by market participants. ‘D’—Payment default on financial commitments.

  9. Rating Agency/Investor Review of DOD Renewable Energy Issues • Term of contract (long-term contracting 10 USC 2992a) • PPA Structure • Third party purchaser of Power (if any) • Interconnection Agreements • SRECS and SREC Guarantees • Tax Credit and issues • Strength of the Developer • Pricing • Termination for convenience • Site control (2662/2667/other) • Relocation • Novation/assignment • State utility laws

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