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Presenting a live 90-minute webinar with interactive Q&A

Financing Municipal Renewable Energy Projects: Negotiating Power Purchase Agreements for Municipalities

Assessing Benefits and Risks of PPAs, Anticipating Regulatory Challenges, Structuring Key Provisions Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific WEDNESDAY, AUGUST 17, 2016

Paul R. Michaud, Counsel, Murtha Cullina, Hartford, Conn. David A. Soldani, Partner, Atkinson Andelson Loya Ruud & Romo, Fresno, Calif.

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Municipal Power Purchase Agreements

Benefits, Risks, and Regulatory Challenges

Paul R. Michaud, Esq. 860-240-6131 | pmichaud@murthalaw.com

August 17, 2016

The PPA Financing Arrangement

 A third-party provider designs, finances, builds, owns, operates

and maintains the renewable energy system.

 Host customer (Municipality) agrees to site the system on its

property and purchase the system’s electric output from the third- party provider for a predetermined period.

 This financial arrangement allows the Municipality to receive

stable and often low-cost electricity, while the services provider or another party acquires valuable financial benefits, such as tax credits and income generated from the sale of electricity.

6

PPA – Key Participants

• Renewable Energy Services Provider
• Host (Municipality)
• Local Utility
• Special Purpose Entity
• Equipment Manufacturer
• Installer
• Investor

7

Roles of PPA Participants

Source: EPA

8

Municipality PPA Point-of-View

HOST Municipality Services Provider $, RECS, Tax Credit Power

9

PPAs Not Allowed In Every State

Source: www.dsireusa.org

10

Third-Party Ownership Restrictions

• Typically where third-party sales (PPA) are illegal it is

due the state’s definition of a public utility – only utilities are permitted to sell electricity

• Some states enact legislation adding exceptions for

certain types of facilities, like solar, to get around this barrier

11

Benefits of a PPA

• No up-front capital costs for municipality
• Predictable payments by the municipality to the third-party services

provider

• Third-party can take advantage of federal tax credit and pass savings

to municipality

• Municipality only pays for the power actually produced by the system
• Third-party deals with complex system design and permitting process
• Third-party services provider operates and maintains the system

12

Risks of a PPA

• Breach of Contract by

either party

• Price of electricity drops
• Developer goes out of

business

• Early Termination Fee
• Host facility outages
• Rooftop needs replacement
• Grid outage
• Limited liability of PPA

provider

13

Municipal Constraints

• Debt limitations in city codes, state statutes, and

constitutions

• Restrictions on contracting power in city codes and

state statutes

• Budgeting issues
• Municipal politics (e.g. BOS v. BOE)
• Authority to grant site interests and buy electricity

14

Regulatory Challenges

• NEM and VNM are in regulatory flux:

 Aggregate caps being reached – states must decide how to

proceed

 Increased amounts of solar PV on the grid

• Rate Design Changes:

 Fixed Charges & Minimum Bills  Demand Charges  Standby Charges or Flat Fees

15

What is NEM and VNM?

95% of distributed PV systems are net-metered

16

Net Metering

Source: www.dsireusa.org

17

Virtual Net Metering

Source: www.dsireusa.org

18

Why are NEM and VNM in Flux?

• Concerns about cost shifting
• Efforts to become more granular in solar valuation and

compensation

• Traditional utility business model
• Change in electric system – centralized generation to

DG

• Regulatory policy has not yet caught up with technology

19

Where are NEM and VNM in flux?

• Arizona
• Arkansas
• California
• Connecticut
• Florida
• Hawaii
• Idaho
• Iowa
• Illinois
• Louisiana
• Maine
• Maryland
• Massachusetts
• Mississippi
• Montana
• Nevada
• New Hampshire
• New Jersey
• New York
• Ohio
• Oregon
• Pennsylvania
• Rhode Island
• Vermont

20

What types of changes?

• NEM & VNM Alternatives
• Ratemaking:

Fixed Charges v. Volumetric Charges

• Value of Solar (VOS)

21

Fixed Charges: Past Year

Source: www.dsireusa.org

22

Other Policy Considerations

• Renewable Portfolio Standard (RPS)
• Renewable Energy Credits (RECs)
• Federal Tax Incentives
• State Incentives

23

Source: www.dsireusa.org

24

25

Federal Tax Incentives

• Investment Tax Credit (ITC)

 30% ITC for Solar, Fuel Cells and Small Wind

• Incentive reduced over time starting in 2020

 10% ITC for Geothermal, Micro-turbines and CHP

• Modified Accelerated Cost Recover System (MACRS)

26

State Incentives

• The Database of State Incentives for Renewables & Efficiency

(DSIRE) is the most comprehensive source of information on incentives and policies that support renewables and energy efficiency in the United States.

• Established in 1995, DSIRE is currently operated by the North

Carolina Solar Center at NC State University, with support from the Interstate Renewable Energy Council.

• WWW.DSIRE.ORG

27

PPA Contractual Considerations

• Performance Guarantees
• Conditions Precedent
• Interconnection costs included price?
• Facility outage and grid outage
• PPA Pricing

28

PPA Pricing Options - Fixed

Source: NREL

29

PPA Pricing Options - Escalator

Source: NREL

30

Municipal Pan to a PPA

 Identify location of Renewable Energy System



Roof-top System (5-10 watts per square foot)



Ground-mount System (1 megawatt per 4-5 acres)

 Issue a Request for Proposals (RFP)



Alternative fee arrangements work well

 Draft and Negotiate Contracts



PPA, Lease or Easement

 Permitting and Interconnection



On the Developer

 Design and Construction



On the Developer

31

Town of Stafford, CT – Ground- Mount Solar (2 MW)

32

Town of Stafford, CT – Landfill Solar (1 MW)

33

• Mr. Michaud is the Chair of the firm’s Renewable Energy practice group. Mr. Michaud’s experience

extends to all elements of renewable energy project development, operations, finance, permitting, and construction including drafting and negotiating complex power purchase agreements, real estate leases, renewable energy certificate agreements, equipment procurement agreements, and construction agreements. Mr. Michaud represents a diverse client-base, including local and national solar, fuel cell, wind, CHP, small hydro and energy efficient companies, as well as municipalities in renewable energy and microgrid RFP matters. Mr. Michaud also represents renewable energy off-takers, including municipalities, commercial and industrial companies, hospitals and other health care facilities. In addition, Mr. Michaud represents renewable energy clients on regulatory matters before state public utility commissions and siting councils. He is the Founder and Executive Director of the Renewable Energy and Efficiency Business Association,

• Inc. (REEBA) where he has extensive experience as a certified lobbyist on renewable energy

policy matters.

Thank You!

34

Cerritos • Fresno • Irvine • Pleasanton • Riverside • Sacramento • San Diego

Financing Municipal Renewable Energy Projects

Presented by: David A. Soldani, Esq.

36

ENERGY AUDIT

Get a Handle on the Agency’s Actual Power Usage Before Pursuing A Solar Energy Solution

– Energy Audits and Assessments – Some states offer free and low costs assessment resources – The Center for Sustainable Energy can also provide free or reduced cost assessment (http://energycenter.org/) – Local utilities have various programs that provide free or subsidized energy auditing

37

Energy Audit

• Deliverables from the Agency

–Historical Utility Usage and Cost Data –Projected Future Energy Requirements – Master Planning Issues

• Access to Records and Sites
• Use of Third Party Consultant By Agency to test PPA

vendor’s assumptions

38

Energy Efficiency Measures

Implement energy efficiency measures prior to determining PV system size

– The more energy efficient your facilities are, the smaller (and less expensive) the PV system will need to be.

39

Design and Siting

Ground mount vs. Roof Mount vs. Parking Lot Shelter Mount Considerations include access, parcel size, neighboring uses and ironically, potential for negative environmental impacts (displacement of wildlife habitat for example)

Alternatives to PPA Model

• Direct Purchase
• Lease/Option

40

41

Utilize a Competitive Process to Select the PPA Vendor

Some states may require a specific type or types

• f process(es)

– Don’t just use the first vendor to approach your Agency. In this highly-competitive environment, you’re better served in requiring the vendors to compete for your business. – Don’t worry about having every last detailed engineering aspect sorted out prior to the RFP. Let the vendors provide different options to give you ideas on how best to structure the transaction.

42

Construction Scheduling and Access

Consider potential for interference with Agency activities on the property Consider what temporary and/or permanent access will need to be afforded the vendor (lease, license, easement, etc.)

PPA Contract Language

• Term:
• How long is too long? Option to Purchase?

43

44

What were cell phones like 25 years ago?

PPA Contract Language

• Rate Considerations — You are gambling that the rate of

increase you select will be less than the rate of increase in traditional “brown power”…

• Use an independent financial consultant with energy

experience to assist in negotiating this amount

• The Term, plus Rate are the largest determiners of whether

the deal “pencils”

45

PPA Contract Language

Minimum Production 9.2 Energy Warranty. Provider grants the energy warranty set forth as Exhibit C. Provider warrants that the System will produce the Guaranteed Minimum Annual Energy (Column C), based on Estimated Annual Production (Column B). If Actual Annual Production is lower than the Guaranteed Minimum Annual Energy, a Reimbursement Rate (Column D) shall be applied to the energy shortfall. The Reimbursement Rate is calculated as the value of the Anticipated Cost Reduction, as defined in Exhibit B, divided by the Estimated Annual Production. The resulting amount shall be the payable by Provider to Host as liquidated

• damages. The period of this warranty is 20 years. The

period will start from the Commercial Operation Date of the System

46

47

PPA Contract Language

Metering Accuracy 3.1 Metering. (a) Maintenance and Testing. Provider shall install and maintain a utility grade kilowatt-hour (kWh) meter for the measurement of electrical energy provided by each System and test the same. Upon Host’s written request, Provider shall furnish a copy all technical specifications and accuracy calibrations for the meter per each System upon and after installation. Provider shall deliver to Host a copy of meter accuracy verification test performed one year after system implementation. Host’s failure to object to such metering and measuring devices shall be deemed an approval of the same and Host waives any future claims as to inaccuracy of such devices.

48

PPA Contract Language

Metering Accuracy (cont’d) (b) Adjustments. If testing of the metering equipment pursuant to Section 3.1(a) indicates that such equipment is in error by more than two percent (2%), then Provider upon Host’s written request shall promptly repair or replace such equipment. A cost adjustment shall be made for any period during which inaccurate measurements were recorded, not to exceed four (4)

• months. Host (in the event of underpayment) or Provider (in the

event of overpayment) will pay the other the amount of any underpayment or overpayment determined as a result of the adjustment, with interest at the rate of _____% per month from the date of such overpayment or underpayment or the maximum amount permitted by law, whichever is less.

49

PPA Contract Language

Assignment Clauses

• Avoid language that permits the Provider to

extinguish its obligations under the PPA by assigning it to another company.

• Either require the Provider to remain on the hook

post-assignment or require that the District approve the assignee prior to assignment.

50

PPA Contract Language

Insurance Requirements

• Utilize your risk manager, carrier and legal

counsel to assist you in determining the appropriate types and amounts of coverage

51

PPA Contract Language

Liquidated Damages/Termination

• It is important that the PV system be up and running

by the projected operation date to achieve the financial benefit of the arrangement. To guard against late project operation date, a provision for liquidated damages or termination of agreement without penalty tied to delayed operation date can be used.

52

PPA Contract Language

System Removal

• Obligate the Provider to remove all components of the

system (including concrete footings for ground-mounted installations) and return property to original condition at end of PPA term.

53

PPA Contract Language

Confidentiality Provisions

• Be mindful of the limitations of such

provisions imposed on public agencies under Federal and State “Sunshine Laws” granting access to public records

54

PPA Contract Language

Early Termination

• 2.3 Early Termination. If Host terminates this

Agreement prior to any applicable Expiration Date in accordance with Section 2.1, for any reason other than for Provider’s Default under Section 11.1, upon such termination, (a) Host shall pay the Early Termination Fee set forth on Schedule 4, Column 2

• f the applicable Appendix for the terminated

System, and

55

PPA Contract Language

(b) Host shall ensure that the terminated System is disconnected and allows Provider the unfettered right to remove the System(s) from the Properties. Upon Host’s payment to Provider of the Early Termination Fee, this Agreement shall terminate with respect to that System or

• Systems. In addition, Host shall be obligated to offer

Provider any substitute property that will avoid Provider becoming ineligible for future subsidies as set forth above. In the case that a suitable substitute property is found, no Early Termination Fee shall be incurred and instead adjustments shall be made to ensure that Provider receives all the economic benefits as if the Agreement continued at the existing Property.

56

PPA Contract Language

Purchase Option 2.4 Purchase Option upon Expiration of this Agreement. So long as a Host Default shall not have occurred and be continuing, Provider grants to Host an option to purchase all the Systems, but no less than all the Systems as of the Expiration Date (including the Expiration Date of the Initial Term or the last day of any applicable Renewal Term) for a purchase price (the “Option Price”) equal to the greater of (a) the Fair Market Value of the System, as determined pursuant to Section 2.5, and

57

PPA Contract Language

(b) A value of $1.15/Wdc of each System purchased. Not less than one hundred and eighty (180) days prior to the Expiration Date, as applicable, Host may provide written notice to Provider of Host’s intent to exercise its

• ption to purchase the Systems. Upon receipt of Host’s

notice, Provider shall specify the Option Price, and Host shall then have a period of five (5) Business Days after notification to confirm or retract its decision to exercise the purchase option.

58

PPA Contract Language

In the event Host confirms its exercise of the purchase

• ption for the Systems and upon receipt of payment of the

Option Price in immediately available funds, such payment to be made in accordance with any previous written instructions delivered to Host for payments under this Agreement, in addition to any other payments pending for Host to make, the Parties will promptly execute all documents necessary to (A) cause title to such System to pass to Host shortly after the Expiration Date, and (B) assign all warranties for the System to Host. In the event Host retracts its exercise of, or does not timely confirm, the purchase option, the provisions of this Agreement shall be applicable as if this Section 2.4 were not included in this Agreement.

59

PPA Contract Language

How To Determine Fair Market Value For Purchase Option

Determination of Fair Market Value. The Fair Market Value of a System or Solar Services, as applicable, shall be determined by the mutual agreement of Host and Provider; provided, however, if Host and Provider cannot mutually agree to a Fair Market Value within ten (10) days of the need to determine Fair Market Value pursuant to Section 2.4, then the Parties shall select a nationally recognized independent appraiser with experience and expertise in the solar photovoltaic industry.

60

PPA Contract Language

Such appraiser shall act reasonably and in

good faith to determine Fair Market Value and shall set forth such determination in a written

• pinion delivered to the Parties. The valuation

made by the appraiser shall be binding upon the Parties in the absence of fraud or manifest

• error. The costs of the appraisal shall be borne

by the Parties equally.

61

PPA Contract Language

Dispute Resolution Process

• Utilize a “tiered” approach requiring

informal attempt to resolve followed by formal meeting and negotiation followed by mediation and finally, litigation.

Other PPA Contract Considerations

• Ownership of the Panels vs. Facility
• Environmental and Tax Credits
• Access and Maintenance (Beware of the “upsell” from the

vendor to maintain the system under a separate agreement)

62

For questions or comments, please contact:

Thank You

David A. Soldani (559) 225-6700 dsoldani@aalrr.com