Renewable Energy and Corporate PPAs: Overcoming Regulatory, - - PowerPoint PPT Presentation

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Renewable Energy and Corporate PPAs: Overcoming Regulatory, - - PowerPoint PPT Presentation

Jun 11, 2023 404 likes •746 views

Presenting a live 90-minute webinar with interactive Q&A Renewable Energy and Corporate PPAs: Overcoming Regulatory, Financing, Intercreditor, Tax Challenges WEDNESDAY, JULY 20, 2016 1pm Eastern | 12pm Central | 11am Mountain |

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

Renewable Energy and Corporate PPAs: Overcoming Regulatory, Financing, Intercreditor, Tax Challenges

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific WEDNESDAY, JULY 20, 2016

Robert Eberhardt, Partner, Chadbourne & Parke, New York Eli M. Katz, Partner, Chadbourne & Parke, New York Robert F . Shapiro, Partner, Chadbourne & Parke, Washington, D.C.

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Renewable Energy and Corporate PPAs:

Overcoming Regulatory, Financing, Intercreditor and Tax Challenges

Rob Eberhardt reberhardt@chadbourne.com Eli Katz ekatz@chadbourne.com Bob Shapiro rshapiro@chadbourne.com

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Agenda

Corporate PPA Overview Corporate PPA Structures and Terms Regulatory Issues Intercreditor Issues Tax Issues

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Corporate PPA Overview

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Recent Market Trends

  • 52% of offtake contracts from wind were signed with

non-utility offtakers last year

  • Many of these contracts are for shorter durations than

typical PPAs (12-15 years)

  • Merchant “tail” puts pressure on tax equity and back-

leverage financings

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Recent Market Trends

  • Corporates are being driven by:
  • desire to reduce price volatility
  • corporate environmental commitments
  • Confluence of factors is driving this trend:
  • Long-term extension of tax credits
  • falling prices for generating renewable power
  • less optimistic of effect of simply buying RECs

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State Renewable Portfolio Standards and Goals

Source: http://www.ncsl.org/research/energy/renewable-portfolio-standards.aspx

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Recent Market Trends

  • Longer term policy support for renewables is becoming

more pronounced

  • Paris Accord
  • Clean Power Plan
  • Corporate customers looking for environmental

commitments

  • Dispersed energy needs for corporates makes on-site

solar or wind less compelling

  • Trend towards “virtual” or synthetic PPAs is rapidly

becoming the solution

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Recent Market Trends

Key Challenges:

  • Corporates unfamiliarity with buying power
  • compare to utilities who “do this for a living”
  • Financing parties evaluating long-term corporate

credit risk

  • Difficulty obtaining parent guaranties
  • Covenant restrictions in corporate credit facilities
  • Inter-creditor issues between financing parties and

corporate buyers

  • More demands on project credit support

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Selected Projects

Year Project Sponsor Offtaker Lead Lender Tax Equity Market 2010 Garden Wind NextEra Google MISO 2012 Minco Wind II NextEra Google SPP 2014 Keechi Wind Enbridge Microsoft N/A MetLife ERCOT 2015 Fowler Ridge IV Wind Pattern Amazon Siemens Financial Services JPMorgan and MetLife PJM 2015 Pilot Hill Wind EDF Microsoft N/A MetLife and GE PJM 2016 CA Flats Solar First Solar Apple TBD TBD CAISO 2016 Cimarron Bend Wind Enel Google N/A TBD SPP

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Corporate PPA Structures and Terms

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Physical PPAs

[“What had

Project Company

Energy

  • Ancil. Services

Corporate Offtaker Wholesale Energy Market (e.g. PJM, CAISO)

Energy Fixed $ Market $ RECs

Electric Utility (Retail Service Provider)

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Synthetic PPAs

[“What had [“What had

Project Company

PPA Payment

  • Ancil. Services

Project Company Wholesale Energy Market (e.g. PJM, CAISO)

Energy Market $

Corporate Offtaker

RECs

Electric Utility (Retail Service Provider)

PPA Payment 17

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PPA Terms

  • Wholesale Sales - Typical
  • Virtual PPAs and Physical PPAs delivered through

spot markets in organized power market

  • Difference from Financial Hedge
  • PPAs in non-organized markets - Wholesaler
  • r Bypass

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PPA Terms

  • Delivery Point is a point on the market grid

( PJM, ERCOT, CAISO)

  • Payment:

1. Virtual—contract for differences—seller gets fixed price; buyer get market price, either at point of interconnection with grid or different settlement point. 2. Physical PPA: fixed price to Seller.

  • Basis risk. Where is floating price?
  • Negative market price risk

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PPA Terms

  • Milestones. Late COD Delay damages and

termination

  • Option for physical delivery sale
  • Minimum Performance requirement –

availability/production

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PPA Terms

  • RECs—who owns (no RPS requirement)
  • Capacity—who gets—auctions
  • Two way credit support—Buyer and Seller
  • Creditworthiness of Buyer—what happens if

downgrade

  • Risk of Curtailment by market operator – impact on

minimum performance requirement; payments for energy

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Regulatory Issues

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Regulatory Issues

  • Market-Based Rate Authority (except ERCOT)
  • Exempt Wholesale Generator Status
  • No Retail Sales (retail franchise/ EWG issues)
  • QF as option for small producers

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Intercreditor Issues

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Wind Farm – Sample Financial Structure

Class B Interests Class A Interests

Sponsor Tax Equity

Operational Phase

Construction loan

Construction Phase

Lenders Project Co. Holdco Lenders Offtaker Offtaker Sponsor Project Co. 25

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Construction Phase Intercreditor Issues

  • At financial closing, the project company has no
  • perational history or hard assets
  • Senior lenders have senior liens on all project assets

and project company equity

  • Liens of offtaker (if any) typically subordinated
  • Offtaker relies on other forms of credit support (e.g.

letters of credit)

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Operational Phase Intercreditor Issues

  • Tax equity is equity – structurally subordinated to

project company creditors

  • Tax equity typically prohibits project company-level

indebtedness and liens on project assets

  • Liens of offtaker (if any) typically subject to

forbearance agreement with tax equity

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Operational Phase Intercreditor Issues – Forbearance Terms

  • Tax equity given notice and opportunity to cure

defaults – cure periods negotiated

  • Offtaker foreclosure prohibited during forbearance

period (e.g., until tax equity flip date)

  • Other offtaker remedies typically remain intact (e.g.,

termination, draw on letter of credit)

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Tax Issues

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Key Tax Issues

  • Most corporate PPAs leave tax ownership with

project owner

  • Tax credits and depreciation are monetized by project sponsor

and reduce energy cost

  • Offtake arrangements should be “service contracts” for

tax purposes and not leases

  • Tax code has six factor test to make this determination

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Key Tax Issues

  • Particular tax issues arise when corporates take equity

stake in project

  • Sales of power to related parties may impact tax credits
  • Arrangements that are “hedge-like” should be identified

as a hedge for tax purposes to avoid:

  • Tax timing issues
  • Capital gain/ordinary income mismatch

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Key Tax Issues

  • Shorter tenor of corporate PPAs also impact form of tax

equity financings at project level:

  • Tax equity demand for greater share of cash flow
  • More accelerated “sweep events”
  • Forbearance on corporate stepping into sponsor’s position
  • Evaluating revised tax profile if Corporate offtaker forecloses
  • n project

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