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The New Green Finance

The best way to tap into renewable project funding.

Fortnightly Magazine - October 2009

loan commitments lenders are giving. Since a joint venture most likely would limit the developer’s responsibility for project costs to the same proportion as its owner-ship share, the developer would need to raise less equity, and the required loan commitment would be smaller.

If a utility intends to enter a power purchase agreement (PPA) with a developer, then the utility can agree to terms in the PPA that cover the developer’s refinancing risk associated with short tenors. For instance, the utility and developer could agree to share the costs (or savings, if any) from a refinancing of the developer’s debt after the expiration of the term of its existing debt, or the utility could agree in advance that, if the developer is unable to refinance, the utility would purchase the developer’s ownership interest at a predetermined price. If in the solicitation a utility signals its flexibility to accommodate financing challenges faced by today’s developers, then it will improve the prospects for a successful RFP.

Government Incentives

Although higher financing costs might increase the cost of renewable projects, government incentives for such projects rarely have been more valuable. IRS regulations promulgated last year made the production tax credit (PTC) for renewable-energy projects available to utilities. More recently, the American Recovery and Reinvestment Act of 2009 (ARRA) boosted renewable-energy tax incentives by extending the PTC, permitting the election of an investment tax credit (ITC) in lieu of the PTC, and providing Treasury Department grants in lieu of the ITC for taxpayers lacking income to offset against the ITC. In addition to tax benefits for renewable projects, the ARRA increased the funding available for Department of Energy (DOE) loan guarantees (though Congress recently redirected a portion of this funding to the “cash for clunkers” program). The ARRA also widened the scope of renewable projects eligible for loan guarantees from just “innovative” renewable technologies to include other renewable technologies.

In its RFP, the utility should request that bidders specify how existing and future tax benefits will be shared between the utility and bidders. The utility in its RFP might wish to encourage developers to propose projects structured to take advantage of tax benefits and to share the savings through the developer’s proposed pricing. The RFP also could require developers intending to monetize tax benefits through a sale and leaseback, inverted lease, or partnership flip structure to describe their anticipated tax structuring, since it might affect the utility’s preferred ownership arrangement. If eligibility for tax benefits is conditioned on satisfying certain development deadlines, then the RFP should include appropriate schedule milestones to ensure such deadlines are met and could specify consequences for delay that compensate the utility for any loss of benefits.

Utilities’ RFPs also should ask bidders whether they intend to apply for DOE loan guarantees, which could decrease the financing costs associated with a project. By partnering with a creditworthy offtaker, a developer should more easily be able to demonstrate the creditworthiness of its proposed project, which according to recent guidance from DOE comprises 30 percent of the DOE’s “Phase II” evaluation criteria. Receipt of