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The New Green Finance

The best way to tap into renewable project funding.

Fortnightly Magazine - October 2009

a DOE loan guarantee, however, subjects a project to certain requirements that might partially counterbalance the lower cost: DOE must receive a first lien on all pledged project assets, which could affect the developers’ financing and, under a joint-venture structure, the utility’s tenancy in common interest (though on Aug. 7, 2009 the DOE proposed eliminating this requirement, in which case DOE instead could share collateral on a pari passu basis with other lenders). Further, all but the smallest projects that apply for a loan guarantee must comply with the National Environmental Policy Act (NEPA) , which likely will mandate an environmental assessment or environmental impact statement depending on the project’s characteristics. The time required to prepare either would lengthen a project’s development schedule. A developer’s plan to apply for a loan guarantee could reduce a project’s costs but at the risk of delay, and thus when a utility evaluates competing proposals, it should take into account whether a developer intends to apply for a loan guarantee and the degree to which such a guarantee is necessary for a project’s completion.

Innovative Technologies

One tranche of DOE loan guarantees was authorized several years ago exclusively for innovative renewable technologies, and utilities eager to remain at, or advance toward, the technological forefront might wish to open their solicitations to such technologies. Because new technologies are by their nature un-proven, however, utilities must carefully assess their appetites for technology risks. If a utility enters into a PPA for power to be provided by such a technology, the utility could defer payments to the developer until the technology succeeds in generating electricity. In today’s tight credit markets, however, private financiers are likely to be tight-fisted unless they are confident of a technology’s success. Also, if a utility is relying on a developer’s project to serve the utility’s load by a particular date, then merely delaying payments until commercial operation wouldn’t address the new technology’s risk of delay. To mitigate the risk, the utility could conduct more extensive diligence of the developer’s proposed technology, or require additional financial security to increase the developer’s incentives to perform in a timely manner. The utility’s RFP could require bidders with innovative technologies to submit more background information about their projects than otherwise would be required, to offer additional security, and to demonstrate that their potential sources of financing historically have funded innovative technologies.

Capturing Green Benefits

When procuring renewable generation resources, utilities today can utilize an RFP process not simply to procure megawatts and megawatt-hours, but to help structure innovative transactions that respond to market constraints, while taking full advantage of new incentives for renewables. Through well-crafted RFPs, utilities can seek expanded information from bidders, explore joint ventures, facilitate financing, and assess technology risk. Also, bidders should be required to describe their anticipated tax structure and any plans to apply for DOE loan guarantees or other renewable incentive programs to ensure the utility has the full scope of data it needs to evaluate proposals appropriately. With a carefully structured RFP, a utility will be well positioned to select a renewable