Here are some of the more common structures of financing renewable energy project.

They vary in
the type of participants, source of financing and allocation of benefits.
Corporate Financing
One corporation develops the project and finances all costs. There are no other investors or
lenders involved. The project may be set up as a subsidiary of the corporate parent. However, with
100% ownership, the subsidiary would have to be consolidated into the parent's financial accounts.
Naturally, the corporation reaps all the benefits of the project.
The corporate parent must have sufficient capacity for tax credits and benefits to be of use.
In the renewable energy sector, this is structure is rare and only used by utility companies
themselves.
Sale before Construction
The developer acquires lease and land rights, permits, interconnection agreements, power
purchase agreements and any renewable certificates or feed-in-tariffs.
The developer sells the developed project to a strategic investor and receives a development fee
from the investor.
The strategic investor (possibly a utility company) constructs the project on its balance sheet or
arranges bridge finance for the construction. The strategic investor owns and operates the plant.
The developer's risk is limited to the development capital.
Sale after Construction
The developer seeks bridge financing from lenders:
Construction Loan: Bank is repaid in full at completion of construction. Alternatively, bridge is
converted into long-term loan.
Cash Equity Bridge: Bank is repaid at completion of construction with funds from sponsor.
Developer may provide limited guarantee for cash equity.
Tax Equity Bridge: Bank is repaid at completion of construction with funds from tax investor, who
will only come in once the plant produces tax credits.
Investor Ownership Flip
The investor contributes almost all of the equity and receives a pro-rata percentage of the cash
and tax benefits prior to a flip in allocation.
At a given level of IRR (internal rate of return), the ownership flips back to the developer, after
which most of the cash and tax benefits are allocated to the developer.
Only the production tax credits will continue to go to the tax investor even after the "flip".
If the investor is a tax investor rather than a strategic investor, the pre-flip allocation may not
be pro-rata, and all tax benefits may go to the investor instead.
Leveraged Ownership Flip and Pay-As-You-Go ("PAYGO")
This is the most common project finance structure.
The tax investor makes contributions before production begins, though a portion may be deferred
until the project receives production tax credits, which are initially allocated to the tax investor,
though a high percentage is paid to the developer as an equity contribution. This serves as a claw-
back should the project not perform.
The leverage is at project level with long-term debt of up to 18 years, based on the PPA (Power
Purchase Agreement).
This structure also includes a return-based flip in the allocations.
As the term for the production tax credits is usually, an additional loan may be secured against
those flows.
Back Leveraged Structure
Similar to the Investor-Ownerhip-Flipstructure. However, the developer is leveraging its equity
stake in the project using debt financing.
The tax investor commits equity upfront.
Pre-Flip: Initially, 100% of cash goes to the developer until return of investment (similar to a
development fee). Then 100% goes to the investor.
Post-Flip: After the investor's pre-agreed IRR (typically 7% - 10% depending on project risks) is
reached ownership and cash flow allocations go back to the developer, including most of the tax
benefits.
Leveraged Lease
Construction is funded by sponsor equity and a construction loan. Once constructed, the sponsor
sells the project to the investors that have formed a trust and immediately leases it back.
The develpoper repays the construction loan from the sale proceeds. The trust is financed with
cash equity and a non-recourse term debt. Lease payments are likely to be assigned to a lender.
For tax purposes, a minimum of 20% equity is usually required.
Leasing generates a "time value of money" cost saving achieved by deferring tax payments. It also
improves cash flow.
If set up as Operating Lease, the lease may only be for 5 years with the option to re-lease.
Homeowner Model
When homeowners invest in renewable energy generators, they will own 100%. However, quite
frequently, they can get bank finance, in some cases up to 100% of the capital costs!
Depending on the jurisdiction, homeowners may have to set up a company to run the generator, in
whcih case they will also be able to profit from tax benefits.
However, unless they can offset the investment against profits elsewhere, the overall tax benefits
are not significant. The lack of tax benefits, however, is often compensated for by higher feed-in
tariffs for small installations..








The Optimum Financing Structure
With so many different financing structures to choose from, which one is the optimum? That very
much depends on the project itself as well as the participants. As with other infrastructure projects,
capital intensive energy projects are often financed as stand-alone entities (Project Finance) rather
than as part of a corporate balance sheet (Corporate Finance). The main advantages of project
finance are:
Non-recourse/limited recourse financing: There is no or only limited recourse to the project
sponsor's assets for the liabilities of the project. Thus, the project preserves the sponsor's debt
capacity.. Also, lenders will be more keen to participate in a workout.
Risk Sharing: By setting up a separate legal entity, the project risk is isloated and can be allocated
to the parties that can best control, understand and mitigate the risks involved. Consequently,
incentives for all involved are optimized. This includes political or country risk.
Favourable Tax Treatment: Project Finance structures allow tax benefits to be allocated to entities
that can make use of them.
Improved Financing Terms: The project may obtain more favourable finnacing term than it would
based on the sponsor's credit profile alone. This way projects can be carried out that would be too
big for one sponsor.
However, all of these benefits come at a high transaction cost, higher interest rates and insurance
coverage.
How to choose the Financing Structure?
The developer who initiates the project decides which finnancing structure best meets their needs for
a project based on multiple considerations.

Consideration /
Motivation
Context
Most
suitable
structure
Project Size
If the project's value is less than $50m, the transaction costs of
Project Finance will outweigh the benefits.
Corporate
Developer can
use tax benefits
If the developer wants to use tax benefits, the project needs to be
on its balance sheet. However, often, developers are much smaller
than the projects they develop and have no capacity to use all the
tax benefits.
Corporate
Developer can
fund project
costs
If the developer can fund project costs
Corporate
PAYGO
Low Project IRR
If the project's projected internal rate of return (IRR) is low,
increasing debt levels will help increase the equity holder's rate of
return.
Leveraged
Structure
Developer
wants early
cash
distribution
Due to the large capital expenditure there are no early cash
distributions available if developed on own balance sheet. The
developer either needs to sell early, or device a structure
wehereby the developer receives a large proportion of cash.
Project
Sale
Back-
leveraged
PAYGO
Re-financing
If the projeect already exists, but just needs re-financing, possibly
after construction, options include a pay-as-you-go structure or
leasing.
PAYGO
Leveraged
Lease

Impact of financing structure on returns and the cost of energy
The
investor's internal return and the plant's levelised cost of energy vary with the choice of financial
structure.
We have calculated the weighted average cost of capital, investor's internal rate of return and the
levelised cost of energy for investment in a 1MW solar park for different financing structures.
The levered structure yields the highest return and lowest cost of ownership because of the lower
cost of debt and the tax shield provided by the debt. Also, the debt lowers the average cost of capital,
though increases the expected return for the investor.
The cost of ownership is highest in the "sales after construction" scenario, as the interest for
financing the construction before the sale has been added to the capital cost of the whole plant.






















Contract Framework
Constructing and operating a power plant or any other infrastructure facility requires a number of
contracts with all participants. They don't just document the legal structure. Contracts are also an
essential part of a risk mitigation strategy. The diagram below provides an overview of the contract
framework.

Financial & Control
Site Survey: A survey carried out by an independent experton feasibility of the project and
expected annual energy supply.
Security: Any loan agreements that are secured with lien on the land or other assets
Shareholder Agreement: Includes the capital structure and governance of the project company.
Management Contract: specifying management incentives.
Project Documents
Supply Agreement: Fixed price & date models may not be available due to the fact that
preparation of foundation (for instance for off-shore farms), turbine or panel sale and the balance of
plant are governed under separate contracts.
Balance of Plant Contracts: As most BOP contractors lack credit ratings, lenders will require
holdback of some payment until completion.
Land Agreements: The term needs to be similar to the useful life of the plant (20 - 25 years).
Contract includes definition of payments (usually based on gross revenues), audit rights of
landowner, exclusivity, non-disturbance provisions and scope of indemnities.
Planning Permissions
Environmental Consent: For most projects, consent will only be given by local authorities if certain
conditions are met with respect to safeguarding the environment. This contract may impose
restrictions on the operations times or demand additional investments.
Insurance: Risks that the sponsors and lenders cannot allocate may have to be insured against, for
instance political risk.
Operations Documents
Interconnection Agreement: Construction of grid connectivity, long-term feed-in agreement,
completion schedule
Turbine / Panel Service Agreement: Provided by the supplier with term duration of the warranty -
needs to correlate to other O & M work. Compensation usually based on a fixed fee.
O & M Contract: Includes the scope of work, compensation and separate fees, liability,
compliance, remedies and dispute resolution
Operating Licenses: If using patented technology, the project company may have to pay for
operating the technology under license. Length must aligh with useful life of plant.
Marketing Documents
Power Purchase Agreement: The Power Purchase Agreement (mostly with a utility company)
includes details on what is being sold (i.e. power, credits, certificates), peak or off-peak tariff. It also
specifies if the electricity has to be purchased if not taken or what happens if electricity is not
produced.
Renewable Energy Certificate Qualification: (or similar) - a certificate from government agency
that project qualifies for feed-in tariffs or production tax credits.



Instruments & Sources for Renewable Energy Projects
Instrument Sub Category Function Source
Equity Ordinary Shares
Rsik capital from
Sponsor
developer or sponsor
Preference Shares
Senior to ordinary
shares, typically from
tax investor;
sometimes proviiding a
cumulative dividend.
Institutional Investors
Investment Funds
Tax Investors
Debt
Subordinated Loan /
Mezzanine
Usually fixed rate,
long-term and
unsecured. May be
considered as equity.
Can be used to cover
construction overruns
or other guaranteed
payments
Lenders specialising in
mezzaninen debt
Syndicated Loans
Loan provided by two
or more lenders,
governed by a single
loan agreement. May
have different
agreements for
construction and
operating phase of
project. Provide long-
term finance
Banks
Senior Debt -
unsecured / secured
Large unsecured loans
are only available to
creditworthy
corporations. Banks
tend to limit their risk
to 5 - 10 years.
Commercial banks
Development Loan
Financing provided
during development of
project to a sponsor
with insuffiicient
resources.
Lender with project
experience
World Bank (only if
project can not
secure borrowing at
reasonable rates
from any other
sources)
Vendor
Intermediary Loan
Export-Import bank
lends to a financial
intermediary
(commercial bank),
which in turns lends to
the project.
Export Credit Agency
Private Placement Direct sale of long-
term debt / equity
Sophisticated investors
including insurance
companies, pension
funds, trading
companies
Eurobond
Issued in amounts
averaging $100m
without prior
registration or
approval by any
particular government.
Terms usually range
from 10 - 15 years.
Loans may be made in
any currency, fewer
covenant than
syndicated bank loans,
and accessible through
a large and liquid
market. However, a
credit rating for the
project entity is
required which could
be both costly and
time-consuming to
obtain. Also, bond
issues tend not to
allow changes to the
underlying project.
Capital Markets
Guarantee Exchange Rate Risk
A commercial lender
provides a loan to the
project entity (the
Export Credit Agency
importing entity), at
below market interest
rates. The Export-
Import bank provides
compensation for the
difference between
commerical rate and
below-market rate
Political Risk
Limited protection
against risks of
sovereign non-
performance and
against certain Force
Majeure risks.
Word Bank
Tax Relief
Tax Credits
Tax Holidays
Duty exemption
Individual
governments may
offer tax incentives
Host governments
















PROJECT FINANCE

Renewable Energy project financing is a relatively young industry, where
transaction structures continue to evolve.

Due to the unique nature of risks in most renewable energy financings,
transactions need to be constructed with a fine balance of risk allocation.

GLOBAL SOLARIS GROUP offers meaningful insight on maintaining this fine
balance and works with the most reputed and experienced Renewable Energy
investment firms.


OVERVIEW

Project finance is a structure employed to finance capital-intensive projects that
are either difficult to support on a corporate balance sheet or that have become
more attractive when financed on their own. Renewable energy projects in the
United States are typically financed using project finance and generally include a
mix of project equity investors, tax equity investors and project-level loans
provided by a syndicate of banks. Terms set forth by both lenders and equity
investors are based on the projects perceived riskiness and its expected future
cash flows.

The project finance structure revolves around the creation of a project
company. The project company holds all of the projects assets, including its
contractual rights and obligations. The project company is typically a limited-
liability company (LLC) or, in some cases, a limited partnership (LLP). Project-
level loans are usually non-recourse, meaning that they are secured by the
projects assets and paid off by the projects cash flow: the investors assets are
shielded should the project be unable to meet loan repayment terms.

Most renewable energy projects require a signed power purchase agreement
(PPA) in order to reach financial close and commence construction. The
commercial terms of the PPA and the engineering, procurement and construction
(EPC) contract, together with the projects associated market and technology
risks, will largely determine whether lenders consider the project financeable.
The maturing of the wind power market in recent years has allowed some major
wind parks to receive project financing in the absence of a long-term PPA
(known as merchant projects), but solar projects rarely receive financing in
advance of a PPA being signed.

I - Direct Equity

Project equity (aka cash equity orprivate equity) is supplied by private equity
firms or the developers themselves. Direct equity investors invest a specified
amount in a project in return for a certain stake in the projects future cash
flows.

II - Tax Equity

Renewable energy project developers typically do not have tax liabilities large
enough to efficiently capture the full amount of tax credits available for large
projects. To circumvent this issue, project developers can pair with a tax equity
partner that is better able to utilize a projects tax benefits. Traditionally, tax
equity investors have been large investment banks, commercial banks and
insurance companies with a high tax burden that seek to offset some portion of
their expected tax liability. In some cases, large equipment manufacturers are
able to provide tax equity.

The two primary tax equity financing structures of renewable energy projects in
the U.S. are the sale-leaseback model and the partnership flip model.

1 - Sale-Leaseback Model
The sale-leaseback model allows a project developer to recoup its entire
investment in a project, eliminating the need to invest directly. In this model,
the developer finances and installs a project and then immediately sells it to a
tax equity investor at full value. The tax equity investor then leases the project
back to the developer at a fixed rate for a period exceeding the PPA schedule.
The developer uses PPA revenue to fund rent payments to the tax equity
investor, who also claims all tax benefits associated with the project. At the end
of the lease term, the tax equity investor either remains the owner of the project
or the developer can buy the project back at its residual value.

The benefit of the sale-leaseback model is that the tax equity investor is able to
pass tax savings on to the project developer in the form of lower rent payments.
In turn, lower rent payments result in a lower PPA price and lower rates charged
to end customers.

2 - Partnership Flip Model
A partnership-flip model is structurally more complex than a sale-leaseback
model, but gives more freedom to the project developer within the partnership.
The project developer and tax equity investor form a partnership company
(typically a limited-liability company), through which they co-own a project. The
partnership becomes the formal owner of the project, receiving all associated
revenue and tax credit. Once formed, the partnership will negotiate over the
distribution of revenues and tax credits, which is done on a project-by project
basis. In all cases, the tax equity investor requires a certain rate of return within
a certain time frame (typically six to ten years). For example, during this time
frame the tax equity investor may claim 99 percent of revenue and tax
incentives within the partnership and the developer just one percent. Once the
tax equity investor achieves its required return, the partnership structure flips
and the developer may receive 95 percent of revenue and the tax equity
investor receives five percent.

A benefit of the partnership-flip model is that the project developer receives
assistance in financing the construction of the project from the tax-equity
investor; financing is often difficult to source for large-scale projects.

III - Debt

Project debt is supplied by a bank or a syndicate of banks, which lend against
the expected future cash flow of a project. Debt packages inevitably vary by
project size and technology, but most solar, wind and geothermal projects
incorporate one or more of the following:

1 - Term Loans
Term loans are a basic vanilla commercial loan. Term loans typically have fixed
interest rates with monthly or quarterly repayments.

Term loans for renewable energy projects are typically long term, with
maturity dates generally between 10 and 20 years (though tenors dropped
significantly directly following the financial crisis). The collateral for term-loans is
typically the project itself.

2 - Construction Loans
The potential risks and returns to an investor during the construction period
differ from those expected once a project has reached commercial operation. As
such, most large renewable energy projects have a construction loan component
in the overall project-financing package. Construction loans are generally
distributed in several installments. After the first installment , and through the
term of the construction loan, the borrower makes interest only payments on the
installments received to date. When construction is complete, payment is due for
the entire amount. In some cases, construction loans will automatically convert
to term loans once commercial operation is reached. The interest rate on
construction loans is generally higher than on term loans.

3 - Equity Bridge Loan
Equity bridge loans have grown in popularity since the introduction of the ITC
cash grant in 2009. Because cash grants (which cover 30 percent of a projects
installed cost) are made 60 days after the project commences operation,
developers still need bridge financing to get through the projects construction
phase. Equity bridge financing is often furnished by equity investors until the
grant comes through, at which time the investor is typically repaid. Cash grant
bridge loan spreads are similar to term debt spreads, if not somewhat lower.

IV - Other

There are several additional financing instruments available: 144A bonds, Clean
Energy Renewable Bonds (CREBs), which are available to co-ops and
municipalities, Class B memberships, and prepaid service contracts.

POWER PURCHASE AGREEMENT (PPA)

The Solar Power Purchase Agreement (SPPA) is an alternative to financing and owning the system.
It offers you an opportunity to install solar or wind power at your facility without paying upfront
costs or worrying about system operation and maintenance. Sometimes referred to as a third
party ownership model, this approach lets you focus on your core mission, while solar experts
manage your energy system. For 15 to 20 years, you enjoy predictable, pre-set electricity prices,
and power from a solar system that is a source of pride for your organization.


PPA TERMS

Disclaimer: this document is only intended to illustrate a possible scenario. A wide range
of variables can and will alter the possible outcomes. All terms are fully negotiable.

The Parties

Buyer is the purchaser of electricity
Seller is the seller of electricity, i.e. a limited partnership owned by GLOBAL SOLARIS
GROUP
1- Term

A base term is established with one or more extensions options.The term
may vary from 15 to 20 years.
2- Effective Date

The PPA becomes binding from the date it is signed.
3- Commercial Operation Date

The PPA term starts from the commercial operation date also called
placed in service date.
4- Installation, Testing, Start-up

The PPA will include an obligation from the project owner to install and
test the system. It will also set a placed in service date that relates to
when the sale of electricity becomes active.
5- Contract Rate

The rate is fixed for the duration of the agreement with an escalation
clause reflecting inflation. The rate is designed to create lifecycle savings
for the consumer by targeting an increase rate that is less than from
utilities.The PPA starting rate is usually set at a discount from the rate
paid to the electric utility company.The contract price is based on the
amount of electricity generated by the project.
6- Environmental Attributes

The environmental attributes will attach and be available to the seller
during the term of the PPA.The PPA states the energy is sold without the
environmental attributes. The sale of Renewable Energy Certificates is the
prerogative of the owner of the system.
7- Interconnection

The PPA requires the seller to bear the cost of interconnection.
8- Operation & Maintenance

The PPA outlines the sellers responsibility to operate and maintain the
project in accordance with prudent operating practices. Such duties
include regular inspection and repair, as well as completion of scheduled
maintenance.The PPA also provides for access to the project.
9- Net Metering

Metering is most important as it determines the quantity of output for
which the seller is paid.Under Arizona law, net metering allows the
consumer to receive credits for excess electricity produced.The PPA
assigns those credits to the buyer.
10-Purchase Options

Timing: During the PPA purchase options can be exercised only from 6
years after commercial operation date up to the end of the term.
Pricing: Pricing is established at fair market value and a discounted
present value of the electricity produced by the system for the remainder
of its useful life.


11-Billing & Payment

The PPA determines how invoices are prepared, when they are issued, and how quickly
they are paid.The PPA sets forth procedures for raising and resolving billing disputes,
and the interest rate and penalties that apply to late payments.


REITs & Securitization

SOLAR REITS

Real Estate Investment Trusts are a financing method in which individual
investors invest in a fund that buys property or makes loans for real estate
assets or invests in other good assets applicable to real estate. As long as the
REIT annually pay its investors at least 90% of the REITs profits, the REIT itself
isnt taxed. Instead, only the individual investors are taxed on their REIT
dividends, thus avoiding double taxation.

Recently, the IRS made a so-called private letter ruling thatunder certain
conditionsallows solar equipment to be a good asset as part of a REIT.

To comply with IRS regulations, NREL has outlined three strategic options:

I - Utilize a taxable REIT subsidiary (TRS) to own PV projects

REITs can create a TRS that can develop, finance, and own rooftop solar PV
systems. The TRS can then receive the benefits of the 30% Investment Tax
Credit and also make income by selling the power generated to the building
tenants. The TRS then returns this after-tax income to the main REIT fund.

II - Utilize a TRS to develop and construct PV projects

A REIT can utilize a TRS to develop and construct PV projects, but instead of
owning the project after construction, the TRS can sell its ownership interest to
an investor or utility. Electricity generated by the project is retained by the
utility or is sold to an offtaker under the conditions of a long-term power
purchase agreement (PPA). In this case, the TRS only acts as a construction
contractor, and the parent REIT collects rent for leasing the rooftop space to the
project owner, which is considered good income by the IRS

III - Lease space to solar developers and project owners

In this case, a REIT owns rooftop space or land but does not form a TRS to
construct or develop the PV project. Instead, the REIT will lease the rooftop or
land to a PV project developer, which will pay the REIT monthly rent. This rental
income is considered good income by the IRS


SECURITIZATION

The introduction of solar asset-backed securities, commonly referred to as solar
securitization, has been the next big thing in energy finance for the past three
to four years. Whether the first real solar securitization happens this year or in
the near future, securitization is coming to solar finance.

As state and federal support for renewables shrinks, the industry must find ways
to continue to reduce costs, and access to less expensive capital will be a vital
piece of this process. Securitization will enable the solar industry to access a
much larger and more diverse investor base, which will eventually help to reduce
the long-term cost of capital to a likely range of 3% to 7%, compared with the
8% to 20% rate required by some project finance equity and tax equity
investors in the current market.

In the most basic form of a solar securitization, the holder, or originator, of a
portfolio of solar assets identifies and isolates contracted revenues from a series
of solar projects. The originator then bundles the contracted revenues into a
reference portfolio, and sells the revenue stream (but not the physical solar
asset itself) to an issuer, typically a special purpose vehicle. The SPV then issues
a tradable, interest-bearing security to investors in the capital markets. The
revenues generated by the reference portfolio fund a trustee account that passes
through payments, either fixed or floating, to the investors in the new security.
These investors are senior to equity investments and for stable income
producing assets like solar projects represent a relatively low risk investment.

Sources: NREL & Power Intelligence