Financing Renewable Energy Projects. Part I: Government Subsidies

Transcription

1 Financing Renewable Energy Projects Part I: Government Subsidies

2 Part I: Government Subsidies Goals of Government Subsidies Renewable Portfolio Standards and Renewable Energy Certificates Illinois Renewable Portfolio Standard The Transaction Feed In Tariffs

3 Goals of Government Subsidies Current state is that renewable energy is more expensive than traditional sources Goal to create a market (i.e. supply and demand) for renewable energy that is equal to traditional power sources must lower prices Current subsidies require retailers to purchase a certain amount of electricity Incentivizing production, market will determine the price

4 Renewable Portfolio Standards Requires a specified percentage of power sold by electricity retailers to be derived from renewable power sources Accompanied by a credit trading system Renewable Energy Certificates

5 Renewable Portfolio Standards Retailers can meet the mandate by: o 1. producing electricity themselves o 2. purchase renewable energy credits from the energy producers, or o 3. purchase the electricity from a renewable facility states have RPS mandates making up 50% of total electricity

6 Renewable Energy Certificates REC A tradable commodity 1 REC represents 1 megawatt hour have become dominant mechanism of RPS compliance Shelf Life length of time during which a REC can be used for compliance o Ranges from 3 months 4 years

7 Value of REC Mandatory v. Voluntary Markets Supply of RECs in the statutorily required geographical area Some states require more solar power, SRECs worth more

8 Limiting Out of State Generators Some states restrict market access to only in state electricity producers Retailer can only purchase RECs or electricity from producers in their state Captures benefits locally energy production, jobs Some states allow a certain region ex. midwest, adjoining states

9 Limiting Out of State Generators Commerce Clause issue Interstate commerce Law can t provide unfair advantage one state over the other

10 Illinois RPS In August 2007, Illinois enacted legislation (Public Act ) that created the Illinois Power Agency (IPA). The agency s purpose is to develop electricity procurement plans for electric utilities (EUs) supplying over 100,000 Illinois customers to ensure adequate, reliable, affordable, efficient, and environmentally sustainable electric service at the lowest total cost. Commonwealth Edison (ComEd) and the Ameren Corporation companies (AmerenCILCO, AmerenIPL, and AmerenCIPCO).

11 Illinois RPS IPA plans and administers the competitive procurement processes that result in agreements between the utilities and wholesale electric suppliers. The procurement plans must include procurement of cost effective renewable energy resources that meet renewable portfolio standard (RPS) schedule.

12 Illinois RPS Cost Effective Renewable energy procurement is limited to cost effective resources. Two tests to determine cost effectiveness. First, the increase in cost to retail customers from the RPS in 2008 cannot exceed 0.5% of the amount paid per kilowatt hour (kwh) during the year ending May 31, The cost cap changes each year through 2011, when it is the greater of an additional 0.5% of the amount paid per kwh during the year ending in 2010, or 2% of the amount paid per kwh during the year ending May, Thereafter, the cost is limited to the greater of 2.015% of the amount per kwh paid in 2007, or the incremental amount paid in The Illinois Commerce Commission (ICC) is to review the cap in 2011 and report to the General Assembly if it unduly constrains the procurement of cost effective renewable energy resources. The second test of cost effectiveness (established in the Public Act ) is that cost of procuring renewable resources must not exceed benchmarks based on market prices for renewable energy resources in the region, where the IPA procurement administrator will determine the benchmarks.

13 Illinois RPS What kind of energy? Solar Thermal Electric, Photovoltaics, Landfill Gas, Wind, Biomass, Hydroelectric, Biodiesel minimum of 75% of the renewable energy must come from wind power, 25% can come from other eligible renewables solar requirement begins EY 2012 and ramps up to 6% of the total requirement by EY 2015

14 Illinois RPS Where can the energy Through 2011: come from? 1. in state 2. If there are insufficient cost effective in state resources, resources can be procured from adjoining states 3. If these also fail the cost effectiveness tests, resources can be procured from other regions of the country. Cost effective test is stringent so many procured from other regions

15 Illinois RPS Where can the energy After 2011: come from? 1. equal preference is given to resources within IL and adjoining states. 2. If neither is cost effective, resources from other regions can be considered eligible.

16 Illinois RPS Where are we today End of 2009, IPA proposed and ICC confirmed the plan that includes provisions for 20 year contracts to secure 1,400,000 MWh per year (ComEd) and 600,000 MWh per year (Ameren) represents approximately 3.5% of each utility's eligible retail load. Delivery of electricity will begin in June 2012.

17 Illinois RPS Where are we today Plan envisions private lenders to finance projects, unlikely to lend without long term contracts for the sale of the electricity Owners of existing and proposed wind farms have until Dec. 9 to submit final bids

18 Illinois RPS Issues Main problem is that IPA is required to facilitate energy purchases the limit cost increase to consumer Someone has to pay for the increased cost

19 Illinois RPS Issues Most cost effective is to get wind power on the spot markets or through short term contracts IPA would like to encourage new project development with long term contracts, but prices on spot markets are lower so have to buy that instead High capital costs to build new wind/solar projects Need guaranteed cash flow to justify lending

20 The Transaction Key Players Who are the parties? Renewable energy developer Finances, builds, sells energy for profit over the long term Energy retailer or other development firm Private business purchasing power Enter into PPA with developer Private business that supports renewable energy in order to meet their power demands

21 The Transaction Key Players Public/Private real estate owner Sells or leases rooftop or vacant land for power generation Most current projects on vacant public land Retail electric company Develops energy production Purchases electricity or RECs

22 The Transaction Key Players Voluntary REC purchaser Certain amount of electricity required for a market REC signifies renewable electricity being used Takes the REC off the market, requiring more production because retailer required to purchase certain amount

23 The Transaction Financing Government Subsidies Government subsidized loans Guarantees/insurance Low interest rate Private Lenders Part 2 of Presentation

24 Legal Aspects of Transactions Contracts Solar License Agreement (SLA) allows Licensee to install and operate the systems on the owners property Lease/Purchase of real estate For energy generation Appreciating asset

25 Legal Aspects of Transactions Power Purchase Agreement Purchaser: retail electricity co., private business Seller: project developer/owner Master REC Purchase and Sale Agreement For sale of RECs to electric utilities

26 Feed In Tariffs Feed in tariffs place a legal obligation on utility companies to purchase electricity from renewable energy producers at an above market price, usually over a long, guaranteed period. establishes a contract for wholesale electricity at a set price that results in a rate of return attractive to investors and developers

27 Feed In Tariffs decreases investment risk by guaranteeing an investor or developer a long term contract at a secured price with a return on investment provides revenue certainty to generators, and reduces the cost of financing generating projects Successfully used in Europe

28 FIT v. RPS RPS: prescribes how much customer demand must be met with renewables FIT: require a certain amount to be paid for the electricity. Supports new supply development by providing renewable projects with revenue streams sufficient to cover development costs plus a return

29 FIT v. RPS RPS policies are focused on quantity, and leave pricing up to the market reports show the FIT works better at lowering the price and providing more renewable electricity Policies can be used together

30 Recommendation Whether it comes from government subsidies or raise in electricity prices, consumers pay. Feed in tariff that allows energy corps. To pass through increased costs to end users cuts out government inefficiencies that subsidies inevitably have. Will motivate people to save energy Will motivate new renewable energy projects which will lower costs over time. Subsidize R and D and nationwide transmission lines

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