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DOE OFFICE OF INDIAN ENERGY
Key Project Development and Financing Concepts
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Agenda
• Levelized Cost of Energy (LCOE)• Electricity Offtakers• Project Roles• Tax Equity Partnerships
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PROJECT FINANCING CONCEPTS: LEVELIZED COST OF ENERGY
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Key Concept: Levelized Cost of Energy (LCOE)• Measures lifetime costs divided by energy production
• Calculates present value of the total cost of building and operating a power plant over an assumed lifetime. Expressed in real or nominal dollars on a megawatt-hour (MWh) or kilowatt-hour (kWh) basis
• Allows the comparison of different technologies (e.g., wind, solar, natural gas) of unequal life spans, project size, different capital cost, risk, return, and capacities
Critical to making an informed decision to proceed with development of a facility-, community-, or commercial-scale project
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LCOE
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Adapted from European Wind Energy Association, “Economics of Wind Energy,” http://www.ewea.org/fileadmin/ewea_documents/documents/00_POLICY_document/Economics_of_Wind_Energy__March_2009_.pdf
Annual ExpensesInitial Costs
Including Financing
Energy System
Annual Cost Per Year
Annual Energy
Production
LCOE ($/
MWh)
× $$$
Site Characteristics/
Resources
$
Simple LCOE Concept
$
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LCOE and Cash Flows
0 1 2 3 4 5 6 7 8 9 1011121314151617181920$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
$1,200,000
$0
$20
$40
$60
$80
$100
$120
Equity Debt Operating Expenses Taxes LCOE
An
nu
al C
osts
($
/year)
LC
OE (
$/M
Wh
)
Adapted from Black and Veatch “Levelized Cost of Energy Calculation”:http://www.efchina.org/csepupfiles/report/20112844913435.70772110666485.pdf/Levelized%20Cost%20of%20Energy%20Calculation_BV_EN.pdf
Levelized Cost of Energy
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Using LCOE
Calculating and comparing LCOE can:
• Measure value across the longer term, showing probable life-cycle costs
• Highlight opportunities for Tribes to develop different scales of projects (facility, community, or commercial)
• Inform decisions to pursue projects on an economic basis, compared to utility rates
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Most renewable energy projects have zero fuel costs (with biomass being the possible exception)
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Wind LCOE Sensitivity: What Are the Big Drivers?Initial capital cost (ICC) and capacity factor are two
critical drivers, but discount rate (financing costs) and annual operating expenses (AOE) are non-trivial. Wind LCOE example shown below:
Source: Tegen et al. 2012
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Tribal Community Scale Example
A Tribe in Arizona has a remote facility not served by the grid. Diesel fuel is used to power generators to run 24/7.
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 200.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
Sample Cost of Energy Comparison
(constant demand)Diesel Power
Utility Power
Renewable Power
Cents
/ k
Wh
Years
• Currently, grid tie appears more expensive than diesel generators
• Immediate savings from new solar generation, including infrastructure
• Savings could total ~$20M over 20 years
• Calculations assumed tax equity used by third-party solar provider 10
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PROJECT FINANCING CONCEPTS: OFFTAKERS
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Potential Options Refinement ImplementationOperations
& Maintenanc
e
Step 1: Site and Project Potential Buyer
MAP KEYWAPA TRANSMISSION,IN-SEVICE
TSGT TRANSMISSION, PROPOSED
IOU UTILIITYSERVICE AREA
WAPA TRANSMISSION, PROPOSED
Tribal UTILITYSERVICE AREA
STATE/MUNICIPAL UTILITIY SERVICE AREA
TSGT TRANSMISSION,IN-SERVICE
COOPERATIVE UTILITY SERVICE AREA
Identify and begin discussions with potential power purchasers in Arizona:
• Navopache Electric Cooperative (NEC)
• Salt River Project (SRP)
• Arizona Public Service (APS)
• Tucson ElectricPower
• Navajo Tribal Utility Authority (NTUA)
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PROJECT FINANCING CONCEPTS: TAX EQUITY PARTNERSHIP
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Potential Options Refinement ImplementationOperations
& Maintenanc
e
Step 2: Ownership Structure Options
• Direct ownership
• Third-party power purchase agreement (PPA)– Containing a traditional land lease/royalty structure
• Equity investment partnering– Partnership flip– Sale leaseback– Inverted lease/lease pass-through
Key Question: What viable ownership structure optionsare attractive to the community?
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So Why Seek a Tax-Equity Finance Partner?• Tax incentives (MACRS and either PTC or ITC) can
represent up to half the project value or reduce project’s capital costs by ~50%
• Tax incentives can help to achieve a competitive price of power
• Many projects also require state-level incentives to be economically viable. 15
3rd Party Owned Tribe Owned (w/o Partner)
0
20
40
60
80
100
120
Aft
er
Ta
x P
roje
ct
Ca
pit
al
Co
sts
Third-Party-Owned
Tribe-Owned (w/o Partner)
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PROJECT FINANCING CONCEPTS: PROJECT ROLES
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Tribe
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Key Concept: Tribal Role Options
Renewable Resource/La
nd Owner/Land
Lessor*Off-taker (Power
Purchaser/User)
Lender/Debt
Provider
Equity Investor/
Generation Equipment
Owner
Project Develop
er
Project Operator/O&M
* Also called Tribal Host
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DISCUSSION: QUESTIONS AND ANSWERS
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