April 11, 2013

Richard A. Kanoff 617.457.4010 | rkanoff@murthalaw.com John F. Cohan 617.457.4012 | jcohan@murthalaw.com Paul R. Michaud 860.240.6131 | pmichaud@murthalaw.com

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Overview

•  Market for Renewable Energy

•  Critical Components of Renewable Energy

•  Federal and State Incentives

•  Financeable Projects

•  Risks

•  Market Structures

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Market For Renewable Energy

NEED A MARKET…

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Solar Power

$34.8 Billion Industry

Wind Power

$51.4 Billion Industry

Biofuels

$29.6 Billion Industry

Total

$115.9 Billion Industry

Solar Power

$105.4 Billion Industry

Wind Power

$139.1 Billion Industry

Biofuels

$80.6 Billion Industry

Total

$325.1 Billion Industry

300% Projected Growth

270% Projected Growth

280% Projected Growth

2008 2018

270% Projected Growth

Markower J, Pernick R & Wilder C. Clean Edge, Inc. Special Report: Clean Energy Trends 2009 (March 2009)

Projected Growth in the Marketplace

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All Industries Solar Wind Biofuels Demand

Resources Transportation

• Energy Prices • Energy Security • Energy Independence • State RPS • Corporate Support • Climate Change Concerns • Carbon-Constrained World • Consumer Imperatives • Tax Credits, Capital Grants, Feed-In Tariffs, Subsidies, Targets and Mandates • Technological Improvements • Economy Expansion

• PV Cost Reduction • Favorable Demand/Supply Conditions • Large Scale Project Development

• Zero-Carbon Advantages • RPS Mandates • Public/Investor Awareness • Short Project Development Cycle

• Government Policies • Energy Prices • Less Price Volatility • Stringent Emissions Controls • Support for Agricultural Sector

• Reduction in Market Clearing Prices for Energy • Quick Deployment

• Air Pollutant Reduction • Cost-Effective Technology • Consumer Acceptance

Industry Drivers

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Critical Components Renewable Energy

•  Regulatory realities—

¡  Key terms (RECs, MWS, MWHs)

¡  Subject to specific rules, regulations and requirements—state and federal

¡  Targeted Incentives

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Renewable Energy Certificates (“RECs”)

= All of the renewable attributes associated with one megawatt hour of energy produced by an eligible

renewable energy generating facility in a specified vintage year or quarter.

Two Options:

o  Sell RECs/SRECs in the REC market; or

o  Retire the RECs and apply them towards lowering your carbon footprint.

REC

Energy

RECs

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Renewable Energy Certificates (REC) continued

State RPS Requirements

Electric Utilities And Suppliers

REC Market Renewable Energy Projects

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Regulations

•  Specific Zoning/Local

•  Siting

•  Interconnection/RTO-ISO

•  FERC

•  DPU/PSCs

•  Legislatures

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Successful Projects

•  Regulatory, contractual, and legal certainty •  Proven technology •  Strong and reliable equipment suppliers and plant

constructors •  Strong, long-term power offtaker •  Adequate economics

•  Strong sponsorship and management •  No/limited commodity price risk and interest rate risk

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Regulatory, Contractual and Legal Certainty

•  Deficiencies in these categories can threaten the overall financeablity of a project.

•  Regulatory:

¡  Stability of Regulatory Programs (PTCs)(SRECs)

¡  PPA approval by PUC—Cape Wind

•  Final unappealable permits—Wind Western MA

•  Contractual: (examples)

¡  Clarity of contract terms, e.g., PPA formulas

•  Legal: (examples)

¡  Home Grown Drafts

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Proven Technology

•  Many new and evolving technologies in renewable energy

¡  New technologies

•  Off Shore Wind?

•  New Wind turbine design

•  New solar panel technology

¡  New designs

¡  Modifications to existing technologies, new applications

¡  Less familiar, more difficult to finance (Factory # 5 Panels)

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Offtakers

•  Plants are long-term assets – need long-term revenue streams

•  Offtakers need to be reliable over the long-term – investment grade rating

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Offtakers continued

•  Power Purchase Agreements – selling energy direct

¡  Typically, utilities are offtakers – supportive regulatory regimes

•  Driven by RES/RPS

•  Feed-in-Tariffs

¡  Institutions – universities, governments, hospitals

¡  Companies – Big Box Stores/Industrial Plants (e.g., rooftop PV on facilities)

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•  Offtake Agreement/Power Purchase Agreement (PPA):

¡  Long-term agreement for the sale and purchase of power between a third party (usually a utility) and a project company.

¡  Project company agrees to make available up to a certain amount of electric generation capacity (adjusted for outages) by an agreed date for an agreed period of time; Purchaser agrees to pay for both capacity made available to it and for energy dispatched by it.

¡  PPA guarantees a market and predictable revenue stream and cost basis for the power to be produced by the project (thereby allowing some of the project to be financed on a project basis with affordable payment terms).

¡  NOTE: Merchant Plants have been constructed without long-term contracts for the facilities’ capacity - under this scenario, the investors accept the market risk.

Offtake Agreements/PPAs

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Other Contractual Agreements

•  Engineering Services Agreement

¡  Design and engineering

•  Procurement Agreements

¡  Required equipment

•  Construction Agreement

¡  Primary construction services agreement; Likely will involve responsibility for subcontractors

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Other Contractual Agreements continued

•  Interconnection Agreement

¡  Connection to the grid

•  Operation and Maintenance Agreements

¡  Responsibility for operating and maintaining the facility

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Bottom Line: Adequate Economics

•  Economic system: revenues, subsidies (incl. tax benefits), capital and operating costs, equipment life, inherent risks, capital structure and market returns.

•  Economics need to support risk-adjusted market returns to attract all categories of capital.

•  Current issues:

¡  Uncertainties in incentive programs (sequestration -1603 Program Funds)

¡  Increased costs of debt?

¡  Shortage of tax equity investors?

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Sponsorship

•  Strong sponsorship preferred

¡  Expertise (development, operation, finance, etc.)

¡  Financial strength to withstand/fix problems

¡  “Skin in the game”

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Sponsorship continued

•  Typical financeable sponsors ¡  Energy companies

¡  Utility affiliates

¡  Established IPPs

¡  Private equity funds, etc.

¡  Query: Does Treasury Grant or tax equity investment count as “skin in the game?”

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Incentives

•  Federal and State Incentives

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•  Modified Accelerated Cost-Recovery System (MACRS): Businesses may recover investments in renewable energy property through depreciation deductions; The Economic Stimulus Act of 2008 expanded MACRS.

•  Tax Credits:

¡  Production Tax Credit (PTC) allows tax credits based on electrical output of renewable energy facilities. The incentives depend on the type of technologies.

¡  Investment Tax Credit (ITC) allows tax credits based on capital investments in renewable energy projects.

•  American Recovery and Reinvestment Act of 2009 (ARRA):

¡  Department of Energy, Treasury and other programs provide incentives to development; programs provide for billions of dollars to promote renewable technologies, encourage development of supply (solar, wind, combined heat and power), efficiency, demand response, construction of manufacturing facilities and research.

Financial Incentives – Federal

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•  Investment Tax Credit (ITC):

¡  A credit equal to 30% of the tax basis for certain renewable generating technologies may be claimed against federal tax liability for the year the property is placed in service.

Federal Tax Incentives Section 1603 ARRA

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Federal Tax Incentives

•  PTC in-service periods (through 2012(wind); 2013-16)(solar, others)

•  ITC/lease structures available for all PTC technologies; in-service wind, 2016 solar

•  Cash Grant for ITC available –start construction in 2011 and in-service per ITC expiration dates

•  Sequestration of Cash Grants—8.7 percent for projects receiving funds after March 1.

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Financial Incentives – State – MA

•  Renewable Energy Portfolio Standard (RPS): MA RPS requires retail suppliers licensed in Massachusetts to buy RECs; Licensed suppliers must hold RPS-eligible RECs equivalent to a fixed percentage of the electricity that they sell to consumers each year.

•  Renewable Energy Certificates (RECs): Tradable environmental commodities in the United States which represent proof that 1 MW-hour of electricity was generated from an eligible renewable energy resource (also known as green tags, Renewable Energy Credits or Tradable Renewable Certificates)

•  MassEfficiency: $2 million state revolving loan fund meant to cover the start-up costs of large-scale energy efficiency programs.

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•  Facilities: Solar Thermal Electric, Photovoltaics, Wind, Biomass, Hydroelectric, Geothermal Electric, Fuel Cells, Municipal Solid Waste, CHP/Cogeneration, Anaerobic Digestion, Small Hydroelectric, Fuel Cells using Renewable Fuels, Other Distributed Generation Technologies

•  Sectors: Commercial, Industrial, Residential, Nonprofit, Schools, Local Government, State Government, Fed. Government, Agricultural, Institutional

•  Capacity Limit:/Aggregate Limits: Net metering allowed in MA up to 2 MWs for non-governmental; aggregate cap increased to 3% of utility peak load

•  Capacity/Aggregate Limits: Net metering for municipality or governmental uses up to 10 MWs; aggregate cap increased to 3% of utility peak load

•  Excess Generation: Varies by customer class; Host Customer credited/paid close to retail for each Kwh supplied in excess of demand

•  RECs: Customer owns RECs

•  System of Assurance: recently enacted “queue” to ensure that projects will receive net metering services when interconnect.

Net Metering – 220 CMR 18.00

Financial Incentives – State – MA continued

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Financial Incentives – State – MA continued

•  Qualifying solar facilities (officially known as “Solar Carve-Out Renewable Generation Units” in the regulations) must be 6 MW or less, and must have become operational after December 31, 2007.

•  The Massachusetts Department of Energy Resources (DOER) will issue the

Statement of Qualification (SQ) and once issued, the developer has four years to put the generation facility into operation. The regulations allow DOER to grant extensions, however the petitioner must submit a new SQ application. No SQ will be issued for Solar Carve-Out projects until all applicable permits are secured.

•  A unit with an SQ is eligible to participate in the Solar Credit Auction for 40 quarters (10 years). DOER expects to modify (shorten) the ten year period no later than July 19, 2013.

•  In February 2013, the DOER issued proposed changes to its RPS Class I and RPS Solar Carve-Out programs. The DOER is soliciting comments from March 1 to March 25, 2013.

SRECS – 225 CMR 14.00

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Massachusetts Commonwealth Solar II Rebate Program – Block 13

•  Solar II Rebate Program Administered by the Massachusetts Clean Energy Center

•  Funding: $1.5 Million; $795,875 remaining; 1st quarter of 2013

•  Eligible Technology: Solar PV only

•  Project Eligibility Requirements: Commercial and residential solar lease systems 15 kW or smaller (rebate capped at 5 kW), all residential systems regardless of size (rebate capped at 5 kW); customers of investor owned utilities or Municipal Light Plants that have opted into the Massachusetts Renewable Energy Trust are eligible.

•  Recipients of the Commonwealth Solar II rebate are also eligible to earn Solar Renewable Energy Certificates

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Financial Incentives – State – MA continued

•  Legislation: Green Communities Act, Green Jobs Act of 2008, Global Warming Solutions Act of 2007, An Act Relative to Competitively Priced Electricity in the Commonwealth of 2012

•  Massachusetts Clean Technology Center

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State of Connecticut: ZREC/LREC Program

•  Public Act No. 11-80 requires CL&P and UI to purchase renewable energy credits (“RECs”) under 15-year contracts

¡  ~$1 billion in contract commitments over a 6-year period

¡  Provides projects with predictable, financeable, 15-year revenue streams

•  CL&P and UI will purchase Class I RECs from projects that have:

¡  Zero Emissions (ZRECs), or

¡  Low Emissions (LRECs)

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ZREC/LREC Program is a Budget Based Program

•  This Program is based on expending an annual budget and not procuring an amount of capacity (MW)

LRECS ZRECs

$4M/Yr for 15 Yr contracts = $60M $8M/Yr for 15 contracts = $120M

5 Procurement Yrs = 60M x 5 = $300M 6 Procurement Yrs = $120M x 6 = $720M

•  Combined Total Program Budget for LRECs and ZRECs = $1.02B

•  Approximate 80/20% budget split between CL&P and UI

¡  CL&P ~80% = $816M

¡  UI ~20% = $240M

Source: CL&P & UI

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ZREC/LREC Program Eligibility

General Project Eligibility Criteria

•  Must be located behind contracting utility distribution meter

•  Must not have received funding/grants from Clean Energy Finance Investment Authority (CEFIA), or its predecessor the CT Clean Energy Fund (other than low cost financing)

•  Projects must be in service on, or after, July 1, 2011

•  EDCs will only contract for projects within their respective service territories

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ZREC/LREC Program Eligibility continued

LRECs •  No larger than 2,000 kW (2 MW)

•  Must have low emissions

•  May include fuel cells and other low emissions Class I resources, as well as all zero emission Class I resources

ZRECs •  No larger than 1,000 kW (1 MW)

•  Must have zero emissions

•  May include solar, hydro and wind

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Four Bid Tranches

•  Competitive Solicitation

•  Tariff Rider (ongoing & continuous basis)

Project Type Size Annual Budget

Large ZRECs ≥250 kW to 1,000 kW $2.7 M

Medium ZRECs >100 kW <250 kW $2.7 M

LRECs Up to 2,000 kW $4.0 M

Project Type Size Annual Budget Small ZRECs Up to 100 kW $2.7 M

Source: CL&P and UI

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Bid Selection

1.  Valid bid proposals are ranked by REC price, with the lowest bid REC price ranked first

2.  Projects are selected until the annual REC Program budget is met

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Summary of 2012 RFP

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LREC and Medium & Large ZREC Schedule

Source: CL&P and UI

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Property Assessed Clean Energy Program (C-PACE)

•  100% low cost, long-term funding for qualified energy upgrades

•  Repayment through property tax assessment over 20 years

•  Upgrades must pay for themselves with energy savings

•  Senior PACE lien stays with the property if the property changes owners

•  Loan does not accelerate in case of default

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C-PACE

•  Enables C&D property owners (the building) to access low-cost, long-term, upfront financing for qualified building upgrades and repay the loan through a benefit assessment on their property tax.

•  Requires the consent of the existing mortgage owner

•  Municipalities can opt-in

•  Enables CEFIA to administer state-wide and to aggregate demand to drive down cost of capital for building owners.

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C-PACE Benefits

•  Municipality – creates jobs and reduces pollution

•  Property Owner – provides access to low cost, long-term financing to improve energy use; loan stays with the building and not owner; allows pass-through to tenant

•  Existing Lenders – lowers operating costs for building and creates a more attractive building for potential tenants

•  Project Lenders – provides low risk investment due to senior lien status of the PACE lien and its link to property tax

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Anaerobic Digestion and CHP

•  $2 - $3 Million for each technology through CEFIA

•  Projects with a high probability of reaching successful installation and operation

•  Projects that maximize the amount of clean energy produced from anaerobic digesters per dollar of ratepayer funds at risk

•  Projects that fully utilize the characteristics of the technology and maximize benefits to a Connecticut property or facility (the Customer Site)

•  Next RFP sometime in the next few months

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Potential Future Incentives in CT

•  Proposed Legislation

•  Enhanced Virtual Net Metering

•  Property Tax Exemption

•  Submetering

•  Enhanced Microgrid Program

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Challenges and Financing Considerations

•  Risk

•  Development Risk

•  Construction Risk

•  Operational Risk

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Risks-Concept

•  NEED TO FOCUS ON RISK FROM THE ONSET ¡  Impacts financing and pricing assumptions

•  Sharing of Risk Provisions: Indemnities, limitations of liability, liquidated damages, insurance, incentives, guaranties and force majeure.

•  Risk Shifting: Often lenders will require that risks assumed by the project company through the PPA - especially if they could affect the flow of payments - are passed through other project agreements to the appropriate party best able to manage such risks; Generally, a project company will not accept a risk that it cannot pass onto another party in the transaction.

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Risks continued

•  Examples of Risk Shifting: ¡  Commercial risks of construction delays and cost

overruns will be shifted to engineering, procurement or construction contracts

¡  Fuel supply risk will be shifted to fuel supplier

¡  Risk of equipment failure will be shifted to manufacturer

¡  Risk of poor operating performance may be shifted to an O&M operator

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Financing Risks

•  Development Risk

¡  Land Control

¡  Permitting

¡  Transmission Access

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•  Construction Risks

¡  Completion

¡  Delay

¡  Performance

¡  Reliability

¡  Minimum Output

Financing Risks continued

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•  Operational Risks

¡  Intermittent Weather

¡  Fuel (Biomass)

Financing Risks continued

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•  Regulatory Risk

•  Change in Law

•  Change in Regulatory Policy

•  Expiration of Incentives

•  Transmission Constraints

•  NIMBY

Other Risks

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Financing Markets Debt Market:

•  Lenders less uneasy and opening up

•  Increased activity by banks (regional and national)

•  Private Placements/Capital markets

Tax Equity Market:

•  Tax Equity Market has expanded somewhat from last year for ITC/PTC/MACRS deals

•  Insurance companies, hedge funds and financial institutions

•  All Markets

•  Activity/Returns have increased since credit crunch

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Financing Markets continued

•  Quality projects key

¡  Established Sponsors

¡  Proven Technology

¡  Credit worthy offtakers

¡  Conservative model assumptions

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Structures

Common Partnership Structures •  Tax Equity Structures

•  Debt Structures

Murtha Cullina can assist

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Tax Equity Structure

•  Specialized investment groups/investors

•  Extremely deal-specific and tax dependent transactions

•  Accounting consultants – regulatory expertise

•  Understanding particular state ITC’s

•  Investor operating agreement

•  Investor subscription or investment agreement

•  Flexibility depends on other financing sources

•  Preferred, common or combinations thereof

•  Dovetail with debt financing

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Debt Structure

•  Certain financing sources – banks usually within region of sites

•  Senior and mezzanine

•  Subordination/intercreditor arrangements

•  Familiarity with ITC and any accompanying equity structures

•  Familiarity with SREC’s

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What’s Coming

•  Outlook

¡  Projects under development with cash grant, ITC and PTC incentives will continue in 2013

¡  Federal Climate Change Initiatives will spur increased activity

¡  Will see increased acquisition activity in the region

¡  Connecticut will continue to grow

¡  ITC for solar expires end of 2016

¡  Crystal Ball – ????

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QUESTIONS?

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Mr. Kanoff co-chairs the Energy Practice Group and focuses on energy, renewable and clean technology law and regulatory policy and litigation. He has advised numerous emerging and established public companies in energy markets including clean coal and other fossil fuel-related generation, bio-fuels, biomass, energy and demand management, smart grid, solar, wind, fuel cells and other distributed generation technologies. Mr. Kanoff assists clients in managing complex legal issues associated with developing, permitting and operating energy facilities, with electrical interconnection and ISO policies, and with evolving renewable energy/climate change regulations. Mr. Kanoff represents clients in proceedings before the Massachusetts Department of Energy Resources, Massachusetts Department of Public Utilities and at the Federal Energy Regulatory Commission and the Department of Energy. Prior to joining Murtha Cullina, Mr. Kanoff represented energy and clean technology clients in private practice. His practice included advising clients in developing and siting energy and renewable projects and in regulatory and transactional matters. In additional to his private practice experience, Mr. Kanoff supported development, construction, permitting, operation, compliance, acquisitions, restructuring and/or disposition of more than $2.5 billion in energy facilities as Regional Counsel for Calpine Corporation, an independent/merchant power producer. Additionally, he directed federal and state energy and environmental activities, including matters before the U.S. Court of Appeals, Federal Energy Regulatory Commission, U.S. Environmental Protection Agency, and regional ISOs. He also served as an Assistant Attorney General in Massachusetts. RKanoff@murthalaw.com | 617.457.4010

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Mr. Cohan focuses his practice on debt and equity financings, private placements, mergers and acquisitions, bank financings, intellectual property licensing, technology law, and general business planning and counseling. He represents and advises financing sources and various corporate entities with regard to their transactional needs and on a general corporate counsel level. He also represents and advises early stage companies and technology entrepreneurs regarding general corporate compliance and in connection with their contracting, licensing, business planning, and intellectual property matters. Mr. Cohan handles multi-million dollar mergers, acquisitions, and divestitures and corporate loan, venture capital financing and private equity transactions.

JCohan@murthalaw.com | 617.457.4012

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Paul Michaud is an accomplished energy and utility attorney with over fifteen years of combined law firm and in-house regulatory and transactional experience. He has extensive regulatory experience representing utility and energy clients in rate-related, rule-making and site permitting matters before various state public utility commissions and other regulatory agencies and tribunals. Mr. Michaud has considerable renewable energy project development experience, and demonstrated experience drafting and negotiating complex renewable energy power purchase agreements, site leases, interconnection agreements, renewable energy certificate (REC) commodity agreements, solar photovoltaic (PV) panel supply agreements, solar PV system construction agreements, and wind farm easement agreements for renewable energy projects located in Connecticut, Massachusetts, New York, New Jersey, Wisconsin and Arizona. He has extensive energy efficiency and demand-side-management (DSM) experience, and demonstrated experience drafting energy performance contracts. Mr. Michaud is the founder and President of the Renewable Energy and Efficiency Business Association, Inc. (REEBA).

PMichaud@murthalaw.com | 860.240.6131

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Mr. Capezzera has extensive experience regarding the solution of business problems, real estate development and management, including market and low income rental housing using low income housing and historic rehabilitation tax credits. He represents a variety of closely held and family businesses and public charities in the corporate, business and compliance areas, financing and related real estate undertakings. He has extensive experience in commercial office and retail leasing and general retail and other real estate development. FCappezzera@murthalaw.com | 617.457.4002

Mr. Menard is an attorney in the firm's corporate law practice, where he represents both private and public companies. He practices in the areas of general corporate law, private equity and venture capital investments, mergers and acquisitions, and securities law. In the private equity and venture capital area, Mr. Menard has represented both companies and investors in debt and equity offerings, and has provided both pre and post-investment general corporate law guidance to companies in the high tech, bio-science, manufacturing, audio and video, steel and retail industries. DMenard@murthalaw.com | 860.240.6047

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Disclaimer

This information is educational material which provides an overview of the issues. It does not deal with every issue, and does not deal with every exception to this information.

This information does not constitute legal advice.

Please contact your attorney or a Murtha Cullina attorney if you would like legal advice.

© 2013 Murtha Cullina LLP