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Biomass Thermal Financing

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Biomass Thermal Finance Options, Steps, and Resources for Biomass Project

DevelopmentThis Webinar is brought to you by:

Biomass Thermal Energy Council (BTEC)

With the generous support of the U.S. Forest Service

Wood Education Resource Center

2 PM ET, June 29, 2011

“The work upon which this publication is based was funded in whole or in part through a grant awarded by the Wood Education and Resource Center, Northeastern Area State and Private Forestry, U.S. Forest Service. This institution is an equal

opportunity provider.”


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Joseph Seymour - Moderator

Program Coordinator - Policy and Government Affairs, Biomass Thermal Energy Council (BTEC)

I. Introduction - Seymour


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Quick NotesTwo Audio Options: Streaming Audio and Dial-In.1. Streaming Audio/Computer Speakers (Default)

2. Dial-In: Use the Audio Panel (right side of screen) to see dial-in instructions. Call-in separately from your telephone.

Ask questions using the Questions Panel on the right side of your screen.

The recording of the webinar and the slides will be available after the event. Registrants will be notified by email.

I. Quick Notes - Seymour


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Speakers

Greg Montgomery,Managing Partner, Abundant Power

Fred Reagan, Facilities Director, Merrimack Valley School District

Dan Kuipers, Managing Partner, Sustainable Energy Financing, LLC

Joseph Seymour, Program Coordinator - Policy and Government Affairs, BTEC

Moderator

I. Event Introduction - Seymour


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Presentation OutlineI. Introduction – Joe SeymourII. Biomass Project Financing– Greg

MontgomeryIII. School Case Study – Fred ReaganIV. Environmental Commodities – Dan

KuipersV. Q & A, Next Events – Joe Seymour

[Full presentation will be available online, www.biomassthermal.org/resource/webinars.asp]

I. Event Introduction - Seymour

http://www.biomassthermal.org/resource/webinars.asp


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About BTEC – Mission & CompositionThe Biomass Thermal Energy Council (BTEC) is a nonprofit association dedicated to advancing the use of biomass for heatand other thermal energy applications.

BTEC engages in research, education, and public advocacy for thefast growing biomass thermal energy industry.

Formed in January 2009 by eight companies, BTEC currently has 85+ members from 34 U.S. states, Canada, and Austria

Includes landowners, handling equipment manufacturers, fuel refiners, appliance manufacturers, project developers, investment companies, nonprofits, universities, associations, and others

I. Introducing BTEC - Seymour


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BTEC Membership

I. Introducing BTEC - Seymour

Abundant Power Froling Energy Public Policy VirginiaACT Bioenergy Fröling GmbH Rainforest AllianceAlliance for Green Heat Fuel Pellet Technologies Ray Albrecht/The Fulton CompaniesAlternative Energy Solutions International, Inc. FutureMetrics Renewable Energy ResourcesAmerican Agriculture Movement Gavilon Group Resource Professionals GroupAmerican Wood Fibers Green Clean Heat Sandri CompaniesAPEX Indeck Ladysmith Santa Energy CorporationBear Mountain Forest Products Innovative Natural Resource Solutions Sewall CompanyBeaver Wood Energy International Renewable Energy Technology Institute Skanden EnergyBiomass Combustion Systems International WoodFuels State of Montana Department of Natural Resources and Conservation

Biomass Commodities Corporation Jesse E. Lyman Pellets State University of New YorkBiomass Energy Resource Center Krieg DeVault Tarm BiomassBiomass Energy Works Lignetics of Virginia Twin Ports TestingBionera Resources Inc. Maine Energy Systems Vapor Locomotive CompanyBiowood Energy Maine Pellet Fuels Association VecoplanChip Energy Marth Vermont Wood PelletClean Power Development Missouri Corn Growers Association ViessmannComact Equipment Montana Community Development Corporation West Oregon Wood ProductsConfluence Energy National Network of Forest Practitioners Western Ag EnterprisesContinental Biomass Industries New England Wood Pellet Westervelt Renewable EnergyControl Labs Northeast Mill Services Wilson Engineering ServicesCorinth Wood Pellet Oregon Forest Industries Council Wisconsin Energy Conservation CorporationCousineau Forest Products PA Pellets WoodFuels Virginia LLCDejno's Pellet Technology USA WoodmasterEcostrat Pelletco WoodPellets.comEnviva LP Plum Creek Zilkha Biomass EnergyErnst Biomass Pratt & Whitney Power Systems ‐ TurbodenForest Energy Corporation Proe Power Systems


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Project made possible by the USDA FS WERCBTEC awarded a grant from the USDA Forest Service’s Wood Education and Resource Center (WERC) in June 2010 to advance education and outreach on biomass thermal energy

The Center's mission is to work with the forest products industry toward sustainable forest products production for the eastern hardwood forest region.

Previous webinars available at: www.biomassthermal.org/resource.

All questions and attendee feedback will help form future activities.

Remember to answer the survey at the webinar’s conclusion!

I. Sponsoring Entity - Seymour

http://www.biomassthermal.org/resource


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Greg MontgomeryManaging Partner, Abundant Power

Biomass Project Financing

II. Project Financing - Montgomery

Biomass Project Financing

Topics for Discussion• Project Financing Overview• Capital and Funding Sources for Projects• Biomass Project Case Study

Greg Montgomery

Managing Partner

Abundant Power Group

(704) 271‐9889

[email protected]

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mailto:[email protected]

Development Cycle and Timeline

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Early Stage

Development

Late Stage

Development

Construction

Operations

What is Project Financing?

• Technique for financing capital‐intensive projects that are either difficult to support on

a Developer’s corporate balance sheet or are more attractive when financed separately.

• “Sponsor”

( the Developer ) creates subsidiary “Project Company”

(Special Purpose

Entity ) to hold the project’s assets, including all contractual rights and obligations.

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• Equity in SPE comes from Sponsor and outside parties.

• Debt is provided to SPE based on the viability of the project• Distribute all risks from SPE to project parties best able to

mitigate particular risk via long‐term, enforceable contracts.

• The combination of contracts, credit‐worthiness of

counterparties, etc. provide sufficient credit to make the

transaction bankable on a stand alone basis.

• Recourse is limited to the Project Company’s assets and not to

Sponsor.

Project

Company(SPE)

Sponsor(Developer)

Parties to the Transaction

Project

EPC

Offtaker

/ Utility

Debt FinancingEquity Financing Developer

Feedstock Supply

Operator

Ownership

EquityDebt

Interest Rate

Return

OwnershipAggregates

Project

FuelPower

Construction Operations and

Maintenance personnel

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Tax Equity

Tax Benefits

Essential Components of Project Finance

Project Sponsor/Developer• Reputation• Track record• Financial strength and skill set• Depth of the development team

Project Technology/ Resource• Technical feasibility• Manufacturer reputation, warranties, creditworthiness• Resource quality for renewable energy projects

Project Economics• Realistic debt assumptions• Attractive equity returns (pre‐tax, after‐tax, unlevered, levered)• Upfront cash and leverage is what every developer is after• Project pro forma and downside sensitivities

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Essential Components (con’t)

Legal Plan• Special purpose entity (SPE) for the project• All the contracts are with the SPE with proper assignment rights• Get good legal help early• Common problems with the early contracts e.g. Form of land leasesConstruction Plan• EPC wrap with reputable, well capitalized, creditworthy contractor• Performance liquidated damages (LDs)• Schedule delay LDsRisk Mitigation• Allocate risks to the party who best can bear them• Have clear contractual obligations and monitor the milestones• Develop the project in phases when you can• Prove out the resource• Minimize cash outflows upfront

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Essential Components (con’t)

Operation and Maintenance• Third party operator or an affiliate of the sponsor• Arms length transaction if the contractor is the affiliate of the sponsor• Track record and reputation• Warranties from the manufacturer and availability guarantees from the

operatorPower Marketing• Power purchase Agreement is a key document – see below• Credit of the power off‐take• Long‐term contractFinancial Package• Project Pro forma• Marketing plan for the power• Transmission plan• Procurement/ construction Plan• Summary contractual

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Efficient Allocation of Risk and Rewards

RisksCounterparties Risk

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Key commercial contracts set forth “basic”

business deal—benefits and

obligations and allocation/transference of risk.

Financeable contracts require this “basic”

deal, but also set forth required

responses to hypothetical uncertainties.

In that regard Project Finance structures are pre‐arranged work‐outs.

Power Purchase Agreements

• Construction milestones

• Delay damages

• Guaranteed commercial

operation date

• Certainty of delivery at agreed quantity

Utility’s Objectives Project’s Objectives

• Force majeure relief on

liability

• Stable cash flow

• No damages if milestone

other than COD is missed

• Caps on delay damages

• Avoid posting of security

• Escalating price over term

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Debt & Equity

Different markets for different capital needs

• Equity sources:• Strategic Equity: Utilities, companies with operation capabilities• Private Equity: Increasing demand for renewable projects• Institutional Investors: Rarely provide equity funding• Family Offices/High Net Worth Investors: Mission oriented with appetite for risk• Tax Equity: Corporations and banks with tax liability; an important source of capital

for renewable energy projects

• Debt sources:• Bank Markets: Most common in the project finance space. Generally floating (Libor)

interest rate based deals (can be swapped). Term is usually less

than 10 years.• Capital Markets (i.e. bond markets): Attractive long term financing option. Generally

fixed rate issuance and natural financiers are institutional investors like insurance

companies. Benefits are maximized leverage over a long term that

increases the

equity returns. Limited/no refinancing risk and interest rate risks. Downside is limited

flexibility vs. Bank debt

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Equity Returns and Ownership

• Typically in project financing , the Equity Investor will invest

all of the equity into the

SPE required for the project.

• For this investment, the Equity Investor initially receives significant majority

ownership (80‐95%) with the Sponsor/Developer retaining the rest as a “promote”

for

conceiving and developing the project through point of investment.

• Sponsor/Developer can also invest alongside outside equity investor in project.• Sponsor/Developer will earn a negotiated development fee at closing of the

project financing for reimbursement of costs associated with development as

well as premium for risk.

• Based on a “waterfall”

structure, the Equity Investor’s ownership will decrease over

time as certain hurdle rates are achieved. The following is an example:

• Initial ownership may be 95/5 to Equity Investor and Sponsor based on Equity

Investor providing all of the equity required for the project.

• Once the Equity Investor achieves a IRR of 18%, then ownership will alter to

75/25 to Equity Investor and Sponsor.

• Upon the Equity Investor achieving an IRR of 25%, the ownership will revert to

60/40 for the life of the project.

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Project Lifecycle & Equity Returns

Project R

eturns

Early Stage

Development

Late Stage

Development

Construction

Phase Operations

Project Stages

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Required equity returns to the outside Equity

Investor are dependent on the stage of the

investment and the project risks.

25‐35%

18‐25%

12‐18%8‐12%

Establishing Debt Capacity

Size project debt to:

Maximize leverage• Cover project costs and expenses• Start‐up costs• Working capitalProvide acceptable risk/reward to lenders• Contract structure• Technology risk• Counterparty riskAmortize debt over acceptable time period• Fully amortizing, Partial amortization, Bullet

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Construction Debt

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• Construction debt for a project is typically lined up after finalizing the

permanent financing and the signing of the EPC agreement with construction

ready to commence.• Typically an interest only loan repayable at completion of construction and

commissioning of plant which triggers permanent financing.• The construction lender will fund draws based on a construction schedule

prepared by the EPC contractor and certified by the project representative. • If the Equity Investor has not already invested into the project, then the

construction lender may require a commitment by the Equity Investor to

fund in the event of issues with timing or completion of the Project to

decrease the construction lender’s exposure.• Construction lender may also be the project’s permanent debt lender

through a “mini‐perm”

feature converting the outstanding construction line

into term debt at completion of construction and commissioning of plant. • Otherwise, construction line repaid out of proceeds of permanent

financing.

Sources of Cash, Tax, and Other Incentives

Project Revenue•Energy sales (power, thermal)•REC sales•Environmental intangiblesFederal Incentives•Production Tax Credits ("PTC").

2.2¢/kWh (wind, geothermal, closed‐loop biomass);

1.1¢/kWh for other s; applies to first 10 years of operation.•Investment Tax Credit ("ITC“): 30% (wind, solar, biomass, others); 10%

(geothermal, micro turbine).•Treasury Grant (expiring 12/31/10). Accelerated Tax Depreciation•MACRS ‐5 yrs•Bonus depreciationState Incentives•Tax credits and grants•Sales and property tax abatement/rebates/exemptions•Other incentives (e.g. S‐RECs)

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Environmental Intangibles

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• Monetization of Environmental Intangibles (“EIs”) associated with a project

are an important revenue source for project cash flows.• Types of EIs

available include:• Renewable energy credits (RECs): general v. carve out (solar, thermal,

swine, poultry)• Carbon credits (becoming less of a factor without supporting policy)• “White Tag”

credits for energy efficiency• Added project cost to design plan for Eis

and increased operating cost to

measure, verify and register.• Monetize through off‐take agreements with credit worthy buyers

• Long‐term v. short‐term• Fixed price with escalator v. indices or open market

• Emerging secondary markets for these credits• Will not be given firm value for financing beyond term of contracted off‐take

Biomass: Sector Dynamics

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• Return profile: 17% - 20%+

• Project Cost: $5 - $200 million

• Abundance of developers and projects• Attractive risk/return profile and project

size• Produce baseload power• Proven and reliable technology• Utilities/Munis are comfortable with

resource and providing PPAs• No tax equity required

Strengths

• Under scrutiny of several environmental groups for not being ‘renewable’ (e.g. State of Massachusetts)

• Long construction period• Out years of long-term wood supply

contracts are unclear

Weaknesses

Valleys of Death – New Technologies

27Source: New Energy Finance.

Crossing to Commercialization:• DOE Loan Guarantee Program• Advanced Research Projects Agency‐Energy (ARPA‐E)• Decentralized state funding

Biomass: Sample Project

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Wood Fueled

Project Size 60 MW

Cost $200 million

Description Power plant built to burn regional wood waste

Revenues • 75% power sales• 25% REC credits (sold with power under long‐term PPA)

Cash Flow per Project $30 million per year EBITDA

Equity Payback Approximately 3 years

Capital Structure • Debt –

50%• Tax Grant –

30%• Equity – 20%

Key Issues • Pass through of fuel cost• Adequacy and quality of wood• Construction cost assurance

Exit Strategy • Sale of interest to financial or strategic investor subsequent to plant establishing

solid operating record

• Sale as part of a portfolio of projects developed by sponsor


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Fred Reagan

Facilities Director, Merrimack Valley School District

Commercial Biomass Heating Case Study: Merrimack Valley School District

III. School Application – Reagan


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Identifying Project Scope and Available Options

Heat days (182) and heating requirement for facilitiesTypically we use 2.80 tons per day = 26,880,000 btu’s.Comparatively, that’s = 170 gals fuel = 23,460,000 btu’s

O Obvious fuel savings with BTU conversion10 / 11 wood chips @ $50/ton = Oil @ $ .82 per gal

Based on 511 tons chips = $25,550 > 31,059 gals #2 oil @ $ 2.35 = $72,989Realized Savings for 10/11 = $ 47,439

Chose to pursue a system with the following features:Wood Chip, 5.0MMBtu, MessersmithDesigned as a stand alone facility with1 stack (use of existing MS boilers as back up)

Designed for two existing buildings with future expansion capacity (have added SAU office and bus garage)Use of underground PEX piping – to Bus Garage and SAU Office



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Financial Considerations and PaybackOverall System Costs for Equipment Purchase and Installation

Annual fuel – $ 25,550 chips vs. $ 72,958 # 2 oilOverall system –conventional oil/gas $ 925,650 vs. chip 1.5 mil

Fuels Savings Average Savings yearly = $ 53,806

Projected Payback – We have achieved payback. Based on difference in conventional system vs. bio mass system.

DEGREE DAYS NET WEIGHT (lbs) NET TONS EQUIVALENT OIL (gal, no. 2)

2008-2009 6190 1,091,630 546 33,174.64

2009-2010 5472 1,083,500 542 32,927.57

2010-2011 6219 1,021,608 511 31,046.67

Total tons Total equivalent oil

1,599 97,148.88



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OTotal cost wood chip heat plant cost of $1,500,000 (conventional fuel oil system priced at $925,650).

O Needed to obtain an additional $574,350

OMVSD received 55% building aid towards total of the Capitol Project ($315,893).

ODistrict tax payers responsible for remaining $258,457.O The total capital project was priced at just over $ 20,000,000.

OBond was approved by the taxpayers with 74% approval.O Proactive planning on the school board’s part due to the

creation of a community task force, taxpayer’s questions were answered well in advance of the district’s annual meeting.

State and Community Funding



Facility Pictures



Lessons Learned1. Operational qualities of

biomass system vs. other fuel sources

10 mins per day. 20 minutes once per week.

2. Expansion of system to other buildings.

Have added SAU office and bus garage

3. Support from community

Decision after surveying other boiler sites in VT



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Contact Information

Fred ReaganFacilities Manager, Merrimack Valley School DistrictP: 603-753-6422Email:[email protected]

Neil BarryPlant Manager, Merrimack Valley School DistrictP: 603-753-6422Email: [email protected]



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Dan Kuipers

Managing Partner, Sustainable Energy Financing LLC

What Does Carbon Mean for Your Bottom Line: Assessing the Economic Impact of Carbon In Biomass Projects

IV. Environmental Commodities - Kuipers

Dan Kuipers, GHG-IQFounder/Managing Partner

Sustainable Energy Financing, LLC

June 29, 2011

Assessing the Economic Impact of CarbonIn Biomass Projects

• SEF Background• Carbon Credits/Renewable Energy Credits • Current State of Affairs• Carbon Consideration• Sample Analysis

• Economic Development Firm Specializing in Biomass Related Renewable Energy Projects• Wood Product/Processing Industry, Greenhouses,

Agricultural Producers, Food Processors, Building Material Industry, Manufacturing Industry, Wood Pellet Manufacturers

• Carbon Credits, Grants, Tax Credits, Renewable Energy Credits

• Carbon Assessments/GHG Inventory Quantification• Millions of Dollars in Successful Incentive Work

RENEWABLE ENERGY CREDITS

• 1 MWh

of electricity =

1 REC

• Represents the Environmental

Attributes Associated with the Generation of Electricity

• Voluntary/Compliance

CARBON CREDITS

• 1 mtCO2e = 1 Carbon Credit

• PAVER• Permanent• Additional• Verifiable• Enforceable• Real

• Robust Documentation• PDD

• Voluntary/Compliance

• Lack of National Policy• Regional Programs Do Offer Some Guidance and Hope

• RGGI• WCI• California

• Thermal Projects Remain Largely Un-incented

• Projects Should Undergo Comprehensive Analysis to Determine Value of Carbon and Other Applicable Incentives

• Methodology• Tonnage• Voluntary/Compliance• Other Incentives

• Numerous Voluntary Standards• VCS• CAR• ACR

• Each standard has own set of program rules and types of eligible

projects

• Each standard uses different methodologies and approaches for quantifying emission reductions

• Each standard has pros and cons• Associated Costs• Ease of Use• Market Value• Liquidity

• Renewable Energy –

Displacement of Fossil Fuels• Thermal Production• Combustion• Gasification• CHP

• AFOLU –

Agriculture Forestry and Other Land Use• Forestry

• Utilization of Waste Materials –

C&D, Pallets, Chips/Hog Fuel• Pellets Can be Difficult

• Life Cycle Analysis• Vertical Integration

• Planning and Analysis Project Developer/SEF• Prior Consideration• Methodology Review• Tonnage Estimates

• Project Design -

SEF

• Validation –

3rd

Party• Long Term Importance of Project Validation/Registration

• Verification –

3rd

Party• Brokerage –

SEF/RFP/Other

• 24 MWth

Biomass Fuel Switch • Replacing Natural Gas with Waste Wood Chips• Annual Thermal Demand 250,000 MMBTU • $1.75 Million/year in fuel cost using Natural Gas• $500,000/year in fuel cost using Biomass

• Simple Payback without Incentives –

7 years

• Simple Payback with Incentives –

6 years• Eligible for USDA REAP (25% of Project Cost) -

$500,000• Carbon Credits (VER’s) Sold Through 2015 -

$4.00/ton• $52,000/year• Over 10 years = $520,000@$4.00/ton

• Can’t See the Future• What If Scenarios

Questions?

Dan KuipersManaging Partner

Sustainable Energy Financing, [email protected]

www.SEF-LLC.com


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Q & A

VI. Discussion - Seymour

Ask questions using the Questions Panel on the right side of your screen.

All questions and comments will be recorded and incorporated in the webinar summary report.

Also, please take a few moments to answer the survey questions.


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Other Resourcesbiomassthermal.org/resources

Podcasts

Interviews with key industry leaders (8+, also on iTunes Podcasts)

Factsheets (posted soon)Presentation (posted soon)

VI. Other Resources - Seymour

http://www.biomassthermal.org/resources


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Upcoming Events

Wood Heat Symposium, Alliance for Green Heat

July 13, DChttp://www.forgreenheat.org/

DOE Biomass ProgramJuly 26-27, DChttp://www1.eere.energy.gov/biomass/biomass_2011.html

VI. Upcoming Events - Seymour

http://www.forgreenheat.org/

http://www1.eere.energy.gov/biomass/biomass_2011.html

http://www1.eere.energy.gov/biomass/biomass_2011.html


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More Information

This Webinar will be available by Thursday, June 30.

Sign up to receive BTEC news at on our website.

Join BTEC for: -- Frequent and timely regulatory, policy and market intelligence updates

-- Business Development opportunities and networking with other biomass leaders

-- Visibility as a supporter of the market’s growth

-- Discounts to nearly all major biomass industry events in the U.S.

For more info or to join, go to: www.biomassthermal.org/membership

VI. More Information - Seymour

http://www.biomassthermal.org/membership


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Thank you!

BTEC Board of Directors

If you want to learn more about the biomass thermal industry, BTEC, or membership, visit

www.biomassthermal.org

http://www.biomassthermal.org/


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this webinar is brought to you by: biomass thermal energy ... · financing, llc {joseph seymour,...

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