Financial Opportunities And Constraints For Hydropower Development 021010
- 1. Financial Opportunities and Constraints for Hydropower Development Ditch and Reservoir Company Alliance (DARCA) Annual Conference Doubletree Hotel Durango, Colorado February 10, 2010 by: Ron Miller, P.E.
- 2. Discussion Topics • Introduction • Market Drivers • Site-Specific Issues • Cash Flow Analysis Example • Project Feasibility Steps • Financing Alternatives Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution to the copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 2
- 3. How Hydro-generation Works Typical Hydroelectric Dam Reservoir Powerhouse Generator Power Lines Intake Penstock Turbine Outflow River Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution to the copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 3
- 4. Hydro-generation Advantages • Well-understood technology • Continued technical improvements • Reasonable rate of return on projects • Hydro energy production coincides with most summer-peaking utilities’ heaviest demand period Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution to the copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 4
- 5. Market Drivers • Existing dams and reservoirs without hydrogeneration capacity 82,600 dams in U.S. – only 3% generate energy DOE estimates 30,000 megawatts of potential energy at 5,677 undeveloped sites, more than half of which already have dams • Renewable Portfolio Standards (RPS) are driving renewable energy generation with renewable energy credit (REC) payments • Federal tax incentives • Low-cost financing alternatives Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution to the copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 5
- 6. Renewable Portfolio Standards • Colorado RPS requires 2 largest utilities to derive 20% of their total energy sales from renewable energy sources by 2020 • Municipalities and co-ops must derive 10% of sales by 2020 • Of the 20%, 4% of all renewable energy must come from solar; the remaining 96% can come from hydro, wind, and biomass sources Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution to the copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 6
- 7. Renewable Portfolio Standards, cont’d. • Utilities must purchase RECs on a 20-year basis to satisfy RPS compliance • REC sales are a new revenue source for hydro projects • Federal legislation is moving to ensure that 10% of the nation's electricity comes from renewable sources by 2012, 25% by 2025 • Federal legislation has already been enacted to provide tax incentives for renewable energy Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution to the copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 7
- 8. Federal Tax Incentives • Tax credits in general - project owner must have tax liability; not applicable for tax- exempt, non-profit entities • Production tax credits (PTC) Tax credit to offset tax liability on $ for $ basis Tax credit, not tax write-off Paid to project owner on a $/kilowatt-hour basis as renewable energy is produced • Investment tax credits (ITC) 30% tax credit of the renewable energy project installed capital cost Paid to project owner as project first year tax returns filed Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution to the copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 8
- 9. Site-Specific Issues Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution to the copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 9
- 10. Site-Specific Issues • Head & flow rate Determines size (kilowatts) of generating unit • Reservoir / watershed / inflow volume Determines length of generating hours each day, generating days in month • Energy generation Evaluate amount of energy produced under different hydrologic conditions • Water release strategy Follows inflow volume daily Align with utility needs Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution to the copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 10
- 11. Site-Specific Issues, cont’d. • Distribution / Transmission Line Connection Single-phase service to existing non-hydrogenerating dams for SCADA, lighting Single-phase distribution line limits energy generation capacity at dam to harness the potential energy from head, flow rate, and size of reservoir Upgrade of single-phase to 3-phase service requires additional capital to be expended, but provides opportunity to capture increased energy from project • Equipment Selection Frances or Kaplan turbines Horizontal or vertical installation Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution to the copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 11
- 12. Financial Issues • Project capital requirements Includes powerhouse, power generating equipment, distribution upgrades • Available revenue streams Sale of energy to utility Sale of RECs to utility or other entity ITC, PTC for tax-paying entities only • Summer or winter peaking utility Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution to the copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 12
- 13. Financial Issues, cont’d. • Long-term energy sale to utility Power Purchase Agreement (PPA), provides project revenue stream and collateral • Long term sale of RECs to utility or other entity Provides additional revenue stream for project • Energy pricing by local utility Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution to the copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 13
- 14. Energy Pricing • Flat rate in dollars per metered kilowatt-hour (kWh) • Blended rate combining the following: Energy charge in dollars per metered kWh Demand charge in dollars per highest or peak kilowatt (kW) demand Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution to the copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 14
- 15. Cash Flow Analysis Assumptions • Single-phase distribution service • 2 MW of installed capacity • Average hydrologic scenario • 4% per year inflation • Loan term of 20 years at 2.5% annual rate • Revenue from sale of energy and RECs • Non-tax paying entity is owner Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution to the copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 15
- 16. Cash Flow Analysis Results • 100% equity, 0% debt 20-year after-tax rate of return: 4.2% Payback: 15 years • 20% equity, 80% debt 20-year after tax rate of return: 13.5% Payback: 9 years • Impact of leveraging with debt Rate of return triples Low cost debt and ability to finance 80% of project capital Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution to the copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 16
- 17. Cash Flow Analysis ($000) 100% Equity Revenue From Revenue From O&M Insurance Property Tax Cumul. Project Sale of Energy Sale of RECs Expense Expense Expense Cash Flow Cash Flow Year ($000) ($000) ($000) ($000) ($000) ($000) ($000) 0 (6,123) (6,123) 1 - - - - 2 537 74 75 24 26 338 338 3 555 74 78 24 25 354 692 4 574 74 81 24 24 372 1,064 5 594 74 84 24 23 389 1,453 6 615 74 88 24 22 408 1,861 7 637 74 91 24 21 427 2,288 8 659 74 95 24 20 447 2,735 9 683 74 99 24 19 468 3,203 10 707 74 103 24 18 489 3,692 11 733 74 107 24 17 511 4,204 12 759 74 111 24 16 534 4,738 13 786 74 115 24 15 558 5,297 14 815 74 120 24 14 583 5,880 15 844 74 125 24 13 609 6,489 16 875 74 130 24 11 636 7,125 17 907 74 135 24 10 664 7,789 18 941 74 140 24 9 693 8,482 19 975 74 146 24 8 723 9,206 20 1,011 74 152 24 7 754 9,960 Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution to the copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 17
- 18. Cash Flow Analysis ($000) 20% Equity / 80% Debt Revenue From Revenue From O&M Insurance Loan Cash Cumul. Project Sale of Energy Sale of RECs Expense Expense Property Tax Pay. Interest Flow Cash Flow Year ($000) ($000) ($000) ($000) Expense ($000) ($000) ($000) ($000) ($000) 0 (1,225) (1,225) 1 - - - - - - - - 2 463 74 75 24 26 314 122 98 98 3 481 74 78 24 25 314 118 114 212 4 500 74 81 24 24 314 113 131 344 5 520 74 84 24 23 314 108 149 493 6 541 74 88 24 22 314 103 168 661 7 563 74 91 24 21 314 97 187 847 8 585 74 95 24 20 314 92 207 1,054 9 609 74 99 24 19 314 86 228 1,282 10 633 74 103 24 18 314 81 249 1,531 11 658 74 107 24 17 314 75 271 1,802 12 685 74 111 24 16 314 69 294 2,096 13 712 74 115 24 15 314 63 318 2,415 14 741 74 120 24 14 314 56 343 2,758 15 770 74 125 24 13 314 50 369 3,127 16 801 74 130 24 11 314 43 396 3,523 17 833 74 135 24 10 314 36 424 3,947 18 866 74 140 24 9 314 30 453 4,400 19 901 74 146 24 8 314 22 483 4,883 20 937 74 152 24 7 314 15 514 5,397 Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution to the copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 18
- 19. Feasibility Study Steps • Data collection and review • Define power potential and estimate energy output • Develop alternatives • Assess market potential • Preliminary cost estimate • Economic analysis and alternative selection Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution to the copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 19
- 20. Financing Alternatives • Colorado Water Conservation Board (CWCB) • Colorado Water Resources & Power Development Authority (CWRPDA) Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution to the copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 20
- 21. Colorado Water Conservation Board (CWCB) Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution to the copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 21
- 22. Program Eligibility Raw water projects only • Reservoirs/dam rehabilitation • River diversion structures • Irrigation ditches • Wells and pipelines • Water rights acquisitions • Flood control • Hydroelectric facilities Special thanks to CWCB’s Kirk Russell and Anna Mauss for their contributions and slides to this presentation Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution to the copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 22
- 23. Project Financing Terms • 90% of total project cost • $100,000 minimum loan • FY2009 rates (30-year) * Agricultural 2.75% Municipal 4.00-5.25% Commercial 6.25% • 1% loan service fee * reduced if < 20 years Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution to the copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 23
- 24. Loan Approval Schedule • Loan request UNDER $10 million Accepted 6 times per year Approved at CWCB bi-monthly meetings Apply by 1st of month (i.e. April 1st for May meeting Allow 5 months for loan approval & loan contracting Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution to the copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 24
- 25. Loan Approval Schedule, cont’d. • Loan requests OVER $10 Million Accepted once a year (Apply by August 1st) Loan Approval at November CWCB meeting Project included in Annual Construction Fund Bill Funding available July 1, with contract in place Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution to the copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 25
- 26. CWCB Loan Program Process Application Board Contracting Design & Loan Approval Construction Repayment Initial Contact Prepare Contract Substantial Staff Review Completion Interest Due Establish Deadlines Contract Signing* Board Presentation Repayment Application & Loan (Loans over FUNDS Feasibility Study $10M go to AVAILABLE Submittal Legislature) Progress Payments Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution to the copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 26 * With Conservation Plan in Place
- 27. Loan Feasibility Study • Prepare by Engineer/consultant and/or Project Sponsor • Provides documentation of project: Need (water supply problem and solution) Technical feasibility (selected project alternative) Impacts (social and environmental) Economic, financial, institutional feasibility Financial program – loan repayment capacity and security CWCB Website: http//cwcb.state.co.us/ Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution to the copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 27
- 28. Colorado Water Resources & Power Development Authority (CWRPDA) Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution to the copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 28
- 29. Small Hydropower Loan Program • $10 million of unrestricted funds available • 5 megawatts or less • Loan limit of $2 million per governmental agency • Interest rate: 2% per year • Term: 20 years • Eligibility: Colorado cities, towns, counties, water districts, water and sanitation districts, metropolitan districts, water conservancy districts, water conservation districts, irrigation districts, and any enterprise created by the foregoing • New hydropower facilities (turbines, mechanical and electrical), pipelines, necessary remodel/reconfiguration of the building housing the facilities and transmission lines Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution to the copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 29
- 30. Loan Program Conditions • A FERC or BOR exemption or permit is required • The governmental agency must have a contract to sell or a plan to use within its system the energy produced from the hydropower project • All required project funds are in place • Final design and costs are available with construction contract imminent • Governmental agency must demonstrate an ability to repay the Small Hydropower loan (feasibility study or a financial/cash flow statement) • Security for the loan (hydropower revenues or utility system revenues) is in place Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution to the copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 30
- 31. Project Evaluation Funding • $150,000 (up to $15,000 each project) of matching grant funds for the evaluation and development of small (5 megawatts or less) hydropower projects for 2010 • Applications for the Matching Feasibility Grants are due to the Authority not later than March 19, 2010. CWRPDA Website: http://www.cwrpda.com/ Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution to the copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 31
- 32. Contact Information Ron Miller, P.E. Ron URS Corporation Miller, P.E. 8181 E. Tufts Avenue 303-723-5465 80237 Denver, CO 303-748-3441 cell Direct: 303-796-4731 ronmiller74@comcast.net Cell: 303-475-0775 Ronald_L_Miller@urscorp.com Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution to the copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 32
- 33. Thank You Questions and Answers Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution to the copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 33