Financial Opportunities And Constraints For Hydropower Development 021010

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.

Copyright© 2010 Ronald L. Miller. Material can be shared or copied with attribution tothe copyright holder. http://www.linkedin.com/pub/ron-miller-p-e/4/842/580 2

Discussion Topics

• Introduction

• Market Drivers

• Site-Specific Issues

• Cash Flow Analysis Example

• Project Feasibility Steps

• Financing Alternatives


How Hydro-generation Works

Typical Hydroelectric Dam

Reservoir

IntakePenstock

Generator

Powerhouse

Power Lines

Outflow River

Turbine


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


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


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


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


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


Site-Specific Issues


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


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


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


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


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


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


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


Cash Flow Analysis ($000) 100% Equity

Project

Year

Revenue From

Sale of Energy

($000)

Revenue From

Sale of RECs

($000)

O & M

Expense

($000)

Insurance

Expense

($000)

Property Tax

Expense

($000)

Cash Flow

($000)

Cumul.

Cash Flow

($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


Cash Flow Analysis ($000)20% Equity / 80% Debt

Project

Year

Revenue From

Sale of Energy

($000)

Revenue From

Sale of RECs

($000)

O & M

Expense

($000)

Insurance

Expense

($000)

Property Tax

Expense ($000)

Loan

Pay.

($000)

Interest

($000)

Cash

Flow

($000)

Cumul.

Cash Flow

($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


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


Financing Alternatives

• Colorado Water Conservation Board (CWCB)

• Colorado Water Resources & Power Development Authority (CWRPDA)


Colorado Water Conservation Board (CWCB)


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


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


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


• 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

Loan Approval Schedule, cont’d.


Application Board

Approval

Contracting Design &

Construction

Loan

Repayment

CWCB Loan Program Process

Initial Contact

Establish Deadlines

Application & Loan Feasibility Study Submittal

Staff Review

Board Presentation(Loans over $10M go to Legislature)

Prepare Contract

Contract Signing*

FUNDS AVAILABLE

Progress Payments

SubstantialCompletionInterest Due

Repayment

* With Conservation Plan in Place


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/


Colorado Water Resources & Power Development Authority (CWRPDA)


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


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


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/


Ron Miller, P.E.

URS Corporation8181 E. Tufts AvenueDenver, CO 80237

Direct: 303-796-4731Cell: 303-475-0775

[email protected]

Contact Information

Ron Miller, P.E.

303-723-5465

303-748-3441 cell

[email protected]


Thank You

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Financial Opportunities And Constraints For Hydropower Development 021010