Walden Renewables: The Energy Revolution Solar Experts Rountable

I want to start by thanking our host Phil Cavallo for inviting me to this conference and setting it up. I would also like to thank Scott Roswell from Beaumont who was my first contact with Beaumont.

Conferences like these are rare and yet very important. As I will explain later, my business focuses on distributed generation, or community scale renewable energy projects because community scale projects not only generate outstanding returns, but they also provide the most efficient means to address many of the problems facing our economy and facing our sustainable future.

I have worked in very large organizations for the past 20+ years so I think I can say with authority that it is at places like this that real change happens.

When you think of REVOLUTION …

We are in the midst of an energy revolution.

When you think of Revolution … what comes to mind?

1. Scientific Revolution: Benjamin Franklin is an excellent representative for the extraordinary technological revolution that is driving down the cost of solar PV systems, as well as the strong entrepreneurial spirit that will transform our energy economy.
2. Restructuring the Status Quo: Robespierre might have used this phrase – “restructuring the status quo” — to describe the Terror. But it is an accurate description for what States like Massachusetts are doing to address the threat of climate change through renewable energy incentives.
3. Tax Credits: We are here in Massachusetts, so you have to think of the Boston Tea Party and the tax revolution. Tax relief, or tax credits are the means by which the Federal government provides incentives to develop clean energy projects.

These are the 3 key ingredients of the recipe for sustainability: technology driving down costs; States setting up new programs to promote green energy; and the Federal government offering significant tax incentives.

How did I get involved?

Mission Statement

Walden Renewables develops and invests in clean energy projects across the United States. The world is in the midst of a revolution in the way we think about our environment and the way we power our society. Walden seeks to harness the momentum driving that revolution to provide clients outstanding after-tax returns, through highly efficient investments in the renewable energy space.

Walden Renewables has over 20 years of experience in energy trading, financing and structuring. Investments are geared to maximize tax-efficiency and returns to the client, making best use of renewable energy technology, thus improving yields to the client while benefiting the planet.

Mission Statement: Walden was founded to develop and invest in renewable energy projects. My background was in trading, structuring and financing in the US energy space. If you look at the chart I am base-lining our energy consumption in 1989, solely because that is the year I stepped onto the tread-mill. Around 2001 my focus turned exclusively to US energy markets and starting about that year you can see the beginning of a long term trend in increased natural gas demand. And then in 2011 I founded Walden to take advantage of the momentum in the renewable energy space.

Completed Transactions:

650 kW mixed use system

Walden Renewables financed, owns and is constructing a 650 kW system comprised ofroof-top solar, ground mount solar, car-port solar, and wind. A 20 year PPA gives Cape Cod Community College access to low cost renewable power. Walden Renewable and its partner/developer benefit from a highly credit worthy off-taker and get full benefits from all RECs and tax-incentives generated by the system

235 kW roof-top

Walden Renewables financed, owns and is constructing a 235 kW roof-top solar farm with a 20 year PPA. This innovative structure moves the utility account over to Walden Renewables. Walden Renewables takes advantage of Massachusetts Net-Metering laws which allows it to get credits for any unused power. This protects the building owner from paying for any power tenants don’t use, and limits Walden’s credit exposure to the off-taker.

I took advantage of the 1603 Treasury grant to invest in 2 solar projects in Massachusetts. Without 1603 I could not have built these projects and I could not profit from the very attractive State incentives.

650kW system is mixed use PPA with a highly credit worthy off-taker. The system is mostly ground, but also some roof and parking lot.

225kW system solved an interesting problem for the landlord. The landlord wanted to lease the roof, but did not want to sign a traditional PPA (take or pay), as he was unsure about vacancy. So Walden took over the meter and is “net-metering” any extra production.

Enough about me, back to the Energy Revolution …

Generating Renewable Power Benjamin Franklin

Building a renewable energy plant requires
entrepreneurial enterprise, and …

• Real Estate Knowledge
• Siting Expertise
• Credit worthy off-taker / PPA contract
• Access to capital
• Technical Know-How

Cost of Renewables is dropping and will approach
“Grid Parity.” Renewables will compete with NG
and Coal, but right now we still need …

The chart on the left is the revenue generated by a 1 mw solar array in MA with SRECs over 5 years. Cost $3.25m. As you can see, not a lot of money. In fact you don’t break-even in 20 years, so your IRR is negative. But this is the essential building block for what is about to come. And it is appropriate that this is the Benjamin Franklin section because building a renewable energy facility requires an incredibly wide array of skills and a lot of entrepreneurial enterprise.

Cost of Solar PV will get to grid parity. Solar may not be the most efficient renewable technology on a cost basis but 1) it generates peak hour power, and 2) this country is very smart when it comes to working with silicon. Expect costs to keep dropping!

State Incentives

Restructuring the Status Quo

State Incentives are often the biggest
investment driver for renewables:
Feed-in-tariffs (FIT)
Renewable Energy Credits (RECs)

• Massachusetts SRECS
• Rhode Island FIT
• Connecticut FIT/REC hybrid
• Vermont FIT
• NJ SREC

Renewables receive about the same
incentives as the Oil and Gas industry. We
need to do away with incentives and move
towards a carbon tax, but until then …

States are the drivers of this energy revolution. They are restructuring the status quo that has been supported by utilities for so long. 2 types of state incentives: Feed-in-tariff: Fixed payment for a set term.
(S)REC: Performance based incentive, price largely determined by the market. Here are some State programs ranked in terms of simple IRR. This still is not quite enough to make a good investment. MA SRECs get you to an IRR of about 7%. And the goal should be to move away from all incentives and go to a Carbon Tax.

Federal Tax Credits

Boston Tea Party

Federal Tax Incentives almost as significant
as State incentives

• Investment Tax Credit (ITC) 30% tax credit on investment
• MACRS accelerated depreciation Asset can be depreciated over 5 years

Tax Equity players are therefore the
major investors behind all renewable
energy projects

Federal tax credits come in 2 forms: 30% ITC and MACRS depreciation. In MA this Federal tax credit is not quite as big as the State incentive. In other regimes, this Federal tax credit is bigger than that State incentive, so it is a critical component of returns on renewable energy projects.

And here you have the full investment stack, with an un-levered IRR of 15%, and a 4.5 year payback period.

But can any thrid party investor take advantage of these tax credits? NO! Only “tax equity” players. Tax Equity investors are typically large corporations that pay corporate tax, and have a stable and predictable tax liability. 2 key components: Corporate Tax and Predictability.

Potential Tax Investors

Renewable Energy projects generate PASSIVE income.
Therefore, entities with other sources of PASSIVE income are best
suited to maximize the tax benefits. (Corporations paying corporate
tax are exempt from the PASSIVE/ACTIVE income distinction.)

• Mid-sized Corporation: Not subject to the passive/active income restriction.
  Cash to invest but tentative about jumping into new territory.
• Mid-sized Corporation with significant energy needs: Mid-sized corporation
  needs advice on the best way to lower their energy costs while taking advantage
  of tax benefits.
• Real Estate Developer / Owner: an opportunity to diversify income stream away
  from rental income while maximizing tax benefits.
• Family Office: with passive income and an interest in outstanding fixed-income
  like returns in the renewable space.
• Large Corporation: Typical tax-equity investor

Passive vs. Active income

Available tax equity is dropping from around $9b in 2010-2011 to $3b in 2012.

But: 1) Good projects will get funding; and 2) There is no reason why the number of tax equity investors should not increase. Don’t leave all of the tax benefits to banks, insurance companies, Apple and Google!

Putting it all together …

Putting it all together you can see how a solar investment breaks down into 3 stages:

1. Very high initial return due to ITC + MACRS + SRECs.
2. Solid return due to SRECs.
3. Fixed income like product once all tax and performance based incentives are gone.

The Energy Revolution

• We are in the midst of an Energy Revolution.
• Harness the momentum behind that revolution to generate outstanding, stable returns in the renewable energy space.
• Take advantage of tax benefits and renewable energy incentives to drive strong investment profits while benefiting the planet.

Thank you.

¹ http://uspref.org/wp-content/uploads/2011/07/US-PREF-ITC-Grant-Market-Observations-12.1.2011-v2.pdf
² http://uspref.org/wp-content/uploads/2011/09/1603-Jobs-One-Pager.pdf
³ http://www.treasury.gov/initiatives/recovery/Documents/Status%20overview.pdf
⁴ http://www.bipartisanpolicy.org/library/staff-paper/reassessing-renewable-energy-subsidies-issue-brief