# Presentation: 302491

## Using Long-Term REC Contractsto Help Developers Secure Project FinancingKarlynn CoryMassachusetts Technology CollaborativeRenewable Energy Trust

**Presented to NREL Energy Analysis Forum**
**Golden, Colorado – November 9, 2004**

## Massachusetts Renewable Energy Trust

- Funded by system benefits charge established under the 1997 electricity restructuring law
- The Trust’s mission:
- Increase the supply of and demand for energy from clean sources
- Promote the development of a vibrant Massachusetts renewable energy industry
- Maximize benefit to Massachusetts ratepayer
- Collect approx. $25 million annually

**Notes:**
The Trust annually collects $25 million in order to:
Increase supply of and demand for energy from clean sources
Promote economic development of a renewable energy industry in the state
Maximize the benefit to Massachusetts ratepayers

Why is the Trust addressing revenue certainty?
The Trust is uniquely positioned to address the barriers and opportunities to developing new renewable projects, including the need for revenue certainty.

## Benefits from Renewables to New England

- The addition of 280 MW biomass or 730 MW wind in New England in 2009 would:
- Reduce regional electricity prices by $37 million1 AND
- Potentially reduce the cost of natural gas by as much as $29 million annually2
- A purchaser of fixed-price renewable energy is protected from electricity price spikes/volatility
- LBNL estimates that, based on limited market information, some participants value this as worth approx. 0.45¢/kWh3
- Also emissions benefits, energy independence and economic opportunities for New England companies.
- La Capra Associates analysis using PROSYM
- Based on extrapolation of results form ACEEE report, September 2003
- Mark Bolinger et al, LBNL August 2003

**Notes:**
$21 million Massachusetts “share” of these savings (not what MA would actually get – that is determined by actual contracts and participation in the spot market.

## New England Market Landscape for Renewables

- Solid renewable supply potential
- Good wind and biomass resources
- Several self-identified developers in planning stage
- Some substantial constraints
- Land constraints restrict size of wind plants
- Siting and permitting are challenges
- Mandatory and voluntary renewable demand
- Renewable Portfolio Standard (RPS): MA, CT, ME, RI
- Proposed RPS: VT
- Voluntary markets: MA, RI, ME, plus TRC products
- Attribute trading through Generation Information System (www.nepoolgis.com)
- Tracks renewable energy certificates (“RECs”)

**Notes:**
New England is positioning itself to be a future leader in renewables
(1)   Several states have put in place demand for renewables:
MA RPS
CT RPS
Proposed: ME, VT
Consumer voluntary markets in MA, RI, CT
(2)   Region-wide renewable energy certificate/tag tracking system to facilitate trades and market liquidity
However, New England renewables have had difficulty securing development financing because they do not have energy and renewable energy certificate revenue certainty.
The tide is starting to change...
In June, CT said that utilities must contract for 100 MW of energy and RECs, which is part of the solution – more is needed.

## The Problem  Renewable Project Financing is Difficult to Secure in New England

- Projects need revenues from REC sales
- REC revenue is subject to regulatory/political risk
- Most projects in New England are small (<40 MW) and of limited interest to financial markets.
- Investors unwilling to take revenue risk on merchant renewable plants – require 15 years of revenue.
- Long-term REC contracts with creditworthy buyers are needed, but...
- Retail suppliers serving load in restructured utility territories cannot count on having load in 10 years.
- Few creditworthy entities have emerged in the REC market.
- Few entities willing to make even 5 year commitments for energy or RECs.

## One Solution:  Mass. Green Power Partnership (MGPP)

- _Goal_:  Provide REC revenue certainty to developers through long-term contracts
- Trust manages market risks regarding future REC value and demand (REC purchase/option contracts)
- MTC offers long-term REC contracts
- Up to 10 year contracts
- Purchase
- Options (put, put-back, collar)
- MTC escrows funds
- The contracts establish a _Massachusetts use_ limitation on the RECs

## How the Contracts Work

**(MTC pays)**

**(If MTC exercises, MTC pays)**

**(If generator **
**exercises,**
**MTC pays)**

## MGPP Round 1 (2003)

- Biomass	1
- Hydro	2
- LFG	2

- PV		1
- Wind – small	2
- Wind – large 	3

- Applicants:  generator or marketer
- Eligible Projects:
- New construction or incremental generation
- Must “produce” NE-GIS Certificates (RECs)
- MA RPS-eligible, plus new hydro
- Commercial operation by 12/31/2005
- 11 proposals received

## Round 1:  Playing the REC Market vs Seeking a Price Guarantee

## MGPP Round 1 Contracts (2003)

## MGPP - Lessons Learned and Limitations

- REC purchase and option contracts can be structured to offer long-term price security
- Will the financiers buy it?
- Later year price support is of greater concern for most applicants (i.e. years 5-15)
- Options (as guarantees) seem more attractive to developers than committing to REC sales
- MGPP is only a partial solution
- Trust funds insufficient to support large projects, much less total MA renewable demand

## Looking Ahead . . .

- Seek to off-load Round 1 REC contracts in order to release committed funds
- MGPP Round 2 – in the works
- Need creditworthy entities to step in and make long-term commitments to finance projects
- Purchases by load serving entities
- Purchases by large end users (or aggregations of smaller end users)

## MGPP Round 2 . . .

- Issue RFP ~ in near future
- Refinements for put options
- Limit total value and set minimum premium
- Proposer pays a higher premium if proposer wants to retain the option after a forward sale of RECs to a third party
- Challenges
- Leveraging limited funds
- Encouraging proposers to maximize benefits to RET Contributors

## Additional Information . . .

-  		Karlynn Cory, Strategy and Business Development Manager		cory@masstech.org
- 		Nils Bolgen, Program Manager		bolgen@masstech.org
- 		Massachusetts Technology Collaborative	Renewable Energy Trust	75 North Drive	Westborough, MA  01581
- 		508-870-0312	www.masstech.org
*Watch for a link to the MGPP round 2 RFP at *www.masstech.org/Grants_and_Awards/grant_dollars.htm