MGT 842 – FINANCING GREEN TECHNOLOGIES Spring 2 2015 March 25 – May 6 Wednesdays 2:40 - 5:40p, Evans 2400
Professor Administrative Assistant Richard L. Kauffman Rhona Ceppos, [email protected] [email protected] Teaching Assistants Office hours Thomas Selby, [email protected] Wednesdays, 1:30 - 2:30p, Evans 3517 Becky Gallagher, [email protected] Andrej Pavlovic, [email protected]
COURSE DESCRIPTION Is Green the new Gold? At least in renewable energy, the last 35 years have seen booms followed by spectacular busts. Within the last few years there have been spectacular successes, including Tesla, Solar City and Nest, as well as visible and politicized failures, such as Solyndra, Fisker Automotive, A123 and more. In spite of the headwinds in Washington, entrepreneurs are still forming green companies. Meanwhile, the ranks of climate change skeptics grow ever thinner in spite of the increase in political partisanship around climate change and renewable energy.
This course explores how renewable energy investment differs from more traditional investments. These differences include capital intensity, commodity market exposure, mature industry structure, local and federal regulation, and market imperfections. The course also reviews the differences in policy support given to renewable energy in other countries. While the particular emphasis is on the capital intensive renewable energy industry, many of the same issues are pertinent to other green technologies—from water to new packaging.
The course relies on real-life case studies to illustrate themes and to expose students to different end markets and to companies along the maturity cycle from early stage ventures to projects using mature technology. In so doing, the course provides insights on how specialized participants -- VC, Private Equity, and Project Finance -- fit together in funding a company. Students will leave the class better prepared to address major issues and seize new opportunities in clean energy finance.
Since renewable energy projects are often developed by independent entrepreneurs (as opposed to large corporations or utilities), the course spends two full sessions on the techniques and analytics of project financing. Specifically, we’ll learn to how to use the cash flows from the anticipated project to finance the project on its own; in technical terms, that debt repayment has only recourse to the project itself, not to any third party guarantor. Without understanding what makes a project “financeable,” a start-up company can easily fail even if its technology works. The VC community has dozens of “green elephants” that have floundered because the companies have not been able to get their technologies financed in projects.
While the course often assumes the investor perspective, business owners seeking to finance renewable energy activities, and policy makers seeking to encourage capital formation in the sector have a similar viewpoint. We’ll explore federal and state renewable energy support policies, including recent innovations in clean tech finance like the Green Bank of New York and other agencies bridging public and private capital. Non-SOM students with backgrounds in finance and business strategy are encouraged to participate, with instructor permission.
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COURSE GRADING • Class participation, 20% • Written assignments, 40% • Final exam, 40%
CLASS PARTICIPATION The class will be conducted using a “modified” Socratic method: The instructor will call on students to answer questions, and more importantly, to take a position. Making good investment decisions requires having a defensible point of view; making superior investment decisions often requires taking a contrary view from others. Please take advantage of the optional reading to learn more about topics of interest to you. Come to class prepared to engage.
Owing to the scope of material covered in seven sessions and uneven level of student familiarity with the material, students will be asked to answer weekly surveys to determine the pacing and depth of topic coverage. To make the course most useful to you, please fill out these surveys promptly so that the instructor (and guests) can make appropriate adjustments.
WRITTEN ASSIGNMENTS The course will have several written assignments during the term each designed to develop specific skills in financing clean technology (e.g., research, due diligence, financial modeling, memo writing). All assignments will be posted under the assignments tab in Classes v2. Written assignments may include one (or more) of the following elements:
Analysis: Case studies requiring students to undertake deeper research and/or quantitative analysis in response to specific investment opportunities.
Policy Recommendation Memorandum: As support of renewable energy (and other green technologies) often requires government support in the form of market development, regulation or financial incentives, students may be asked to formulate a short paper outlining a policy problem and proposed recommendation.
Term-Sheets: Contract summaries and issue-spotting lists of risks and mitigating factors (1-2 page reviews of certain project finance contracts) Project finance modeling, to assess the financial impact of different financing strategies on the viability of an energy project and to increase students’ familiarity with Microsoft Excel, a ubiquitous tool in project finance.
FINAL EXAM (MAY 7, 6-9 PM) The final exam will be based upon a case that will be distributed prior to the last class. The case will be based on a semi-fictitious company that seeks to raise funds to expand its business. The exam questions will test whether students have mastered some basic financing principles covered in the course.
One last note The instructor is a current government official. The views expressed in the class will be his own, not those of any administration in which he serves or has served. Richard expects students to adhere to “Chatham House Rules” in respect of quoting him or other guests that may appear in class. In addition, he will ask for student flexibility in possible rescheduling of class times in event that government obligations make his attendance at a scheduled class meeting not possible.
2 COURSE SCHEDULE
Required Reading Assignment Due Date Class Topic (optional readings in (11am on that date on following pages) classes v2) Global Thermostat Presentation 1. Introduction to Investing in
Green Tech Global Thermostat White
3/25 Paper Reading only Guest Lecturer
Nicholas Eisenberger, Pure HBS “VC Investment…” Energy Partners
GTM Article
1366 Case
“Venture Capital Investment…” 2. Business Strategy and 4/1 GT slides Financing Strategy “Investment Terms…”
“Introduction to Venture Capital Deal Terms”
Groobey & Faber Project 3. Project Finance: Session I PPA Assignment Finance Primer
4/8 Guest Lecturer 1366 Valuation PPA Agreement Matt LeBlanc, JPM
4. Project Finance: Session II NREL Report on Solar
Financing 4/15 Guest Lecturer Light modeling assignment
Daniel Gross, Oaktree Capital
Management
HBS case – US DOE & 5. Traditional Support Policy: Valley of Death RECs, Feed-In Tariffs, Tax Policy, Financial modeling exercise RPSN, CEDA 4/22 Article on German Feed- of loan structure
In Tariff Guest Lecturer
Blake Sturke, Turning Earth NYSERDA PON
6. Policy Innovations: REITS, All readings under the Financial modeling with 4/29 MLPs, Green Banks, Community Green Bank and REIT MACRS/Taxes worked in Aggregation categories
7. Putting it all together: VC, project finance, policy and more 5/6 Investment Memorandum Reading only Guest Lecturer Jessica Aldridge, NYGB 5/7 FINAL EXAM, 6-9p
3 CLASS 1 MARCH 25 INTRODUCTION TO INVESTING IN GREEN TECH
Guest Speaker Nicholas Eisenberger, Managing Partner at Pure Energy Partners (Bio – scroll down)
Class Discussion Part I: Discussion will cover road-to-market for emerging clean technologies, financing considerations and overview of the energy industry
Part II: Analysis of the case mentioned above – CCS
No Assignment Due for this Class
Required Reading for this Class 1. Nicholas Eisenberger Bio http://pureenergypartners.com/
2. Global Thermostat Presentation
3. Global Thermostat White Paper
4. Venture Capital Investment in the Clean Energy Sector (skim)
5. “Is It Getting Any Easier for Cleantech Firms to Cross the “Valley of Death”? GTM http://www.greentechmedia.com/articles/read/why-the-valley-of-death-is-still-a-problem- for-cleantech
Optional Reading • 60 Minutes, January 5th, 2014. “Clean Tech Crash, Hollywoods Villains, Volcanoes” http://www.cbsnews.com/videos/the-cleantech-crash-hollywoods-villain-volcanoes/
• Kholsa Venture’s Open Letter to 60 Minutes, Jan. 14, 2014. http://www.khoslaventures.com/open-letter-to-60-minutes-and-cbs/
• Vinod Khosla, “Green Investing Strategies” http://www.khoslaventures.com/wp-content/uploads/Green-Investing-Strategies.pdf
• Market data from http://www.eia.doe.gov/ and http://www.iea.org/
• Nathan Lewis, “Chemical Challenges in Renewable Energy” and “Powering the Planet” (powerpoint presentation) http://nsl.caltech.edu/energy
• Neil Dikeman, “Cleantech Venture Capitalists Beware” http://www.cleantechblog.com/2008/10/cleantech-venture-capitalists-beware.html
4 CLASS 2 APRIL 1 CLEAN TECH BUSINESS STRATEGY AND FINANCING STRATEGY
Class Discussion Part I: Discussion of regulation, incumbent competitors, value chain, capital requirements, the Venture Capital business model, IP, VC term sheets
Part II: Analysis of the 1366 Technologies case
Due by this Class: Assignment 1 4 slides on Global Thermostat
Required Reading for this Class 1. 1366 Technologies Case
2. Harvard Business School, “Venture Capital Investment in the Clean Energy Sector” http://www.hbs.edu/research/pdf/11-020.pdf
3. SJF Advisory Services, “Investment Terms: How Venture Capitalists Structure Investments,” Getting Reading for Equity
4. Corenswet and Reed, “Introduction to Venture Capital Deal Terms,” Venture Capital 2010: Nuts & Bolts
5. Blank VC Term Sheets
Optional Reading • USA Today, “Green tech shows progress but not prosperity” 26 March 2013 http://www.usatoday.com/story/money/business/2013/03/25/financing-green-tech- companies/1919633
• Case Study: SolarCity and Tesla (read BAML coverage reports for both)
• Electric Car Company (read sample investment memo)
5 CLASS 3 APRIL 8 PROJECT FINANCE SESSION I: OVERVIEW OF PROJECTS, PARTIES AND CONTRACTS
Guest Speaker Matt LeBlanc, Managing Director and CIO of OECD Infrastructure Equity Investments, J.P. Morgan (Bio: http://cbey.yale.edu/people-partners/matthew-leblanc)
Class Discussion Part I: Introduction to project corporate form, overview of project parties, contractual framework, project development process, contents and structure of legal contracts.
Part II: Introduction to structural, tactical, legal, market and modeling concepts: selling electricity and interconnecting to the grid (Power Purchase and Interconnection Agreements, risk allocation, hedging, regulatory issues), partnerships and risk mitigation frameworks.
Due by this Class: -PPA Assignment (submit on V2) -1366 Valuation (submit on V2)
Required Reading for this Class 1. Matt’s Bio
2. Groobey and Faber of Wilson, Sonsini, Goodrich & Rosati “Project Finance Primer for Renewable Energy and Clean Technology Projects” (2012)
3. Power Purchasing Agreement
Optional Reading • Nevitt and Fabozzi “Project Financing” 2000. Chapters 1, 2, 5, 8, 9
6 CLASS 4 APRIL 15 PROJECT FINANCE SESSION II: PROJECT FINANCE, DEBT MODELS, TAX INCENTIVES AND PROJECT EQUITY
Guest Speaker Daniel Gross (SOM ’98), Managing Director at Oaktree Capital Management (Bio: http://cbey.yale.edu/people-partners/daniel-gross)
Class Discussion Part I: Introduction to project finance debt and walk through sample financial model and an overview of the project finance debt modeling assignment due on 4/23.
Part II: Overview of US Taxation and Equity Structuring, ITC federal tax credit, partnership capital accounts, tax equity flip structures. Review of methodological differences between financial models for venture capital and project finance.
Due for this Class: Assignment 3 Light Modeling Assignment, submit on V2
Required Reading for this Class 1. Daniel’s Bio
2. NREL (2013), The Impact of Financial Structure on the Cost of Solar Energy, http://www.nrel.gov/docs/fy12osti/53086.pdf
Optional Readings • Standard & Poor’s “Key Credit Factors: Methodology And Assumptions On Risks For Utility-Scale Solar Photovoltaic Projects” (2009)
• Moody’s “PV Solar Power Generation Projects” (2010)
• FitchRatings “Rating Criteria for Solar Power Projects” (2011)
7 CLASS 5 APRIL 22 TRADITIONAL SUPPORT POLICY: RECs, FEED-IN TARIFFS, TAX POLICY, RPSN, CEDA
Guest Speaker Blake Sturke, EVP and Head of Corporate Development at Turning Earth (Bio – scroll down)
Class Discussion Part I: Overview of traditional support policies with a focus on German’s Feed-In Tariff
Part II: Analysis of HBS Case – US DOE and Recovery Act Funding
Due for this Class: Assignment 4 Loan Modeling Assignment via Classes v2
Required Reading for this Class (subject to change) 1. Michael J. Roberts, Joseph B. Lassiter, and Ramana Nanda, Harvard Business School Case 810-144, U.S. Department of Energy & Recovery Act Funding: Bridging the "Valley of Death"
2. Energy Transition. The German Energiewende. Renewable Energy Act with Feed-In Tariffs http://energytransition.de/2012/10/renewable-energy-act-with-feed-in-tariffs/
3. NYSERDA Public Opportunity Notice 2149 Solar Thermal Incentive Program Project Summary (skim the Attachments) http://www.nyserda.ny.gov/Funding- Opportunities/Current-Funding-Opportunities/PON-2149-Solar-Thermal-Incentive- Program.aspx
Optional Reading • Stefan Nicola, Bloomberg News. German Industry Wants End of Feed-In Tariff on Rising Power Cost. http://www.bloomberg.com/news/2013-09-19/german-industry-wants-end- of-feed-in-tariff-on-rising-power-cost.html
• Richard Kauffman, July 18, 2013 Address To Congress as Chairman of Energy and Finance for New York State http://www.energy.senate.gov/public/index.cfm/files/serve?File_id=0488fbd8-d2b9-4fae- 962f-04833e7f78d5
8 CLASS 6 APRIL 29 POLICY INNOVATION – REITS, MLPs, GREEN BANKS, COMMUNITY AGGREGATION
Guest Speaker Jessica Aldridge, VP at New York Green Bank (bio – scroll down)
Class Discussion Part I: Overview of Innovative Finance Mechanisms including REITs, MLPs, Yield Cos and Solar Asset-Backed Securitization
Part II: Discussion of the role of Green Banks in the US and the an inside view of the initiatives and goals of NYSERDA’s New York Green Bank Assignment Due: NRG Evaluation of New York Green Bank financing proposal.
Due for This Class: Assignment 5 Financial model with MACRS/Taxes added in
Required Readings for this Class Elect 1-2 readings from each topic. Generally, NREL reports provide detailed background and analysis of financial mechanisms. News articles cover important actions of key players as well as opinion pieces.
Green Banks 1. New York Green Bank. RFP No. 1 http://greenbank.ny.gov/RFP1.aspx
2. State of New York Public Service Commission. Petition of the New York State Energy Research and Development Authority to Provide Initial Capitalization for the New York Green Bank http://documents.dps.ny.gov/public/Common/ViewDoc.aspx?DocRefId={C3FE36DC- 5044-4021-8818-6538AAB549B8}
3. Booz&Co. New York Green Bank Business Plan Development – Final Report http://documents.dps.ny.gov/public/Common/ViewDoc.aspx?DocRefId={52B09652- 1BA1-4B85-845C-B6F05185E692}
REITs/MLPs:/Yield Cos. 1. David Feldman and Edward Settle (Nov. 2013), NREL, Master Limited Partnerships and Real Estate Investment Trusts: Opportunities and Potential Complications for Renewable Energy http://www.nrel.gov/docs/fy14osti/60413.pdf
2. Herman K. Trabish, GreentechMedia, REITs, MLPs and Mortgages: Solar after the ITC http://www.greentechmedia.com/articles/read/REITs-MLPs-and-Mortgages-Solar-After- the-ITC
3. Tom Konrad, Forbes, Go North Solar Income Investor http://www.forbes.com/sites/tomkonrad/2013/10/18/go-north-solar-income-investor/
4. NRG Yield Co prospectus
5. Skim Power REIT website, http://pwreit.com/
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Optional Readings • NREL. The Solarize Guidebook: A community guide to collective purchasing of residential PV systems. http://www.nrel.gov/docs/fy12osti/54738.pdf
On Green Banks • Review the New York Green Bank website http://greenbank.ny.gov/ particularly RFP No. 1 http://greenbank.ny.gov/RFP1.aspx
• Press Release, Governor Cuomo Announces $210 Million Initial Capitalization to Jump Start New York Green Bank, http://www.governor.ny.gov/press/09102013-green-bank- initiative
• Hallie Kennan (Nov. 2013). State ‘Green Banks’ Helping Fund Clean- Energy Expansion (Op-Ed), http://www.livescience.com/41175-green-banks-fund-energy-expansion.html
• Hallie Kennan (Jan. 2014). Working Paper: State Green Banks for Clean Energy, http://energyinnovation.org/wp- content/uploads/2014/01/WorkingPaper_StateGreenBanks.pdf
On Solar Asset-Backed Securities • Eric Wesoff, GreentechMedia, Solar Milestone: Solar City Introduces Securitization to Distributed PV http://www.greentechmedia.com/articles/read/Solar-Milestone-SolarCity- Introduces-Securitization-to-Distributed-PV
• Travis Lowder and Michael Mendelsohn (Dec. 2013), NREL, The potential of Securitization in Solar PV Finance http://www.nrel.gov/docs/fy14osti/60230.pdf
• Tom Konrad, Forbes, Solar REITs – A Better Way to Invest in Solar http://www.forbes.com/sites/tomkonrad/2012/10/09/solar-reits-a-better-way-to-invest-in- solar/
• Kelly Kogan, Renewable Energy World, Is the IRS Considering Solar REITs? http://www.renewableenergyworld.com/rea/news/article/2013/06/is-the-irs-considering- solar-reits
10 CLASS 7 MAY 6 PUTTING IT ALL TOGETHER: VC, PROJECT FINANCE, POLICY AND MORE
Class Discussion Summary discussion
No Assignment Due for this Class
Required Readings for this Class 1. Investment Memorandum
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GENERAL RESOURCES
Markets http://www.eia.doe.gov/ http://www.iea.org/ http://www.cera.com/aspx/cda/public1/home/home.aspx http://www.cleanedge.com/ http://www.luxresearchinc.com/ http://www.rmi.org/rmi/ http://www.ieee-pes.org/
Technologies http://www.eere.energy.gov/ http://www.nrel.gov/ http://gcep.stanford.edu/index.html http://nsl.caltech.edu/energy http://www.ucsusa.org/clean_energy/ http://www.pveducation.org/pvcdrom http://britneyspears.ac/lasers.htm
Verticals http://my.epri.com/portal/server.pt? http://www.awea.org/ http://www.solarelectricpower.org/ http://www.seia.org/ http://www.smartgridnews.com/ http://www.uspref.org/ http://www.nvca.org/
Perspectives http://www.electrificationcoalition.org/ http://www.carbonwarroom.com/ http://www.google.org/rec.html http://www.khoslaventures.com/khosla/papers.html http://www.americanenergyinnovation.org/ http://www.hudsoncep.com/?q=hudson-presentations http://www.dbcca.com/dbcca/EN/investment_research.jsp
News http://www.greentechmedia.com/ http://www.greentechmedia.com/cleantech-investing/ http://www.technologyreview.com/energy/ http://earth2tech.com/ http://www.renewableenergyworld.com/rea/home http://blogs.wsj.com/venturecapital/
Books
12 Accelerating Innovation in Energy: Insights from Multiple Sectors (2010; U of Chicago Press); draft available at: http://www.nber.org/books/hend09-1/
Energy and Transportation: Challenges for the Chemical Sciences in the 21st Century; National Research Council (2003); available at: http://books.nap.edu/catalog.php?record_id=10814
Greening our Built World: Costs, Benefits and Strategies; Greg Kats (2010, Island Press)
Renewable Energy Policy; Paul Komor (2004, iUniverse)
Sustainable Energy: Choosing Among Options (2005, MIT)
Sustainable Energy – Without the Hot Air; David MacKay (2009, UIT); available at: http://www.withouthotair.com/
Unlocking Energy Efficiency in the US Economy; McKinsey & Company (2009); available at: http://www.mckinsey.com/clientservice/electricpowernaturalgas/downloads/us_energy_efficienc y_full_report.pdf
Venture Capital and the Finance of Innovation; Andrew Metrick (2007, Wiley) http://www.ctmirror.org/story/16726/state-green-bank-chief-entrepreneurial-spirit-government- suit
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