Project Development: Back-to-the-Basics

By By John Eustermann
With the anticipated infusion of debt and equity into biomass project development, keeping a few things in mind while developing projects may lead to shovel-ready status. This can remind us of a few things we may have forgotten in the shadow of the stimulus package and its required rulemaking. Thus, here are a few back-to-the-basics points worthy of consideration:

Negotiate letters of intent (LOIs) seriously: Project developers would be wise to ensure that LOIs address key deal points and business terms. Whether negotiating an LOI with respect to the lease arrangements for a co-location structure, the terms and conditions of a feedstock/fuel supply agreement or an operations and maintenance agreement, the developer should ensure the parties' expectations match and are reflected in the LOI. Further, the parties should set forth in the LOI terms and conditions they consider enforceable (i.e. nondisclosure, transaction cost allocation, governing law) and provisions that they consider non-enforceable and still subject to negotiations and change. Although many argue that LOIs are not enforceable, the courts have held otherwise in many instances. A good policy is to anticipate that the counter party may seek to enforce all the LOI provisions and communicate and negotiate accordingly. Time spent ensuring the parties are of like mind will result in efficiencies in the drafting of definitive documents.

Communicate with utilities: One issue cited as a frustration for energy project developers is attaining appropriate power purchase agreements (PPAs). Although biomass projects can be attractive to utilities, the utility needs to address other risks inherent in such facilities. Whether participating in a request for proposals or directly negotiating outside of a procurement process, the parties need to address risks, including feedstock/fuel, electricity pricing and curtailment risks. Although many risks can be addressed in the contractual terms and conditions, the process can take longer than that of other material project documents. As such, a wise project developer will engage the utility early in the process. Planning appropriately and allowing the time needed to finalize the PPA will minimize spillover effects on other project agreements and relationships.

Run multiple financial modeling scenarios: To finance projects in today's environment, developers should create two financial models: one that doesn't account for any stimulus money; and another that considers stimulus funds and other capital and revenue streams.

With the first model, the developer should fight the urge to include financing from the Recovery Act, save for maybe specific treatment of the grants in lieu of tax credits. This includes revenue calculations that seek to monetize renewable energy credits (RECs) as well (though consideration must be given to the treatment and allocation of the credits when dealing with the project's off-taker both with regard to the REC and greenhouse gas markets). Such figures will be stripped out by prospective financiers and the numbers re-worked depending on their applicable credit parameters. Preparing for this allows the developer to examine the realities of project metrics accordingly. As for the model that includes incentives and the like, knowing what possible incentives apply and incorporating them into a project's economics is important for any sensitivity analysis. Further, as such incentives become available they presumably will only improve the project's viability.

John Eustermann is a partner with Stoel Rives LLP. Reach him at [email protected] or (208) 387-4218.