Project Financing Process
Financing tribal renewable energy and energy efficiency projects will continue to be challenging and project-specific for the foreseeable future. For smaller projects, self-financing may be an option, and government grants are available for a wide variety of projects. For larger projects, the Department of Agriculture's Rural Utility Service (RUS) is a potential financing source: The RUS has provide partial financing for the 750-kilowatt Rosebud Sioux wind turbine, and has stated their interest in financing additional Indian country projects. Such larger power projects generally require some combination of equity and debt that can be paid off through the sale of electric power, the sale of "green credits" for pollution avoidance, and using whatever tax incentives may be available on a local or national basis. See Project Financing for more information.
At some point, project financing and the project's "deal structure" become inseparable. Project financial partners will certainly have a say over the management and oversight structure of the project. Federal tax incentives, and deal structures that are framed to capture these incentives, may have significant influence over the implementation of a project. Due to tribal tax-exempt status, with federal tax incentives available, some sort of partnership with a non-tribal organization that can take advantage of the tax credits will likely be of financial benefit to the project. However, if legislation is enacted that allows tribes to directly take advantage of the credits, outside partnerships may be less important unless there are other technical reasons for the partnership.
The design of the financing package and deal structure is an art of its own. Often outside project developers will have financial partners lined up, pending clearing of the financial "hurdle rate," or rate-of-return, required by the partner. Accepting this outside financing usually brings requirements, however, that the tribe may or may not be willing to accept. Understanding how far the tribe is willing to go in concessions to obtain this financing is an important internal discussion. Extremes range from no tribal ownership to a build-own-operate-transfer scheme where an outside organization would capitalize the project, operate it for some duration (at least until the tax credits expire), then transfer the project to the tribe, perhaps retaining a minority interest in the project in the out-years.
As an example, a recent report from Wisconsin Focus on Energy examined a potential deal structure and partnership for wind power development. As suggested by the report, the tribe, and potentially other investors, would form a limited liability corporation (LLC) that would develop a project plan, find a site, and aggregate funds. The LLC would identify a larger corporate or investment entity looking for investment opportunities and a utility willing to contract for the power. The LLC would then loan its invested funds to the larger partner (most likely a C-Corporation) to help finance the purchase and installation of the wind farm. The LLC would also retain an option to purchase the wind farm after ten years. The C-corporation would invest its own equity and borrow additional funds from a commercial lender as necessary and would be the sole owner of the wind farm for the first ten years. As such it would benefit from both the production tax credit and depreciation.
The tribe's LLC would receive interest income from its loan to the C-corporation for ten years. The C-corporation would pay only interest on its debt to the LLC, with the principle due in one balloon payment at the end of ten years. At the end of the ten-year period, the LLC would exercise its option to purchase the wind farm from the C-corporation at a pre-negotiated purchase price equal to the principle amount of the balloon payment owed to the LLC. The LLC then becomes the sole owner of the wind farm, which, as a debt-free wind farm, can be profitably operated for its remaining life.