Last year, the state Legislature authorized up to $10 million in special purpose revenue bonds to help Sopogy build a solar-energy plant at Keahole, Kona, on state land administered by the Natural Energy Laboratory of Hawai`i Authority.
That cleared the way for Keahole Solar Power, LLC, owned by Sopogy founder Darren Kimura, to sign a five-year lease for seven acres near NELHA’s Gateway Center, where the company proposed to build a 1-megawatt solar energy plant using concentrated solar power – a relatively new technology that involves collecting solar heat in curved mirrors, focusing the heat onto pipes containing a fluid, and then using that super-heated fluid to drive a turbine to produce electricity.
But according to John Rei, Sopogy’s chief operating officer, the company does not have any intention at present of building the Keahole facility with capital raised through the SPRBs, which benefit lenders by making interest income free of federal taxes and which benefit borrowers by making money available at discounted rates. What is driving Sopogy these days is a federal investment tax credit, which gives investors in alternate power projects a 30 percent deduction for investments they make on projects that are up and running by the year’s end. Against that kind of incentive, SPRBs lose their luster.
“We need to move quickly,” Rei told the NELHA board at its May meeting. “The investment tax credit of 30 percent is due to expire at the end of this year. We need to have this [plant] turned on prior to December 31, otherwise we don’t qualify, and we would take a big hit if that were the case… Every delay we get puts that tax credit in jeopardy.”
When Sopogy signed the lease last October, land rent was set at $1,200 per acre per month (instead of the standard $3,000 per acre). NELHA also is to receive 250 “equity warrants” in the company for each month the lease is in force. As Rei explained, a warrant is basically an equity position in a company, but with no voting rights.
But even these terms weren’t favorable enough. In May, the company asked to renegotiate the lease and scale back the project. As Rei explained in a memo to the board, after the lease was signed, the company “engaged an expert solar developer to finance, own and operate this project, as Sopogy realized it is outside of our skill set to do so. The project developer determined that a 15-20 year power purchase agreement (PPA) was optimal, with a 10-year PPA being the minimum acceptable term in order for this project to pass the economic tests required to qualify for the federal investment tax credit.” To do this, Rei continued, Sopogy had to have a lease with at least a 10-year term, which NELHA director Ron Baird had assured him would not be a problem.
But before that problem could be addressed, Rei wrote, the developer pulled out, partly as a result of the “high land lease rate,” which “consumes over 75 percent of projected revenues… By way of comparison, the land lease rates for Sopogy’s other solar deals, both in this state and in the mainland, are less than 12 percent of projected revenues.”
To make its operations economically feasible, Rei said, the company was scaling back its plans by half – to a 500-kilowatt facility. For this, it would require four acres instead of seven, and it would also need to have the lease term extended to 10 years. Finally, Sopogy was asking the board to approve transferring the ownership of Keahole Solar Power to “another project developer,” as yet unnamed.
At the May board meeting, Rei got more than he dared ask. Baird recommended that the lease be amended to allow Sopogy to reduce its acreage, with the retained acreage to include 1.7 acres of graded land near the Gateway Center that staff had suggested be excluded, and that the lease be extended to 10 years. Board member Richard Henderson made a motion to adopt Baird’s recommendations. But for Ted Liu, director of the state Department of Business, Economic Development and Tourism, Baird’s recommendations did not go far enough.
“It would be to NELHA’s credit to move forward on this,” Liu said, adding that he was taken aback by a land lease requiring 75 percent of the projected revenues. “I wasn’t going to make an issue of that, until the issue of warrants was raised.”
Those warrants, Liu said, gave NELHA a stake in making sure the project succeeds. “It would seem that given the warrant position, and the overall interest NELHA has in seeing the local-grown entity succeed, we should give the best conditions possible for Sopogy to make it through to the first phase,” Liu said. He then suggested that the lease rent should be reduced for now, “stepping it up to where we recoup down the road what we give up early on.”
Board chairman John DeLong expressed mild dissent: “We’re trying to accommodate Sopogy by giving them a lower-cost property, giving them the ability to downsize the project…. I think we have taken steps to facilitate Sopogy and help them be successful, but they entered into the lease knowing what the terms are, what the financial situation is. At this point, I think we’ve done what we need to do to help them be successful.”
Then Liu asked Rei whether, under the scaled-down scenario, the land lease was still a large part of the revenues.
“Even more,” Rei said.
Board member Richard Hess expressed his strong disagreement with the now-amended motion to cut the rent. “I can’t understand why Liu is giving a break to Rei, when he didn’t even ask for it.” Rei and other Sopogy principals were adults who entered into a legally binding lease with their eyes wide open, he said. At the very least, he added, when the time comes for Sopogy to pay back the foregone lease rents, it should be with interest.
Hess was a minority of one. When the vote was taken, every other board member approved the motion to halve the rent (either for the first 18 months or the first year, the motion was not clear), with Sopogy making up the difference later. The request that it be allowed to assign the lease to the unnamed third party was deferred.
A Question of Equity
Since Ron Baird has taken over the helm at NELHA, he has attempted to negotiate arrangements with prospective tenants that allow NELHA to share in their profits. One of the earliest examples occurred when OCEES was attempting to iron out conditions for building an ocean-thermal energy conversion plant at NELHA. As reported in the August 2007 edition of Environment Hawai`i, the plan called for NELHA to provide land, in return for which it would receive “an initial 25 percent interest in the plant and intellectual property to be developed,” as well as discounted electricity.
According to Stephen Oney, vice president of OCEES, Baird had thought that NELHA, “being an independent state agency, could inter into a joint venture with a private entity, but the AG [attorney general] said no.” A bill introduced into the state Legislature in 2007 would have allowed NELHA to “acquire, hold, and sell qualified securities,” but it failed even to get a hearing.
Bryan Yee, the deputy AG who advises NELHA, told Environment Hawai`i that nothing prevents NELHA from holding an equity interest in a company that is also a tenant on land NELHA manages. He said he could not comment on what distinguished the OCEES case from that of Sopogy.
It was clear at the May meeting that special consideration was being given to Sopogy because of the perception of benefit to NELHA in the company’s success. But special consideration had been given even earlier, when the rent was being negotiated at the outset. The standard lease rent for NELHA land is $3,000 per acre per month, or two and a half times the rate that Sopogy and NELHA agreed to in Sopogy’s lease. Sopogy president Kimura told the board last year that in return for the discounted rent, Baird proposed that NELHA obtain the warrants – an “exercisable option to purchase stock at a future point in time at a given price.”
More SPRBs
This year, the Legislature authorized $35 million more in SPRBs for Sopogy to be used in building solar power plants on O`ahu.
Will those SPRBs languish as well?
According to Rei, that’s not likely. He told Environment Hawai`i that the company intends to avail itself of all the bonds, including the $10 million bonding authority given in 2007. “Definitely it is our intent to use them,” he said in a phone interview. Using the $10 million bond for investment at Keahole was a problem, however, “because the project has to be large enough to bring in the low-cost debt financing without any impact to the federal tax credits.”
If a project is large enough, he explained, it’s possible to segregate out the investments that qualify for the tax credit from those that don’t but which can still be financed with money raised through the SPRB. “The $10 million SPRB can be used anywhere in the state,” he said, even though it was originally intended to spur the Keahole plant, which, when first conceived some three years ago, was to be at a larger scale that the 500-kilowatt plant now proposed. “Now,” Rei said, “it’s not feasible to do a large project at that [Keahole] location…. It’s easier now to get a small project through than to do a large project with an intermittent source of energy.”
Part of the problem, he said, was because the neighbor island utilities need firm power in their grids more than the intermittent power that most renewable energy providers deliver. On the other hand, he added, renewable energy providers tended to migrate toward the neighbor islands because of their higher electricity costs.
–Patricia Tummons
Volume 19, Number 1 July 2008
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