Financing Considerations for Renewables and Energy Efficiency Projects

1
Financing Considerations for Renewables and
Energy Efficiency Projects

• By
• Guido Alfredo A Delgado
• August 28, 2006
• FUTURE ENERGY SCENARIOS TOWARD SUSTAINABLE ENERGY
  POLICIES AND PRACTICE IN THAILAND WORKSHOP

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Background

• GAAD Inc.
• Financial Consultancy firm focused on investment
  banking for the power sector mobilized over
  US2.0B for the Philippine sector over the last 4
  years
• Philippine Power Distributors Investments
  Corporation (PPDIC)
• Holding company with subsidiaries involved in the
  management of power utilities, technical
  advisory, energy management systems, and IT
  systems
• National Power Corporation
• 1994-1998 and was mainly responsible for
  mobilizing over 3,000 MW of new power to address
  12-hour brownouts.

• CEO
• Chairman
• Former CEO

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Philippine Generation Mix
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Addressing Power Needs

• Grid electricity
• Renewables
• Grid
• Off-grid (distributed generation)
• Energy management
• REDUCTION of consumption
• -- MANAGEMENT of load profile

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FINANCING RISKS

• Energy Efficiency Projects
• Renewable Energy Projects

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RENEWABLE ENERGY ENERGY EFFICIENCY
The cleanest energy Is the energy not consumed
(saved) And which costs less
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Energy Management

• For energy management from the private sectors
  standpoint to make sense, grid tariffs should
  reflect real costs every hour in the grid load
  profile
• Will provide market opportunities for energy
  management services and renewable power
• Will reduce actual fossil-fuel power plant
  utilization especially at peak leading to reduced
  emission

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TOU Schedule
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Why the Consumer cost will be higher
Customer Load Profile
Savings
Loss
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ENERGY EFFICIENCY SOLUTION
THERMAL ENERGY STORAGE - Ice at night and
chilled water during the day
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Energy Management
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Indicative Annual Energy Savings
In kWh Current System Proposed System
Energy Peak Off Peak 5,267,977 4,950,351 317,626 5,267,977 4,950,351 317,626
Thermal Peak Off Peak 9,783,387 9,193,509 589,877 5,637,450 3,891,160 1,746,290
Total Peak Off Peak 15,051,364 14,143,860 907,504 10.905,427 8,841,511 2,063,916
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PROJECT RETURNS

• Project Cost US1.0M
• SAVINGS 4M kwh x US0.04 US0.16M
• Payback 6.25 years
• RISKS
• Regulatory who will guarantee that the utility
  tariff of US0.04/kwh will remain the same for
  the next 6 years?

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FINANCING ISSUES FOR ENERGY EFFICIENCY PROJECT
Savings
BANK FINANCING
Old consumption
Physical savings
Financial savings
New consumption

• Can only be guaranteed either by
• Regulatory order
• Long-term power sales contract

May be guaranteed by technology providers
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FINANCING ISSUES FOR RE PROJECTS

• Diesel versus solar for an isolated grid

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CASHFLOW OF SOLAR VERSUS DIESEL
gt
NPVSOLAR
NPVDIESEL
COST
TIME
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CASHFLOW OF SOLAR AND PROJECT FINANCE
The challenge of project finance for solar
is to move this lump here
COST
to here.
TIME
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SOURCE OF REVENUE FOR PROJECT FINANCE
Theoretically, the financing can be done if
the savings as the source of revenue.
COST
TIME
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THE RISKINESS OF THE REVENUES
gt
NPVSOLAR
NPVDIESEL
The risk is measured by determining the
appropriate discount rate when computing the
projects NPV.
COST
TIME
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RISKINESS OF THE REVENUES
Riskiness (or quality) is determined by

• Country risks
• Political stability and monetary policies
  (forex)
• Regulatory
• Quality of the technology
• Availability of expertise
• Maintenance
• Operations risks e.g. hydrology
• Market risks
• Volume
• Price
• Credit

Any deterioration in any of these factors, can
make this line
COST
go down and therefore reduce or undermine the
expected savings.
TIME
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THE AVAILABILITY PROJECT FINANCE
Project finance for ordinary IPP and grid-based
projects have tenors of 12-15 years.
COST
..will require much longer tenors.
TIME
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MARKET MECHANISMS AVAILABLE

• Ability to monetize desirability of effects of
  RE e.d. carbon credits.

Effect
Putting less stress on the revenue and tenor of
the financing
COST
TIME
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MARKET MECHANISMS AVAILABLE

• Straight subsidy on the cost of the technology
  to help in competitive markets

Effect
Putting less stress on the revenue and tenor of
the financing
COST
TIME
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MARKET MECHANISMS AVAILABLE

• Customer quality purchasing power, credit
  behavior, titles to assets

Effect discount rate to achieve NPV is lower
when these qualities are positive
COST
TIME
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FINANCING ANALYSIS

• Payback 5 years i.e. circa 18 IRR after tax
• Leverage 7030 to improve IRR
• Debt service cover Minimum energy off-take same
  tenor as loan
• How to compute
• Compute annuity of Total Project Cost _at_ 18
• Add Fuel Cost price is pass-through
• Divide by the annual kwh to be purchased MEOT
• IMPLICATION FINANCIAL TERMS ALMOST HAS NO
  CONNECTION TO THE PHYSICAL PROFILE OF EITHER THE
  EE OR RE PROJECT
• FURTHER IMPLICATION GET YOUR CONTRACT TO SELL
  FIRST!

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TO SUMMARIZE
REGULATOR -- Tariffs -- Market power
GOVERNMENT -- Environmental Policy -- Competition
policy
DISTRIBUTOR -- Buy-and-sell -- Pass through
GENERATOR -- Competition
END CUSTOMER
For EEs, Financing terms Will depend on
regulatory risks
For REs, Financing terms Will depend on cashflow
risks
FINANCIAL MARKETS -- Financing efficiency i.e.
breadth and depth -- Settlements systems to
minimize leakage
Financial Flow
Physical Flow
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SOME CONCLUSIONS

• For private sector to participate in either REs
  or EE projects, the regulatory framework must be
  very clear
• If clear, subsidies/guarantees may no longer be
  necessary
• Otherwise, bank financing will still be based on
  collaterals and balance sheet financing rather
  than project financing
• In this case, whats the economic value of all
  these promotions for Res and EEs?
• Or guarantees and subsidies will still be
  required
• BIS rules must also be considered collaterals

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FINANCIAL AND MARKET RISKS

• Transmission risks
• Distribution risks
• Wholesale Market risks
• Payment risks

LARGE BASELOAD GENERATORS

• No transmission risks
• Specific credit risks
• Mitigated market risks
• BUT MAJOR REGULATORY RISK
• Demand side management

Distributed Generation DSM
Individual Clients
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THANK YOU