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Introduction – Project Finance and Renewable Energy

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  1. Introduction – Project Finance and Renewable Energy

  2. General Objectives • Global overview on renewable energy and electricity issues that may not be part of your daily work • Hands-on analytical calculations so you can see how things really work • Integration of financial issues with technology and resource assessment • Risk and cost of capital theory for renewable energy resources • Analysis of policy issues related to incentives for renewable energy • Detailed tax and financing issues

  3. Teaching Points • Understand Relative Costs of Renewable Technology Relative to other Electricity Technologies • Consider Financial Theory with Respect to Renewable Resources • Importance of Project Financing Terms in the Context of Renewable Energy • Risk Assessment of Alternative Renewable Energy Projects • Required Electricity Prices with Alternative Incentive Programs and Different Resource Availability • Effects of Renewable Resources on Power Markets

  4. General Outline • Relative Cost of Renewable Resources • Renewable Income in Electricity Prices • Carrying Charges and Renewable Value • Cost of Wind Power • Cost of Renewable versus Conventional • Background on Cost of Capital and Financing Cost • Project Finance versus Traditional Finance • Solar versus Off Shore Financing • Project Finance Introduction • Off Shore Case Study

  5. General Outline • Structuring and Modelling of Renewable Projects • General Discussion of Modelling • Financial Structure of Renewable Projects • Value of Development Activities • DSCR and IRR for Renewable and Other Projects • Other Financial Statistics • Project Finance Model Case • Resource Assessment of Renewable Projects • Solar Resource Assessment • Wind Resource Assessment • Case Study

  6. General Outline • Risk Analysis of Project Renewable • General Discussion of Risk Issues • Risk Evaluation by Banks and Rating Agencies • P95, P90 etc. • Sensitivity Analysis, Scenario Analysis, Spider, Tornado • Monte Carlo Simulation • Policy Incentives for Renewable • Tax Depreciation • Feed-in Tariffs • Net Metering • Other

  7. General Outline • Complex Modelling Issues • Periodic Modeling • Operating and Decommissioning Reserve • Tax Issues • Covenants • Debt Service Reserve • Re-financing

  8. Review of Some Terms in the Model • Cost of Project: $/kW • Operation and Maintenance Cost: Cost/kW/Year or Cost/MWH • Cost of Electricity: $/MWH • Spot or Wholesale Pricing: $/MWH • Net Metering: $/MWH • Capacity Factor: Percent • Availability Factor: Percent • Production Tax Credit (PTC): $/MWH • Accelerated Tax Depreciation Method (MACRS) • Development Period • Construction Period • Interest During Construction • Payments in Lieu of Taxes (PILOT)

  9. Meaning of a Few Financial Statistics • Cash Flow • Project Cash Flow (No Financing) • Equity Cash Flow (Including Financing Effects) • Project IRR • Compare to the interest rate on debt issues • Use in break-even analysis • Ignores any debt effect • Equity IRR • How much put in and how much take out • Used by private investors • Payback Period • Theory and practice • Equity or Free Cash Flow • Discount Rate • Town • Private • Net Present Value of Free Cash Flow • Related to the project IRR • See what it takes to make negative • Net Present Value of Equity • Related to Equity IRR • Value to Investors

  10. Renewable Resources and Electricity Prices

  11. Valuation of Renewable Projects in the Context of Historic Energy Prices • Revenue realized for 1 MW of capacity at different capacity factors • Evaluate using different time periods and different markets • Wind , solar and hydro projects • Generate the value per kW

  12. Electricity Pricing Review • In reviewing electricity prices in the next few slides consider the following general characteristics of prices” • Mean reversion of prices both in the short and long term, which is due to the fact that the supply curve defined by generating plant costs remains relatively stable over time (it takes a long time to build new plants); • Generally smooth price changes from one time period to the next driven by smoothly fluctuating demand, punctuated by infrequent and temporary but dramatic upward price "spikes" which occur because of the high cost of supply shortages (electricity outages are very expensive to customers); and, • Daily, weekly and seasonal correlation between price level and price volatility – implying that there is more variation in prices during periods of high price than during low price periods (due to the non-linear shape of the supply curve).

  13. Selected Electricity Price Websites • Australia • You can retrieve data on prices from the website for the Australia Electricity Market Operator • • This website is very good – you can get average monthly and annual prices and you can download hourly loads and demand data. • Argentina • This website is a bit difficult to use, but you can transfer data to excel • • Nordpool • • UK Prices • Need to download the excel files. • • US Prices • The EIA has a page that includes many of the important prices • • This includes NEPOOL, PJM, California, Texas and the Midwest

  14. Information Sources for Price Forecasts • Sources of data for price forecasts: • NYMEX • EIA • Company Presentations

  15. Mean Reversion and Spikes – Summer Month with Constrained Capacity

  16. PJM Prices – Overall Region

  17. PJM – Western Hub

  18. UK Electricity Prices - Crash in 2001

  19. Nordpool Prices – Hydro System

  20. Australia Market Prices

  21. California Price History

  22. Wind Vaule Analysis

  23. Comparison of Feed-In Tariffs

  24. Feed In Tariffs

  25. Cost of Renewable Energy

  26. Cost Drivers • Capital Costs • Development Cost • Installation Costs • Interest During Construction • Operating Costs • Fixed Costs • Variable Costs • Contracts

  27. Importance of Structuring Issues Given the High Capital Cost Relative to Total Cost • Structuring Issues • Municipal Ownership or Private Ownership • REC Contracts • Capital Grants • Hybrid Private and Municipal Ownership • Capital Intensity • The adjacent graph shows the capital intensity of Wind versus Natural Gas (natural gas is from a utility presentation and is lower because of the high amount of fuel costs in the total)

  28. Capacity Costs from the EIA

  29. General Cost Data

  30. Recent Capital Costs • .

  31. Project Cost

  32. Cost of Installed Capacity

  33. Drivers of Cost Increase • Commodities used in the manufacture and installation of wind turbines and ancillary equipment, including cement, copper, steel and resin (for blades) have increased in cost in recent years. • Drivers have included general economic recovery, disaster recovery and increased demand from developing Asian economies. • NYMEX copper increased from $0.72/lb in July 2002 to $2.32/lb in March 2006. Rebar has increased about 45% over the same period. • Structural concrete is forecast to increase to about $580/cy in 2006, up 50% from 2002. • Likewise, the cost of energy needed to fabricate, transport and erect wind turbine generators and related components has also increased. The average U.S. retail price of No. 2 diesel has increased from $0.85/gallon in July 2002 to $2.07/gallon in March 2006.

  34. Turbine Prices

  35. Cost Components • The model contains a number of different cost components, some of which are development costs and some of which are construction costs. • The development costs have different timing than other costs.

  36. Solar Example • The 11 megawatt PS10 solar power plant will generate 24.3 GW/hr per year of clean energy and comprises 624 movable heliostats (mirrors). Each of the mirrors has a surface area of 120 square meters (1292 square feet) which concentrates the Sun's rays to the top of a 115-meter (377 foot) high tower where the solar receiver and a steam turbine are located. The turbine drives a generator, producing electricity. The two axis heliostats move automatically as a function of the solar calendar. This power plant alone will prevent the emission of 18,000 tons of CO2 per year. • The investment required to build the concentrating solar power plant amounted to €35 million (US$47 million), with a contribution of €5 million (US$6.7 million) from the EU's Fifth Framework Program for research, awarded for the project's innovative approach.

  37. Example of Capacity Cost Estimates from Feasibility Studies • The table below shows the range in project cost estimates from various MA Community Wind projects. For studies in 2008, the range is from $2,800/kW to $3,290/kW – a difference of 17%. Capacity costs are important factors in overall project economics, but can be hard to estimate in advance of bids. Estimates may vary from study to study due to factors such as the size and height of turbine in question, supply and demand for particular turbine models, method of procurement, number purchased, etc. • Location A – GE 1.5MW (2005) $1,852/kW • Location B – Vestas RRB 600kW (2008) $2,800/kW • Location B – GE 1.5sle @ 80m (2008) $3,000/kW • Location C – Fuhr 1500 (2008) $3,006/kW • Location D – GE 1.5sle @ 65m (2008) $3,020/kW • Location D – GE 1.5sle @ 80m (2008) $3,153/kW • Location D – GE 1.5sle @ 80m (2008) $3,290/kW

  38. Solar Project Cost • The solar power plant in Jumilla, Murcia, Spain is currently one of the two largest solar energy plant in the world. It produces 20 megawatts with 120,000 PV panels. The panels are spread over an area of 100 hectares and provide enough electricity for the equivalent of about 20,000 houses. With construction recently finished, the plant is expected to generate $28 million USD. The project was completed by Luzentia Group with help from Elecnor’s solar industry Atersa. The solar plant was built over 11 months with 400 people in an area that locals say is perfect since it receives about 300 days of sun a year.

  39. Operating Expense Analysis • The operating cost of a project can be measured on an absolute basis, on the basis of the kW capacity or on the basis of the MWH produced. The range in operating costs for a few projects is shown in the accompanying table. • . • .

  40. . More O&M Cost

  41. Operating Cost Breakdown • .

  42. O&M Costs

  43. FPL Comments on Capacity Factor and O&M Cost • Average capacity factor is a critical element for wind economics and the range is wide, but most of our recent projects and expected capacity factors are 35% or more. A project in the low 40s is excellent. Healthier free capacity factor is a function of geography and the particular local wind resource, and we devote a great deal of effort to modeling and estimating wind resource availability. Wind, of course, has no fuel cost and O&M is relatively small. • Most projects' production costs are somewhere in the range of $4 per megawatt hour.

  44. Capacity Factor Comparison

  45. Capacity Factor by Year

  46. Wind Capacity Factor

  47. Projects in FPL Financing • .

  48. Data for Case Study

  49. Data for Case Study

  50. Cost of Renewable versus Conventional Resources