Commercial development of grid connected and off grid small hydro schemes
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Commercial Development of Grid-connected and Off-grid Small Hydro Schemes. Jayantha Nagendran Senior Vice President (Project Management) DFCC Bank, Sri Lanka Energy Week, 6-8 March 2006 The World Bank, Washington, D.C. Presentation Outline. Introduction Policy Regulation Design

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Commercial Development of Grid-connected and Off-grid Small Hydro Schemes

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Commercial development of grid connected and off grid small hydro schemes

Commercial Development ofGrid-connected and Off-gridSmall Hydro Schemes

Jayantha Nagendran

Senior Vice President (Project Management)

DFCC Bank, Sri Lanka

Energy Week, 6-8 March 2006

The World Bank, Washington, D.C.


Presentation outline

Presentation Outline

  • Introduction

  • Policy

  • Regulation

  • Design

  • Implementation

  • Financing

  • Sustainability

  • Results

Energy Week 2006


Sri lanka

Sri Lanka

  • Island nation; 65,600 sq km; 20 m population

  • State owned, vertically integrated electricity utility

  • Electricity demand growing at about 8% p.a.

  • Access to grid: presently 70% of households

    The WB & GEF-assisted Renewable Energy Program:

  • ESD Project (1997-2002) … completed

  • RERED Project (2002-2007) … on-going

Energy Week 2006


Business model

Business Model

  • Demand driven, market based approach

  • Create an enabling environment:

    • Address information, institutional, legal/regulatory and financial barriers in an integrated manner

    • Loans on standard commercial criteria

    • ‘Smart subsidies’ for off-grid projects

    • Technical assistance and capacity building

  • Program management by an Administrative Unit set up within a private development bank

Energy Week 2006


Policy

Policy

  • Private investments in the power sector were encouraged (mid-1990s) to address:

    • Lack of public sector investments

    • Growth in demand and impending power crisis

    • Inability of the utility to develop small hydros

  • Utility willing to buy energy from small hydros consistent with its least cost generation plan

  • Off-grid solutions to complement the grid or as ‘pre-electrification’ measures

  • Policy documents: Rural Electrification (2002), Electricity Reforms (2002), PUC (2002), Renewable Energy (under prep)

Energy Week 2006


Regulation grid connected mini hydros gcmh

Regulation: Grid-connected Mini Hydros (GCMH)

  • Standard Small Power Purchase Agreement (SPPA) signed with the utility for renewable energy plants up to 10MW:

    • Transaction costs minimised

    • Tariff determined on commercial principles (avoided cost) and announced each year in advance

    • Safety net (floor price: 90% of first tariff)

    • Generous tenure (15 yrs, > payback period)

  • Grid interconnection standards developed through technical assistance

Energy Week 2006


Regulation off grid village hydros ogvh

Regulation: Off-grid Village Hydros (OGVH)

  • Light handed regulation in lieu of licence

  • Special arrangements developed by Administrative Unit

    • No objection letters from local or central government agencies: land, water, forestry etc

    • Central Environmental Authority clearance

    • Registration of Electricity Consumer Society (ECS)

    • Compliance with technical standards (defined by Project)

    • All consumers are members of ECS and pay ‘membership fees’; no ‘sale’ of electricity

Energy Week 2006


Design gcmh

Design: GCMH

  • Run of the river schemes, up to 10 MW

  • Built, owned and operated by private commercial entities

  • Developer identifies site; utility issues time bound Letter of Intent after evaluation

  • Standard Small Power Purchase Agreement (SPPA) and Tariff (SPPT) for renewable energy plants up to 10 MW

  • Loans on market terms, based on independent credit assessment and access to long-term funds

Energy Week 2006


Design ogvh

Design: OGVH

  • Run of the river schemes providing 230V AC power through an independent mini grid: a typical 10kW scheme serves 40 HH within a 2km radius

  • Built, owned and operated by the community through an ECS

  • Technical specifications defined by Project

  • Technical assistance and grant through GEF

  • Loans on market terms, based on independent credit assessment and access to long-term funds

Energy Week 2006


Implementation gcmh 1 2

Implementation: GCMH (1/2)

  • Non-negotiable SPPA and tariff arrangements

    • A critical success factor … but

    • Disputes on tariff computation (no regulator)

    • Interventions by Project: independent review; TA for a new policy framework

    • Industry association (GCSPDA) an effective watchdog

  • A ‘devt bank + developer joint venture’ pioneered the first ever GCMH … even before WB assistance

    • Vision … saw business potential

    • Capacity and determination to overcome obstacles

    • Demonstration effect … others followed

Energy Week 2006


Implementation gcmh 2 2

Implementation: GCMH (2/2)

  • Local knowledge

    • Reliable historical data on rainfall

    • Local engineering capability avoided expensive EPC/turnkey contracts

    • Developer includes ‘technocrats’ in the team to manage projects, who receive an equity stake based on results

    • Project cost typically USD 1.0-1.1 m per MW

  • Commercial approach

    • Developer identifies and secures site (LOI)

    • Developer obtains all required approvals and signs SPPA

    • Developer negotiates financing

    • No subsidies, no special concessions

Energy Week 2006


Implementation ogvh 1 3

Implementation: OGVH (1/3)

  • Awareness creation

  • OGVH potential assessment survey

  • Project preparation consultant responsible for

    • Site identification

    • Technical feasibility

    • Socio-economic analysis

    • Social mobilisation and society (ECS) formation

    • Business plan preparation

    • Statutory approvals / no objections

    • Bank loan negotiation

    • Assistance in procurement, construction

    • Training of ECS personnel

Energy Week 2006


Implementation ogvh 2 3

Implementation: OGVH (2/3)

  • Equity stake by consumers: labour and cash

  • Compliance with OGVH technical standards

  • Liasion with a local testing facility (NERDC) for certifying turbines and IGCs (recent development)

  • Regular stakeholder consultations

  • Needs based TA and capacity building

    • Project preparation consultants (engg design, social)

    • Suppliers/manufacturers (quality)

    • ECSs (O&M, bookkeeping, general management)

    • Productive applications by day

Energy Week 2006


Implementation ogvh 3 3

Implementation: OGVH (3/3)

  • Management of ECSs

    • Model constitution, org structure, bookkeeping

    • Participatory management, incl tariff setting

    • Consumer voice through Federation of ECSs (FECS)

  • Consumer protection

    • Clarify stakeholder roles and responsibilities

    • Service and warranty arrangements

    • Complaint investigation scheme

  • Flexible management

    • Learn and adapt as you go

    • Tighten the screws gradually as the industry matures

Energy Week 2006


Financing gcmh 1 2

Financing: GCMH (1/2)

  • Development banks led the way

    • Familiar with term lending for greenfield projects

    • Saw business opportunity and national interests

  • Innovations in managing credit risk

    • Syndicate large loans to mitigate concentration risk

    • Secure cash flows through an Escrow Account

    • Schedule loan amortisation by season

      (rainfall = cash flow)

    • Be able to take over and transfer the project as a going concern:

      - Mortgage of project assets and shares

      - Custody of SPPA and all licences, rights etc

Energy Week 2006


Financing gcmh 2 2

Financing: GCMH (2/2)

  • Negotiated on-lending terms: Use competition to drive down financing costs

    • Six banks now competing for business

    • Interest rates: AWDR + 3-5 %

    • Debt:Equity around 60:40

    • Tenure: 6-8 yrs including 1-2 yrs grace

  • Access to long-term funds through WB credit line: Participating banks receive 80% refinance on loans disbursed at the 6-month Average Weighted Deposit Rate (AWDR)

Energy Week 2006


Financing ogvh 1 2

Financing: OGVH (1/2)

  • No wilful defaulters … but

    plant performance determines credit recovery

  • Loan secured on project assets and personal guarantees … only a moral obligation with no practical collateral value

  • Banks use OGVH as an entry point to provide other financial services

  • Provincial Councils provide supplementary subsidies

  • Avg cost USD 1,600-2,000 / kW excluding project preparation fees

Energy Week 2006


Financing ogvh 2 2

Financing: OGVH (2/2)

  • Typical financing plan:

    Equity (cash + labour)20-25%

    Commercial loan40-50%

    GEF grant20-25%

    Provincial Council subsidy20-25%

  • Negotiated on-lending terms

    • Interest rates: AWDR + 5-8 % p.a.

    • Tenure: 5-6 years

  • WB credit line provided access to long-term debt capital for banks (80% refinance at 6-mth AWDR)

Energy Week 2006


Sustainability gcmh

Sustainability: GCMH

  • Standardised arrangements minimise barriers to entry

  • Rule based tariff

  • Credibility of utility in honouring SPPA

  • Government facilitates a conducive policy environment, but with no role in operations

  • Absorptive capacity of grid substations

  • Utility’s system stability issues as % of non-dispatchable generators increase

  • Maintain a win-win situation for developer, utility and banks

Energy Week 2006


Sustainability ogvh

Sustainability: OGVH

  • Technical standards (safety, reliability, longevity)

  • Capacity building: developers, suppliers, ECSs

  • Demand driven … with equity contribution

  • Consumer protection

  • Cofinancing grant for off grid projects

    • Transparent, measurable and output based

    • Govt subsidy funds complement GEF grant

  • Mainstream credit delivery: a viable business with opportunities to cross sell other financial products

  • Commitment and involvement of Provincial Councils

Energy Week 2006


Results 31 dec 2005 1 2

Results: 31 Dec 2005 (1/2)

  • GCMH:

    • 79MW through 35 plants completed

    • Another 67MW through 22 plants under construction

  • OGVH:

    • 100 schemes (1,011 kW) serving 4,587 homes completed

    • Another 47 OGVH schemes under construction

    • 50 verified productive applications using off-grid electricity; more being set up

  • Solar home systems:

    • 83,820 homes electrified

    • 600+ verified productive applications (mostly shops)

Energy Week 2006


Results 31 dec 2005 2 2

Results: 31 Dec 2005 (2/2)

  • Private commercial financing:

    • 2 development banks

    • 5 commercial banks

    • 2 leasing cos

    • an MFI

    • ... and more participating indirectly

  • Loans over USD 75 m disbursed

  • Rs 2 billion (USD 20 m) Renewable Energy Support Bond to be issued in 2006

  • Large pipeline of projects … success breeds success

Energy Week 2006


Contact us

Contact us

RERED Administrative Unit

DFCC Bank

73/5, Galle Road, Colombo 3

Sri Lanka

www.energyservices.lk

Energy Week 2006


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