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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. FINANCING RISKS. Energy Efficiency Projects Renewable Energy Projects.

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financing considerations for renewables and energy efficiency projects

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

financing risks
FINANCING RISKS
  • Energy Efficiency Projects
  • Renewable Energy Projects
renewable energy energy efficiency
RENEWABLE ENERGY = ENERGY EFFICIENCY

The cleanest energy

Is the energy not consumed (saved)

And which costs less

energy management
Energy Management
  • For energy management from the private sector’s 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
why the consumer cost will be higher
Why the Consumer cost will be higher

Customer Load Profile

Savings

Loss

energy efficiency solution
ENERGY EFFICIENCY SOLUTION

THERMAL ENERGY STORAGE:

- Ice at night and chilled water during the day

energy management1

Managed Load Profile

Current Load Profile

Blue: Thermal Red: Pure Electricity

Blue: Thermal Red: Pure Electricity

Energy Management
project returns
PROJECT RETURNS
  • Project Cost: US$1.0M
  • SAVINGS: 4M kwh x US$0.04 = US$0.16M
  • Payback: 6.25 years
  • RISKS:
    • Regulatory: who will guarantee that the utility tariff of US$0.04/kwh will remain the same for the next 6 years?
financing issues for energy efficiency project
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

financing issues for re projects
FINANCING ISSUES FOR RE PROJECTS
  • Diesel versus solar for an isolated grid
slide13

CASHFLOW OF SOLAR VERSUS DIESEL

>

NPVSOLAR

NPVDIESEL

COST

TIME

slide14

CASHFLOW OF SOLAR AND PROJECT FINANCE

The challenge of project finance for solar…

…is to move this lump here…

COST

…to here.

TIME

slide15

…will be sufficient to cover the amortization of the financing.

Savings

SOURCE OF REVENUE FOR PROJECT FINANCE

Theoretically, the financing can be done if…

…the savings as the source of revenue….

COST

TIME

slide16

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

slide17

This type of financing…

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

slide18

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

financing analysis
FINANCING ANALYSIS
  • Payback: 5 years i.e. circa 18% IRR after tax
  • Leverage: 70:30 to improve IRR
  • Debt service cover: Minimum energy off-take: same tenor as loan
  • How to compute:
    • Compute annuity of Total Project Cost @ 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!
to summarize
TO SUMMARIZE

GOVERNMENT

-- Environmental Policy

-- Competition policy

REGULATOR

-- Tariffs

-- Market power

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

some conclusions
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, what’s 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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