Financing considerations for renewables and energy efficiency projects
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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

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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


Tou schedule

TOU Schedule


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


Indicative annual energy savings

4,145,937

Indicative Annual Energy Savings


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


Financing considerations for renewables and energy efficiency projects

CASHFLOW OF SOLAR VERSUS DIESEL

>

NPVSOLAR

NPVDIESEL

COST

TIME


Financing considerations for renewables and energy efficiency projects

CASHFLOW OF SOLAR AND PROJECT FINANCE

The challenge of project finance for solar…

…is to move this lump here…

COST

…to here.

TIME


Financing considerations for renewables and energy efficiency projects

…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


Financing considerations for renewables and energy efficiency projects

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


Financing considerations for renewables and energy efficiency projects

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


Financing considerations for renewables and energy efficiency projects

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


Thank you

THANK YOU


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