Deloitte Consulting LLP August 2012 Positioning P3 for Success and Applications for Energy Sustainable Energy Workshop 2012

Deloitte Consulting LLP

August 2012

Positioning P3 for Success and Applications for EnergySustainable Energy Workshop 2012

© 2010 Deloitte Global Services Limited 2

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© 2010 Deloitte Global Services Limited

Contents

- Definition of P3- A Case Study and Lessons Learned

- Strategic Considerations- P3 Execution Challenges- Solutions

Positioning P3 for Success


Definition of P3 IP3 enables an overall energy and sustainability strategy and the definitions are broad

A public-private partnership, or P3, refers to a contractual agreement formed between a government agency and a private sector entity that allows for greater private sector participation in the delivery of public projects. Compared with traditional procurement models, the private sector assumes a greater role in the planning, financing, design, construction, operation, and/or maintenance of public facilities.


Definition of P3 IIAt the Federal level, there are lesser-known tools in the P3 toolbox that can be used to great affect

Government | Commercial Partnership Description

Alliance Agreement Alliance Agreements are legal documents between one or more parties, for the purpose of competitive intelligence, drafting documents or to get information about transactions within a particular industry or sector.

Public-Private Ventures A special-purpose public/private venture refers to a business entity that is created by public and private parties for a single specified purpose and whose activities are predetermined by the contracts and other arrangements.

Enhanced Use Lease for R&D Test-bed

An EUL is a contract calling for the lessee (user) to pay the lesser (owner) for use of an asset.

Patent License Agreement A license to commercial companies to utilize patented government-developed technology commercially. The government retains the rights to use the technology for government purposes.

Government | Non-profit Partnership Description

Memorandum of Understanding (MOU)

A bilateral agreement between parties, indicating an intended coordination and collaboration between agencies, rather than a legal commitment.

Memorandum of Agreement (MOA) Document written between parties to cooperatively work together on an agreed upon project or meet an agreed objective (Can also be a legal document that is binding).


A Case Study and Lessons Learned IA successful P3 can come together through many different types of transacting mechanisms

Deloitte served as strategic advisors to the Government of Bulgaria on the long-term concession of Bulgaria’s Black Sea Coast airports. We performed an options

analysis in close consultation with the Government, proposed amendments to the enabling environment for P3, assisted the Government to create a core base of stakeholder support, managed interactions with strategic investors, assisted in the conduct of the competitive tender, and built the capacity of the Civil Aviation Authority to be a strong partner for this P3.

The Government received 4 proposals from leading airport development groups, and accepted the proposal from Fraport, the international arm of the Frankfurt International Airport, with an estimated total value in excess of $500M USD, while securing the long-term development of these strategic assets.


A Case Study and Lessons Learned IIEstablishing governance up-front helps to ensure a successful transaction and subsequent operate environment

Due Diligence: legal, environmental, technical and social

• Developed capital expenditure plan for 10-years

• Identified problem with Civil Aviation Act

Financial Analysis

• Developed traffic forecast and financial modeling

• Clear projections on key issues: future costs /returns to public sector and user charges

International Market Study

• At the macro-level by sector

• Detailed review of individual aviation projects

Options Analysis

• Public vs. private operation

• Issue: To bundle the airports to make more attractive

Project Development and Implementation: Pre-feasibility activities


A Case Study and Lessons Learned IIISelecting the optimal framework is a first step to a functioning governance model for the P3

Selecting a Model

Applications for Energy


Strategic Considerations IERCOT faces some difficult supply challenges in the near-term future

According to the most recent ERCOT capacity report, reserve margins are forecast at less than 10 percent by next year

Coal and natural gas make up the largest share of generating capacity in Texas with more reliance on gas expected in the future

ERCOT, May 2012

ERCOT, May 2012


Future Energy PricesDeveloping a strategic view of future prices is critical to success

ContractingThe federal government has an array of available tools but their use is complex

Raising CapitalNew funding sources require networked outreach to stakeholders

Above or Behind the MeterDirect interaction with the grid will be one of the larges and most tangible sources of value for the P3. The P3 should be structured to optimize the strategic objectives of both parties in the transaction.

Own or LeaseAsset ownership comes with risk and will greatly impact pricing considerations

Risk ManagementEstablishing a governance model that can last the duration of the lifecycle

$.05 per kwh price electric

$50M annual energy

cost

3% annual energy goal

1055 GWh annual energy consumption

727,485 metric tons of carbon emitted per year

Mandates versus ValueSelecting the optimal balance of mandates versus value will drive tactical considerations such as the type of contracting vehicle used.

P3 Execution Challenges IBreaking down barriers to P3 execution requires tenacious problem solving


According to NIST forecasts, electricity escalators are flat out to 2022, excluding general inflation

P3 Execution Challenges IINIST Supplemental 135 has serious analytical shortcomings, which can lead to faulty P3 pricing

Measures of future prices are based on census zone, which has little direct applicability to electric markets

South Region


Our analysis shows that TRE South could see significant price increases by 2030 with more than a doubling of prices from today’s level in nominal terms. With large generating capacity needed in the region, a number of pricing assumptions should be evaluated to determine future strategy.

P3 Solutions IIEven before considering spot prices and DR opportunities, long-term energy economics in Texas yield potential


P3 Solutions IIIAlthough energy prices are local, energy markets are integrated and have global reach

In today’s world, local decisions quickly bump up against international factors. Long-lived P3 assets will be impacted by these factors well into the future.


P3 Solutions IVInternational markets could be knocking at America’s door; what are the scenarios to consider?

Impact of LNG Exports on Average US Citygate Gas Prices

Price Impact by Region

A recent Deloitte analysis forecasts a marginal affect on domestic gas prices as a result of LNG imports. Despite varying worldviews, strategic flexibility enables strong organizations.

As compared to the NIST 135 census regions, local markets and regions are a key factor in forecasting future prices.

Source: Deloitte MarketPoint


Tried and true P3 tools for energy will be a major source of project funding with ARRA funds expended

P3 Solutions VWith a compelling and targeted value proposition, sources of capital reach beyond traditional buckets

While not typically a source of outsized returns, energy project financing can go a long way to solving the asset / liability mismatch facing the U.S. and other developed economies


Solutions VStructured processes help drive execution through the transaction phase and beyond

PPAPPA

Level 0Process

Steps

13

Selec

t Agen

t

Issu

e In

fo R

eques

t

Issu

e Qual

s Req

uest

Devel

op RFP

Issu

e RFP

Admin

iste

r RFP

Evalu

ate

Proposa

ls

Award

Desig

n Pro

ject

Constru

ct P

roje

ct

Comm

issi

on Sys

tem

M&V P

erfo

rman

ce

End Ove

rsig

ht

EULEUL

Level 0Process

Steps

12

Devel

op sco

pe

Notice

of Opp.

Issu

e Notic

e of O

pp.

Evalu

ate

Proposa

ls

Selec

t Contra

ctor

Lease

and M

gmt.

Plan

Issu

e Lea

se

Desig

n Pro

ject

Constru

ct P

roje

ct

Comm

issi

on Pro

ject

M&V P

roje

ct

End Ove

rsig

ht

Sample Level 0 Process Steps for PPA and EUL

Source: Federal Energy Management Program


ConclusionEnergy and sustainability strategy drives capital budgeting decisions and P3s support and enable execution

After designing a project that best meets an organization’s strategic goals and objectives there are many P3 options that can support successful implementation and operations.

Careful consideration is required to ensure that both parties achieve the maximum risk-adjusted value from the projects while ensuring the transaction gets done and service is maintained.


Thank You

© 2010 Deloitte Global Services Limited

For more information

Alexander Kasuya

Manager, Deloitte [email protected]

www.deloitte.comwww.deloittemarketpoint.com

Documents

Deloitte Consulting LLP August 2012 Positioning P3 for Success and Applications for Energy Sustainable Energy Workshop 2012