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Florian Egli, Energy Politics Group, ETH Zürich
Financing conditions - A missing link to explain rapid cost decreases in renewable energies?Frontiers in Energy Research, Zurich/Switzerland, 5 March 2019
|Florian Egli | Energy Politics Group | ETH Zürich
EU Horizon 2020 Project“generate new, state-of-the-art low-carbon pathways for the European Union”
Cross-cutting finance work-stream Project partners
1
This work contributes to the European Union's Horizon 2020 research and innovation programme project INNOPATHS. It has received funding from the European Union’s Horizon 2020 research and innovation programme under grant agreement No. 730403 as well as from the Swiss State Secretariat for Education, Research and Innovation (SERI) [contract number 16.0222]. The opinions expressed & arguments employed herein do not necessarily reflect the official views of the Swiss Government.
Background
This talkThe research project
|Florian Egli | Energy Politics Group | ETH Zürich
Agenda
2
Dynamics of financing conditions3
Finance and the energy transition2
Introduction1
Research question, method and data3.1
Results3.2
Conclusion4
|Florian Egli | Energy Politics Group | ETH Zürich
Agenda
3
Dynamics of financing conditions3
Finance and the energy transition2
Introduction1
Research question, method and data3.1
Results3.2
Conclusion4
|Florian Egli | Energy Politics Group | ETH Zürich 4
A milestone: the 2015 Paris Agreement
Introduction | Methods and Data | Results | Conclusion
|Florian Egli | Energy Politics Group | ETH Zürich 5
We are not on track…
Introduction | Finance & energy transition | Dynamics | Conclusion
Go to www.menti.comEnter: 64 20 95
|Florian Egli | Energy Politics Group | ETH Zürich 6
1990 1995 2000 2005 2010 20150
2.000
12.000
4.000
6.000
8.000
10.000
Billion tons of CO2eq
Manufacturing industries and construction
Transport
Other EnergyOther
Electricity production (Excluding CHP)
Source:IEA, own calculationsNote:Other Energy includes CHP plants, hearing plants and other energy industry own use.
Low-carbon electricity is key to reach Paris Agreement targets
Introduction | Finance & energy transition | Dynamics | Conclusion
Go to www.menti.comEnter: 64 20 95
|Florian Egli | Energy Politics Group | ETH Zürich 7
Global average levelized cost of electricity generation(USD2016/kWh)
Note:For 2010 – 2017 based on IRENA data; wind data for earlier years based oninformation from BNEF and Lawrence Berkeley National Laboratory. Biomass datafrom earlier years referring to wooden biomass from Sweden, as provided byJunginger et al. 2006, Energy Policy 34, 4024-4041. Fossil-fuel based range fromIrena (2018), “Renewable Power Generation Costs in 2017”
0
5
10
15
20
25
30
35
40
45
1980 1985 1990 1995 2000 2005 2010 2015 2020
Fossil-fuel based electricity cost range
Solar PVWind
Sources:https://www.bloomberg.com/news/articles/2017-10-03/saudi-arabia-gets-cheapest-ever-bids-for-solar-power-in-auctionhttps://www.pv-magazine.com/2018/02/20/germanys-auction-for-large-scale-solar-bids-below-e0-04-kwh-for-the-first-time/https://www.greentechmedia.com/articles/read/mexican-solar-record-low-price-latin-america#gs.FVwCkgI
Renewable energy competitive in many places
Introduction | Finance & energy transition | Dynamics | Conclusion
|Florian Egli | Energy Politics Group | ETH Zürich
Agenda
8
Dynamics of financing conditions3
Finance and the energy transition2
Introduction1
Research question, method and data3.1
Results3.2
Conclusion4
|Florian Egli | Energy Politics Group | ETH Zürich 9
Investment decision
Source: Polzin, F., Egli F., Steffen B., and Schmidt T.S. (2019). How Do Policies Mobilize Private Finance for Renewable Energy?—A Systematic Review with an Investor Perspective. Applied Energy (236), 1249–68.
Introduction | Finance & energy transition | Dynamics | Conclusion
|Florian Egli | Energy Politics Group | ETH Zürich 10
Project finance
96%
88%
50%
22%
50%
94%
78%
100%
4%
12%
Solar PV
Windoffshore
Windonshore
6%Gas
Hard coal
Lignite
100%
Project finance Corporate finance
Feed
-in ta
riff
Mer
chan
t
German power generation projects 2010–2015
96%
88%
50%
22%
50%
94%
78%
100%
Gas
4%
Windoffshore
Windonshore
Solar PV
12%
Hard coal
6%
Lignite
100%
Project finance Corporate finance
Feed
-in ta
riff
Mer
chan
t
German power generation projects 2010–2015
Source: Steffen, B. (2018), The importance of project finance for renewable energy projects, Energy Economics (69), 280–294.
Project finance in practice
Introduction | Finance & energy transition | Dynamics | Conclusion
Project finance definition
Jargon: Sponsor realises project, lender provides financing
Project = separate legal and commercial entity (SPV)
Off-balance sheet Non-recourse; i.e., lender can only
access project asset and cash flows
The financing conditions are project-specific
|Florian Egli | Energy Politics Group | ETH Zürich 11
NPV and the role of risk
y0
Cos
t Time
Rev
enue
s
y1 y2 y3 y4 y5
Cash-flow (nominal)
Investment costs (upfront)
Cash-flow (real)
y0
y1
y2
y3
y4
y5NPV
( )∑= +
+=n
tt
t
rcashflowinvestmentNPV
10 1
r = cost of capitalt = year of cash-flown = expected lifetime of investment
Introduction | Finance & energy transition | Dynamics | Conclusion
|Florian Egli | Energy Politics Group | ETH Zürich 12
Components of the cost of capital
KE = cost of equityKD = cost of equityT = tax rate
r (1 )E D
E DK K T
V V= + −
E = equityD = debtV = project volume
Higher risks increase the cost of capital in several ways
- Increasing cost of debt and equity- Decreasing leverage (i.e., capital structure)- Other financial indicators (e.g., loan tenor)
Introduction | Finance & energy transition | Dynamics | Conclusion
|Florian Egli | Energy Politics Group | ETH Zürich 13
For renewables, cost of capital particularly important
Note: Assumes 5% cost of debt, 10% cost of equity, European fuel costs. Fossil fuel based is the average of hard coal, natural gas and diesel.
Renewables w/ high upfront investment… …hence LCOE are sensitive to WACC
17%
18%
3%
15%
15%
56%
58%
85%
12%
8%Avr fossil fuel-based power
Wind turbines(onshore)
4%
SolarPhotovoltaic
9%
CAPEXCost of equityOPEX (O&M, fuel)Cost of debt
4%0%
0%
100%
27%
73% 56%
44%
8%
56%
135
105
44%
12%
81
59
Financing costsCAPEX & OPEX
LCOE $/MWh (example solar PV)
WACC
Percentage of LCOE
Introduction | Finance & energy transition | Dynamics | Conclusion
|Florian Egli | Energy Politics Group | ETH Zürich
Agenda
14
Dynamics of financing conditions3
Finance and the energy transition2
Introduction1
Research question, method and data3.1
Results3.2
Conclusion4
|Florian Egli | Energy Politics Group | ETH Zürich
Renewable energy (RE) cost dynamics Detailed understanding on renewable
energy technology cost reductions,large ‘experience curve’ literature(e.g., Nemet 2006; Ferioli et al. 2009)
Role of financing dynamics of RE cost Conceptual studies on drivers impacting
RE investment decisions(e.g., Wüstenhagen & Menichetti 2012)
Model-based studies on impact of financing conditions on technology costs (e.g., Schmidt 2014; Hirth & Steckel, 2016)
1. How and why did solar PV and wind onshore financing conditions in DE change over time?
2. What is the effect of these changes on technology costs?
15
Research adds to experience curve & RE financing literatures
Our research questionsPrevious literature
Challenges:- Scarce data, as financial details of
project finance deals not disclosed- For “why” part: Interest rate levels
affected by multitude of drivers
Introduction | Finance & energy transition | Dynamics | Conclusion
|Florian Egli | Energy Politics Group | ETH Zürich 16
We follow a mixed-method approach in four steps
Descriptive: Elicitation and mapping of project finance data Cost of equity, cost of debt/debt margin Leverage, loan tenor, debt service coverage ratio
Qualitative: Investor interviews to identify drivers for changes Semi-structured interviews, grounded theory-type coding of arguments
Quantitative: Regression analysis for experience curves Various specifications of dependent and independent variables
Model-based: Split-up of LCOE into technology cost effects Calibration of levelized cost of electricity (LCOE) in different settings
1
2
3
4
Introduction | Finance & energy transition | Dynamics | Conclusion
|Florian Egli | Energy Politics Group | ETH Zürich
Deployment history (2000 – 2016)‒ Most solar deployed in 13 of 17 years‒ Most wind deployed in 8 of 17 years
Policy regime ‒ Electricity market liberalized since 1998 and investments
largely private‒ Landmark feed-in tariff in since 2000
Project finance Project-specific financing structures predominant for solar
and wind
17
Case selection – why Germany?
Best suited to study financing dynamics
Introduction | Finance & energy transition | Dynamics | Conclusion
|Florian Egli | Energy Politics Group | ETH Zürich 18
Data: Interview sample
IDInterview type
Current organisation Current position
RET investment experience since
1 Structured Debt provider Head of Division Energy & Utilities 20062 Structured Debt provider Vice President 19903 Structured Debt provider Associate Director Project Finance & Capital Advisory 20114 Structured Debt provider Associate Director Infrastructure & Power Project Finance 20095 Structured Debt provider Executive Director Project Finance Renewable Energies 19976 Structured Debt provider Associate Director Global Infrastructure Debt 20137 Structured Debt provider Head Renewable Energies 19918 Structured Debt provider Project Finance Analyst 20079 Structured Debt provider Vice President Corporates & Small Business Project Finance 2007
10 Structured Debt provider Director Structured Finance Power & Renewables 200711 Structured Debt provider Director Structured Finance Utilities, Power & Renewables 200712 Structured Debt provider Senior Manager Structured Finance Renewable Energy 199913 Structured Debt provider Director Project & Structured Finance Utilities, Power, Ren. 200714 Structured Debt provider Director Corporate Strategy 199915 Structured Debt provider Head of Renewable Energies 199516 Structured Debt provider Head of Project Finance Origination Renewable Energies 201017 Structured Debt provider Managing Director Project & Acquisition Finance 200618 Structured Equity provider Head Risk Advisory 200519 Structured Equity provider CEO 200820 Structured Equity provider Founder and CEO 201321 Structured Equity provider Principal 201322 Structured Equity provider Partner 200923 Structured Equity provider Director Infrastructure Equity Investment Team 200624 Structured Equity provider Vice President Renewables 201525 Structured Equity provider CIO 201626 Structured Equity provider CEO 201627 Structured Equity provider Associate Director Energy & Cleantech 200628 Structured Equity provider Associate 200029 Structured Public actor Head Energy Services 200630 Structured Public actor Deputy Head Energy Management 201531 Structured Public actor CEO 201132 Structured Public actor Head Portfolio and Asset Management Renewable Energies 201033 Structured Public actor Vice President Origination and Structuring 201234 Exploratory Equity provider Founding Partner 200035 Exploratory Equity provider Investments Director 200636 Exploratory Equity provider Head Risk Advisory 200537 Exploratory Equity provider Partner 200938 Exploratory Equity provider Principal 201339 Exploratory Other Head Hybrid Power Solutions (former researcher) 200640 Exploratory Public actor Senior Investment Manager 200741 Exploratory Public actor Economist 2003
Exploratory interviews based on existing contacts
Theoretical interview sampling1. Publicly available addresses of
senior investment managers (BNEF)
2. Professional network (esp. via Allianz Climate Solutions)
3. Snowball sampling
17 private debt providers (13 commercial banks, 4 private investment banks)
16 private equity providers 7 public actors
(4 utilities that invested in RE, 3 public investment banks)
1 former researcher
Sampling
Sample
Introduction | Finance & energy transition | Dynamics | Conclusion
|Florian Egli | Energy Politics Group | ETH Zürich 19
Data: Sample coverage
Project sample coverage
Capacity sample coverage
Investment sample coverage
42%
71%
19%
51%
15% 20%
58%
29%
81%
49%
85% 80%
Solar PV Wind onshore Solar PV Wind onshore Solar PV Wind onshore
100%
Sample coverage Rest
Introduction | Finance & energy transition | Dynamics | Conclusion
Source: Egli et al. (2018), cf. p.1.
|Florian Egli | Energy Politics Group | ETH Zürich 20
Step 1: The data
0
5
10
15
20152010 20202000 2005 20102005 202020152000
CoCf debt
Solar PV Wind onshore
Introduction | Finance & energy transition | Dynamics | Conclusion
Source: Egli et al. (2018), cf. p.1.
|Florian Egli | Energy Politics Group | ETH Zürich 21
Step 1: The data (other financial indicators)
8
10
12
14
16
18
20
22
201520102000 2005 2020
eas
0.9
1.0
1.1
1.2
1.3
1.4
1.5
2000 2005 20152010 202020102005 20152000
0
0
0
0
0
2020
65
70
75
80
85
90
95
100
2015201020052000 2020
%
Leverage
Debt service coverage ratio
Year
Year
Wind onshore
d
Introduction | Finance & energy transition | Dynamics | Conclusion
Source: Egli et al. (2018), cf. p.1.
|Florian Egli | Energy Politics Group | ETH Zürich 22
Step 1: The dynamics
After-tax CoC (1 )E D
E DK K T
V V= + −
Solar PV Wind onshore
2.3
2.2
2.5
1.20.6
2.8
6
4
2
0
1.6
-69%5.1
0.9
Cost of debtCost of equity
2.1
1.4
2.31.1 1.0
2.4
0
1
2
3
4
5
6
4.5
1.9
0.9
-58%
Ø 2000 - 05 2017change
Introduction | Finance & energy transition | Dynamics | Conclusion
Source: Egli et al. (2018), cf. p.1.
|Florian Egli | Energy Politics Group | ETH Zürich 23
Step 2: The drivers
Economy
Renewable energy sector
Renewable energy
financing industry
Drivers of changes in financing conditions
Capital markets: Low-cost liquidity, few investment alternatives, low return expectations
Banks: Low-cost refinancing, low bank fees, preference for project finance
Availability of performance data: Accumulated operation experience of RET assets
Technology reliability: Proven track record of technology, low default rates of projects
Support policies: Regulatory environment, e.g. introduction of exposure to market risks
Learning by doing: In-house RET knowledge, better risk assessment and due diligence processes
Investment ecosystem: Standardised investment structures, frame contracts, partner networks
Market entry of investors: New investor types (e.g., large banks, insurers, pension funds), increasing investor competition
Level
Drivers specific to RET deployment and financing
Drivers related to general economic development
control for
estimate
Introduction | Finance & energy transition | Dynamics | Conclusion
Source: Egli et al. (2018), cf. p.1.
|Florian Egli | Energy Politics Group | ETH Zürich 24
Step 3: Identifying an experience effect
0.1
1.0
10.0
1 100 10,000
Wind onshore
0.1
1.0
10.0
1 100 10,000
Deb
t mar
gin
(%)
Solar PV
ER = 11 ± 8%ER = 11 ± 7%
Identification: 1
00
( ) ( )b
tt
IDebtMARGIN I DebtMARGIN II
−
=
Cumulative world investment ($) Cumulative world investment ($)
Introduction | Finance & energy transition | Dynamics | Conclusion
Source: Egli et al. (2018), cf. p.1.
|Florian Egli | Energy Politics Group | ETH Zürich 25
But…
0
1
2
3
4
5
6
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Year
%
Yield on 10 year German government bond (in %)
Introduction | Finance & energy transition | Dynamics | Conclusion
|Florian Egli | Energy Politics Group | ETH Zürich 26
Step 3: Experience and financial crisis
2000 2005 2010 2015 2020
5
6
1
2
3
4
0
5.3%
2.5%
0.3%
2.1%
1.0%1.1%Bo
nd yi
eld
orm
argi
n(%
)
Year
Solar PV debt marginWind onshore debt marginGeneral interest rate level(10-year German government bond)
Introduction | Finance & energy transition | Dynamics | Conclusion
Source: Egli et al. (2018), cf. p.1.
|Florian Egli | Energy Politics Group | ETH Zürich
Financing expenditure of total LCOE
The change in financing expenditure
The channels contributing to the change
27
Step 4: Quantifying the effect on LCOE
, , 0i iit it CoC r it CoCLCOE LCOEδ = == −
, 1 , 2i i t i tδ δ= =∆ = −
EXP INT CAPEXi i i i∆ = ∆ + ∆ + ∆
Introduction | Finance & energy transition | Dynamics | Conclusion
Source: Egli et al. (2018), cf. p.1.
|Florian Egli | Energy Politics Group | ETH Zürich 28
Step 4: Channels of improved financing costs
313
187
8
0
100
200
300
400
500
LCO
E (U
S$ M
Wh
)
59%
2017
67
59
2000-2005
500
Change
36%4%
1%
ØØ
41% Change in
financing cost
54
85
7
28
0
20
40
60
80
100
120
($
)
60%
2017
62
2000-2005
113
Change
16%20%
4%
40% Change in
financing cost
General interest rate effectExperience effect
esLower capital expenditures
Change in financing cost from
Solar PV Wind onshore
Introduction | Finance & energy transition | Dynamics | Conclusion
Source: Egli et al. (2018), cf. p.1.
|Florian Egli | Energy Politics Group | ETH Zürich
Large effect of financing conditions on renewable energy cost empirically established – to be considered in changing interest rate environment: Future work on this under way
Experience effect qualitatively and quantitatively established – “co-benefit” of deployment policies for immature technologies
More work needed to - investigate other countries and technologies (differences)- reduce uncertainty on size of experience effect- understand learning mechanisms- understand risk perceptions in renewable asset financing
29
Conclusion
Introduction | Finance & energy transition | Dynamics | Conclusion
|Florian Egli | Energy Politics Group | ETH Zürich 30
Thank you very much!@ETH_EPG | @floegli