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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
RENEWABLE ENERGY = ENERGY EFFICIENCY
The cleanest energyIs the energy not consumed (saved)And which costs less
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
Why the Consumer cost will be higher
Customer Load ProfileSavings
Loss
ENERGY EFFICIENCY SOLUTION
THERMAL ENERGY STORAGE:- Ice at night and chilled water during the day
Energy Management
0
5,000
10,000
15,000
20,000
25,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
P er i od
SM E ner gy P r ofi le SM T her mal P r ofi le
Current Load Profile
Blue: Thermal Red: Pure Electricity
0
5,000
10,000
15,000
20,000
25,000
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
P er i od
SM E ner gy P r ofi le SM T her mal P r ofi le
Managed Load Profile
Blue: Thermal Red: Pure Electricity
Indicative Annual Energy Savings
In kWh Current System Proposed System
Energy
Peak
Off Peak
5,267,977
4,950,351
317,626
5,267,977
4,950,351
317,626
Thermal
Peak
Off Peak
9,783,387
9,193,509
589,877
5,637,450
3,891,160
1,746,290
Total
Peak
Off Peak
15,051,364
14,143,860
907,504
10.905,427
8,841,511
2,063,916
4,145,937
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
New consumption
Savings
Old consumption
BANK FINANCING
“Physical” savings Financial savings
May be guaranteed by technology providers
Can only be guaranteed either by:• Regulatory order• Long-term power sales contract
FINANCING ISSUES FOR RE PROJECTS
• Diesel versus solar for an isolated grid
TIME
COST
NPVSOLAR > NPVDIESEL
CASHFLOW OF SOLAR VERSUS DIESEL
TIME
COST
CASHFLOW OF SOLAR AND PROJECT FINANCE
The challenge of project finance for solar…
…is to move this lump here…
…to here.
TIME
COST
SOURCE OF REVENUE FOR PROJECT FINANCE
Theoretically, the financing can be done if…
Savings
…the savings as the source of revenue….
…will be sufficient to cover the amortization of the financing.
TIME
COST
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…
…go down and therefore reduce or undermine the expected savings.
TIME
COST
THE AVAILABILITY PROJECT FINANCE
Project finance for ordinary IPP and grid-based projects have tenors of 12-15 years.
This type of financing…
..will require much longer tenors.
TIME
COST
MARKET MECHANISMS AVAILABLE
• Ability to monetize desirability of effects of RE e.d. carbon credits.
Effect
Putting less stress on the revenueand tenor of the financing
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
GENERATOR-- Competition
DISTRIBUTOR-- Buy-and-sell-- Pass through
REGULATOR-- Tariffs-- Market power
END CUSTOMER
FINANCIAL MARKETS-- Financing efficiency i.e. breadth and depth-- Settlements systems to minimize leakage
GOVERNMENT-- Environmental Policy-- Competition policy
Physical FlowFinancial Flow
For REs, Financing termsWill depend on cashflow risks
For EEs, Financing termsWill depend on regulatory risks
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