Cost of capital for onshore wind in EU

Cost of Capital for Onshore Wind in EU

Webinar Leonardo ENERGY & Ecofys

David de Jager

11/02/2016

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Agenda

11/02/2016 David de Jager

Risks, Finance and Policies

DiaCore: Cost of capital for onshore wind in Europe

Reducing cost of capital

Conclusion

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Agenda





Conclusions

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Risks, finance and policies

Planning Construction Operation


Baseline rate (country risks)

Social risks

Administrative risks

Financing risks

Technical & management risks

Grid access

Policy design risks

Market & regulatory risks

Sudden policy change risks

Finance

Policies

Risk

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0%

20%

40%

60%

80%

100%

Technology costs Taxes Finance cost Total

Breakdown of levelised cost of onshore wind (investor perspective, non-recourse finance)

CAPEX OPEX Tax Interest Risk premium equity

Finance costs can be significant


70-80 €/MWh

Discount rate of 15% vs 7.5%

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Project finance: Key financial parameters

> DEVEX, CAPEX, OPEX and decommissioning cost

> TIME (development, construction, debt, fiscal, etc.)

> Debt / Equity

– Finance structure (leverage, senior/junior debt, mezzanine, linear/annuity)

– Interest / discount rates

– Terms

– Debt Service Coverage Ratio (DSCR): affects debt/equity ratio

> Taxes

– Tax structure

– Tax rate(s)

– Depreciation

> Income

– Power purchase agreement

– RE support scheme


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-250

-200

-150

-100

-50

0

50

100

150

200

250

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34

DEVEX CAPEX OPEX Decommissiong Energy sales Interest Repayment Tax

Cash flow of a 500 MW offshore wind energy project(investor perspective, in M€)


Shape of free cash flow determines the overall net present value and internal rate of return

Develo

pm

ent

Decom

mis

sio

nin

g

Operation

FID

Constr

uction

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Free cash flow


-300

-200

-100

0

100

200

300

0 5 10 15 20 25 30 35

Free cash flow - nominal vs discounted (@ 15%)

Free cash flow (investor) Discounted Free cash flow (investor)

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-300

-200

-100

0

100

200

300

0 5 10 15 20 25 30 35

Free cash flow - nominal vs discounted (@ 15%)

Free cash flow (investor) Discounted Free cash flow (investor)

Free cash flow


Risks early in the project lifecycle have higher impact on net present value

RISK

RISK

RISK

RISK

RISK

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Agenda





Conclusion

© ECOFYS | | 11/02/2016 David de Jager

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DiaCore subtask: Enhancing RES investment

> Main objectives:

– Examine the role of risk and its influence on investments in the RES

sector

– Compare the cost of capital and show why it matters

– Provide solutions in order to enhance investments in the RES sector

> Scope of research:

– What is the range between cost of capital in the 28 EU MS for wind

onshore projects and why is there such a range?

– Which risks to wind onshore projects have which impact on RES

investments?

– How do changes in policy design affect costs of capital?


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Methodology


Model

•Estimation of costs of capital & ranking of wind onshore-investments risks

•Comprehensive literature study

•Application of RE-frame barriers database (more than 900 listed barriers)

•Draft of 28 EU MS country profiles

Evaluation

•Interviews with financial experts (more than 80 interviews in 26 MS)

•Evaluation of underlying assumptions of model & estimated parameters

•Adaptation of model based on input from interviews

Results

•Aggregation of EU-wide data

•Presentation of results and feedback from more than 40 national experts

•Preparation of deliverables: Country profiles, policy toolbox & final report

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Perceived risks - ranking


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Perceived risks(based on interviews for onshore wind)


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Regional grouping of risk-perception


North-West: AT, BE, DE, DK, FI, FR, NL, SE, UK

East: BG, CZ, EE, HU, LT, LV, PL, RO, SI, SK

South: CY, ES, GR, IT, PT

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Cost of Equity(approximation based on interviews for onshore wind)


Cost of Equity across the EU-28

(interview results for onshore wind)

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Cost of Debt(approximation based on interviews for onshore wind)


Cost of Debt across the EU-28


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Debt/Equity Ratios(approximation based on interviews for onshore wind)


Debt/Equity ratio across the EU-28


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WACC estimations onshore wind(approximation based on interviews)


𝑾𝑨𝑪𝑪 =𝑬

𝑬+𝑫∗ 𝑹𝒆 +

𝑫

𝑬+𝑫∗ 𝑹𝒅 ∗ (𝟏 − 𝒕𝒂𝒙)

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WACC estimations and support schemes for onshore wind


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Conclusions DiaCore

> Weighted Average Cost of Capital (WACC) significantly varies across EU

Member States between 3.5% (Germany) and 12% (Greece) for onshore

wind projects in 2014

– Cost of equity: 6% (Germany) and more than 15% (in Estonia, Greece,

Latvia, Lithuania, Romania and Slovenia)

– Cost of debt: 1.8% (Germany) and 12.6% (Greece)

– Debt/equity: 80%/20% to 50%/50%

> High cost of capital lead to increasing wind onshore deployment costs

> Across all EU Member States, the risks induced by policy design is perceived

as most pressing


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Agenda





Conclusion

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‘Triple A’ policy ingredients per risk category

Planning Construction Operation


Baseline rate (country risks)

Social risks


Financing risks


Grid access

Policy design risks

Market & regulatory risks


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Country risk


> Political stability

> Societal stability (e.g. strikes)

> Structure of governance

> Legal system

> Corruption

> Exchange rate fluctuations

> Economic situation and development

• Generic conditions applicable

to all investments

• Differ per Member State

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Country risk


> Political stability

> Societal stability (e.g. strikes)

> Structure of governance

> Legal system

> Corruption

> Exchange rate fluctuations

> Economic situation and development

• Role of RE in value creation and

long-term economic development

• Role of RE in reducing country risk

Policy ingredients

• Promote strategic investment

• Link investment to employment

creation and capacity building

• Supplier development

programmes

• Local Content

Requirements (LCRs)

• Develop industrial clusters

• Improve cooperation between

public and private R&D

• Enhance know-how through

education & training

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Social acceptance risks

> Delay or cancellation of projects (NIMBY/NOPE)

> Higher DEVEX and longer development periods


Policy ingredients

• Stakeholder participation

• New/innovative democratic models

• (Partial/Initiated) Co-development by government

• Streamline administrative procedures, and manage them properly

• Enable or prescribe financial participation (e.g. crowdfunding)

• Facilitate citizen project ownership

• Address distributional impact of renewable energy support policies

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> Long and complex procedures increase project risk

– Spatial planning

– Environmental impact

– Health and Safety

– …


Policy ingredients

• Streamline and align administrative procedures, and manage

them properly

• Educate/train civil servants

• Prepare guidelines / best practices

• One-stop shops

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Financing risks

> During the project development phase the market, financial, economic

and/or policy circumstances might change

> How to ensure that projects are bankable and investable after the

development phase or at the moment of re-financing?


Policy ingredients

• Government or public/private investment funds and bank

• Catalyst

• Safety-net

• Loan guarantees

• Export credit facilities

• Align policy support with finance practices (e.g. frontloading,

banking/flexibility)

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> Risk of budget overruns for key financial parameters (DEVEX, CAPEX, OPEX)

> Risk of lower energy production

> Typically main responsibility of project developer


Policy ingredients

• Performance and risk databases for new/innovative technologies

• Guarantees / insurance (e.g. for drilling for geothermal energy)

© Ecofys

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Grid access risks

> No access to grid = no project return

> Grid access risks:

– Development phase: grid access procedure / timing

– Start of operation phase: risk of delays in grid connection

– Operation phase: reliability of operation, risk of curtailment


Policy ingredients

• Clear procedures and processes (governments/regulators/TSOs)

• Right to grid access

• Liabilities and compensation in case of delayed or interrupted

access, or curtailment

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Policy design risks

> Policy dependence of RE deployment is a risk factor

> Policy design affects project risk


Policy ingredients

• Reduce revenue risk by using contracts for difference instead of

fixed premium systems

• Flexibility / banking

• Reduce compliance risk by a careful tender design

• Increased predictability of policy influences on market

development (e.g. market restructuring)

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Market design and regulatory risks

> Market risks related to government energy strategy and power market

liberalisation


Policy ingredients

• Reduce the revenue risk by continued RES support in times of

moderately negative electricity prices

• Provide compensation for RES generators in case of grid related

curtailment of RES generation

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> The risk of any unexpected, unanticipated, short-term announced or sudden

changes of policies or policy design features.


Policy ingredients

• Don’t do it

• Design responsive yet predictable policy instruments

• Integrate RE policies into economic and industrial policy

frameworks

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Conclusion

Key features of Triple A policies for RE:

> Tailor-made, addressing key financial challenges of a particular

product/market combination and country

> Aligned to one another and embedded in a broader economic policy context

> If all countries would have the same renewable energy policy risk profile as

the best in class, EU Member States could reduce the policy costs for wind

onshore by more than 15%

> RE policies should result in a dynamic, responsive ‘lock-in’

into renewable energy

> The lock-in provides the investor certainty which will drive cost reductions

through innovations, learning, and economies of scale, and through lower

cost of capital


© ECOFYS | |

David de Jager

Principal Consultant

Ecofys Netherlands b.v.

E: [email protected]

I: www.ecofys.com

T: +31 30 6623388


www.diacore.eu

mailto:[email protected]

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Cost of capital for onshore wind in EU

Technology

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