Financial Assessment of Wind Project - USAID SARI/Energy ......Financial Assessment of Wind Project....

Financial Assessment of Wind Project

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Financial Assessment of Wind Project

Pramod Jain, Ph.D.Presented to:

DFCC Bank and RERED Consortia MembersJanuary 25– 27, 2011 | Colombo, Sri Lanka

Agenda What is financial assessment?

• Revenue• Capital costs• Operating costs

Financial statements and metrics What is the associated uncertainty?

• Project stages• Reduction in uncertainty

What are the financing options?• Organizational structure• Financing structure

Pramod Jain; Sept. 22, 2010

Module Objectives

Learning Objectives• Understand the components of financial model• Understand the components of revenue in a wind project• Understand the components of capital cost• Understand the components of recurring cost• Understand the financial performance metrics

Financial Assessment

Role of Financial Assessment in Wind Project

ProspectingWind Resource Assessment

PPAFinancing

EngineeringProcurementContracting

Construction Installation

Commissioning

Operations & Maintenance


Components of Financial Model

Deterministic Financial Model

Capital & Operating

Cost

PPA

Average Annual Energy Prod

Risk

Cost

Time

Others

PPA

Risk‐based Financial Model

Scenarios UncertaintyImpact on financial

performance


Revenue Sources

Sale of Electricity

PPA

Market

FiT

Net‐Meter

Sale of Environmental Attributes

• Negotiated• Long‐term

• Spot market• High volatility

Captive use

Mandated

Tax Benefits

Energy

Carbon CER

$

• Carbon credits• Renewable Energy Certificates

Energy PTC

Taxable IncomeTaxes

Tax >= PTC PTC

TE Partner

• Tax incentives tied to amount of energy produced

•Accelerated depreciation


Wind Project Flow of Cash

Wind Project

Developer’s Equity

Tax Investor Equity

Lender

Capital Investment

Cash Revenue

Taxable Revenue

Tax Credits

Op Ex, Princ+Int, Reserves

Op Ex, Int, Depr‐ ‐

Cash Distribution Tax Losses

Sale Price of Wind Energy in US

Source: P. Jain, Wind Energy Engineering, 2010

Range of Capital Costs & Recurring CostsRange, $/kW Reasons for variance

Capital Costs (Total Installed Cost)

$1,200 to $2,200Normal range: $1,800 to $2,100

India costs are: $1,200 to $1,500/kWUS costs are: $1,800 /kWEurope costs are: $2,000/kW

Shipping cost, Terrain, Insurance

Operations and maintenance

$20 to $50/kW annually

Normal: $40/KW

Duration of manufacturer warrantyRemoteness of site

Scenario 1 Capital Costs: Equipment, BOP, TransmissionCapital costs % of

TIC$ per KW

Equipment costsTurbines (excluding blades and

towers) 44.76 $895

Blades 10.48 $210

Towers 11.60 $232

Transportation 8.01 $160

Equipment total 74.85 $1,497

Balance of plant, contd. % of TIC

$ per KW

LaborFoundation 0.62 $12Erection 0.70 $14Electrical 1.02 $20Management/supervision 0.53 $11Misc. 3.80 $76Labor subtotal 6.67 $133

Development/other costsHV Sub/Interconnection

Materials 0.74 $15Labor 0.23 $5

Engineering 1.01 $20Legal services 0.55 $11Land easements 0.00 0Site certificate/permitting 0.26 $5Development/other subtotal 2.79 $56

Balance of plant total 25.15 $503

Balance of plant (BOP) % of TIC

$ per KW

MaterialsConstruction (concrete, rebar,

equip, roads and site prep)10.82 $216

Transformer 1.22 $24Electrical (drop cable, wire) 1.29 $26HV line extension 2.36 $47Materials subtotal 15.68 $314

Total Installed Cost (TIC) of $2,000/kW is used

Source: P. Jain, Wind Energy Engineering, 2010100% Owner Equity, no finance cost

Scenario 2, Capital Costs: Equipment, BOP, Financing CostCapital costs % of

TIC$ per KW

Equipment costsTurbines (excluding blades and

towers) 44.76 $895

Blades 10.48 $210

Towers 11.60 $232

Transportation 8.01 $160

Equipment total 74.85 $1,497

Balance of plant, contd. % of TIC

$ per KW

LaborFoundation 0.62 $12Erection 0.70 $14Electrical 1.02 $20Management/supervision 0.53 $11Misc. 3.80 $76Labor subtotal 6.67 $133

Balance of plant total 25.15 $400

Development/other costsFinancing fees 5.00 $100Development/Engineering 1.01 $20Legal services 0.55 $11Land easements 0.00 0Site certificate/permitting 0.26 $5Development/other subtotal 2.79 $136

Balance of plant (BOP) % of TIC

$ per KW

MaterialsConstruction (concrete, rebar,

equip, roads and site prep)10.82 $216

Transformer 1.22 $24Electrical (drop cable, wire) 1.29 $26

Materials subtotal 15.68 $277

Total Installed Cost (TIC) of $2,000/kW is used


Capital Cost of Wind Projects


Average total installed cost, based on 4GW of international wind projectsWind Power Monthly, 2010

Average total installed cost, and turbine cost in the US based on 6GW of wind projects. LBL.

Operating Costs: Labor & Materials/Services

Operations and maintenance costs

% of O&M

$ per KW

Labor

Personnel

Field salaries 14.3 2.86

Administrative 2.3 0.46

Management 5.7 1.14

Labor/personnel subtotal 22.3 4.47

Materials and services% of O&M $ per

KW

Vehicles 2.2 0.44

Site maint/misc. services 0.9 0.17

Fees, permits, licenses 0.4 0.09

Utilities 1.7 0.35

Insurance 16.6 3.33

Fuel (motor vehicle gasoline) 0.9 0.17Consumables/tools and misc.

supplies 5.6 1.13Replacement parts/equipment

/spare Parts Inventory 49.3 9.86

Materials and services subtotal 77.7 15.53

Total O&M cost 100.0 20.00

Total annual O&M cost of $20/kW is used


Relationships between Revenue, Capital Cost & O&M Costs

Higher hub height

PM Direct Drive Turbine Higher

costs

Higher revenue, Higher reliability

Longer-term warranty

Underground cables

Higher Revenue

Higher Cost Higher

costs

Higher revenue, Higher reliability

Higher costs

Higher reliability

Questions?

Questions?

Line item in income statement Values for year iAnnual revenue

R1 Revenue from selling electricity kWh produced multiplied by energy price in $/kWhR2 Revenue from production tax credits kWh produced multiplied by tax credit in $/kWh

R3 Revenue from renewable energy credits or carbon credits

kWh produced multiplied by price of REC or other credit in $/kWh

RA Total revenue R1+R2+R3Annual operating expenses

O1 Operations and maintenance kWh produced multiplied by scheduled maintenance charges $/kWh + annual reserve fund payment based on TIC

O2 Insurance Annual insurance charges O3 Leaseholder payments Payment usually based on percentage of revenueO4 Admin/financial/legal General and administrative chargesO5 Other expenses (transmission) kWh produced multiplied by transmission charge (if applicable)

OE Total operating expenses O1+O2+O3+O4+O5annual depreciation and interest

D1 Depreciation TIC multiplied by an annual depreciation scheduleD2 Interest Total outstanding loan multiplied by interest rateDA Total depreciation & interest D1+D2TI Annual taxable income RA – (OE + DA)TA Taxes TI* tax rateNIA Net income RA – (OE + DA + TA)

CF After tax cash flow NIA+D1‐Principal payment on debt

Income Statement


Balance Sheet

Balance sheet line items Values for year iCurrent assets

B1 Cash in bank Year‐end cash positionBA Total current assets B1

Fixed assetsFA1 Machinery and equipment Total installed cost of the project

FA2 Less accumulated depreciation Sum of depreciation claimed up to current year

FAA Total fixed assets FA1 – FA2Total assets FAA + B1Liabilities and equity

L1 Current liabilities Short‐term debtL2 Long term debt Long‐term debtLA Total liabilities L1 + L2

Owner’s equityC1 Invested capital Equity investment in project

C2 Retained earnings From income statementCA Total owner’s equity C1 + C2

Total liabilities + owner’s equity LA + CA


Financial Performance Parameters

Levelized Cost of Energy (LCOE) Industry standard

method of comparing cost of electrical energy

It is the value of energy that yields a zero NPV, while taking into account:

• Revenue• Operating

expenses• Total installed cost• Discount rate

Net Present Value (NPV) Sum of discounted net

after tax cash flow

Payback Period Simple payback:

Accumulated liquidity is zero. Misleading

Real payback period: Year when the sum of discounted liquidity is zero

Internal Rate of Return Discount factor that

yields zero NPVDebt Service Coverage Ratio (DSCR) Ratio of revenues to

loan payments. This ratio is calculated every year for the life of the loan. Minimum DSCR and average DSCR are computed


Implications of Debt Service Coverage Ratio

Common to have minimum DSCR in the first year of operation• This is because of ramp up of production, leading to lower revenue

Minimum DSCR limits the amount of debt • => higher equity requirement• => lower return

Tricks used:• Front load the PPA (through constant nominal payments)• Back load debt payments

Spreadsheet Model

Target IRR = 15% Minimum DSCR = 1.27 Target average DSCR = 1.34 Sensitivity analysis

• Impact on DSCR, IRR and other performance metrics

Risk and Uncertainty of Wind Projects

Revenue• Strength of grid: If there is a

fault in grid, wind goes offline. These interruptions add up

• Matching of production to load: If load is low, wind goes offline

• Weather and other events: Cyclones, wildfires, etc.

• Turbine repair: In remote locations, it may take weeks to get parts, equipment and manpower

• Delayed payments by utility Depending on the situation

revenue may be reduced by about 10%, or even higher

Cost• Installation in remote areas

(usually accounted):– Transportation of towers,

blades & equipment– Crane cost: 500 ton cranes

are expensive to import/transport/rent

– Transmission lines– Clearing of land,

constructing roads• Recurring costs (usually

not fully accounted):– Cost of insurance– Cost of O&M

Other Issues• Environmental issues:

Stopping of machines during migrating and breeding seasons

• Delay in projects due to land ownership issues

• Delay due to community opposition

• Delay due to other legal challenges

• All these delays can cause loss of revenue or deferred revenue


Organization Structure and Flow of Money

Alternate Organization Structures

Corporate structure Tax-equity & flip investor Debt leveraged


Sources of Investment

Corporate Tax-equity investor Equity investor Banks and other lenders Government funding agencies International development financing: ADB, World Bank, USTDA Export promotion agencies, e.g. USEXIM Vendor financing or arm of vendor (e.g. GE Capital)

• May be cheaper than others because of lower due diligence and interest in winning business

• May be easier to get BOP financing

Rate of Return for Alternative Finance StructuresCorporate Institutional

flipCash leveraged

Cost assumptionsHard cost $1,600 1600 1600Soft cost $125 $183 $215 Total installed cost $1,725 $1,783 $1,815 Tax investor after tax return10‐year Target IRR n/a 6.50% 9%20‐year IRR, Computed n/a 7.12% 9.29%Debt assumptionsInterest rate n/a n/a 6.70%Maturity 15 yearsDeveloper after tax return10‐year IRR 6.64% 0 9%20‐year IRR 10% 10.44% 30.58%

20‐year LCOE per kWh $0.06 $0.05 $0.05

Corporate structure: Utilities and other power producers

Institutional flip: Wind farm developer with an equity partner

Cash leveraged: Wind farm developer with equity partner and debt


Conclusions

Detailed financial analysis requires significant due diligence Fixed fee construction contracts and third party

maintenance contracts tied to production are strategies to minimize risk

Wind projects require a framework for risk management for:• Categorizing risk• Quantifying risk• Assessing impact of risk• Strategies for mitigating risk

Risk management has to be a ongoing task along with project management


Financial Assessment of Wind Project - USAID SARI/Energy ......Financial Assessment of Wind Project....

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