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