Public Private Partnerships, Business Models and

Financial Approaches for Municipal Energy Projectsby

Magdalena A K MuirAssociate Adjunct Research Scholar, Columbia Climate Center at Earth

Institute, Columbia University, New York City

Visiting Scholar, Center Carbon-free Power Integration and Mangone

Center for Marine Policy, University of Delaware

Research Associate, Arctic Institute of North America

Associate Professor, Aarhus University & Centre for Energy Technologies

Board Member, Climate, Coastal and Marine Union (EUCC)

A Fulbright Research Webinar, Presentation and Discussion

with Sustainable Cities International Energy Lab

February 25th, 2014

Webinar Presentation and Discussion

-Overview of Public Private Partnerships Business Models and Financial Approaches

- European Approaches

- Partnerships for Municipal Energy Projects

-Municipal Opportunities and Challenges

- Next Steps

Possible Partners and Actors

PPP Investment Commitments by Sector (2005-9)

PPP Investment Commitments by Type/Size (2005-9)

PPP Investor Commitments by Region (2005-9)

PPP Structure and Evaluation Process

Range of PPP Business Models

Example of Build Operate Transfer Model

More PPP Business Models

Overview of Public Private Partnerships and Debt/Equity

Financial Framework and Public/Private Incentives

15

Source: Vikram Kutaree –World Ban

European Public Private Partnerships, Business Models and Financing Approaches

Unique approaches in Europe for public private partnerships, given overarching role of EU and nature of infrastructure funding. One of approaches discussed below.

Following slides draw upon the C.R.E.A.M. Europe PPP Alliance Public Private Partnership Association

For further information, please see www.cream-europe.eu

26.02.2014

European MasterPPPlan Competitive Process

European MasterPPPlan Project Map

European MasterPPPlan Infrastructure Lifecycle

Management Platform

Project Finance Risk Matrix for PPPlan Contract

Risk Type Mitigation

Pre-completion

- Cost over-runs

- Delays

(a) Fixed price turnkey contracts

(b) Warranties / penalties / incentives

(c) Fixed project specification

(d) Strong contractors

Post-completion

- Revenue forecasts

- Revenue build-up

- Operating costs

- Management failure

(a) Committed supply contracts

(b) Committed off-take contracts

(c) Strong operators

(d) Performance guarantees

Technical

- Performance

- Environmental

- Safety

(a) Warranties

(b) Proven technologies

(c) Public consultation and approval

Financial

- Structure: debt/equity ratio, eg. 75/25

- Structure: return on capital

- Structure: risk / reward ratio

- Foreign exchange

- Interest rates

- Debt service cover

- Taxation

(a) Equitable ROE, ( eg. 15-20 %)

(b) Acceptable cover ratios ( e.g 1.5 -2.0)

(c) Escrow and reserve accounts

(d) Dividend constraints

(e) Loan syndication

(f) Insurance / financial derivatives

(g) Standby funding arrangements

Legal

- Regulatory framework?

- Concession law?

(a) Experienced lawyers.

(b) Clear, simple documents

Political

- Regime stability

- Force majeure aggt.

- Political intervention

(a) Clear regulatory regime

(b) Investment insurance

(c) IFI support

Master PPPlan Project Structure and Risks

SPV

Project

Company

Shareholders

Lenders /

Bondholders

Operator

Construction

Contractor

Granting

Authority

Services

Purchaser

Raw Material

Supplier

Shareholder’s Agreement Concessio

n Agreement

Purchase Agreement (e.g., housing purchase agreement)

Supply Agreement (e.g., cement supply agreement)

Construction Contracts

Operation & Maintenance Agreement (O&M)

Regulatory Risks

Regulatory and Performance Risks

Completion Risks

Performance Risks

FX Risks and Refinancing Risks

Political and Macroeconomic Risks

MasterPPPlan Business Model Structure

1. EU-wide, transparent PPP Procurement = Competitive Dialogue

Bidder 1

AwardedBidder

Bidder 2

Bidder 3

MasterPPPlan Procurement

2. L

ife C

yc

le C

os

ts

3. Project Finance

4. C

on

tra

ctu

al-

PP

P

PPP Bid Management

PPP Bid Management

PPP Bid Management

PPP Procurement Management

Refunding of Bidder Costs

Refunding of Bidder Costs

Integration of Transaction and Bidder Costsin the PPP Life Cycle Costs

PPP Transaction Costs

( )( )( )( )( )550

10

10

10

−×

×−=

PVLOG

PVPVLOGPC

MasterPPPlan Financing and Funding

Equity provided by

sponsorsMezzanine or Equity

provided by MasterPPPlan Funds

Debt

Project Financing

provided by banks / IFIs

Leverage fund

– MasterPPPlan funds attract money from long term investors (such as pension funds, banks, foundations).

– Inject equity or mezzanine finance in PPP projects

100

European Master PPPlan Project Agreements

Implementation AgreementConcession AgreementConstruction ContractOperations ContractMaintenance ContractRaw Materials Supply ContractSales Purchase ContractSpecial-Purpose Company DocumentsShare Subscription ContractsLoan AgreementsInter-creditor AgreementEscrow Account / Trustee ArrangementsInsurance Licences; Permits; Bills & Decrees

Municipal Energy Partnerships

Energy projects, energy infrastructure, and transportation projects have been most subject to partnerships.

Suitable energy projects could include:

Private generation projects with sales to utility or electricity market,

Building and/or operating electricity transmission and distribution systems,

Improving energy efficiency of municipal built environment and transportation.

Municipal fleet and buses use cleaner energy (electricity, natural gas, LNG, H2).

Business Model for Energy Projects

Municipal Opportunities and Challenges

Challenge: Municipal and local government may have less ownership, legislative or regulatory authority over energy resources and production than national governments. Therefore, it may be more difficult for them to negotiate and implement agreements.

Opportunity: Municipal governments may be more closely linked to markets, and more able to speak to or for stakeholders.

Scenario 1- Public Private Partnerships for Power Generation

These partnerships explored most extensively, and function within diverse governments, regulators and markets.

Depending on type of project, may be short, medium or long term investment.

Supports flexibility and competition within energy sector and markets, particularly for renewable energy and low carbon energy.

Power generation at municipal levels consistent with decentralized energy and smart grids.

Scenario 2 – Public Private Partnerships for Local Transmission and Distribution

Most similar to infrastructure investment.

Allows diverse investment, construction, operation and ownership approaches.

For long term investment and ownership, stability of governments, legal and regulatory structures very important.

Technology trends like CCS, decentralized energy and smart grids may require certain infrastructure or may render certain infrastructure obsolete.

Scenario 3 – Improving Carbon and Energy Efficiency of Municipal Built Environment

An early successful example of public private partnership involved private parties investing in energy efficiency improvements, being paid back by energy savings, and returning ownership of improvements after payback.

Integrating carbon and energy efficiencies is next stage, and increasing focus on leadership role of municipalities in low carbon construction, operation, and recycling of their buildings and infrastructure within territory.

TableSector Public Private

PartnershipBusiness Model Financial

Approach

Energy Generation

Private ownership of generation facilities

Power generatedsold to monopoly utility or power market.

Private or bank investment in projects, based on projected revenues over life of project (5 to 40+ years).

EnergyTransmission and Distribution

Privatized constructionand/or ownership

Paid to construct facilities, or invest in and own facilities.

Contract terms, or regulated rate of return for life of project (40+ years)

MunicipalBuildings- Energy Efficiency Improvements

Privateinvestment in public infrastructure

Private investment and ownership of improvements till payback occurs due to energy savings.

Contract with security provided by ownership of improvements till payback by transfer of energy savings.

Discussion of Next StepsFacilitated discussion by Ms. Stelzer of four possible areas of participatory research by Municipalities of Los Cabos, Durban and Zagreb and Dr, Muir in the framework of the SCI Energy Lab and under the auspices of the Fulbright Scholarship.

Participatory research options explored included:

1. Explore availability and suitability of different types of energy projects in various municipalities.

2.Consider appropriate partnerships, business models and financing for energy projects occurring in or with municipalities.

3. Consider advantages and opportunities for municipalities to facilitate and benefit from partnerships in the energy sector.

4. Develop recommended best practises for partnerships with and involving municipalities.

In discussion, there was the greatest interest in options 2, 3 and 4. All parties decided to work together to finalize next area of research, including possible joint case studies and report, and future webinar prior to August 2014.

Thank you for your attention and participation in discussion.

For further information or to provide additional feedback,

please contact:

Dr. Magdalena A K Muir at mamuir@ucalgary or

Bertine Stelzer, Program Officer, Sustainble Cities

International Energy Lab at Bstelzer@icsc.ca

This webinar and research supported by Fulbright Canada under the

Fulbright Canada- RBC Award; the Columbia Climate Center at the

Earth Institute, Columbia University; the Center for Carbon-free Power

Integration and the Mangone Center for Marine Policy in the College of

Earth, Ocean, and Environment, University of Delaware; and Aarhus

University Herning and the Center for Energy Technologies.