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
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
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).
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 [email protected]
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.
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