Commercial Development of Grid-connected and Off-grid Small Hydro Schemes

1. Commercial Development ofGrid-connected and Off-gridSmall Hydro Schemes Jayantha Nagendran Senior Vice President (Project Management) DFCC Bank, Sri Lanka Energy Week, 6-8 March 2006 The World Bank, Washington, D.C.

2. Presentation Outline • Introduction • Policy • Regulation • Design • Implementation • Financing • Sustainability • Results Energy Week 2006

3. Sri Lanka • Island nation; 65,600 sq km; 20 m population • State owned, vertically integrated electricity utility • Electricity demand growing at about 8% p.a. • Access to grid: presently 70% of households The WB & GEF-assisted Renewable Energy Program: • ESD Project (1997-2002) … completed • RERED Project (2002-2007) … on-going Energy Week 2006

4. Business Model • Demand driven, market based approach • Create an enabling environment: • Address information, institutional, legal/regulatory and financial barriers in an integrated manner • Loans on standard commercial criteria • ‘Smart subsidies’ for off-grid projects • Technical assistance and capacity building • Program management by an Administrative Unit set up within a private development bank Energy Week 2006

5. Policy • Private investments in the power sector were encouraged (mid-1990s) to address: • Lack of public sector investments • Growth in demand and impending power crisis • Inability of the utility to develop small hydros • Utility willing to buy energy from small hydros consistent with its least cost generation plan • Off-grid solutions to complement the grid or as ‘pre-electrification’ measures • Policy documents: Rural Electrification (2002), Electricity Reforms (2002), PUC (2002), Renewable Energy (under prep) Energy Week 2006

6. Regulation: Grid-connected Mini Hydros (GCMH) • Standard Small Power Purchase Agreement (SPPA) signed with the utility for renewable energy plants up to 10MW: • Transaction costs minimised • Tariff determined on commercial principles (avoided cost) and announced each year in advance • Safety net (floor price: 90% of first tariff) • Generous tenure (15 yrs, > payback period) • Grid interconnection standards developed through technical assistance Energy Week 2006

7. Regulation: Off-grid Village Hydros (OGVH) • Light handed regulation in lieu of licence • Special arrangements developed by Administrative Unit • No objection letters from local or central government agencies: land, water, forestry etc • Central Environmental Authority clearance • Registration of Electricity Consumer Society (ECS) • Compliance with technical standards (defined by Project) • All consumers are members of ECS and pay ‘membership fees’; no ‘sale’ of electricity Energy Week 2006

8. Design: GCMH • Run of the river schemes, up to 10 MW • Built, owned and operated by private commercial entities • Developer identifies site; utility issues time bound Letter of Intent after evaluation • Standard Small Power Purchase Agreement (SPPA) and Tariff (SPPT) for renewable energy plants up to 10 MW • Loans on market terms, based on independent credit assessment and access to long-term funds Energy Week 2006

9. Design: OGVH • Run of the river schemes providing 230V AC power through an independent mini grid: a typical 10kW scheme serves 40 HH within a 2km radius • Built, owned and operated by the community through an ECS • Technical specifications defined by Project • Technical assistance and grant through GEF • Loans on market terms, based on independent credit assessment and access to long-term funds Energy Week 2006

10. Implementation: GCMH (1/2) • Non-negotiable SPPA and tariff arrangements • A critical success factor … but • Disputes on tariff computation (no regulator) • Interventions by Project: independent review; TA for a new policy framework • Industry association (GCSPDA) an effective watchdog • A ‘devt bank + developer joint venture’ pioneered the first ever GCMH … even before WB assistance • Vision … saw business potential • Capacity and determination to overcome obstacles • Demonstration effect … others followed Energy Week 2006

11. Implementation: GCMH (2/2) • Local knowledge • Reliable historical data on rainfall • Local engineering capability avoided expensive EPC/turnkey contracts • Developer includes ‘technocrats’ in the team to manage projects, who receive an equity stake based on results • Project cost typically USD 1.0-1.1 m per MW • Commercial approach • Developer identifies and secures site (LOI) • Developer obtains all required approvals and signs SPPA • Developer negotiates financing • No subsidies, no special concessions Energy Week 2006

12. Implementation: OGVH (1/3) • Awareness creation • OGVH potential assessment survey • Project preparation consultant responsible for • Site identification • Technical feasibility • Socio-economic analysis • Social mobilisation and society (ECS) formation • Business plan preparation • Statutory approvals / no objections • Bank loan negotiation • Assistance in procurement, construction • Training of ECS personnel Energy Week 2006

13. Implementation: OGVH (2/3) • Equity stake by consumers: labour and cash • Compliance with OGVH technical standards • Liasion with a local testing facility (NERDC) for certifying turbines and IGCs (recent development) • Regular stakeholder consultations • Needs based TA and capacity building • Project preparation consultants (engg design, social) • Suppliers/manufacturers (quality) • ECSs (O&M, bookkeeping, general management) • Productive applications by day Energy Week 2006

14. Implementation: OGVH (3/3) • Management of ECSs • Model constitution, org structure, bookkeeping • Participatory management, incl tariff setting • Consumer voice through Federation of ECSs (FECS) • Consumer protection • Clarify stakeholder roles and responsibilities • Service and warranty arrangements • Complaint investigation scheme • Flexible management • Learn and adapt as you go • Tighten the screws gradually as the industry matures Energy Week 2006

15. Financing: GCMH (1/2) • Development banks led the way • Familiar with term lending for greenfield projects • Saw business opportunity and national interests • Innovations in managing credit risk • Syndicate large loans to mitigate concentration risk • Secure cash flows through an Escrow Account • Schedule loan amortisation by season (rainfall = cash flow) • Be able to take over and transfer the project as a going concern: - Mortgage of project assets and shares - Custody of SPPA and all licences, rights etc Energy Week 2006

16. Financing: GCMH (2/2) • Negotiated on-lending terms: Use competition to drive down financing costs • Six banks now competing for business • Interest rates: AWDR + 3-5 % • Debt:Equity around 60:40 • Tenure: 6-8 yrs including 1-2 yrs grace • Access to long-term funds through WB credit line: Participating banks receive 80% refinance on loans disbursed at the 6-month Average Weighted Deposit Rate (AWDR) Energy Week 2006

17. Financing: OGVH (1/2) • No wilful defaulters … but plant performance determines credit recovery • Loan secured on project assets and personal guarantees … only a moral obligation with no practical collateral value • Banks use OGVH as an entry point to provide other financial services • Provincial Councils provide supplementary subsidies • Avg cost USD 1,600-2,000 / kW excluding project preparation fees Energy Week 2006

18. Financing: OGVH (2/2) • Typical financing plan: Equity (cash + labour) 20-25% Commercial loan 40-50% GEF grant 20-25% Provincial Council subsidy 20-25% • Negotiated on-lending terms • Interest rates: AWDR + 5-8 % p.a. • Tenure: 5-6 years • WB credit line provided access to long-term debt capital for banks (80% refinance at 6-mth AWDR) Energy Week 2006

19. Sustainability: GCMH • Standardised arrangements minimise barriers to entry • Rule based tariff • Credibility of utility in honouring SPPA • Government facilitates a conducive policy environment, but with no role in operations • Absorptive capacity of grid substations • Utility’s system stability issues as % of non-dispatchable generators increase • Maintain a win-win situation for developer, utility and banks Energy Week 2006

20. Sustainability: OGVH • Technical standards (safety, reliability, longevity) • Capacity building: developers, suppliers, ECSs • Demand driven … with equity contribution • Consumer protection • Cofinancing grant for off grid projects • Transparent, measurable and output based • Govt subsidy funds complement GEF grant • Mainstream credit delivery: a viable business with opportunities to cross sell other financial products • Commitment and involvement of Provincial Councils Energy Week 2006

21. Results: 31 Dec 2005 (1/2) • GCMH: • 79MW through 35 plants completed • Another 67MW through 22 plants under construction • OGVH: • 100 schemes (1,011 kW) serving 4,587 homes completed • Another 47 OGVH schemes under construction • 50 verified productive applications using off-grid electricity; more being set up • Solar home systems: • 83,820 homes electrified • 600+ verified productive applications (mostly shops) Energy Week 2006

22. Results: 31 Dec 2005 (2/2) • Private commercial financing: • 2 development banks • 5 commercial banks • 2 leasing cos • an MFI • ... and more participating indirectly • Loans over USD 75 m disbursed • Rs 2 billion (USD 20 m) Renewable Energy Support Bond to be issued in 2006 • Large pipeline of projects … success breeds success Energy Week 2006

23. Contact us RERED Administrative Unit DFCC Bank 73/5, Galle Road, Colombo 3 Sri Lanka www.energyservices.lk Energy Week 2006