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Financing Considerations for Renewables and Energy Efficiency Projects

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.

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Financing Considerations for Renewables and Energy Efficiency Projects

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  1. 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

  2. FINANCING RISKS • Energy Efficiency Projects • Renewable Energy Projects

  3. RENEWABLE ENERGY = ENERGY EFFICIENCY The cleanest energy Is the energy not consumed (saved) And which costs less

  4. 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

  5. TOU Schedule

  6. Why the Consumer cost will be higher Customer Load Profile Savings Loss

  7. ENERGY EFFICIENCY SOLUTION THERMAL ENERGY STORAGE: - Ice at night and chilled water during the day

  8. Managed Load Profile Current Load Profile Blue: Thermal Red: Pure Electricity Blue: Thermal Red: Pure Electricity Energy Management

  9. 4,145,937 Indicative Annual Energy Savings

  10. 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?

  11. FINANCING ISSUES FOR ENERGY EFFICIENCY PROJECT Savings BANK FINANCING Old consumption “Physical” savings Financial savings New consumption • Can only be guaranteed either by: • Regulatory order • Long-term power sales contract May be guaranteed by technology providers

  12. FINANCING ISSUES FOR RE PROJECTS • Diesel versus solar for an isolated grid

  13. CASHFLOW OF SOLAR VERSUS DIESEL > NPVSOLAR NPVDIESEL COST TIME

  14. CASHFLOW OF SOLAR AND PROJECT FINANCE The challenge of project finance for solar… …is to move this lump here… COST …to here. TIME

  15. …will be sufficient to cover the amortization of the financing. Savings SOURCE OF REVENUE FOR PROJECT FINANCE Theoretically, the financing can be done if… …the savings as the source of revenue…. COST TIME

  16. 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… COST …go down and therefore reduce or undermine the expected savings. TIME

  17. This type of financing… THE AVAILABILITY PROJECT FINANCE Project finance for ordinary IPP and grid-based projects have tenors of 12-15 years. COST ..will require much longer tenors. TIME

  18. MARKET MECHANISMS AVAILABLE • Ability to monetize desirability of effects of RE e.d. carbon credits. Effect Putting less stress on the revenue and tenor of the financing COST TIME

  19. 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!

  20. TO SUMMARIZE GOVERNMENT -- Environmental Policy -- Competition policy REGULATOR -- Tariffs -- Market power DISTRIBUTOR -- Buy-and-sell -- Pass through GENERATOR -- Competition END CUSTOMER For EEs, Financing terms Will depend on regulatory risks For REs, Financing terms Will depend on cashflow risks FINANCIAL MARKETS -- Financing efficiency i.e. breadth and depth -- Settlements systems to minimize leakage Financial Flow Physical Flow

  21. 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

  22. THANK YOU

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