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Financial Assessment of Wind Project
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Financial Assessment of Wind Project
Pramod Jain, Ph.D.Presented to:
DFCC Bank and RERED Consortia MembersJanuary 25– 27, 2011 | Colombo, Sri Lanka
Agenda What is financial assessment?
• Revenue• Capital costs• Operating costs
Financial statements and metrics What is the associated uncertainty?
• Project stages• Reduction in uncertainty
What are the financing options?• Organizational structure• Financing structure
Pramod Jain; Sept. 22, 2010
Module Objectives
Learning Objectives• Understand the components of financial model• Understand the components of revenue in a wind project• Understand the components of capital cost• Understand the components of recurring cost• Understand the financial performance metrics
Financial Assessment
Role of Financial Assessment in Wind Project
ProspectingWind Resource Assessment
PPAFinancing
EngineeringProcurementContracting
Construction Installation
Commissioning
Operations & Maintenance
Pramod Jain; Sept. 22, 2010
Components of Financial Model
Deterministic Financial Model
Capital & Operating
Cost
PPA
Average Annual Energy Prod
Risk
Cost
Time
Others
PPA
Risk‐based Financial Model
Scenarios UncertaintyImpact on financial
performance
Pramod Jain; Sept. 22, 2010
Revenue Sources
Sale of Electricity
PPA
Market
FiT
Net‐Meter
Sale of Environmental Attributes
• Negotiated• Long‐term
• Spot market• High volatility
Captive use
Mandated
Tax Benefits
Energy
Carbon CER
$
• Carbon credits• Renewable Energy Certificates
Energy PTC
Taxable IncomeTaxes
Tax >= PTC PTC
TE Partner
• Tax incentives tied to amount of energy produced
•Accelerated depreciation
Pramod Jain; Sept. 22, 2010
Wind Project Flow of Cash
Wind Project
Developer’s Equity
Tax Investor Equity
Lender
Capital Investment
Cash Revenue
Taxable Revenue
Tax Credits
Op Ex, Princ+Int, Reserves
Op Ex, Int, Depr‐ ‐
Cash Distribution Tax Losses
Sale Price of Wind Energy in US
Source: P. Jain, Wind Energy Engineering, 2010
Range of Capital Costs & Recurring CostsRange, $/kW Reasons for variance
Capital Costs (Total Installed Cost)
$1,200 to $2,200Normal range: $1,800 to $2,100
India costs are: $1,200 to $1,500/kWUS costs are: $1,800 /kWEurope costs are: $2,000/kW
Shipping cost, Terrain, Insurance
Operations and maintenance
$20 to $50/kW annually
Normal: $40/KW
Duration of manufacturer warrantyRemoteness of site
Scenario 1 Capital Costs: Equipment, BOP, TransmissionCapital costs % of
TIC$ per KW
Equipment costsTurbines (excluding blades and
towers) 44.76 $895
Blades 10.48 $210
Towers 11.60 $232
Transportation 8.01 $160
Equipment total 74.85 $1,497
Balance of plant, contd. % of TIC
$ per KW
LaborFoundation 0.62 $12Erection 0.70 $14Electrical 1.02 $20Management/supervision 0.53 $11Misc. 3.80 $76Labor subtotal 6.67 $133
Development/other costsHV Sub/Interconnection
Materials 0.74 $15Labor 0.23 $5
Engineering 1.01 $20Legal services 0.55 $11Land easements 0.00 0Site certificate/permitting 0.26 $5Development/other subtotal 2.79 $56
Balance of plant total 25.15 $503
Balance of plant (BOP) % of TIC
$ per KW
MaterialsConstruction (concrete, rebar,
equip, roads and site prep)10.82 $216
Transformer 1.22 $24Electrical (drop cable, wire) 1.29 $26HV line extension 2.36 $47Materials subtotal 15.68 $314
Total Installed Cost (TIC) of $2,000/kW is used
Source: P. Jain, Wind Energy Engineering, 2010100% Owner Equity, no finance cost
Scenario 2, Capital Costs: Equipment, BOP, Financing CostCapital costs % of
TIC$ per KW
Equipment costsTurbines (excluding blades and
towers) 44.76 $895
Blades 10.48 $210
Towers 11.60 $232
Transportation 8.01 $160
Equipment total 74.85 $1,497
Balance of plant, contd. % of TIC
$ per KW
LaborFoundation 0.62 $12Erection 0.70 $14Electrical 1.02 $20Management/supervision 0.53 $11Misc. 3.80 $76Labor subtotal 6.67 $133
Balance of plant total 25.15 $400
Development/other costsFinancing fees 5.00 $100Development/Engineering 1.01 $20Legal services 0.55 $11Land easements 0.00 0Site certificate/permitting 0.26 $5Development/other subtotal 2.79 $136
Balance of plant (BOP) % of TIC
$ per KW
MaterialsConstruction (concrete, rebar,
equip, roads and site prep)10.82 $216
Transformer 1.22 $24Electrical (drop cable, wire) 1.29 $26
Materials subtotal 15.68 $277
Total Installed Cost (TIC) of $2,000/kW is used
Source: P. Jain, Wind Energy Engineering, 2010
Capital Cost of Wind Projects
Source: P. Jain, Wind Energy Engineering, 2010
Average total installed cost, based on 4GW of international wind projectsWind Power Monthly, 2010
Average total installed cost, and turbine cost in the US based on 6GW of wind projects. LBL.
Operating Costs: Labor & Materials/Services
Operations and maintenance costs
% of O&M
$ per KW
Labor
Personnel
Field salaries 14.3 2.86
Administrative 2.3 0.46
Management 5.7 1.14
Labor/personnel subtotal 22.3 4.47
Materials and services% of O&M $ per
KW
Vehicles 2.2 0.44
Site maint/misc. services 0.9 0.17
Fees, permits, licenses 0.4 0.09
Utilities 1.7 0.35
Insurance 16.6 3.33
Fuel (motor vehicle gasoline) 0.9 0.17Consumables/tools and misc.
supplies 5.6 1.13Replacement parts/equipment
/spare Parts Inventory 49.3 9.86
Materials and services subtotal 77.7 15.53
Total O&M cost 100.0 20.00
Total annual O&M cost of $20/kW is used
Source: P. Jain, Wind Energy Engineering, 2010
Relationships between Revenue, Capital Cost & O&M Costs
Higher hub height
PM Direct Drive Turbine Higher
costs
Higher revenue, Higher reliability
Longer-term warranty
Underground cables
Higher Revenue
Higher Cost Higher
costs
Higher revenue, Higher reliability
Higher costs
Higher reliability
Questions?
Questions?
Line item in income statement Values for year iAnnual revenue
R1 Revenue from selling electricity kWh produced multiplied by energy price in $/kWhR2 Revenue from production tax credits kWh produced multiplied by tax credit in $/kWh
R3 Revenue from renewable energy credits or carbon credits
kWh produced multiplied by price of REC or other credit in $/kWh
RA Total revenue R1+R2+R3Annual operating expenses
O1 Operations and maintenance kWh produced multiplied by scheduled maintenance charges $/kWh + annual reserve fund payment based on TIC
O2 Insurance Annual insurance charges O3 Leaseholder payments Payment usually based on percentage of revenueO4 Admin/financial/legal General and administrative chargesO5 Other expenses (transmission) kWh produced multiplied by transmission charge (if applicable)
OE Total operating expenses O1+O2+O3+O4+O5annual depreciation and interest
D1 Depreciation TIC multiplied by an annual depreciation scheduleD2 Interest Total outstanding loan multiplied by interest rateDA Total depreciation & interest D1+D2TI Annual taxable income RA – (OE + DA)TA Taxes TI* tax rateNIA Net income RA – (OE + DA + TA)
CF After tax cash flow NIA+D1‐Principal payment on debt
Income Statement
Source: P. Jain, Wind Energy Engineering, 2010
Balance Sheet
Balance sheet line items Values for year iCurrent assets
B1 Cash in bank Year‐end cash positionBA Total current assets B1
Fixed assetsFA1 Machinery and equipment Total installed cost of the project
FA2 Less accumulated depreciation Sum of depreciation claimed up to current year
FAA Total fixed assets FA1 – FA2Total assets FAA + B1Liabilities and equity
L1 Current liabilities Short‐term debtL2 Long term debt Long‐term debtLA Total liabilities L1 + L2
Owner’s equityC1 Invested capital Equity investment in project
C2 Retained earnings From income statementCA Total owner’s equity C1 + C2
Total liabilities + owner’s equity LA + CA
Source: P. Jain, Wind Energy Engineering, 2010
Financial Performance Parameters
Levelized Cost of Energy (LCOE) Industry standard
method of comparing cost of electrical energy
It is the value of energy that yields a zero NPV, while taking into account:
• Revenue• Operating
expenses• Total installed cost• Discount rate
Net Present Value (NPV) Sum of discounted net
after tax cash flow
Payback Period Simple payback:
Accumulated liquidity is zero. Misleading
Real payback period: Year when the sum of discounted liquidity is zero
Internal Rate of Return Discount factor that
yields zero NPVDebt Service Coverage Ratio (DSCR) Ratio of revenues to
loan payments. This ratio is calculated every year for the life of the loan. Minimum DSCR and average DSCR are computed
Source: P. Jain, Wind Energy Engineering, 2010
Implications of Debt Service Coverage Ratio
Common to have minimum DSCR in the first year of operation• This is because of ramp up of production, leading to lower revenue
Minimum DSCR limits the amount of debt • => higher equity requirement• => lower return
Tricks used:• Front load the PPA (through constant nominal payments)• Back load debt payments
Spreadsheet Model
Target IRR = 15% Minimum DSCR = 1.27 Target average DSCR = 1.34 Sensitivity analysis
• Impact on DSCR, IRR and other performance metrics
Risk and Uncertainty of Wind Projects
Revenue• Strength of grid: If there is a
fault in grid, wind goes offline. These interruptions add up
• Matching of production to load: If load is low, wind goes offline
• Weather and other events: Cyclones, wildfires, etc.
• Turbine repair: In remote locations, it may take weeks to get parts, equipment and manpower
• Delayed payments by utility Depending on the situation
revenue may be reduced by about 10%, or even higher
Cost• Installation in remote areas
(usually accounted):– Transportation of towers,
blades & equipment– Crane cost: 500 ton cranes
are expensive to import/transport/rent
– Transmission lines– Clearing of land,
constructing roads• Recurring costs (usually
not fully accounted):– Cost of insurance– Cost of O&M
Other Issues• Environmental issues:
Stopping of machines during migrating and breeding seasons
• Delay in projects due to land ownership issues
• Delay due to community opposition
• Delay due to other legal challenges
• All these delays can cause loss of revenue or deferred revenue
Pramod Jain; Sept. 22, 2010
Organization Structure and Flow of Money
Alternate Organization Structures
Corporate structure Tax-equity & flip investor Debt leveraged
Source: P. Jain, Wind Energy Engineering, 2010
Sources of Investment
Corporate Tax-equity investor Equity investor Banks and other lenders Government funding agencies International development financing: ADB, World Bank, USTDA Export promotion agencies, e.g. USEXIM Vendor financing or arm of vendor (e.g. GE Capital)
• May be cheaper than others because of lower due diligence and interest in winning business
• May be easier to get BOP financing
Rate of Return for Alternative Finance StructuresCorporate Institutional
flipCash leveraged
Cost assumptionsHard cost $1,600 1600 1600Soft cost $125 $183 $215 Total installed cost $1,725 $1,783 $1,815 Tax investor after tax return10‐year Target IRR n/a 6.50% 9%20‐year IRR, Computed n/a 7.12% 9.29%Debt assumptionsInterest rate n/a n/a 6.70%Maturity 15 yearsDeveloper after tax return10‐year IRR 6.64% 0 9%20‐year IRR 10% 10.44% 30.58%
20‐year LCOE per kWh $0.06 $0.05 $0.05
Corporate structure: Utilities and other power producers
Institutional flip: Wind farm developer with an equity partner
Cash leveraged: Wind farm developer with equity partner and debt
Source: P. Jain, Wind Energy Engineering, 2010
Conclusions
Detailed financial analysis requires significant due diligence Fixed fee construction contracts and third party
maintenance contracts tied to production are strategies to minimize risk
Wind projects require a framework for risk management for:• Categorizing risk• Quantifying risk• Assessing impact of risk• Strategies for mitigating risk
Risk management has to be a ongoing task along with project management
Pramod Jain; Sept. 22, 2010
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