PPPs in Power GenerationPPPs in Power Generation

Patricio MansillaPatricio MansillaInfrastructure DirectorInfrastructure Director

ChemonicsChemonics InternationalInternationalWashington DC Washington DC

AprilApril 20112011AprilApril 20112011

AgendaAgendagg

1 Useful Concepts for PPPs in Power Generation1 Useful Concepts for PPPs in Power Generation1. Useful Concepts for PPPs in Power Generation1. Useful Concepts for PPPs in Power Generation

2. Selected Case studies2. Selected Case studies

A. Chilean CaseA. Chilean Case

B. Peruvian CaseB. Peruvian Case

C. Mongolian CaseC. Mongolian Case

1. Useful Concepts for PPPs in1. Useful Concepts for PPPs in1. Useful Concepts for PPPs in 1. Useful Concepts for PPPs in Power GenerationPower Generation

Energy SystemEnergy System• Generation: Process of creating electricity from others forms of

energy. It is normally generated at a power station (power plant) byelectromechanical generators normally driven by heat engines fueledby chemical combustion or nuclear fission but also by kinetic energyor flowing water and wind. Others technologies to generate electricityare solar and geothermal.

• Transmission: is the movement of energy from its place of generationto a location where it is applied to performing useful work.

Watt = Joule/second = Newton*Meter/secondWatt = Joule/second = Newton*Meter/second

• Distribution: is the final stage in the delivery of electricity (beforeretail) to end users It carries electricity from the transmission systemretail) to end users. It carries electricity from the transmission systemand delivers it to consumers.

Energy SystemEnergy System

Power Station or Power PlantPower Station or Power Plant• Centralized power generation is possible because

alternating current power lines can transport electricity at low cost raising and lowering the voltage using power transformers.

• Central Stations, Power Station or Power Plant normally , yuse: coal, nuclear, natural gas, hydroelectric and petroleum.

• Power Plants also rely on solar energy tidal harnesses• Power Plants also rely on solar energy, tidal harnesses, wind generators and geothermal sources.

CoalCoal--Fired Power PlantFired Power Plant• A coal-fired power plant produces electricity by burning coal to boil water,

producing steam which drives a steam turbine, which turns an electrical generator.Th b ti f f l i l di l it l t f b• The combustion of any fuel, including coal, emits large amounts of carbon dioxide and other pollutants into the atmosphere, contributing to global warming.

• The largest coal fired power station is Kendal Power Station South Africa• The largest coal-fired power station is Kendal Power Station, South Africa and the most efficient is in Denmark.

Combined Heat and Power (CHP) Combined Heat and Power (CHP) PlantPlant• Combined heat and Power (CHP) plant or Cogeneration

Plant use heat engine or power station to simultaneously generate both electricity and heat.

Hydroelectric PlantHydroelectric Plant• Hydroelectric Plants produce power through use of the gravitational force of falling or flowing

water. Most hydroelectric power comes from the dammed water driving a water turbine and generator.

• Pumped storage hydroelectricity produces electricity to supply high peak demands by moving p g y y p y pp y g p y gwater between reservoirs at different elevations. At times of low electrical demand, excess generation capacity is used to pump water into the thigher reservoir. When there is higher demand, water is release back into the lower reservoir through a turbine.

• Hydroelectric plants with no reservoir capacity are called run-of- the-river plants, since it is not y p p y p ,then possible to store water

• A tidal power plant makes use of the daily rise and fall if water due to tides, such sources are highly predictable and if conditions permit construction of reservoirs, can also be dispatchable to generate power during high demand periods.g p g g p

PPP Schemes for Power GenerationPPP Schemes for Power Generation• Design, Build, Operate.• Design, Build, Operate and Finance.• Build, Operate and FinanceBuild, Operate and Finance• Normally different schemes of PPPs for Power Generation rely on a

Power Purchase Agreement (PPA), were the power purchaser is alocal utility, public service provider or operator that sell the energy tothe market.

• PPA is normally a long term contract with a dual payment system.• Dual payment system: capacity or availability charge and a usage or

ff k hofftake charge.• In some cases there are Tolling Agreements: the purchaser delivers

fuel to the concessionaire and it turn the fuel into electricity.

Typical PPA (1)Typical PPA (1)• A typical PPA may contain the following:

• (1) Preamble (2) Definitions and interpretation (3) Conditions(1) Preamble, (2) Definitions and interpretation, (3) Conditions precedent, (4) Development stage, (5) Construction period, (6) Commissioning and entry into commercial service, (7) Plant operation, maintenance and fuel management, (8) Dedication of capacity, g , ( ) p y,availability declaration, (9) Measurement of capacity, availability and energy metering, (10) Capacity charge and payment provisions, (11) Fuel Price provisions, (12) Billing procedures, terms of payment, (13) Insurance, (14) Changes in tax, changes in law, (15) Force Majeure, 6) Termination and buy out provisions, (17) Governing law/dispute resolution, (18) Liability and indemnity, (19) Confidentiality, (20) R t ti / ti / t d (21) Mi llRepresentations/warranties/covenants and (21) Miscellaneous.

Typical PPA (2)Typical PPA (2)• A typical PPA may contain the following Schedules:

• (1) Description of Power Station, (2) Clearances, (3) Development milestones, (4) Interconnection and transmission facilities, (5) Commissioning and testing (6) , ( ) g g ( )Metering standards and testing, (7) Despatch procedures (8) Capacity payment and (9) Energy payments.

Options for PPPsOptions for PPPs• Option A: Public sector develop the project using its own resources and then

privatizes it or prepare a PPP

• Option B: The public sector completes the feasibility studies and invites to the private sector to finance construct and operate the PPP projectprivate sector to finance, construct and operate the PPP project

• Option C: The private sector conducts all feasibility studies and prepare the j d d i fi d h jproject under a design, finance, construct and operate the PPP project

Projec Cycle of HPP PPPsProjec Cycle of HPP PPPsProjec Cycle of HPP PPPsProjec Cycle of HPP PPPsStage Activities

Site Selection Identification of potential sitesSite Selection Identification of potential sites

Prefeasibility Scheme concept. Preliminary estimate of cost and benefits

Short Feasibility Preliminary optimization of main project parameters based largely on existing data

Full Feasibility Detailed site mapping and geological investigation Full Environmental Impactinvestigation. Full Environmental Impact Assesment.

Tender Design Business model preparation and contract regulation based on Short or Full Feasibility

Detailed Design Adjudication and detailed design of each element of civil works.

Risks in Power Generation PPPsRisks in Power Generation PPPs• Site-specific nature of projects

• Long period of construction and high construction risk

• Capital intensive

• Hydrological risk river flows make volatile output Important waterHydrological risk, river flows make volatile output. Important water management

• Flow of revenues need to be predicted under real scenarios.

• Operation risks

Risks Allocation HPP PPPsRisks Allocation HPP PPPsRisks Allocation HPP PPPsRisks Allocation HPP PPPsRisk AllocationHydrology Temporary deficits: Conces and Gov.

Long Term deficits:Util-GovFlood damage: Contractor and Conces

Costruction Cost overrun and delayed completion: Concess and contractor. Unforeseen ground conditions: Util-Gov-concess

Performance Equipment and project performance: concessTransmission: Utility company

Market Utility company through take or pay or PPA

Political Government

Financial Increasing costs: utility company or gov

E i t l L d i iti d tl t G UtilitEnvironmental Land acquisition and resetlement: Gov-Utility company

Market 1 PUBLIC GOODFailure 1

Market

PUBLIC GOOD

Market Failure 2 MONOPOLY

Market Failure 3

EXTERNALITIES

Market ASSIMETRICFailure 4 INFORMATION

¿Do we have a Monopoly?

Market Market CompetitionCompetition

¿Is it large the loss in ¿Is it large the loss in Economic efficiencyEconomic efficiency

From First Best to Second Best?From First Best to Second Best?

no yes

D

ACMgCP

QD

ACMgC

P

Qyes noyes no

-- Lump sum SubsidyLump sum Subsidy-- No Lineal TarificationNo Lineal Tarification-- Price DiscriminationPrice Discrimination

¿Regulation ¿Regulation By Competition?By Competition?

yesno y

•• Ramsey TarificationRamsey Tarification•• RPIRPI--XX

R t f R tR t f R t

•• Demsetz CompetitionDemsetz Competition(bidding)(bidding)•• Contestable MarketsContestable Markets•• Rate of ReturnRate of Return Contestable MarketsContestable Markets

PRICE CAPSPRICE CAPS(RPI, RPI(RPI, RPI--X, RPIX, RPI--X+K)X+K)(RPI, RPI(RPI, RPI X, RPIX, RPI X K)X K)

Profitability or Rate of ReturnProfitability or Rate of ReturnTariffs RamseyTariffs Ramsey--BoiteauxBoiteaux

Regulatory Models Regulatory Models for PPPfor PPP

YARDSTICK Competition YARDSTICK Competition

oo

DEMSETZ CompetitionDEMSETZ CompetitionDEMSETZ CompetitionDEMSETZ Competition(Bidding)(Bidding)

Characteristics in LAC countriesCharacteristics in LAC countriesCharacteristics Brazil Chile PeruCapacity (MW) 90,733 10,367 6,016p y ( )

Energy (GWh) 387,451 51,640 24,267

Hydropower generation

80% 41% 71%

Nuclear 3% 0% 0%

Generation

Large Hydropower ProjectsLarge Hydropower ProjectsLarge Hydropower Projects Large Hydropower Projects Project Capacity (MW) CountryThree Gorges 18 200 ChinaThree GorgesErtanCaruachiPorto Primavera

18,20033002,1601,818

ChinaChina

VenezuelaBrazil

ItaSerra de MesaSalto Caxias

,1,4501,2931,240

BrazilBrazilBrazil

Rio Baker-Aysen 800 Chile

A. Chilean CaseA. Chilean CaseA. Chilean CaseA. Chilean Case

Power Systems in Chile (1)Power Systems in Chile (1)Systems Generation Transmission DistributionSING Edelnor, Electroandina,

Celta Norgener GenerEdelnor, Electroandina, Norgener

Emelari, Eliqsa, ElecdaCelta, Norgener, Gener, Gasatacama

Norgener

SIC Arauco, Petropower, Gener, San Isidro, Endesa, Colbun, Guacolda E Verde

TranselecSTSTransnet

Chilectra, CGE, Chilquinta, Rio Maipo, Saesa, Frontel, Emec, Conafe EmelectricGuacolda, E. Verde,

Santiago, Pangue, Pehuenche, Pilmaiquen,Aconcagua, Maipo, Vieja, Valpo, Capullo, Andes,

TransquillotaConafe, Emelectric, Emelat, Puente Alto, Copelec, Litoral, Luzagro, Emetal, Colina, Luzpar.

Capullo, Andes, Carbomet

Aysen Edelaysen Edalaysen Edelaysen

Magallanes Edelmag Edelmag EdelmagMagallanes g g g

Power System in Chile (2)Power System in Chile (2)Power System in Chile (2) Power System in Chile (2) Type of Contracts Characteristics

Generator-Generator Generator without contract with distribution company or free client sell energy to the spot market at marginal cost set up by CDEC.

Generator – Free client No regulation of transactions with clients with gcapacity of 2000 kw or more. Free to negotiate prices because of the negotiation power.Codelco case.

Generator – Distribution companies High risk for generators if marginal cost of p g g goperation is higher than the price. By law distribution companies must to contract through public tendering process.

CodelcoCodelco--Chile (1) Chile (1) • Corporación Nacional del Cobre (or “Codelco Chile”) is the National Copper• Corporación Nacional del Cobre (or Codelco-Chile ) is the National Copper

Corporation that manage the cupper production in Chile as a State owned copper mining company. It is the largest copper producer company in the world.world.

• Codelco decided in 2007 to tender to one or more independent power producers its future electricity supply requirements in Salvador, Andina, Ventanas and El Teniente Divisions, located in Chile´s central region and connected to Chile´s SIC, the central interconnected transmission Chilean grid

CodelcoCodelco--Chile (2) Chile (2) • The power plants in Chile (combined cycle gas- fired thermoelectric plants)

usually use Argentine natural gas as a fuel and because of the shortage of it Codelco decide to initiate the process to have safe and reliable electricityCodelco decide to initiate the process to have safe and reliable electricity supply.

• The SIC in Chile extends over 2000 kms and some 326.000 km2 with 11.700 km of transmission lines, serving 93% of the population

• The total capacity of SIC is 8,512 MW (2006) generating 40,334 GWh in 2006, 55.8% is hydrolectric and 44.2% is thermal.

CodelcoCodelco--Chile (3) Chile (3) • The project called Long term electricity supply for Codelco• The project called Long-term electricity supply for Codelco-

Chile´s Divisions in central Chile, was recently adjudicated in September of this year to Colbun and it includes two contracts for 15 and 30 years.

• The concessionaire will design, build and operate power plants of any kind, as well as the construction of any other investment y , ynecessary to operate them and to connect them to the trunk transmission system of the SIC (3-10 regions)

• The concessionaire will design build start up and maintain the• The concessionaire will design, build, start-up and maintain, the new transmission system or expansions of the existing that might be required to connect the power plant to the trunk transmission system of the SIC.

CodelcoCodelco--Chile (4) Chile (4) • The concessionaire will design develop and construct a port• The concessionaire will design, develop and construct a port

terminal, if necessary, for the uploading of fuel that will be needed for the power plant, or otherwise, reach and agreement with the operator of an existing port.

• The demand to be supplied over the period of the agreement shall pp p gbe from 450 MW up to a capacity of approximately 900 MW.

A project with Low RiskA project with Low Risk• Long term contract with minimum commercial risks: Codelco has 20% of

the total existing copper reserves in the world, around 77 million metric tons. Codelco accounts for 15% of the total Chilean electricity consumption.

• Adequate credit rating: Codelco has a rating of A according to Standard & Poor´s.

• Chilean Regulation: It does not contemplate any specific license, only t ti d i t l t diconstruction and environmental studies.

• Selling of remaining power: the concessionaire can sell to SIC the remaining power if the plant has excess of capacity. SIC requires annual capacity additions of approx 500 MW in order to match supply and demand Averageadditions of approx. 500 MW in order to match supply and demand. Average annual growth of 6.9% in the last ten years.

• Chile is an investment grade country: Chile is the most solid economy in Latin America and it is rated A by S&P.y

Bidding CharacteristicsBidding CharacteristicsF t t b h d t C d l I t t ti d i t• Free cost to be charged to Codelco: Investment, operation and maintenance fixed costs does not have a maximum in the bidding process. The variable costs are recovered via a pass through mechanism with certain efficiency.

• Codelco included provisions to make the project bankable: sharing the risks on fuels and fluctuation in the international fuel prices.

• Option for bidders: Codelco had set-up a new special purpose company (Newco) that own all the studies, licenses and a project. The concessionaire has the option to develop its own project or to buy Newco at a price equal to p p p j y p qthe incurred costs by Codelco.

Economic CharacteristicsEconomic CharacteristicsBiddi V i bl C d l ill fi d thl h i U it d St t• Bidding Variable: Codelco will pay fixed monthly charges in United States Dollars (US$) to cover the investments and the fixed operating expenses associated with the service.

• Provisions: The contract will also include provisions for the transfer of variable costs, except hydro plants for which no variable costs will be paid, as well as charges for transmission fees (on a pass through basis, with certainwell as charges for transmission fees (on a pass through basis, with certain efficiency signals).

• Winner: Colbun was the winner offering a supply of up to 510 MW and g pp y penergy for 4000 GWh annually. The electricity supply will start on March 1st of 2013 with 328 MW and it will reach 510 MW on January 1st of 2015. The power stations will use coal and hydroelectricity. Investment US$7 billion.

B. Peruvian CaseB. Peruvian CaseB. Peruvian CaseB. Peruvian Case

Power System in Peru (1)Power System in Peru (1)Power System in Peru (1) Power System in Peru (1) Generation Transmission DistributionCahua Edegel Egenor Piura Mantaro-Socabaya Edelnor Luz del Sur EdeCahua, Edegel, Egenor, Piura, Cahua y Electroandes

Mantaro-Socabaya, Reforzamiento Sur, Oroya, Etecen y Etesur.

Edelnor, Luz del Sur, Ede, Etevensa, Cañete, Electro Sur

Policy Regulation CompetitionMinistry of Energy Osinerg Indecopi

Yuncan Hydroelectric Plant (1)Yuncan Hydroelectric Plant (1)• First Intent to bid: In 2003 the bid was suspended because of a

dispute with Pasco department authorities over ownership of the j Th i h P ill i fproject. The agreement is that Pasco will receive payments from

the concession through a social trust fund.• Hydro Power Plant built by the Government: The State power y y p

company Egecen ( Empresa de Generación de Energía Eléctrica del Centro) was building the plant with 75% of the total investment of $262 million finance by JBIC (Japan Bank forinvestment of $262 million finance by JBIC (Japan Bank for International Cooperation) and in same moment it had to stop works because lack of funds from the 25% committed to the

j f h P i Fi ll h jproject from the Peruvian government. Finally the project was completed in 2006. The plant has a capacity of 130 MW.

Yuncan Hydroelectric Plant (2)Yuncan Hydroelectric Plant (2)• Construction companies: Skanska, Cosapi and Chizaki• Equipment suppliers: Vatech Hydrovevey, Alstom France and

T hibToshiba• LOM Project: The concessionaire will operate, maintain and

usufruct the project under a lease of the power plant built by the p j p p yState power company.

• Term of Concession: 30 years since the take over of the power plant from the concessionaire Egecen will transfer the plant inplant from the concessionaire. Egecen will transfer the plant in perfect operating conditions for the operation and usufruct of the concessionaire.

Bidding ResultsBidding Results• One Bidder: Peruvian Government received just one offer from Enersur, local

subsidiary of the Belgian energy company Tractebel.

• Bidding mechanism: Higher payment to the Peruvian Government.

• Result of the Bidding: Enersur offered $57.5 million paid over the first 17 h f h i d i l f f d i h fi 17months of the concession and a semi-annual usufruct fee during the first 17

years of the contract and once the concessionaire receive the power plant from Egecen. The total amount is $124.5 million.

• Social Trust Fund: In addition Enersur has to pay to the Social Trust Fund under a payment schedule a total of $6.9 million

GuaranteesGuarantees• Concessionaire

a) Contract Rights and first-second social payment: $10 million valid until 15 d ft th ti f th l t b th i i15 days after the reception of the power plant by the concessionaire.

b) Usufruct Rights and periodic payments: $10 million valid until the last payment for this concept.

c) Completion: $2 million valid until 90 days after finish the contract periodc) Completion: $2 million valid until 90 days after finish the contract period.

• Peruvian Government

a) Multilateral guarantee or commercial bank for $50 million valid since the first payment of the concessionaire and until Peruvian Government transfer to the concessionaire the power plant to the concessionaire.p p

b) Peruvian government assumes the performance risk of the power plant for the first 12 months and the concessionaire will receive a compensation.

C. Mongolian CaseC. Mongolian CaseC. Mongolian CaseC. Mongolian Case

CHP5 Power PlantCHP5 Power Plant• Energy in Mongolia is a relevant sector where five coal-fired cogeneration

power plants are managed by a central power system, but it is necessary to prepare more projects in urban cities and rural areas that have diesel generators.

• One interesting project in development is the CHP5 project which anticipates to implement a build, own and operate model for a cogeneration power plant

d th difi ti f th i ti b t ti t d l t i it d h tand the modification of the existing sub stations to produce electricity and heat energy for Ulan Bator.

• The capacity of the plant must be 300 MW for power and 700 Gcal for heat energy The project finally was not adjudicated this year Mongolianenergy. The project finally was not adjudicated this year. Mongolian government decided does not accept the unique proposal submitted by a Chinese corporation.

• ADB will be supporting the new intent to adjudicate succesfully this projectpp g j y p j

Secure Fuel Supply and Bankable Secure Fuel Supply and Bankable

• Secured fuel supply and Bankable PPAPPAPPA

– Generation cost: 60% of the retail tariff– Fuel cost: 60-65% of the generation cost – Government’s control over prices of coal used for generation of energy,– Coal mines are in bad financial shape;– Long term coal supply to Darhan and Erdenet CHPs must be secured,– Not clear sources of revenues

C l l t l t l l d i th CHP 5 t d d t– Coal supply was not completely resolved in the CHP-5 tender documents

4. Future Projects in Power4. Future Projects in Power4. Future Projects in Power 4. Future Projects in Power GenerationGeneration

Ch i

Shivee ovoo JSC

ChoirCoal deposits

Copper and gold depositsLime stone deposits

Mandakh

Khokh tsavDalanjargalan

Mongolian Gold LLC

Copper

G T

Tsogt TsetsgiiTsagaan suvarga

Mongolian Gold LLC

Mandakh

TAvantolgoiUhaahudag

SGS LLCChi h MAK N ii S kh it LLC

Energy Resource LLCErdes MGL LLCTavantolgoi JSCQGX LLC

Gurvan Tes Khanbogd

Ivanhoe Mines Mongolia LLC

Nariin SukhaitTAvantolgoi

Oyutolgoi

Chinhua-MAK-Nariin Sukhait LLCMongolian Gold MAK LLC

Minerals deposits42

New Projects in MongoliaNew Projects in MongoliaThe ever-increasing electricity demand of the Southern Gobi shall be supplied as the following:

• Construct the UB-Mandalgobi- Tavantolgoi-Oyutolgoi 670 km power and heat station with 220 kW, with two reinforced concrete pillars and with two linked AC-400 transformations

• Facilitate to build 12 mW small size power station with the private sector initiatives near the group of the coal mines of Tavantolgoi and implement the plan to build the power station with the capacity not less than 300 mW through the government integrated regulation and the PPP principlesregulation and the PPP principles

Thank you Thank you yy