photovoltaic grid parity monitor - utility scale - 1

PV Grid Parity Monitor for the Utility-

scale segmentGPM 4th Issue

Financial Advisory Strategy Consulting Market IntelligencePolicy Consulting

Leonardo ENERGY Webinar Series

September 11, 2014 - 17:00 CET

David Pérez, Partner

[email protected]

Carolina Fondo, Associate

[email protected]

• ECLAREON

• Grid Parity Monitor (GPM)

- Introduction

Agenda

Platinum sponsors:Platinum sponsors:

- Introduction

- Definitions and Methodology

- Results

- Conclusions

2

ECLAREON’s service portfolio includes strategy and policy consulting as

well as financial advisory

COMPANY OVERVIEWINDUSTRY FOCUS

• Entry strategies

(new

geographies &

technologies)

• Commercial &

business

strategy

• Market

information tools

and publications

for the RE sector:

- Grid Parity

Monitor (GPM)

- PV price

• Commercial due

diligence

• M&A advisory,

coordination &

negotiations

• Company

valuation

• Horizon 2020:

coordination of

proposals and

participation as

partners

• Legal framework

analysis

Strategy

consultingMarket intelligence

Financial advisory

/ M&APolicy consulting

Renewable Energy


3

• New ventures &

business

planning

• EBITDA

improvement

• Restructuring

• Corporate

strategy

- PV price

navigator

- Solar Atlas

• Organization of

trade

delegations and

sector

conferences

valuation

• Target screening

& partner search

• Equity and debt

capital raising

• Investment

opportunities

• Expert’s reports

• Support in policy

making

• International

knowledge

sharing

Business

promotion

Smart Grids

Energy

Efficiency

ECLAREON mainly covers the European, Latin American and US markets

and has permanent offices in Berlin and Madrid (>40 employees) and

partner offices in Bogota, Milan, New Delhi, and Santiago

ECLAREON’s global presence

COMPANY OVERVIEWGEOGRAPHIC REACH


4

Note: * Partner offices represent partnership agreements with local consultants

Permanent office Partner office* ECLAREON activity

• ECLAREON

• Grid Parity Monitor (GPM)

- Introduction

Agenda


- Introduction

- Definitions and Methodology

- Results

- Conclusions

5

PV “generation parity” is the moment when profitability

requirements of PV investors are completely fulfilled with

wholesale electricity prices

INTRODUCTION

Reference price in the wholesale

market

Required PV tariff based on

investors’ profitability

requirements

EUR ct /

kWh

Generation

Parity

Simplistic Illustration of PV Generation Parity


requirements

Years

• Electricity from wholesale markets

is cheaper than PV-generated

electricity

- PV sponsors will need support

mechanisms (FiT, tax credit,

etc.) in order to invest in PV

energy

• PV-generated electricity is cheaper

than electricity from wholesale

markets

- Wholesale prices are such that

the IPP would achieve at least

the minimum profitability sought

in order to build the PV plant

6

Source: ECLAREON

The GPM Series analyzes grid and generation parity in several

markets; this 4th issue focuses on the utility-scale segment

INTRODUCTION

Countries included in the GPM Series up to date Distinctive features of this issue

ITALY(Pomezia)

MOROCCO(Ouarzazate)

TEXAS(Midland) Perspective

Markets

• Utility-scale segment

- 50 MWp using a single-

axis tracking system

- Merchant plant (if

possible)

• Chile, Italy, Mexico,

Morocco, Texas and

Platinum sponsors:Platinum sponsors:7

Included in GPMU Included in previous issues

MEXICO(Sonora Norte)

CHILE(Diego de

Almagro)

(Ouarzazate)

TURKEY(Karaman)

Key:

Markets

Methodology

Morocco, Texas and

Turkey

• Assumptions (not

exhaustive)

- Project finance scheme

- 70% debt ratio

• Inputs (not exhaustive)

- Real market data for EPC

prices

- Economics (P&L and cash

flows) of the PV plant from

investor’s perspective

Source: ECLAREON

The PV Grid Parity Monitor is sponsored by renowned international

companies

• Platinum Sponsors

INTRODUCTIONSPONSORS


• Gold Sponsors

The PV Grid Parity Monitor is supported by relevant PV partners in

most markets

• Partner Associations

INTRODUCTIONPARTNERS


• Supported by

9

The required tariff is calculated as the theoretical rate with

which the PV investor would achieve at least the minimum

profitability sought in order to build the PV plant

DEFINITIONS & METHODOLOGY

Economics (cash flows) of a utility-scale PV plant

Equity cash flow (ECF)

• As real market data for the initial

investment, operating expenses and

debt costs of the PV plant are available,

the only remaining data necessary to

complete the economics of the project

is income

- Actual electricity production of the PV

plant can be accurately modeled, so the

Years

Modeling

Eur


Income

10

Equity

Debt service

Operating expenses

plant can be accurately modeled, so the

only “X” of our equation is the required

tariff (Eur/kWh) which will be applied to

electricity production

• When investing in a merchant plant, PV

investors will ask for an IRR at least

equal to the specific cost of equity of

that kind of project and country

- The required tariff will be the one that

gives the minimum IRR required by the

investor

IRR ECF = Cost of equity country

Real market

data

Unknown

ModelingTaxes

Source: ECLAREON

It is necessary to determine a reference price that will serve as a

benchmark of the potential income that a PV IPP could obtain from

the market in each considered country

DEFINITIONS & METHODOLOGY

• In order to determine if the analyzed market

presents generation parity, the following market

prices can be considered as a good reference:

- Marginal prices of the day-ahead market in a power

exchange

- Price of PPA contracts that are negotiated freely in

a liberalized market

CAGR

2009 – 2014

100.000

120.000

140.000

7.2%

Evolution of average nodal prices per semester in Diego de

Almagro node (CDEC-SIC, Chile)

6.4%


• As PPA prices are not always easy to obtain (no

public information is available), the GPM report

selects between these two alternatives as a

practical simplification:

- A marginal price, where possible

- A regulated tariff for large consumers

- In countries where no spot market exists, it

has been selected this option as a theoretical

upper boundary of a PPA contract (working

hypothesis)

Source: ECLAREON

CLP/

MWh

0

20.000

40.000

60.000

80.000

2009 S1

2009 S2

2010 S1

2010 S2

2011 S1

2011 S2

2012 S1

2012 S2

2013 S1

2013 S2

2014 S1

6.4%

Average price

Average price for

dayligh hours

120

140

160

180

200

RESULTS

Only Chile is in a full generation parity situation, although

Morocco, Italy and Mexico are or have been close recently

Generation parity proximity in the countries analyzed

Reference price

Chile

MoroccoFull generation parity

Close to generation

parity


0

20

40

60

80

100

0 20 40 60 80 100 120 140 160 180 200

12

Note: Data from the first half of 2014 and second half of 2013

Source: ECLAREON analysis

Reference price

(USD/MWh)

Required tariff (USD/MWh)

Mexico

Texas

Turkey

Italy

Full generation parity

Close to generation

parity

2014 S1

2013 S2

RESULTSCHILE

Reference prices are clearly above the required tariff for a PV

investor, which implies that full generation parity exists in

Chile for a large PV producer

Comparison of hourly marginal cost of spot market and the required

tariff for a PV investor in Chile under a project finance structure

(Diego de Almagro)

• Both high electricity rates

and extraordinary irradiation

levels contribute to the full

generation parity in this

Chilean region

• Although SIC market has

presented high volatility rates

100.000

120.000

Reference price

CAGR

S2'12-S1'14

1.0%


presented high volatility rates

in the past decade, PV tariff

offers a wide margin to

absorb potential decreases in

the spot market

- It represents less than 50%

of current spot market prices

- It is necessary to go back to

2009 to find spot prices

below the current required

tariff

13

0

20.000

40.000

60.000

80.000

2012S2

2013S1

2013S2

2014S1

CLP/

MWh

1.6%Required tariff


RESULTSITALY

In Italy, PV utility-scale generation is not currently

competitive in the spot market although by the end of 2013 a

close generation parity was reached

Comparison of hourly day-ahead market prices and the

required tariff for a PV investor in Italy under a project finance

structure (Pomezia) • Spot prices have decreased

7% annually over the past 5

years

• Moreover, a high cost of

equity and specific taxes for 100

120

140

Required tariff

CAGR

S2'12-S1'14

-12.4%


equity and specific taxes for

electricity generation and

land renting are barriers to

reach generation parity

• However, the appetite of

financial institutions in the

Italian market is recovering

after past years’ financial

crisis, which will help PV

required tariff to keep on

decreasing

14

0

20

40

60

80

100

2012S2

2013S1

2013S2

2014S1

EUR /

MWh

Required tariff

Reference price

-12.4%

-16.3%


RESULTSMEXICO

In Mexico generation parity was reached in 2012 and S1 2013

with electricity prices clearly higher than the required tariff

for a PV investor

Comparison of CTCP-based remuneration and the required

tariff for a PV investor in Mexico under a project finance

structure (Santa Ana, Sonora)• Although one year ago full

generation parity was a

reality in Mexico, today the

situation has turned upside

down due to a major

decrease in wholesale market

prices1.500

2.000

Required tariff

CAGR

S2'12-S1'14

-3.4%


prices

• With an energy reform

underway, the evolution of

wholesale market prices (and

thus generation parity) is

uncertain

- It is strongly recommended

to recurrently monitor this

market

15

0

500

1.000

2012S2

2013S1

2013S2

2014S1

MXN /

MWh

Reference price -41%


RESULTSMOROCCO

Morocco is very close to generation parity, as the required

tariff for a PV investor is only 14% higher than reference

prices for industrial consumers

Comparison of electricity tariffs for industrial consumers (HV-

VHV) and the required tariff for a PV investor in Morocco under

a project finance structure (Ouarzazate)

1.250

1.500CAGR

S2'12-S1'14

• High irradiation levels and the

continuous decrease in PV

prices have almost

compensated for the

subsidized rates



16

0

250

500

750

1.000

2012S2

2013S1

2013S2

2014S1

MAD /

MWh

Required tariff

0.0%

-4.1%

Reference price

subsidized rates

• However, a long asset

depreciation period (20 years)

is hindering generation parity

in the country

• The foreseen tariff increases

until 2017 will push

significantly generation parity

proximity

RESULTSTURKEY

In Turkey, PV technology is far from being competitive in the

utility scale segment although wholesale electricity prices are

not low

• Despite of the significant

decrease of PV prices, the

weakening of the Turkish

currency against dollar has

raised prices of imported PV

items

•

Comparison of hourly DAM prices of the spot market and the

required tariff for a PV investor in Turkey under a project

finance structure (Karaman)

300

400

Required tariff

CAGR

S2'12-S1'14

5.9%


• Turkey presents a high CPI

rate, which is expected to

continue in similar levels and

hinders the investment case

• A relatively high discount rate

(which reflects the high

return required by equity

holders) is also a great

barrier for PV generation

parity


17

0

100

200

2012S2

2013S1

2013S2

2014S1

TRY /

MWhReference price 0.4%

RESULTSTEXAS

Although Texan required tariffs for a PV investor are below

115 USD / MWh (which represents one of the lowest PV rates

analyzed) PV generation parity is still distant

Comparison of hourly day-ahead market prices of ERCOT’s

spot market and the required tariff for a PV investor in Texas

under a project finance structure (Midland), USA

80

100

Required tariff

CAGR

S2'12-S1'14

-1.7%

• The positive impact of ITC

and low discount rates do not

compensate medium

irradiation levels and low

wholesale electricity prices in

the ERCOT market

• However, with a growing



18

0

20

40

60

2012S2

2013S1

2013S2

2014S1

USD /

MWh Reference price 13.8%

• However, with a growing

trend in electricity rates

(annual increase of over 13%)

and a decreasing PV tariff,

generation parity in Texas

should be monitored

recurrently

• Moreover, this PV rate may

allow achieving PPA

contracts with large

consumers or utility

companies

CONCLUSIONS

Main conclusions

• The results of the GPM analysis show that only Chile is in a full generation parity situation, although

Morocco, Italy and Mexico are or have been close recently

- Given the volatility in wholesale markets, the fast decline of PV prices (much higher in the utility segment

than in residential or commercial segment), and ongoing regulatory reforms, PV utility-scale

competitiveness should be recurrently monitored over time

• The fact that generation parity has not been reached in a country does not imply that utility-scale PV

plants will not be built, as other reasons may trigger such an investment, e.g.:

- A RPS (Renewable Portfolio Standard) system is in place

-


- A FiT exists

- A convenient PPA scheme has been granted to the investor

• The required tariff in this report is calculated based on the economics of the PV plant under a project

finance scheme, since this is currently the most common form of financing

- Other financing possibilities that could significantly improve generation parity results have not been

analyzed in this report

• New countries (Central America and MENA) and different financing schemes (corporate bonds) for PV

installations will be included in the 2015 issue of GPM for utility-scale segment

Source: ECLAREON

19

The GPM is a Series of analyses that show the evolution of PV

competitiveness in different consumer segments: residential,

commercial, and utility-scale

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UTILITY SCALE


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photovoltaic grid parity monitor - utility scale - 1

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