PV Power project economics (optimization) Speaker: Emmanuel Guyot - - PowerPoint PPT Presentation

Speaker: Emmanuel Guyot April 2012

PV Power project economics (optimization)

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Key Components of a PV Power Plant

A PV Power Plant consists of a few core components

Overview of a PV power plant and its main components

MAIN COMPONENTS A MODULE

| Conversion of sunlight into DC electricity

B INVERTER

| Conversion of DC electricity into AC electricity

C MOUNTING SYSTEM

| Structure for installation of modules – either fixed or moving (tracking)

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Introduction to Solar PV Technology

PV technology is split in three main categories and each technology differs in efficiency, costs and required area

Comparison of common PV technologies

| High efficiency lowest cost/ kWh | Low technology cost faster payback | Higher efficiency + lower technology cost best value for money

Solar PV Categories Area for 1 kWp [m2] Module Costs Module Efficiency [%] Monocrystalline Polycrystalline Thinfilm – – a-Si CIGS CdTe 7 – 9 8 – 11 11 – 20 +++ ++ + / ++ 13 – 17 11 – 14 6 – 11 System Costs ++/+++ ++ +/++

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The project life and finance cycle shows entry and exit of players that needs to be anticipated right from the beginning

Project life cycle (schematic)

| 1-2 years

Development & Finance EPC / Construction Operation Project Development Project Finance Purchasing Planning and Execution Commercial & technical Mgmt. Time- frame Ø Main Mile- stones

| Equity closure (4 month) | Financial closure (2 months) | First operation cycle (1 year) | Cruise operating Regime (24 years) | 10 Months (depending on size of project) | Land | Building Permit | PPA | Equity | Debt in place | COD (commercial operation date) | First accounting Results (proof of IRR expectations) | Project decommissioning (after project lifetime)

LESSONS LEARNT FROM PROJECT DEVELOPMENT

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PV Projects have the advantage to be comparable to financial products as they are straight forward on a technological perspective

Main characteristics of PV projects

Reliable

| Technology is simple and passive | Maintenance is light | Module life time 25 years

Predictable

| Sunlight is stable through the years | Energy yield are predictable and Regular | Output directly linked to quality of modules / inverters | O&M costs are stable

Safe

| Returns are known well in advance | Economical reality does not vary too much from simulations

LESSONS LEARNT FROM PROJECT DEVELOPMENT

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Key Quality issues in PV Modules

Melting of Junction Box Frame damage e.g. due to water in cavities Short Circuits due to incorrect soldering Degradation of anti- reflective coating Hotspots due to imprecise cell alignment Degradation of cell connectors Micro Cracks Delamination

The 8 most common quality issues in modules

Issues in Component Integration

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Every system has losses – but they can be minimized

Overview of possible system losses and optimization levers

Issues in Component Integration

| Temperature losses | Shading losses | PV loss due to irradiance level | Array soiling loss | Module array mismatch loss | DC wiring losses | Inverter loss during operation | AC losses from inverter to grid @ peak | | Gain in overall solar insulation due to module tilt | Module | Plant Design | Modules | Operations & Maintenance | Modules | Choosing the right cables, minimizing cable distances | Inverters, Modules | Cabling sizing, minimizing cable distances | Transformers | Plant design

Loss reasons Optimization lever Power fed to the grid

8-12% 0-1% 3-4% 1-2% 2-5% 1-2% 2-2.5% 2-3% 2% Typical average losses

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The wrong technology choice could result in huge revenue losses for a project

Influence of technology choice on project revenue per component

1 CHOICE OF TECHNOLOGY

CHANGE REMARK

| Efficiency and reliability varies up to 3% between manufacturers | Irradiation is very well predictable System efficiency Module Inverter Irradiation System output

PROJECT EXAMPLE

| 10 MWp (PC) solar farm in Thailand region | Estimated output: ~15 MWh/year | 6% efficiency loss: ~0.9 MWh/year | Loss of ~ 346 000 USD /year in revenues | Extrapolated to 25 years of project lifetime the loss amounts to | ~ 2.2 M USD on project NPV | ~ -1.8% on project equity IRR

x =

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Wrong project timing will have a key impact on project returns and project sustainability

2 WRONG PROJECT TIMING AND DELAYS

Example for impact of delay Possible delay reasons

| Unprofessional EPC contract can cause delays in procurement and construction phase | Authorities can cause delays due to administrative hick-ups | Financial close can be delayed by banks involved | Seasonal climate (monsoon) can cause delays | Example: 3 month delay | Risks involved due to delay | Risk to view PPA Expiring (Limit date) | Risk of major agreements to be re- discussed or renegotiated (Land Lease) | Loss of 3 month Cash flows at the beginning

• f the project (higher weight in NPV

calculations) | Risk of loan not being in lined with cash flows (treasury risk) | Irreversible deterioration of Project IRR | Result: reduction of cash inflow by | ~ 1.5 MUSD

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The absence of clear exit strategies reduces the attractiveness of your project for co-investors

Investor types and possible exit strategies

3 ABSENCE OF CLEAR EXIT STRATEGIES

Investor types TYPES OF EXIT STRATEGIES | Innovation funds | Development banks | Sector Trade Sales | Buy back of shares by remaining shareholders | IPO (min. 50 MWp) | … | Utilities | Pension funds | Investment period of up to two years | Early bird investors | Investment over whole project life time | Create exit for short-term investors

SHORT-TERM INVESTORS LONG-TERM INVESTORS

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Through the eyes of Finance, a project is Risk Management

Overview of project development framework

ENVIRONMENT “Framework” TECHNOLOGY “Know-how” PLAYERS “human factor” PROJECT FINANCE | Social Need | Political framework | Geological conditions | Yield check | Technical feasibility | Technical/site risks | Promoters | Technology suppliers | Investors | Banks Land + Rights

LESSONS LEARNT FROM PROJECT DEVELOPMENT

Project development

| Mitigate the risks of a project by | Proper project documentation | Scenario Analysis | EPC Guarantees

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For an equity investor a bad project is a project showing him shadow areas and risks with no answers, no mitigations …

Overview Project risks

PROJECT INTERNAL RISKS TECHNOLOGY RISK | Clear shareholding structure of SPV with clear leadership Clear ownership rights | One Majority shareholder mastering with track record | Clear exit strategies | Potential delays in EPC | Previous References project implementation (Shareholders/EPC) in the country | Degradation factor of modules (generation)

• ver the years

| Efficiency of components (Modules Inverters) | Guarantees on performance/yields | O& M issues | Political stability and energy framework | Project geological location | Project administrative environment | PPAS Capacity of local institutions to honor PPAs | PPAs duration and renegotiation risk | Land lease risks

INTERNATIONAL CO-INVESTORS APPROACH

PARTNERSHIP RISK ENVIRONMENT RISK

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The choice of the EPC contractor is key as it is seen by the project players as the main guaranty of project returns

Overview of risk-limiting function of EPC Provider for the project

PROMOTERS | Individuals | Utilities BANKS | Local | International | Development REGULATORY AGENCY | Utilities | Regulatory Energy Commission | Municipalities INVESTORS | Family office | Funds | Utilities | Banks EPC CONTRACTOR | Quality | Time

Lessons learnt from Project Development

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The example project is a 10 MWp-Project, financed by 30% Equity and 70% debt

Project example: Details and key figures

PROJECT OPTIMIZATION / CASE STUDY OF A 10 MWP SOLAR POWER PLANT

Project Details Capital Structure

| Installed capacity: 10 MWp | CAPEX: USD 2.1m / MWp | Development costs: ~15 KUSD / MWp | Civil engineering: ~10% of CAPEX | O&M: ~1% of CAPEX per year | Equity held by mix of investors | Debt provided either by | Local banks (recourse) or | International banks (mix of local currency / international hedge loans | Non recourse

Reference by figures

70% 30% Equity Debt

• Dev. banks

Promoters Funds Equity Investors 7 MUSD

• 21 M USD

| Inflation rate: usually between 3 to 6% | Actualization rate: 10% | Loan interest rate: between10 % to 14% | Loan Duration: from 7 to 12 years | Equity portion asked by banks: From 20 to 40% | PPA duration: from 10 to 15 years | PPA FIT: from 20 to 30 USD cts / kwh | Equity IRR: from 10 to 16% | Project IRR: always inferior to equity IRR (as if equity is 100%) | DSCR: min required by banks : 1.3

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Ranked by importance weight on EQUITY IRR

PROJECT OPTIMIZATION / CASE STUDY OF A 10 MWP SOLAR POWER PLANT

Key Factors For Project Optimization

There are several important variables that determine the equity IRR of a project

Equity portion required by banks 1 FIT 2 Project CAPEX 3 Power generation efficiency (Modules / Inverters) 4 Distance to Substation Meter (losses) 5 Interest rate 6 Duration of loan 7

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In order to reach a successful financial close of a project, the project has to be developed properly

KEY FACTORS FOR SUCCESSFUL FINANCIAL CLOSURE

KEY SUCCESS FACTORS FOR PROJECT FINANCIAL CLOSURE

Bundle projects together (5MWp) Make the proper simulations anticipating environment changes (sensitivity analysis) Identify the right partners Define precisely exit strategies Allow fast and transparent access to information Anticipate timing sequence of events and delays