Wind Project Finance & Development - TERI University MTECH and MBA Guest Lecture Wednesday, April 27, 2011
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Wind Project Finance & Development TERI University MTECH and MBA Guest Lecture Wednesday, April 27, 2011
Introduction
• This presenters today are Sumit Kadakia and Alieda Baig, both members of the
strategy and finance team at Emergent Ventures
• Emergent Ventures is a climate change and clean energy development firm
o Started as a carbon advisory business
o Has built a clean energy team over the past 3 years
o Currently working on a portfolio that spans a range of renewable energy technologies
– Biomass combustion
– Biomass gasification
– Waste –to-energy
– Solar
– Wind
o Wind is primary handled through a majority owned subsidiary, WinDForce Management
Systems
What you should get out of today’s discussion
A general overview of the wind project
development cycle
Wind project fundamentals and economics
Key opportunities / challenges for
developing and funding projects in India
An overview of the wind industry in India
• 5th largest in terms of installed capacity
• Primary renewable energy source contributing
over 70% of the total renewable energy in
India Country-wise wind power installation- June 2010
(MW Installed)
• Very favorable environment, mature markets, 40,000
low technology risk due to tested variations,
substantial support from the government 30,000
• Numerous Indian and International WEG 20,000
manufacturers active in India; this increases
10,000
competition and consumer orientation; makes
for easier market penetration in some cases 0
• CWET estimates that wind power potential is USA China Germany Spain India Italy
at 70 GW; only ~12 GW is installed;
opportunity is therefore huge
Basic components of a turbine and wind farm
690V 33KV 110KV
DP Yard Farm SS Grid SS
110/230KV
Wind Project Case: TN Wind Setup A colleague of yours has approached you to perform a feasibility study for a 100 acre site in Tamil Nadu which should yield a 10MW wind farm. He has seen other wind turbines in the area and believes he may be able to construct a farm in the region He has a few basic details about the site: • A wind resource assessment has been conducted and indicates an expected PLF of 33% • About half of the land is held by small farmers, the other half is held by a single large land-owner Some requirements he informs you of: • His company has a hurdle rate of 18% on equity investments • Any investment made today must begin to generate cash by December 2012
Process for wind farm development
Land Technology
Wind Resource Obtaining
Identification identification Micrositing PPA structure
Assessment approvals
and Acquisition and sourcingFinding a good wind site is the first step of the
development process
Land Technology
Wind Resource Obtaining
Identification identification Micrositing PPA structure
Assessment approvals
and Acquisition and sourcing
What is it? • A wind resource assessment (WRA) is an assessment used for
developers to determine the power output from a proposed wind
farm
Why? • Precision and accuracy is crucial for a WRA because this helps mitigate
the risk of farm under-performance
• There are typically three steps during a WRA process
Process
• Preliminary Area Identification
• Area wind resource evaluation
• Micrositing
• At a minimum data must be collected for one year to understand the
Standard
seasonal and diurnal variations in wind flow; 2-3 years of data
produces more reliable resultsFinding a good wind site is the first step of the
development process
Land Technology
Wind Resource Obtaining
Identification identification Micrositing PPA structure
Assessment approvals
and Acquisition and sourcing
Preliminary area identificationFinding a good wind site is the first step of the
development process
Land Technology
Wind Resource Obtaining
Identification identification Micrositing PPA structure
Assessment approvals
and Acquisition and sourcing
Area wind resource identificationLand identification is a detail-oriented process that
must be tightly controlled
Land Technology
Wind Resource Obtaining
Identification identification Micrositing PPA structure
Assessment approvals
and Acquisition and sourcing
What is it? • Land identification and acquisition is the process undertaken to find
available tracts of land, legally due-diligence the land and finally
purchase it
Why? • Can be done on a point or contiguous basis
• Better question is why should this be done right: land acquisition is a
make or break step for all renewable energy projects – especially as a
developer. No one wants a claim after turbine erection.
• Deploy land team at site
Process
• Vet brokers / agents
• Have transparent negotiations for price
• Document collection / legal opinion / registration
Standard
• Often a commercial callHow to pick the right turbine?
Land Technology
Wind Resource Obtaining
Identification identification Micrositing PPA structure
Assessment approvals
and Acquisition and sourcing
There are many turbine manufacturers to choose between…Choosing a turbine should be a techno-commercial
decision
Land Technology
Wind Resource Obtaining
Identification identification Micrositing PPA structure
Assessment approvals
and Acquisition and sourcing
Quantitative Qualitative
•Sweet area / MW •Blade Airfoil
•Hub Height •Blade Manufacturing
•Annual Energy •Power regulation
Output / MW •Generation system
•Braking system
Evaluate
Organizational Operational
commercially
•Structure in India to •Track record of
take care of O&M maintenance
•Spare parts •Track record of
•Liabilities from availability
contractsA few technical charts…
Land Technology
Wind Resource Obtaining
Identification identification Micrositing PPA structure
Assessment approvals
and Acquisition and sourcing
Sweep area
Power CurveApprovals for wind: Evacuation and Land (if necessary)
Land Technology
Wind Resource Obtaining
Identification identification Micrositing PPA structure
Assessment approvals
and Acquisition and sourcing
• Three main types of permitting required for farms:
• No objection certificates (NOCs)
• Evacuation capacity
• Forest land clearance (if using forest land)
• In TN, Evacuation used to be promised to wind farms based on a system called
IDC (Infrastructure Development Charges).
• Developer / owner would pay about 26 lakhs / WTG
• TN would provide capacity and maintain substation
• Demand was so high, TN was unable to keep up
• Now developers can file to build their own substation and evacuation systems.Micrositing – the fine tuning of turbine placement
within a farm
Land Technology
Wind Resource Obtaining
Identification identification Micrositing PPA structure
Assessment approvals
and Acquisition and sourcing
What is it? • Micrositing is the process of quantifying the small-scale variability of a
wind resource over a given terrain
Why? • Necessary to conduct especially when there is surface roughness
• Typically done with specific micrositing or wind-farm development
Process software:
• WAsP
• MeteodynePPA structures available in TN
Land Technology
Wind Resource Obtaining
Identification identification Micrositing PPA structure
Assessment approvals
and Acquisition and sourcingWind Project Case: What do you need to know about
this project?
Setup
A colleague of yours has approached you to perform a feasibility study for a 100 acre
site in Tamil Nadu which should yield a 10 MW farm. He has seen other wind turbines
in the area and believes he may be able to construct a farm in the region
He has a few basic details about the site:
• A wind resource assessment has been conducted and indicates an expected PLF of
33%
• About half of the land is held by small farmers, the other half is held by a single
large land-owner
Some requirements he informs you of:
• His company has a hurdle rate of 18% on equity investments
• Any investment made today must begin to generate cash by December 2012
Based on this information, what are the 10
initial questions to ask your friend?Recommended areas of inquiry
• Is the land contiguous? • What model turbine is the
Land • Do all land holders have Turbines project using and why?
clear title? • What is the land
requirement for a single
turbine?
• Do we have a primary- • What kind of state / national
WRA source WRA? Regulatory incentives are in place ?
• If so, how many months of • Will they be applicable for
data? this project?
• Is there evacuation capacity • Will the project be eligible
Evacuation available in the region? Credits for CERs and RECs?
• Does the project have • Any other benefit
approval to expand
capacity?
• What is the expected mode • What is the total project
Cost (CAPEX
Power sales of power sales? cost?
and OPEX)
• Are there LOIs in place? • What operational costs will
the project face?Detailed information about the project
• Land purchased on a point • Project uses 1.8 MW Vestas
Land basis Turbines turbines
• Detailed land title diligence • Rotor diameter of 100M
pending
• Primary WRA with 2 years of • Preferential tariff for SEB sales
WRA data Regulatory • GBI
• PLF of 33% is a P50 PLF • Preferential transmission rates
• No, but permission to build • Project will be eligible for
Evacuation substation to handle project Credits CERs regardless of power
capacity sales methodology
• Eligibility for RECs if no
preferential treatment
• Group captive and SEB sales Costs • 7 Cr / MW
Power sales are both possible (CAPEX and • O&M & Insurance of 2% of
• LOIs in place with 5 off- OPEX) Project Cost
takers • Interest cost of 11%
• Transmission costsSummary • Wind project development is approximately a 1.5-2 year play if done properly • WRA is the most important step – the other pieces can be re-done at a later point • Evacuation and land are currently the two largest constraints • PPA structuring will often have the largest impact on project economics
Questions?
Wind project finance
Wind project finance overview
• Limited recourse or “project finance”
o Debt is backed only by the project assets and the revenues they are able to generate
o In case of default, the lender cannot pursue the non-project assets or revenues of equity
holders/project promoters
• Be prepared for lots of contracts!
Lenders Investors
Loan Agreement
Share Purchase Agreement
WTG Purchase Off-taker/s
Turbine Agreement
Manufacturers Project Co Power
Construction Purchase
Agreement Agreement
O&M
O&M Provider
ContractWind project finance overview: Incentives
• Given current market and technology, wind projects cannot compete with thermal
projects on price alone
• Public incentives are key to making wind competitive :
o Feed-in Tariffs
o Renewable Energy Certificates (RECs)
– “Environmental Attributes” corresponding to 1 MW of electricity generated
– Tradable to meet state targets
o Certified Emissions Reductions (CERs)
– Carbon reductions generated through the Clean Development Mechanism
o Generation-Based Incentives
– Rs. 0.50/unit (capped at Rs 62 lakh/MW and Rs. 15.5 lakh/MW annually)
o Accelerated Depreciation
– Up to 80% of the project in the first yearWind project finance overview: Incentives
For a Sample 25MW Wind Project in Tamil Nadu, REC/CER sales drive profits
Equity IRR (%)
45% 38% 39% 39%
40% 36%
1%
35%
2%
30% 20%
25% 16%
20% 39%
15%
10% 11%
5%
6%
0%
Base tariff + REC (at 1.5 INR + REC (at 3.9 INR + CER (at 8 EUR / + CER (at 12 EUR Total
/unit) / unit) tonne of CO2) / tonne of CO2)Wind project case continued: PPA Structure
• What are the benefits of selling to the state electricity board vs. to captive
consumers?
Model SEB Group Captive
Tariff (INR) / unit 3.39 4.0
Availability of RECs No Yes
Preferential transmission Yes, 5% No, ~11%
charges
Credit risk None, but late payment Dependent upon off-
likely taker specifics and
number of consumers
Friend decides to select group captive
because of the availability of the higher
recognizable tariff and RECsWind project finance overview: Risk Assessment
• Credit analysis is key! Identify the risks in the project, project sensitivities and
appropriate mitigation strategy.
• Contracts must clearly demonstrate roles and scope of different counterparties.
Risk Examples Mitigation Strategies
Regulatory Change in tax regime; eligibility • Price-certain long-term PPA
for incentives • Take-or-pay agreements
• Diversified revenue streams
Construction Project delays and cost over-runs • Parent company guarantees
• Liquidated damages
Operational High O&M costs; machine • Performance guarantees
breakdowns • Insurance
Sales Off-takers do not pay; terminate • Credit analysis of off-takers
the PPA • 1-3 mo L/C
Market Unexpected changes in exchange • Swaps or other hedging strategies
rates, interest rates or inflation • Fixed rate debt
• Government guarantees/supportWind project case continued: Bank Financing
• Your friend has proceeded with the project and is now seeking funding from
domestic banks. He has asked you for your opinion on willingness for banks to fund
such a project with non-recourse financing and has provided you with the following
returns information below. Do you think this is possible?
Model At P50 PLF with 1.5 REC At P90 PLF, no RECs, no
and 8 EUR CERs CERs
Equity IRR 18% 5%
Project IRR 13% 7%
Average DSCR 1.95x 1.42x
Minimum DSCR 1.68x 1.27x
Loan period 10 years, 1 year 10 years, 1 year
moratorium moratorium
Leverage 70% debt / 30% equity 70% debt / 30% equity
Interest rate on debt 11% 11%Wind project case continued: Bank Financing
Conclusions
• Banks will always conduct a credit analysis at your “worst-case” scenario
• If the project does not meet guidelines in this scenario, banks will often ask for a
change in the project’s leverage. This can be done in one of three ways:
o Setting up a debt service reserve account (DSRA) of typically 6 months
o Providing parent company guarantees and /or letters of credit
o Reducing the debt / equity ratio
• However, there are factors on the promoter’s side that can influence banks
willingness to lend
o Relationship with bank
o Track record in industry
o Adjust loan repayment schedule to align with revenue projections (e.g. balloon, principle
moratoriums)
• Banks will look beyond pure return matrix and seek additional comfort on contract
terms and conditions
o Break up of project costing
o Warranties
o Liquidated DamagesQuestions?
Thank you!
Can be reached at:
alieda.baig@emergent-ventures.com
sumit.kadakia@emergent-ventures.com
sumitkadakia@gmail.comYou can also read
