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Deloitte Consulting LLP August 2012 Positioning P3 for Success and Applications for Energy Sustainable Energy Workshop 2012
© 2010 Deloitte Global Services Limited 1 About Deloitte Deloitte is a leading professional services firm with a commitment to energy and sustainability Financial Services ManufacturingEnergy & Resources Health Care Consumer Business TransportationPublic Sector Real Estate TMT Audit and Enterprise Risk Finance Operations and Controls Transformation Financial Instrument Valuation & Securitization Governance, Regulatory & Risk Strategies Financial Advisory Corporate Finance Advisory Capital Projects Business Valuation Consulting Strategy & Operations Human Capital Technology Tax Global Business Tax Services Multistate Tax Indirect Tax Services Industries Sustainability
© 2010 Deloitte Global Services Limited Contents Positioning P3 for SuccessApplications for Energy - Definition of P3 - A Case Study and Lessons Learned - Strategic Considerations - P3 Execution Challenges - Solutions
Positioning P3 for Success
© 2010 Deloitte Global Services Limited 4 Definition of P3 I P3 enables an overall energy and sustainability strategy and the definitions are broad A public-private partnership, or P3, refers to a contractual agreement formed between a government agency and a private sector entity that allows for greater private sector participation in the delivery of public projects. Compared with traditional procurement models, the private sector assumes a greater role in the planning, financing, design, construction, operation, and/or maintenance of public facilities.
© 2010 Deloitte Global Services Limited 5 Definition of P3 II At the Federal level, there are lesser-known tools in the P3 toolbox that can be used to great affect Government | Commercial Partnership Description Alliance AgreementAlliance Agreements are legal documents between one or more parties, for the purpose of competitive intelligence, drafting documents or to get information about transactions within a particular industry or sector. Public-Private VenturesA special-purpose public/private venture refers to a business entity that is created by public and private parties for a single specified purpose and whose activities are predetermined by the contracts and other arrangements. Enhanced Use Lease for R&D Test- bed An EUL is a contract calling for the lessee (user) to pay the lesser (owner) for use of an asset. Patent License AgreementA license to commercial companies to utilize patented government-developed technology commercially. The government retains the rights to use the technology for government purposes. Government | Non-profit Partnership Description Memorandum of Understanding (MOU) A bilateral agreement between parties, indicating an intended coordination and collaboration between agencies, rather than a legal commitment. Memorandum of Agreement (MOA)Document written between parties to cooperatively work together on an agreed upon project or meet an agreed objective (Can also be a legal document that is binding).
© 2010 Deloitte Global Services Limited 6 A Case Study and Lessons Learned I A successful P3 can come together through many different types of transacting mechanisms Deloitte served as strategic advisors to the Government of Bulgaria on the long-term concession of Bulgarias Black Sea Coast airports. We performed an options analysis in close consultation with the Government, proposed amendments to the enabling environment for P3, assisted the Government to create a core base of stakeholder support, managed interactions with strategic investors, assisted in the conduct of the competitive tender, and built the capacity of the Civil Aviation Authority to be a strong partner for this P3. The Government received 4 proposals from leading airport development groups, and accepted the proposal from Fraport, the international arm of the Frankfurt International Airport, with an estimated total value in excess of $500M USD, while securing the long-term development of these strategic assets.
© 2010 Deloitte Global Services Limited 7 A Case Study and Lessons Learned II Establishing governance up-front helps to ensure a successful transaction and subsequent operate environment Due Diligence: legal, environmental, technical and social Developed capital expenditure plan for 10-years Identified problem with Civil Aviation Act Financial Analysis Developed traffic forecast and financial modeling Clear projections on key issues: future costs /returns to public sector and user charges International Market Study At the macro-level by sector Detailed review of individual aviation projects Options Analysis Public vs. private operation Issue: To bundle the airports to make more attractive Project Development and Implementation: Pre-feasibility activities
© 2010 Deloitte Global Services Limited 8 A Case Study and Lessons Learned III Selecting the optimal framework is a first step to a functioning governance model for the P3 Selecting a Model
Applications for Energy
© 2010 Deloitte Global Services Limited 10 Strategic Considerations I ERCOT faces some difficult supply challenges in the near- term future According to the most recent ERCOT capacity report, reserve margins are forecast at less than 10 percent by next year Coal and natural gas make up the largest share of generating capacity in Texas with more reliance on gas expected in the future ERCOT, May 2012
© 2010 Deloitte Global Services Limited 11 Future Energy Prices Developing a strategic view of future prices is critical to success Contracting The federal government has an array of available tools but their use is complex Raising Capital New funding sources require networked outreach to stakeholders Above or Behind the Meter Direct interaction with the grid will be one of the larges and most tangible sources of value for the P3. The P3 should be structured to optimize the strategic objectives of both parties in the transaction. Own or Lease Asset ownership comes with risk and will greatly impact pricing considerations Risk Management Establishing a governance model that can last the duration of the lifecycle $.05 per kwh price electric $50M annual energy cost 3% annual energy goal 1055 GWh annual energy consumption 727,485 metric tons of carbon emitted per year Mandates versus Value Selecting the optimal balance of mandates versus value will drive tactical considerations such as the type of contracting vehicle used. P3 Execution Challenges I Breaking down barriers to P3 execution requires tenacious problem solving
© 2010 Deloitte Global Services Limited 12 According to NIST forecasts, electricity escalators are flat out to 2022, excluding general inflation P3 Execution Challenges II NIST Supplemental 135 has serious analytical shortcomings, which can lead to faulty P3 pricing Measures of future prices are based on census zone, which has little direct applicability to electric markets South Region
© 2010 Deloitte Global Services Limited 13 Our analysis shows that TRE South could see significant price increases by 2030 with more than a doubling of prices from todays level in nominal terms. With large generating capacity needed in the region, a number of pricing assumptions should be evaluated to determine future strategy. P3 Solutions II Even before considering spot prices and DR opportunities, long-term energy economics in Texas yield potential
© 2010 Deloitte Global Services Limited 14 P3 Solutions III Although energy prices are local, energy markets are integrated and have global reach In todays world, local decisions quickly bump up against international factors. Long-lived P3 assets will be impacted by these factors well into the future.
© 2010 Deloitte Global Services Limited 15 P3 Solutions IV International markets could be knocking at Americas door; what are the scenarios to consider? Impact of LNG Exports on Average US Citygate Gas Prices Price Impact by Region A recent Deloitte analysis forecasts a marginal affect on domestic gas prices as a result of LNG imports. Despite varying worldviews, strategic flexibility enables strong organizations. As compared to the NIST 135 census regions, local markets and regions are a key factor in forecasting future prices. Source: Deloitte MarketPoint
© 2010 Deloitte Global Services Limited 16 Tried and true P3 tools for energy will be a major source of project funding with ARRA funds expended P3 Solutions V With a compelling and targeted value proposition, sources of capital reach beyond traditional buckets While not typically a source of outsized returns, energy project financing can go a long way to solving the asset / liability mismatch facing the U.S. and other developed economies
© 2010 Deloitte Global Services Limited 17 Solutions V Structured processes help drive execution through the transaction phase and beyond PPA Level 0 Process Steps 13 Select Agent Issue Info RequestIssue Quals RequestDevelop RFPIssue RFPAdminister RFPEvaluate ProposalsAwardDesign ProjectConstruct Project Commission SystemM&V PerformanceEnd Oversight EUL Level 0 Process Steps 12 Develop scopeNotice of Opp.Issue Notice of Opp.Evaluate ProposalsSelect ContractorLease and Mgmt. PlanIssue LeaseDesign ProjectConstruct ProjectCommission Project M&V ProjectEnd Oversight Sample Level 0 Process Steps for PPA and EUL Source: Federal Energy Management Program
© 2010 Deloitte Global Services Limited 18 Conclusion Energy and sustainability strategy drives capital budgeting decisions and P3s support and enable execution After designing a project that best meets an organizations strategic goals and objectives there are many P3 options that can support successful implementation and operations. Careful consideration is required to ensure that both parties achieve the maximum risk-adjusted value from the projects while ensuring the transaction gets done and service is maintained.
© 2010 Deloitte Global Services Limited 19 Thank You
© 2010 Deloitte Global Services Limited For more information Alexander Kasuya Manager, Deloitte Consulting
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