1. Financing Considerations for Renewables and Energy Efficiency Projects By Guido Alfredo A Delgado August 28, 2006 FUTURE ENERGY SCENARIOS TOWARD SUSTAINABLE ENERGY POLICIES AND PRACTICE IN THAILAND WORKSHOP

2. Background CEO Chairman Former CEO GAAD Inc. Financial Consultancy firm focused on investment banking for the power sector; mobilized over US$2.0B for the Philippine sector over the last 4 years Philippine Power Distributors Investments Corporation (PPDIC) Holding company with subsidiaries involved in the management of power utilities, technical advisory, energy management systems, and IT systems National Power Corporation 1994-1998 and was mainly responsible for mobilizing over 3,000 MW of new power to address 12-hour brownouts.

3. Philippine Generation Mix

4. Addressing Power Needs Grid electricity Renewables –Grid –Off-grid (distributed generation) Energy management – REDUCTION of consumption -- MANAGEMENT of load profile

5. FINANCING RISKS Energy Efficiency Projects Renewable Energy Projects

6. RENEWABLE ENERGY = ENERGY EFFICIENCY The cleanest energy Is the energy not consumed (saved) And which costs less

7. Energy Management For energy management from the private sector’s standpoint to make sense, grid tariffs should reflect real costs – every hour in the grid load profile –Will provide market opportunities for energy management services and renewable power –Will reduce actual fossil-fuel power plant utilization especially at peak leading to reduced emission

8. TOU Schedule

9. Why the Consumer cost will be higher Customer Load Profile Savings Loss

10. ENERGY EFFICIENCY SOLUTION THERMAL ENERGY STORAGE: - Ice at night and chilled water during the day

11. Energy Management Current Load Profile Blue: Thermal Red: Pure Electricity Managed Load Profile Blue: Thermal Red: Pure Electricity

12. Indicative Annual Energy Savings In kWhCurrent SystemProposed System Energy Peak Off Peak 5,267,977 4,950,351 317,626 5,267,977 4,950,351 317,626 Thermal Peak Off Peak 9,783,387 9,193,509 589,877 5,637,450 3,891,160 1,746,290 Total Peak Off Peak 15,051,364 14,143,860 907,504 10.905,427 8,841,511 2,063,916 4,145,937

13. PROJECT RETURNS Project Cost: US$1.0M SAVINGS: 4M kwh x US$0.04 = US$0.16M Payback: 6.25 years RISKS: –Regulatory: who will guarantee that the utility tariff of US$0.04/kwh will remain the same for the next 6 years?

14. FINANCING ISSUES FOR ENERGY EFFICIENCY PROJECT New consumption Savings Old consumption BANK FINANCING “Physical” savings Financial savings May be guaranteed by technology providers Can only be guaranteed either by: Regulatory order Long-term power sales contract

15. FINANCING ISSUES FOR RE PROJECTS Diesel versus solar for an isolated grid

16. TIME COST NPV SOLAR > NPV DIESEL CASHFLOW OF SOLAR VERSUS DIESEL

17. TIME COST CASHFLOW OF SOLAR AND PROJECT FINANCE The challenge of project finance for solar… …is to move this lump here… …to here.

18. TIME COST SOURCE OF REVENUE FOR PROJECT FINANCE Theoretically, the financing can be done if… Savings …the savings as the source of revenue…. …will be sufficient to cover the amortization of the financing.

19. TIME COST NPV SOLAR > NPV DIESEL THE RISKINESS OF THE REVENUES The risk is measured by determining the appropriate discount rate when computing the project’s NPV.

20. TIME COST RISKINESS OF THE REVENUES Riskiness (or quality) is determined by… Country risks Political – stability and monetary policies (forex) Regulatory Quality of the technology Availability of expertise Maintenance Operations risks e.g. hydrology Market risks Volume Price Credit Any deterioration in any of these factors, can make this line… …go down and therefore reduce or undermine the expected savings.

21. TIME COST THE AVAILABILITY PROJECT FINANCE Project finance for ordinary IPP and grid-based projects have tenors of 12-15 years. This type of financing…..will require much longer tenors.

22. TIME COST MARKET MECHANISMS AVAILABLE Ability to monetize desirability of effects of RE e.d. carbon credits. Effect Putting less stress on the revenue and tenor of the financing

23. TIME COST MARKET MECHANISMS AVAILABLE Straight subsidy on the cost of the technology to help in competitive markets Effect Putting less stress on the revenue and tenor of the financing

24. TIME COST MARKET MECHANISMS AVAILABLE Customer quality – purchasing power, credit behavior, titles to assets Effect – discount rate to achieve NPV is lower when these qualities are positive Leading to higher value to back up long- term credit

25. FINANCING ANALYSIS Payback: 5 years i.e. circa 18% IRR after tax Leverage: 70:30 to improve IRR Debt service cover: Minimum energy off-take: same tenor as loan How to compute: –Compute annuity of Total Project Cost @ 18% –Add Fuel Cost: price is “pass-through” –Divide by the annual kwh to be purchased = MEOT IMPLICATION: FINANCIAL TERMS ALMOST HAS NO CONNECTION TO THE PHYSICAL PROFILE OF EITHER THE EE OR RE PROJECT FURTHER IMPLICATION: GET YOUR CONTRACT TO SELL FIRST!

26. TO SUMMARIZE GENERATOR -- Competition DISTRIBUTOR -- Buy-and-sell -- Pass through REGULATOR -- Tariffs -- Market power END CUSTOMER FINANCIAL MARKETS -- Financing efficiency i.e. breadth and depth -- Settlements systems to minimize leakage GOVERNMENT -- Environmental Policy -- Competition policy Physical Flow Financial Flow For REs, Financing terms Will depend on cashflow risks For EEs, Financing terms Will depend on regulatory risks

27. SOME CONCLUSIONS For private sector to participate in either REs or EE projects, the regulatory framework must be very clear –If clear, subsidies/guarantees may no longer be necessary Otherwise, bank financing will still be based on collaterals and balance sheet financing rather than project financing; –In this case, what’s the economic value of all these promotions for Res and EEs? –Or guarantees and subsidies will still be required –BIS rules must also be considered: collaterals

28. FINANCIAL AND MARKET RISKS LARGE BASELOAD GENERATORS Transmission risks Distribution risks Wholesale Market risks Payment risks Individual Clients Distributed Generation DSM No transmission risks Specific credit risks Mitigated market risks BUT MAJOR REGULATORY RISK Demand side management

29. THANK YOU