project financing of energy projects

| January 3, 2016

One of the objectives of this course was to develop a thorough understanding of project finance—specifically non-recourse project

financing of energy projects in emerging economies—and to challenge you to consider real world problems. To do so, we have discussed,

and you are asked to explore the cost generation model and the LCOE models.

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One of your first assignments at a NYC financial institution may be assessing the viability and attractiveness of different energy

projects. Using the cost of generation model, assess whether to invest in the following project. In doing so, answer the four questions

following the project description.

Case study: Orascom Wind Project in Egypt. January 1, 2016—

 The proposed project design calls for 40 2.5MW Suzlon turbines to be sited offshore in the Red Sea. Our preliminary data collection

suggests a project average wind speed of 18 miles per hour suggesting 219,000 MWh of production.

 Due to the project’s close proximity to India, we anticipate buying the turbines from Suzlon Energy for $200 million CIF. Because of

the offshore location, it will cost an additional $20 million to build the offshore pylons and to interconnect the turbines. This

construction phase of the project will take 19 months and is scheduled to start January 1, 2016.

 Suzlon will be providing 50 percent of the financing and European Investment Bank (EIB) the balance. There will be a debt financing fee

from both EIB and Suzlon of $300,000 provided that project debt does not exceed 70% of the total project cost for equipment, balance of

system, and project/utility integration. The project should qualify for a 10% investment tax credit, and any tax benefits earned, may be

used to offset other income.

 The development group estimates that fixed annual operations and maintenance will cost $3million and that the variable operational

management of the facility will be an additional (.007$kWh). Initial site preparation, design studies, and regulatory and environmental

permitting will cost $4 million. Insurance is estimated at three percent of equipment and balance of system costs.

 The developers anticipate a 20-year lifetime for the project. What can we model as an appropriate interest rate for both the

construction loan and project loans from EIB and from Suzlon.

Although estimates vary, the international financial community now anticipates higher inflation rates of 7-9%. In Egypt, the developers

anticipate a 20% corporate federal tax rate. What is an appropriate cost of equity and what is an appropriate discount rate?

The Egyptian Electrical Authority (EEA), which controls the lease for the offshore site, has agreed to connect the wind farm to their

distribution grid at their cost. They will charge us a three percent annual lease royalty.

We are in the process of negotiating a cost for the electricity delivered to the grid. Egyptian electrical prices are typically subsidized

with recent wind farm electricity costs estimated to be about 700EGL/MWh according the Egyptian-German High Level Joint Committee on

renewable energy. Energypedia suggests a price of Euro .06 cents/KWh

 https://energypedia.info/index.php/Egypt_Energy_Situation

 Because of the recent political unrest in Egypt, our board of directors is seeking a higher IRR than we would generally be willing to

accept. Our concern is that a higher level of return may result in too high a price for the EEA.

 Please review the following document on MACR depreciation and select the most appropriate MACR of 5, 7, 15, 20 years. Depreciate at

100%, unless you think a different percentage is warranted.

http://www.ourenergypolicy.org/wpcontent/uploads/2014/01/MACRSwhitepaper.pdf

 Questions to be answered:- Â

1) Given the underlying assumptions, what will the price of electricity for sale to the

EEA have to be to deliver a 15% and 20% IRR. What price escalation do you

consider relevant? E

2) If the price is too high, what strategy do you suggest we take in negotiating with

the EEA for them to agree to the consequent price of electricity necessary for our

15 and 20% IRRs?

3) Given the unfolding situation in Egypt, what additional economic and financial

risk factors exist for the project. If the Egyptian government agrees to the PPA

that results in a 15%, or even better a 20% return, should we go forward with the

project?

4) Using the LCOE model, calculate what the LCOE of the generated electricity will

be?

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Print out your cash flow results and assumptions on a single one page. Submit on no more than two pages the answers to questions 1-3

detailing any assumptions. You can add additional assumptions/analysis pages to support your recommendations.
For an explanation of terms and items, see: Demystifying LCOE
Assumptions
Project size (w) 500,000
Cost/watt $4.60
Investment Tax Credit 30%
Watt-hours/Watt-peak 1,840
Derating 80%
Discount rate 10.0%
Productive years 20
Degradation 0.50%
Operations cost 0.50%
Inverter replacement year 10
Inverter replacement cost ($/W) $0.35
Levelized cost of electricity $0.288
Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34

35
Production
kWh Produced (actual) 735,840 732,179 728,536 724,912 721,305 717,717 714,146 710,593 707,058 703,540 700,040 696,557 693,092

689,643 686,212 682,798 679,401 676,021 672,658 669,311 0 0 0 0 0 0 0 0 0 0 0

0 0 0 0
kWh Produced (discounted) 668,945 605,107 547,360 495,125 447,874 405,132 366,470 331,497 299,862 271,245 245,360 221,945

200,764 181,605 164,274 148,597 134,416 121,588 109,985 99,489 0 0 0 0 0 0 0 0 0 0

0 0 0 0 0
Total lifetime kWh produced 6,066,638
Costs
CAPEX $1,610,000
Maintenance cost $8,050 $8,050 $8,050 $8,050 $8,050 $8,050 $8,050 $8,050 $8,050 $8,050 $8,050 $8,050 $8,050

$8,050 $8,050 $8,050 $8,050 $8,050 $8,050 $8,050 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

$0 $0 $0 $0
Inverter replacement $175,000
Total cost (discounted) $1,610,000 $7,318 $6,653 $6,048 $5,498 $4,998 $4,544 $4,131 $3,755 $3,414 $70,574 $2,821 $2,565

$2,332 $2,120 $1,927 $1,752 $1,593 $1,448 $1,316 $1,197 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

$0 $0 $0 $0 $0
Total lifetime cost $1,746,004
Overall cost per kWh $0.288

Capacity factor 21%
8760
Annual Ouput 919800

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