Concepts of economic attributes part 1
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This document summarizes key aspects of electricity generation and costs in the United States from the Annual Energy Outlook 2020 reference case. It finds that: 1) Natural gas and renewables increase as a share of electricity generation due to lower gas prices and declining costs of solar and wind capacity. 2) Electricity demand grows slowly at around 1% per year through 2050 due to economic growth offset by efficiency gains. 3) Natural gas combined cycle and solar PV are increasingly competitive technologies for new power plants based on their declining costs relative to revenues.
Concepts of economic attributes part 1
- 2. Unit 3 Concepts of economic attributes Part 1: • Calculation of unit cost of power generation :from different sources with examples, different models and methods, • Social cost – benefit analysis of renewable energy technologies • Financial feasibility evaluation of renewable energy technologies,
- 3. Part 2: • Technology dissemination models, • Volume and learning effects on costs of renewable energy systems, • Dynamics of fuel substitution by renewable energy systems and quantification of benefits
- 4. Power Generation Cost Analysis and Support for Renewables
- 6. Rationale and Goals • Renewable energy can meet policy goals for secure, reliable and affordable energy and access. • Lack of objective and up-to-date data is a barrier • Decision making based on: outdated numbers, opinion • Goals: Assist government decision-making, allow more ambitious policies Fill a significant information gap
- 7. LCOE Ranges and Averages 7
- 8. Levelised cost of electricity by country/region Note: assumes a 10% cost of capital 8
- 9. Hydropower • Mature technology, flexibility in design in many cases • Lowest cost electricity of any source in many cases • Importance will grow with penetration of variable RE 9
- 10. The LCOE of Wind © IRENA 2013 11 Higher capacity factors from improved technology Wind turbine cost reductions
- 12. Learning rates for PV modules 2013 13 Source: Bloomberg New Energy Finance, February, 2011 and IRENA
- 13. An Emerging/persistent issue: Balance of system costs? 14 Source: Seel, Barbose and Wiser, 2012
- 14. Diagnosis for support policies 14 • The patient is very healthy Technology improvements, capital costs reducing -> LCOEs falling • But growing pains may be experienced Rapid growth can lead to significant supply/demand imbalances • Suggested treatment is very patient specific Trade-offs involved, depends on market, technology and scale • Preventative measures can be highly effective Future proofing policies is challenging, but necessary • Further basic research required A lot of data exists, but it is typically not collected, IRENA to change this
- 15. Rationale and Plans 15 • Analysis to date has been based on low hanging fruit • Engage with business: The Alliance will work at a technical level on data and its availability • Alliance members share, confidentially, their data on real world project costs • Entirely voluntary, we work together for mutual benefit • Establishment period now, offical launch at Assembly • Goals: more data, better data, a greater focus on analysis of data
- 16. Structure 16 Member countries: Steering group for costing analysis focus One workshop a year Must nominate institution to deliver data Quarterly newsletter Alliance Members: Provide data, confidentially One workshop a year Ability to query the database in detail Quarterly newsletter Observers: Quarterly newsletter Mailing list for new publications/analysis
- 17. 17 Renewable are increasingly competitive, but more needs to be done to fulfill their potential…
- 18. Electricity As electricity demand grows modestly, the primary drivers for new capacity in the Annual Energy Outlook 2020 (AEO2020) Reference case are retirements of older, less-efficient fossil fuel units; the near-term availability of renewable energy tax credits; and the continued decline in the capital cost of renewables, especially solar photovoltaic. Low natural gas prices and favorable costs for renewables result in natural gas and renewables as the primary sources of new generation capacity through 2050. The future generation mix is sensitive to the price of natural gas and growth in electricity demand.
- 19. • Electricity generation from natural gas and renewables increases as a result of lower natural gas prices and declining costs of solar and wind renewable capacity, making these fuels increasingly competitive 0 1,000 2,000 3,000 4,000 5,000 6,000 2010 2020 2030 2040 2050 2019 history projections Electricity generation from selected fuels billion kilowatthours natural gas renewables nuclear coal 36% 38% 12% 13% 19% 19% 37% 24% 0 500 1,000 1,500 2,000 2,500 2010 2020 2030 2040 2050 Renewable electricity generation, including end use billion kilowatthours 2019 history projections solar wind geothermal hydroelectric other 46% 38% 14% 33% 37% 7% 15% 3% 5% 2% 19
- 20. Electricity demand grows slowly through 2050 -1 0 1 2 3 4 5 1990 2000 2010 2020 2030 2040 2050 Percentage growth (three-year rolling average) 2019 history projections High Economic Growth Reference Low Economic 0 400 800 1,200 1,600 2,000 1990 2019 2050 1990 2019 2050 1990 2019 2050 1990 2019 2050 Electricity use by end-use sector billion kilowatthours direct use electricity sales residential industrial commercial transportatio 20
- 21. • Although near-term electricity demand may fluctuate as a result of year-to- year changes in weather, trends in long-term demand tend to be driven by economic growth offset by increases in energy efficiency. The annual growth in electricity demand averages about 1% throughout the projection period (2019-2050) • Historically, although the economy has continued to grow, growth rates for electricity demand have slowed as new, efficient devices and production processes that require less electricity have replaced older, less-efficient appliances, heating, ventilation, cooling units, and capital equipment. • Electricity use in the High Economic Growth case grows 0.3 percentage points faster on average, and electricity use in the Low Economic Growth case grows 0.2 percentage points slower. —with increases occurring across all end-use sectors 21
- 22. • The growth in projected electricity sales during the projection period would be higher if not for significant growth in generation from rooftop photovoltaic (PV) systems, primarily on residential and commercial buildings, and combined-heat-and-power systems in industrial and some commercial applications • Electric power demand from the transportation sector is a very small percentage of economy-wide demand because electric vehicles (EVs) still represent a developing market 22
- 23. • An increasing share of total electricity demand is met with customer-owned generation, including rooftop solar photovoltaic 23 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 0 1,000 2,000 3,000 4,000 5,000 6,000 2015 2019 2030 2040 2050 history projections Electricity generation, end-use solar photovoltaic share billion kilowatt-hours percent share end-use solar photovoltaic share of generation end-use PV generation other end-use generation electricity generation from the power sector
- 24. 0 500 1,000 1,500 2,000 2,500 3,000 1990 2010 2030 2050 2019 history projections Electricity generation from selected fuels billion kilowatthours natural gas coal nuclear renewables 0 500 1,000 1,500 2,000 2,500 3,000 2015 2050 2019 projections 0 500 1,000 1,500 2,000 2,500 3,000 2015 2050 2019 projections Declining costs for new wind and solar projects support the growing renewables share of the generation mix across a wide range of assumptions— 24 0 1 2 3 4 5 6 7 2010 2030 2050 Natural gas price at Henry Hub 2019 dollars per million British the 2019 history projections Low Oil and Gas Supply Reference High Oil and Gas Supply Low Oil and Gas Supply High Oil and Gas Supply
- 25. $0 $200 $400 $600 $800 $1,000 $1,200 $1,400 natural gas combined cycle wind solar photovoltaic AEO2020 overnight installed cost by technology 2019 dollars per kilowatt Reference case Low Renewables Cost case High Renewables Cost case 2019 2050 2019 2050 2019 • The High Renewables Cost and Low Renewables Cost cases assume different rates of cost reduction for renewable technologies compared with the Reference case; non-renewables assume the same rates 25
- 26. • New wind capacity additions continue at much lower levels after production tax credits expire in the early 2020s, but the growth in solar capacity continues through 2050 for both the utility-scale and small-scale applications because the cost of solar PV declines throughout the projection period. • Natural gas-fired combined-cycle generation capacity is also added steadily throughout the projection period to meet rising demand. • Heat rate improvement technologies increase the efficiency of power plants. • The remaining coal plants are more efficient and continue to operate throughout the projection period. • Low natural gas prices in the early years also contribute to the retirements of coal- fired and nuclear plants because both coal and nuclear generators are less profitable in these years. —as a result of competitive natural gas prices and declining costs for renewables 26
- 27. In the AEO2020 Reference case, combined-cycle and solar photovoltaic are the most economically competitive generating technologies— 27 region with builds (2023–25) region with no builds (2023–25) Note: economically attractive builds are shown at or above the diagonal breakeven line for each technology. levelized avoided cost of electricity levelized cost of electricity AEO2020 levelized cost of electricity and levelized avoided cost of electricity by technology and region, 2025 2019 dollars per megawatthour 0 30 60 90 120 0 30 60 90120 natural gas natural gas combined- 0 30 60 90 120 0 30 60 90 120 coal, 30% carbon coal 0 30 60 90 120 0 30 60 90 120 nuclear 0 30 60 90 120 0 30 60 90 120 solar photovoltaic 0 30 60 90 120 0 30 60 90 120 onshore wind
- 28. • The levelized cost of electricity (LCOE) reflects the cost to build and operate a power plant per unit of generation, annualized over a cost recovery period • When compared with the levelized avoided cost of electricity (LACE), or expected average revenue realized by that plant, we can estimate the economic competitiveness for that generating technology • The solid, colored circles on the figure indicate that projects tend to be built in regions where revenue (LACE) exceeds costs (LCOE) • In the AEO2020 Reference case, expected revenues from electric generation for both natural gas-fired combined-cycle and solar photovoltaic with single axis tracking are generally greater than or equal to projected costs across the most electricity market regions in 2025 • Correspondingly, these two technologies show the greatest projected growth through the middle of the 2030s —when considering the overall cost to build and operate and the value of the plant to the grid 28
- 29. • The value of wind approaches its cost in nearly half of the regions. These regions see new wind capacity builds in the AEO2020 Reference case, primarily in advance of the phase-out of the production tax credit (PTC), through the early part of the next decade. • LACE accounts for both the variation in daily and seasonal electricity demand in the region where a new project is under consideration and the characteristics of the existing generation fleet where the new capacity will be added • The prospective new generation resource is compared with the mix of new and existing generation and capacity that it would displace • For example, a wind resource that would primarily displace existing natural gas-fired generation will usually have a different value than one that would displace existing coal-fired generation. Contd… 29
- 30. Onshore wind will become more competitive over time, while natural gas-fired combined-cycle and solar photovoltaic maintain their current competitive positions— 30 AEO2020 Reference case levelized cost of electricity (LCOE) and levelized avoided cost of electricity (LACE) by technology and region, 2025 and 2040 2019 dollars per megawatthour levelized avoided cost of electricity levelized cost of electricity 2025 2040 0 20 40 60 80 0 20 40 60 80 natural gas combined- cycle economically economically attractive 0 20 40 60 80 0 20 40 60 80 onshore wind 0 20 40 60 80 0 20 40 60 80 solar photovoltaic
- 31. • For both solar photovoltaic (PV) and onshore wind, LCOE increases in the near term with the phase-out and expiration of the investment tax credit (ITC) and PTC, respectively • However, LCOE eventually declines over time because technological improvements tend to reduce LCOE through lower capital cost or improved performance (as measured by heat rate for natural gas combined-cycle plants or capacity factor for onshore wind or solar PV plants), partly offsetting the loss of the tax credits. • Solar may show strong daily generation patterns within any given region • LACE for onshore wind is generally lower than other technologies because most of the generation at these plants occurs at night or during fall and spring seasons when the demand for and the value of electricity is typically lower • Solar PV plants produce most of their energy during the middle of the day when higher demand increases the value of electricity, resulting in higher LACE. —as LCOE declines through learning-induced cost reductions and LACE increases with rising demand and natural gas prices 31
- 32. • Solar and wind lead the growth in renewables generation in most regions across all cases in AEO2020 32 0 100 200 300 400 500 600 700 800 history Reference HC LC HOGS LOGS history Reference HC LC HOGS LOGS history Reference HC LC HOGS LOGS history Reference HC LC HOGS LOGS history Reference HC LC HOGS LOGS history Reference HC LC HOGS LOGS history Reference HC LC HOGS LOGS Total renewables generation (all sectors), 2018 and 2050 billion kilowatthours Northeast PJM Southeast Mid-Continent ERCOT CAISO West Note: HC = High Renewables Cost, LC = Low Renewables Cost, HOGS = High Oil and Gas Supply, LOGS = Low Oil and Gas Supply, PV= photo onshore wind offshore wind small-scale solar PV utility-scale
- 33. 33 0 10 20 30 40 0 50 100 150 200 diurnal storage Reference case 0 10 20 30 40 0 50 100 150 200 diurnal storage Reference case 0 50 100 150 200 Low Renewables Cost case 0 50 100 150 200 Low Renewables Cost case 0 50 100 150 200 Low Oil and Gas Supply case 0 50 100 150 200 Low Oil and Gas Supply case • Growth in utility-scale battery storage in AEO2020 follows growth in solar in most regions in high renewable penetration scenarios— AEO2020 regional diurnal storage and solar photovoltaic capacity, 2050 gigawatts solar photovoltaic onshore wind AEO2020 regional diurnal storage and onshore wind capacity, 2050 gigawatts CAISO ERCOT Mid-Continent Northeast PJM Southeast West
- 34. 0 200 400 600 800 1,000 1,200 1,400 2000 2050 AEO2020 coal production by region million short tons 2019 history projections total West Interior Appalachia Reference case 0 200 400 600 800 1,000 1,200 1,400 2015 2050 2019 projections Low Oil and Gas Supply case 0 200 400 600 800 1,000 1,200 1,400 2015 2050 2019 projections High Oil and Gas Supply case • Coal production decreases through 2025 due to retiring coal- fired electric generating capacity, but federal rule compliance and higher natural gas prices lead to coal production leveling off afterwards 34
- 35. 0 20 40 60 80 100 2010 2020 2030 2040 2050 Capacity factor for fossil-fired plants (AEO2020 Reference case) percent coal new multi-shaft combined-cycle (natural gas) new single-shaft and existing combined-cycle (natural gas) oil and natural gas steam combustion turbine (natural gas) 2019 history projections • Lower operating costs and higher efficiencies result in advanced natural gas-fired combined-cycle capacity factors of 80% by 2030 in the AEO2020 Reference case— 35
- 36. • After 2035, capacity factors for both combined-cycle technologies decline gradually, in part because large increases in intermittent generation through 2050 alter the dispatch patterns and requirements for fossil fuel-fired generation. • The utilization rate of coal plants has fallen significantly in recent years as declining natural gas prices have led to a shift in economics between existing coal-fired and natural gas-fired combined-cycle generators • In 2019, the average capacity factor of the U.S. coal-fired fleet was 48% compared with an average natural gas-fired combined-cycle capacity factor of 58% • After 2025, the installed coal-fired capacity level is much lower because only the most efficient plants remain online. As a result, the average capacity factor for the fleet recovers quickly and stabilizes at about 65%. —but then decline over time as natural gas prices increase and renewable generation grows 36
- 37. Social Cost – Benefit Analysis of Renewable Energy Technologies
- 38. • Introduction • Cost Benefit Analysis (CBA) • Method of Cost Benefit Analysis • Benefit Cost(B/C) Ratio • Renewable Energy Technology Parameter • CBA parameters for Renewable Energy • Implementof CBA forwind Energy • Conclusion
- 39. Introduction ⚫Concern over global warming has led policy makers to accept the importance of reducing green house gas emissions ⚫Renewable Energy system become quite favorable now a day becauseof national and international policies ⚫Still renewable energy technology is in early stage of implementation and unit cost of energy is higher than conventional plant ⚫But government provide incentive and cost based tariff tosupportrenewableenergy ⚫Cost Benefit Analysis give a idea about the acceptability of any renewableenergy plant
- 40. Cost Benefit Analysis ⚫Cost-Benefit Analysis applied to energy is the appraisal of all the costs and all the benefits of an energy project taking account of presentand futurework ⚫Cost Benefit Analysis (CBA) is little bit difference than Social Cost Benefit Analysis ⚫Cost Benefit Analysis taking account of both financial benefitanalysis and social cost benefit Analysis Cost Benefit Analysis Social Cost Benefit Analysis Financial Benefit Analysis
- 41. Choice of Cost Benefit Analysis Decision Making is aboutchoice • For an Individual: It takes CBA for own benefit and future prospective. i.e project for employee to make there future bright. • For a Company: Being Concerned with the profit earning capacityand income flow, they takecash flow analysis. • For the government: Decision making for the government is always a tough work, as it account for profit and at the same time working to provide social benefit. This is the reason because of that government project fail to become financial viable.
- 42. Method of Cost Benefit Analysis In financial term, there is mainly fourway of evaluating cost-benefit: 1. Benefits/Cost Ratio 2. Net PresentValue (NPV) 3. Internal Rateof Return (IRR)
- 46. Type of Benefit-cost ratio
- 47. Renewable Energy Parameters for C/BAnalysis ⚫The type of parameter for C/B analysis is depend upon the type of renewable technology ⚫Here the list which affect the analysis of RET 1. Location of plant 2. Type of renewable energy 3. Technology status 4. Government involvement 5. Availability of technical staff 6. Economical consideration of society 7. Overall objective of installation 8. Climate condition 9. Risk of natural disaster
- 48. CBAparameters for Renewable Energy ⚫CBA parameter can be categories on the basis of cost inflow and outflow Cost Outflow Cost Inflow 1. Capital costof plant 2. Annual maintenance cost 3. Unwanted investment due to technology failure 4. Extra investment due to change in incentive policyof govt. 1. Benefit byselling energy 2. Social benefit bysupplying electricity in rural area 3. Carboncredit 4. Commitment to ward green development 5. High rateof return to support renewableenergy (incentive from govt)
- 49. Implementation of CBA for wind Energy ⚫Cost of the system: 1. Land leasecost 2. Turbine installationcost 3. Electrical network upgradation cost 4. Costof additional reserve requirement 5. Component life maintaining cost 6. Operating cost ⚫Benefitsof thesystem 1. Capacity benefit 2. Carbon credit benefit 3. Fuel saving benefit 4. Social empowerment benefit in remotearea 5. With properdesign, multi function land utilization
- 50. Conclusion • Most of the renewable energy project are less economical viable, because of high investment and risk associated with the project • But still most of the government interested to increase the shareof renewableenergy. • Overall Cost Benefit analysis of renewable energy show that theyareacceptable. • Main benefit of renewable energy is that it is clean form of energy and also socially acceptable and help government to make a dream true to provide electricity tovillage.
- 51. Financial Feasibility Evaluation of Renewable Energy Technologies
- 52. • The purpose of this study is to assess the sites designated by an industrial Company for possible solar PV, thermal solar or geothermal installation and to estimate the cost, performance and site impacts of these three systems • Most of the capital will be provided by private investors who get a share of the profit and risks involved in the capital investment. The rest of the investment is financed by bank credit • Financial feasibility of any project is based on the risk involve • Therefore financial feasibility evaluation is important in term of stake holder benefit/cost-benefit analysis/benefit related to govt. agency • So the different study approach to risk and different has been explored here
- 53. 1. Analyse renewable energy (RE) using LCOE modeling Macro level Technology/Sector level 1. Power Market Risk 2. Permits Risk 3. Social Acceptance Risk 4. Resource & Technology Risk 5. Grid/Transmission Risk 6. Counterparty Risk 7. Financial Sector Risk 8. Political Risk 9. Currency/Macroeconomic Risk 2. Define 9 risk categories from an investment perspective 3. These 9 risk categories form part of the cost of equity/debt for renewable energy Objective: Reduce RE LCOE Best in Class RE Investment (Developed Country) Cost of Equity/Debt Risk #1 Risk #2 Risk #3 % % Pre de-risking RE investment (Developing Country) Cost of Equity/Debt 4. Public instruments can reduce these risks and thereby decrease cost of equity/debt % Pre De-Risking (Developing Country) Cost of Equity/Debt % De-risking instrument #2 Post de-risking (developing country) Cost of Equity/Debt De-risking instrument #1 Current LCOE of Renewable Energy Target LCOE Cap Ex/ Depreciation Op Ex Cost of Debt Cost of Equity US$ US$ Study’s approach to risk and renewable energy
- 54. Survey: 9 Risk Categories Macro level Technology/Sector level 1. Power Market Risk 2. Permits Risk 3. Social Acceptance Risk 4. Resource & Technology Risk 5. Grid/Transmission Risk 6. Counterparty Risk 7. Financial Sector Risk 8. Political Risk 9. Currency/Macroeconomic Risk
- 55. Survey: Risk/Derisking Concepts The study uses a conceptual framework in order to quantify risks and the impacts of public de- risking instruments. Investor risk is broken down into three conceptual components (barriers; negative events; financial impact). De-risking instruments fall into two categories (barrier removal; risk transfer) Policy derisking instruments act to reduce barriers Financial derisking instruments act to transfer risk (impact) to another actor Negative events: Uncertainty and delays due to poorly administered licensing Financial impact: Transaction costs; delayed revenues; under- or no investment Barrier removal Streamlined licensing process: Harmonized requirements, reduced licensing steps; priority areas/zoning Conceptual framework for risks Practical example: permits risk Drivers of Risk Components of Risk Existence of barriers in investment environment Result in increased probability of negative events affecting wind farm Negative events result in financial impact for investors Barriers: Lack of clear responsibility of different agencies for RET energy approvals Drivers of Risk Components of Risk
- 56. Survey: Questions and Assumptions Q1 : How would you rate the probability that the events underlying the particular risk occur? Q2: How would you rate the financial impact of the events underlying the particular risk, should the events occur? Q3: How would you rate the effectiveness of the identified de-risking instrument in mitigating the particular risk? 1 2 3 4 5 Low Impact High Impact 1 2 3 4 5 Unlikely Very Likely 1 2 3 4 5 Low Effectiveness High Effectiveness 1. Please answer all questions based on the current status of the risks in the country’s investment environment today 2. Assume you have the opportunity to invest in a 10-100 MW on-shore wind park 3. Assume a high quality c-Si PV panel manufacturer with proven track record (eliminating certain technology risks) 4. Assume an O&M insurance contract (eliminating certain technology risks) 5. Assume that transmission lines with free capacities are located relatively close to the project site (within 10 km) 6. Assume a build-own-operate business model and a construction sub-contract with high penalties for contract breach (eliminating certain technology risks) 7. Assume a project finance structuring 3 Key Questions for Each Risk General Assumptions
- 57. 1: Power Market Risk Risk Definition: Risk arising from limitations and uncertainties in the power market, and/or suboptimal regulations to address these limitations and promote renewable energy markets Barriers Market outlook: Lack of or uncertainties regarding governmental renewable energy strategy and targets Market access/price: Suboptimal energy market liberalization; uncertainties regarding competitive and price outlook; limitations in PPA and/or PPA process Market distortions: high fossil fuel subsidies Negative events • Inability to secure a visible and viable outlook for cash flow generation Examples: • Uncertainty on long term policy outlook • Difficult to negotiate PPAs • Uncompetitive with subsidised fossil fuels Financial impacts Q1 Derisking Instrument #1: Public sector activities to create an enabled investment environment • Establish transparent, long-term national wind energy strategy and targets: National-level resource inventory/mapping; establish national energy office; review technology options; renewable energy targets • Establish well-designed and harmonized energy market liberalization and FIT (or similar instrument): Unbundling of the energy market (generation, transmission, distribution); establish well-designed and transparent procedures for FIT, PPA tendering (or similar); well-designed, transparent policy on key clauses for standard PPA • Reform of fossil fuel subsidies: Assessment of fuel subsidies, phase-out/down of subsidies, awareness campaigns, design of transfer programs to affected groups Q2 Q3 Key Stakeholder Group: Public sector (legislators, policymakers)
- 58. 2: Permits Risk Risk Definition: Risk arising from the public sector’s inability to efficiently and transparently administer renewable energy-related licensing and permits Barriers • Labor-intensive, complex processes and long time-frames for obtaining licenses and permits (generation, EIAs, land title) for renewable energy projects • High levels of corruption. No clear recourse mechanisms Negative events • Project delays and operational uncertainties due to administration of permits Examples: • Inability to advance permitting of project • Uncertainty and delays due to poorly administered licensing process • Limited/inability to have recourse in case of breach of contract or arbitrary decisions Financial impacts Q1 Derisking Instrument #1: Public sector activities to create an enabled investment environment • Establish a one-stop-shop for renewable energy permits; streamline processes for permits: Establish institutional champion with clear accountability and appropriate expertise for renewable energy; harmonisation of requirements; reduction of process steps; training of staff in renewable energy • Contract enforcement and recourse machanisms: Enforce transparent practices, wind energy related corruption control and fraud avoidance mechanisms; establish effective recourse mechanisms Q2 Q3 Key Stakeholder Group: Public sector (administrators)
- 59. Key Stakeholder Group: End-users, general public 3: Social Acceptance Risk Risk Definition: Risks arising from lack of awareness and resistance to wind energy in the general public Barriers • Lack of awareness of renewable energy in the general public: including, for example, consumers, end-users, local residents and labor unions Negative events • Social and political resistance activities due to special interest groups Example: • Protests or vandalism at project site • Delays in development, construction or operations of renewable energy plant Financial impacts Q1 De-Risking Instrument #1: Public sector activities to create an enabled investment environment • Awareness raising of key stakeholders: Working with the media, awareness campaigns and stakeholder dialogue with end users, policymakers, and local residents • Community involvement at project sites: Community consultations including piloting models such as in-kind services (energy access, local employment; etc.) or equity stakes in renewable energy projects Q2 Q3
- 60. 4: Resource & Technology Risk Risk Definition: Risks arising from use of the renewable energy resource and technology (resource assessment; construction and operational use; hardware purchase and manufacturing) Barriers • For resource assessment and supply: inaccuracies in early- stage assessment of renewable energy resource • For planning, construction, operations and maintenance: sub- optimal plant design; lack of local firms and skills. limitations in civil infrastructure (roads etc.) • For the purchase and, if applicable, local manufacture of hardware: purchaser's lack of information on quality, reliability and cost of hardware; lack of local industrial presence and experience with hardware Negative events • Operational disruptions or underperformance due to technology disruptions or malfunctions Examples: • Breakdown of hardware • Delays through prolonged repairs Financial impacts Derisking Instrument #1: Public sector activities to create an enabled investment environment • For resource assessment and supply: Project development facility: capacity building for resource assessment • For planning, construction, operations and maintenance: Project development facility: feasibility studies; networking; training and qualifications • For the purchase and, if applicable, local manufacture of hardware: Research and development; technology standards; exchange of market information (e.g., via trade fairs) Q1 Q2 Q3 Key Stakeholder Group: Project developers, supply chain
- 61. Derisking Instrument #1: Public sector activities to create an enabled investment environment • Strengthen transmission company's operational performance, grid management and formulation of grid code: Develop a grid code for new renewable energy technologies; sharing of international best practice in grid management • Policy support for national grid infrastructure development: Develop a long-term national transmission/grid road-map to include intermittent renewable energy 5: Grid/Transmission Risk Risk Definition: Risks arising from limitations in grid management and transmission infrastructure in the particular country Barriers • Grid code and management: limited experience or suboptimal operational track-record of grid operator with intermittent sources (e.g., grid management and stability). Lack of standards for the integration of intermittent, renewable energy sources into the grid • Transmission infrastructure: inadequate or antiquated grid infrastructure, including lack of transmission lines from the renewable energy source to load centres; uncertainties for construction of new transmission infrastructure Negative events • Problems in connecting the renewable energy plant to the grid and transmitting electricity Examples: • Delays in grid connection • Higher cost due to excessive grid code requirements • Inability to feed-in electricity due to poor grid management Financial impacts Q1 Q2 Q3 Key Stakeholder Group: Utility (transmission company/grid operator) Derisking Instrument #2: Take-or-Pay Clause in PPA • Addresses grid/transmission risks ((black-out/brown-out) and grid management (curtailment))
- 62. 6: Counterparty Risk Risk Definition: Risks arising from the utility's poor credit quality and an IPP's reliance on payments Barriers • Limitations in the utility's (electricity purchaser) credit quality, corporate governance, management and operational track-record or outlook; unfavourable policies regarding utility's cost-recovery arrangements Negative events • Inability to receive payments for wind energy generated and sold to the grid Examples: • Non-payment of tariffs • Utility's credit profile deteriorates resulting in reduced or non-payment of tariffs Financial impacts Q1 Q2 Derisking Instrument #2: Guarantee of tariff /PPA • Depends on specific circumstances and division of risks in PPA. Can include, as necesssary: partial risk guarantees on PPA; counterparty guarantees as part of political risk insurance (PRI) Q3 Derisking Instrument #1: Strengthen utility's management/operational performance • Establish international best practice in utility/distribution company's management, operations and corporate governance; implement sustainable cost recovery policies Key Stakeholder Group: Utility (electricity purchaser)
- 63. 7: Financial Sector Risk Risk Definition: Risks arising from the lack of information and track record on financial aspects of wind energy, and general scarcity of investor capital (debt and equity), in the particular country Barriers • Capital scarcity: Limited availability of local or international capital (equity/and or debt) for green infrastructure due to, for example: under-developed local financial sector; policy bias against investors in green energy • Limited experience with renewable energy: Lack of information, assessment skills and track-record for renewable energy projects amongst investor community; lack of network effects (investors, investment opportunities) found in established markets; lack of familiarity with project finance structures Negative events • Failure or delay in launch of wind project due to unfavorable or insufficient debt and/or equity financing Examples: • High costs in soliciting investors and debt providers • Longer and more extensive process for closing on financing Financial impacts Q1 Q2 Derisking Instrument #1: Debt and equity products • Depends on specific financial circumstances. Can include as necessary: public loans; public loan guarantees; public equity Derisking Instrument #1: Public sector activities to create an enabled investment environment • Financial sector policy reforms: Assess trade-offs between financial stability regulation and renewable energy objectives (e.g. liquidity treatment); promote financial sector policy favorable to long-term infrastructure, including project finance • Strengthen investors‘ familiarity with and capacity regarding renewable energy projects: Industry-finance dialogues and conferences; workshops/training on project assessment and financial structuring Q3 Key Stakeholder Group: Investors (equity and debt)
- 64. 8: Political Risk Risk Definition: Risks arising from country-specific governance, social and legal characteristics Barriers • Uncertainty or impediments due to war, terrorism, and/or civil disturbance • Uncertainty due to high political instability; poor governance; poor rule of law and institutions • Uncertainty or impediments due to government policy (currency restrictions, corporate taxes) Negative events • Interferences to the operations and finances of the renewable energy plant due to socio- political instability Examples: • Damage or delays to renewable energy plant due to violence • Expropriation of assets • Inability to repatriate cash flows Financial impacts Q1 Q2 Q3 Derisking Instrument #1: Political Risk Insurance for equity and debt holders (PRI) • Provision of political risk insurance to equity holders covering (i) expropriation, (ii) political violence, (iii) currency restrictions and (iv) breach of contract Key Stakeholder Group: National Level
- 65. 9: Currency/Macroeconomic Risk Risk Definition: Risks arising from the broader macroeconomic environment and market dynamics Barriers • Uncertainty due to volatile local currency; unfavourable currency exchange rate movements • Uncertainty around inflation, interest rate outlook due to an unstable macroeconomic environment Negative events • Exposure of project operations and cash flows to macroeconomic and market related changes Examples: • Inability to sell electricity to the grid • Mismatching of currency for revenues and expenses • Unexpected rise in financing costs due to higher interest rates Financial impacts Q1 Q2 De-Risking Instrument: Partial-indexing of the PPA tariff • Addresses currency risk (the foreign exchange rate exposure that IPPs may face due to hard-currency lending with a local- currency denominated PPA) Key Stakeholder Group: National Level Q3
- 66. References • Africa”, August 2011 2. IRENA working paper,“Renewable Energy Technologies: Cost Analysis Series”, June 2012 3. Eleanor Denny B.A., M.B.S, “A Cost Benefit Analysis of Wind Power”, thesis report, University college Doublin, Ireland, 2007 4. Paul Samuelson,“Economics”, McGraw-Hill, 21stEdition Implementing 1. Ea Energy Analyses, Renewable “Costs And Benefits Of Energy Policy In South