IFC ESMAP- RENEWABLE ENERGY TRAINING PROGRAM. Wind Module. II. Wind Project Development, Implementation, and Financing

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1 IFC ESMAP- RENEWABLE ENERGY TRAINING PROGRAM Wind Module II. Wind Project Development, Implementation, and Financing Washington DC, June 16th 2014

2 Index Wind Project Development, Implementation, and Financing Financial Modeling Key Inputs& Considerations Cost of Generation Appendix 2

3 Financial Modeling Valuation Key Principles A project generates economic value when it generates cash to remunerate costs for all capital employed The same project can have a different value for different investors Economic valuation reflects future expectations for the project Economic valuation needs to reflect risks and uncertainties Methodology that includes all main inputs and risks consideration is Discounted Cash Flows 3

4 Financial Modeling Valuation Key Principles A project generates economic value when it generates cash to remunerate costs for all capital employed Shareholders CF Taxes Banks Suppliers Opex FCA > Ini(al Capex 4

5 Financial Modeling Valuation Key Principles The same project can have a different value for different investors Different Expectations Different Risk Perception Profitability means nothing if it s not associated to Risk 5

6 Financial Modeling Valuation Key Principles Economic valuation reflects future expectations for the project Free Cash Flow Debt Cash Flow Shareholders Cash Flow 6

7 Financial Modeling Valuation Key Principles Economic valuation needs to reflect risks and uncertainties WACC! Whicharethemainriskstobeincluded?Howdowetakethemintoconsideration? 7

8 Financial Modeling Cash Flow Calculation + - = Operating Incomes: (Production x /MWh) Operating Costs: (O&M, land, ) EBITDA Free Cash Flow No financing Costs included - Taxes(over EBIT) Capex Working Capital Terminal Value = Free Cash Flow 8

9 Financial Modeling Cash Flow Calculation = = Free Cash Flow Debt Debt Amortization Interests Shareholders Cash Flow Shareholders Cash Flow Real IRR for the invested Capital 9

10 Financial Modeling Key Metrics Years to achieve WACC Price to achieve WACC % Incomes subject to merchant exposure % Incomes subject to regulatory risk Terminal Value contribution to Value Creation Sensitivity to Key inputs 10

11 Financial Modeling Basic components and structure of model Case Study: Brazil Case (BNDES Financing) Case Study: Tax Equity Investor in US 11

12 Financial Modeling Risks What about Risks? Let s review Key inputs first! 12

13 Index Wind Project Development, Implementation, and Financing Financial Modeling Key Inputs& Considerations Cost of Generation Appendix 13

14 Key Inputs & Considerations Key Inputs WF SET WTG Export Cable Grid SET Medium Voltage Wind Farm Grid 14

15 Key Inputs & Considerations Key Inputs Capex $ Incomes Opex? Financing 15

16 Key Inputs & Considerations Key Inputs Capex WTG prices rationalization Full Risk Approaches BOP smaller as a percentage One supplier approach is over Complex tender processes Partial financing of the construction Still Bankable 16

17 Key Inputs & Considerations Key Inputs Incomes Capacity Factor External Expert report Discussions on Probability P70? New measurements technologies More historical data Bankable? 17

18 Key Inputs & Considerations Key Inputs Incomes Price Curve PPA required? Regulatory vs. Merchant Risk! Shorter support mechanism Potentially based in tax incentives Payback due to taxes or incomes??? What is more fixed? New Approach?? USA CASE: Tax Equity Investor Bankable? 18

19 Key Inputs & Considerations Key Inputs Opex? Full Risk Approach Riskier but cheaper!!! Local Taxes!! Regulatory Requirements!!! As long as support mechanism goes off, variable cost analysis needed. Still Bankable 19

20 Key Inputs & Considerations Key Inputs Financing Cost of equity needs to be reduced in order to take cost of generation down!! Reducing Risks Cost of debt needs to be reduced in order to take cost of generation down!! Sharing Knowledge / Working toguether 20

21 Key Inputs & Considerations Sensitivities What are the main risks? Those that have a higher impact and probability of happening + Impacto - + Prob. - 21

22 Key Inputs & Considerations Sensitivities What do we do with our risks? Mitigate Avoid Transfer Ignore 22

23 Key Inputs & Considerations Sensitivities Avoid + Impacto - + Prob. - Ignore or Mitigate 23

24 Key Inputs & Considerations Sensitivities If 10% modification in impact on IRR is Capex Price NCF Opex There is a need of studying particular cases High or Low prices curves 24

25 Index Wind Project Development, Implementation, and Financing Financial Modeling Key Inputs& Considerations Cost of Generation Appendix 25

26 Cost of Generation and Externalities What is generation cost? How is it calculated? What s included in the calculation? 26

27 Cost of Generation and Externalities Direct costs Taxes Opex Capex Profitability Taxes Opex Capex Generation Costs Direct costs Taxes Opex Capex Profitability Externalities Taxes Opex Capex Generation Costs 27

28 Cost of Generation and Externalities Are Renewable energies more expensive than others? 28

29 Cost of Generation and Externalities How to calculate volatility of commodities Iran Revolution Irak Invasion 29

30 Cost of Generation and Externalities How to calculate energetic independence? 30

31 Cost of Generation and Externalities How to calculate manageability? 31

32 Cost of Generation and Externalities How to calculate additional risks? 32

33 Cost of Generation and Externalities How to calculate climate change? 33

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