Powering solar in a world full of energy.

Powering solar in a world full of energy. TGSTW - Project Economics & Finance Bangkok, Thailand / 9 Oct 2014 CONERGY.COM

Today s Agenda Introduction Project Structures Project Economics Costs Revenues Risks Financing 1

Photovoltaics (PV) is a technology which directly converts solar radiation into electricity Schematic overview of electricity production through PV solar radiation direct current alternating current inverter photovoltaic modules public grid 2

PV projects are attractive to all financing parties because they are reliable, predicable, and safe Why are PV projects appealing investments? Reliable Technology is simple and passive Maintenance is light Module lifetime 25 years Predictable Sunlight is stable through the years Energy yield are predictable and regular Output directly linked to quality of modules / inverters O&M costs are stable Safe Returns are known well in advance Economic reality does not vary too much from simulations 3

Participants in solar projects vary by country but generally have the same roles Participants and Roles Participant Role Example Lender Provides debt to a project Repaid via interest payments over the loan s tenor Investor Provides equity to a project Repaid via cash flows / dividends from the project Developer Originates and develops project through commissioning or shovel reading Sources financing from investors Most relevant in the utility-scale model Rooftop Owner Provides rooftop or land for solar projects Consumes electricity produced by hosted project Kasikorn Bank Standard Chartered Thai Solar Energy Local developers International developers Home Owners Factory Owners 5

Participants in solar projects vary by country but generally have the same roles Participants and Roles (con t) Participant Role Example Special purpose vehicle Created by developers and third-party financiers to hold ownership of assets EPC Installs projects on its own or via a partnership with a third-party financier Can assist with arranging financing Offtaker Distributes energy from producers to consumers Purchases solar energy via PPAs with large projects Under net metering, credits hosts for project generation in excess of use Third-Party Investor Originates solar customers and provides small-scale financing services via a lease or PPA Sources financing for project portfolios from large investors Provides monitoring and customer services Can also act as an installer Conergy PEA (Thailand) MEA (Thailand) Cooperatives / DUs (Philippines) Sunrun (US) Solarcity (US) O&M Provides operation and maintenance services to investor / owner Conergy 6

Responsibility for projects shifts from developer to investor, at which point the developer should have adequately de-risked the project Example: Timing of Participants in Utility Scale Project Project Development Project Finance Purchasing Planning and Construction Commercial & Technical Mgmt. Developer Complete development Shovel Ready Investor Sale Agreement Manage project, provide equity Lender Financial Close Provide debt EPC / O&M Provide technical input, dev t financing EPC Contract Engineering, procurement, construction COD O&M Contract O&M Utility PPA Signed Support interconnection Purchase electricity Project Milestone 7

Most large utility projects are structured with equity from investors and debt from banks Project Finance (Utility Scale) Project Structure Comments Investor(s) (equity) Project company is set up to reduce risk to investor Lender (finances project) Provide funds for project construction Loan Agreement 100% ownership / provides equity Special Purpose Vehicle (SPV) Project provides all generated electricity Power Purchase Agreement Offtaker (buys electricity) Project sizes are 5MW and above because of need for project finance May be multiple investors / shareholders depending on project size Repay loan with interest Offtaker buys power at a defined tariff over a long term (15-25 years) EPC Contract O&M Contract EPC (builds project) O&M (operates / maintains project) 8

Rooftop owners who have the funds to purchase their own PV system can install directly Balance Sheet Financing (Rooftop) Project Structure Comments Rooftop Owner / Investor Project provides all generated electricity Power Purchase Agreement Offtaker (buys electricity) No need to set up an SPV since project is too small Typically not large enough to secure financing unless projects are aggregated together (>10MW) EPC Contract O&M Contract Offtaker buys power at a defined tariff over a long term (15-25 years) Investors are large companies with adequate capital to purchase PV systems and invest 100% EPC (builds project) O&M (operates / maintains project) May also involve a lease contract with a bank in which case they own the plant Revenue model may also be savings from self-generation 10

or they can invite third-party investors to build on their roof and agree to a lease payment Third-Party Investment (Rooftop) Project Structure Comments Rooftop Owner (provides roof) Allows investor to use roof Lease Agreement Third-Party Investor Project provides all generated electricity Power Purchase Agreement Offtaker / Rooftop Owner (buys electricity) Model is comparable to utility scale model but instead of land lease, rooftop lease No SPV needed since project is small Lease payments EPC Contract O&M Contract Offtaker buys power at a defined tariff over a long term (15-25 years) Since investor is not the same as rooftop owner, rooftop owner must make a long term commitment to stay EPC (builds project) O&M (operates / maintains project) Revenue model may includes sale to the rooftop owner and a separate offtaker 12

Third-party investors can also aggregate small projects to finance them as a bundle Third-party Investment with Financing (Rooftop) Project Structure Comments Lender (finances project) Loan Agreement Repay loan with interest Project 1 Third Party Investor (own electricity) SPV (own electricity) 100% Ownership Project 2 Project 3 Investor may create fund structure to finance multiple small rooftop projects via single SPV Aggregation allows financing Diversified approach reduces risk PPA Offtaker (buys electricity) 13

Project profitability according to accountants is Net Income, however this is not what investors care about Introduction to Profit & Loss P&L Item Examples Revenue kwh x Tariff $200k - $400k / MW in Year 1 + -- Operating Expenditures (OPEX) O&M, Lease, Insurance 0.5-2% of CAPEX - - = Depreciation Interest Expense Taxes Net Income Reduction on value of assets Bank charges Corporate tax, land / property tax, asset tax Final reported profit of the company 10% of CAPEX / year over 10 years 7% interest rate on loan value Tax holidays, reduced tax rates Negative to start because of depreciation 15

Investors measure profitability by cash flows or dividends, which may be very different from net profit Introduction to Project Cash Flows What happens Year 0? What happens after? Significant capital expenditures No revenue 60 40 Annual Project Cash Flow Very small operating expenditures (OPEX) Moderate, stable revenues Construction risk 20 Operating risks May require financing during construction Other development risks if project is not fully permitted or if FIT is not guaranteed until the end of the project musd 0-20 -40-60 Refinancing available -80 0 5 10 15 20 Year Yearly Cashflows Cumulated Cashflows 16

One-time costs at the beginning of the project are high but can have significant impact on revenues Drivers of Project Cost Developer Utility EPC Developer Installation / Civil Works Interconnection 1 Components Land (if buy) Developer O&M Developer EPC Development Costs 2 CAPEX 3 4 O&M Land (if lease) Insurance One-time Cost + Ongoing / Annual Cost = Total Project Cost For detailed discussion 17

PV technology is split in three main categories and each technology differs in efficiency, costs and required area 1. One-time Costs: Components Solar PV Monocrystalline Polycrystalline Thinfilm Categories Module Efficiency [%] Area for 1 kwp [m 2 ] Module Costs a-si CIGS CdTe 15 19 13 16 8 12 7 9 8 11 11 20 +++ +/++ ++ High efficiency lowest cost/ kwh Low technology cost faster payback Higher efficiency + lower technology cost best value for money System Costs ++/+++ +/++ ++ 18

There is no simple-best solution for a PV system in this region as suitability is based on multiple factors 1. One-time Costs: Components (Common myths and the truth) MYTH 1 Crystalline projects are more expensive MYTH 2 When evaluating offers I will compare the $/Wp Thinfilm modules itself are generally cheaper in terms of $/Wp Capital Cost requirements can vary greatly for each project and technology Thinfilm projects usually require more land, cabling and mounting structure incl. foundations Crystalline projects can generate a higher output and hence reduce the $/kwh The project owner under a Feed-in-Tariff scheme gets paid for installed capacity in Wp The owner only gets paid for the generated kwh hence $/kwh from the system plus reliability and longevity are the key decision factors 19

Warranties alone do not help running the PV power plant to increase yields and enhance lifetime beyond guaranteed life is crucial 3. Ongoing Costs: O&M New York times 28/05/2013 A review of 30.000 installations in Europe by the German solar monitoring firm Meteocontrol found 80% were underperforming 20

Decisions on the project costs have a direct influence over revenues in the future Drivers of Project Revenue Developer Investor / EPC EPC Developer Developer Site Size & Shape (m 2 ) 1 2 Component Selection System Design Site Irradiance (kwh / m 2 / year) Site Quality EPC / Manufacturer Offtaker 3 4 Warrantees & Guarantees PPA Terms Size (kwp) Yield (kwh / kwp / year) Offtaker Annual kwh x Tariff = Annual Revenue ($m) For detailed discussion 21

Choosing the right technology and optimising system design greatly increase revenue 2. System Design and Revenue Impact Loss reasons Temperature losses Shading losses PV loss due to irradiance level Array soiling loss Module array mismatch loss DC wiring losses Inverter loss during operation AC losses from inverter to grid @ peak Gain in overall solar insulation due to module tilt 8-12% 0-1% 3-4% 1-2% 2-5% 1-2% 2-2.5% 2-3% 2% Optimization lever Module Plant Design Modules Operations & Maintenance Modules Choosing the right cables, minimizing cable distances Inverters, Modules Cabling sizing, minimizing cable distances Transformers Plant design Power fed to the grid = Revenue 22

Warrantees and guarantees provide certainty about revenue streams, which is why lenders and investors insist on them 3. Warrantees / Guarantees and Revenue Impact solar radiation Public grid direct current alternative current Photovoltaic modules - Product Guarantee - Performance Warranty PV Power Plant - Performance Ratio Guarantee PV Power Plant + External Factors - 3 rd party insurance Inverter - Product Guarantee - Other guarantees on request Guarantees specific to single products; these cover damages but not cash flow Guarantees specific to the plant; these cover overall performance & cash flow Insurance specific to the OVERALL CAPEX; covers overall performance, cash flow and external factors, e.g. sun 23

PPA is the project s revenue contract and its terms can significantly affect profitability 4. PPA Terms and Revenue Impact Participant Description Term Duration of the PPA (years) Price Tariff which the electricity will be purchased at; consider escalation or degredation Commercial Operation Date (COD) Purchaser Obligation / Output Guarantee Date specified for the start of operations of the plant Take or pay meaning that the offtaker is required to buy all the system output, even if they do not use it Availability Guarantee System is available a certain percentage of the time, excluding scheduled maintenance Curtailment Rights of an offtaker to not purchase electricity in case of need Commitment to Develop Obligations of the developer to the offtaker to complete construction (e.g., security deposit) Milestones / Delay Damages Dates by which the developer must achieve progress or PPA could be revoked / or payments may be required Liquidated Damages Penalties in case the plant cannot produce the amount of electricity required, calculation formula is particularly important 24

Risks are an inherent part of solar projects and must be managed actively by developers, investors, and EPCs Introduction to Project Risk Management Solar Project Risks Development Finance Construction Operation How to assess risks? Severity: Determine how serious the impact of the risk is (e.g., $ lost, hour spent) Probability: Determine how likely the risk is to occur (e.g., % chance) Avoid: Change the project direction to avoid the risk, stop the project altogether How to respond to risks? Mitigate: Take actions to minimize the severity or probability of the risk Transfer: Buy insurance to deal with the risk, share the risk with someone else Accept: Do not take action against small risks 26

Developers are responsible for addressing significant risks during the setup of a project Risks to Solar Project Financials during Development Source: Project Development in the Solar Industry, Fong & Tippett, 2013 27

Developers are responsible to brings projects to shovel ready How do lenders assess projects? Identify site with the best resources Negotiate use of the land Has the developer completed the required steps? Conduct an initial solar analysis Completes an environmental impact assessment (if required) Conducts initial layout and design including initial equipment selection Applies for and receives planning permits and consents Applies for and receives grid connection offer or letters of intent Applies for feed in tariff and / or PPA Source: Utility Scale Solar Power Plants: A guide for developers and investors, IFC, 2012 29

Then lenders and investors will do due diligence to assess risks when financing / investing How do lenders assess projects? Technical Due Diligence (using external technical consultants) What risks remain in the project? Sizing of the plant Layout of PV Electrical design layout and sizing Technology review of major components Energy yield assessments Legal Due Diligence (using external lawyers) Permits and consents (e.g., wayleaves) EPC, O&M contracts PPA, Interconnection Financial Due Diligence (internal) Construction timelines Warrantees / guarantees Financial model and assumptions Scenario analysis Source: Utility Scale Solar Power Plants: A guide for developers and investors, IFC, 2012 30

OUR WORLD IS FULL OF ENERGY