PV Power project economics (optimization) Speaker: Emmanuel Guyot April 2012
Key Components of a PV Power Plant A PV Power Plant consists of a few core components Overview of a PV power plant and its main components MAIN COMPONENTS MODULE A | Conversion of sunlight into DC electricity B INVERTER | Conversion of DC electricity into AC electricity C MOUNTING SYSTEM | Structure for installation of modules – either fixed or moving (tracking) 1
Introduction to Solar PV Technology PV technology is split in three main categories and each technology differs in efficiency, costs and required area Comparison of common PV technologies Monocrystalline Polycrystalline Thinfilm Solar PV a-Si Categories – – CIGS CdTe | High efficiency Module � lowest cost/ kWh Efficiency 13 – 17 11 – 14 6 – 11 [%] | Low technology cost � faster payback Area for 1 kWp [m 2 ] 7 – 9 8 – 11 11 – 20 | Higher efficiency + lower technology cost � best value for money Module +++ ++ + / ++ Costs System ++/+++ ++ +/++ Costs 2
LESSONS LEARNT FROM PROJECT DEVELOPMENT The project life and finance cycle shows entry and exit of players that needs to be anticipated right from the beginning Project life cycle (schematic) Development & Finance EPC / Construction Operation Project Project Planning and Commercial & Purchasing Development Finance Execution technical Mgmt. | Equity closure | First operation cycle (4 month) (1 year) Time- | 10 Months (depending on size of | 1-2 years | Financial frame Ø project) | Cruise operating closure Regime (24 years) (2 months) | First accounting Results (proof of IRR | Land Main | Equity expectations) Mile- | Building Permit | COD (commercial operation date) | Project | Debt in place stones | PPA decommissioning (after project lifetime) 3
LESSONS LEARNT FROM PROJECT DEVELOPMENT PV Projects have the advantage to be comparable to financial products as they are straight forward on a technological perspective Main characteristics of PV projects Reliable Predictable Safe | Technology is simple and | Sunlight is stable through | Returns are known well passive the years in advance | Maintenance is light | Energy yield are | Economical reality does predictable and Regular not vary too much from | Module life time 25 years simulations | Output directly linked to quality of modules / inverters | O&M costs are stable 4
Issues in Component Integration The 8 most common quality issues in modules Key Quality issues in PV Modules Frame damage e.g. due Degradation of anti- Melting of Junction Box Short Circuits due to to water in cavities reflective coating incorrect soldering Degradation of cell Delamination Hotspots due to imprecise Micro Cracks connectors cell alignment 5
Issues in Component Integration Every system has losses – but they can be minimized Overview of possible system losses and optimization levers Loss reasons Optimization lever | Temperature losses 8-12% | Module | Shading losses 0-1% | Plant Design | PV loss due to irradiance level 3-4% | Modules | Array soiling loss 1-2% | Operations & Maintenance Typical average losses | Module array mismatch loss 2-5% | Modules | DC wiring losses 1-2% | Choosing the right cables, minimizing cable distances | Inverter loss during operation 2-2.5% | Inverters, Modules | AC losses from inverter to grid @ peak 2-3% | Cabling sizing, minimizing cable distances | | Transformers | Gain in overall solar insulation due to module tilt 2% | Plant design Power fed to the grid 6
1 CHOICE OF TECHNOLOGY The wrong technology choice could result in huge revenue losses for a project Influence of technology choice on project revenue per component CHANGE REMARK PROJECT EXAMPLE System efficiency | Efficiency and reliability varies up to 3% between | 10 MWp (PC) solar farm in Thailand Module Inverter manufacturers region x | Estimated output: ~15 MWh/year | Irradiation is very Irradiation well predictable | 6% efficiency loss: ~0.9 MWh/year | Loss of ~ 346 000 USD /year in revenues = | Extrapolated to 25 years of project lifetime the loss amounts to | ~ 2.2 M USD on project NPV System output | ~ -1.8% on project equity IRR 7
2 WRONG PROJECT TIMING AND DELAYS Wrong project timing will have a key impact on project returns and project sustainability Possible delay reasons Example for impact of delay | Unprofessional EPC contract can cause | Example: 3 month delay delays in procurement and construction | Risks involved due to delay phase | Risk to view PPA Expiring (Limit date) | Authorities can cause delays due to | Risk of major agreements to be re- administrative hick-ups discussed or renegotiated (Land Lease) | Financial close can be delayed by banks | Loss of 3 month Cash flows at the beginning involved of the project (higher weight in NPV calculations) | Seasonal climate (monsoon) can cause delays | Risk of loan not being in lined with cash flows (treasury risk) | Irreversible deterioration of Project IRR | Result : reduction of cash inflow by | ~ 1.5 MUSD 8
3 ABSENCE OF CLEAR EXIT STRATEGIES The absence of clear exit strategies reduces the attractiveness of your project for co-investors Investor types and possible exit strategies Investor types | Innovation funds SHORT-TERM | Development banks INVESTORS TYPES OF EXIT STRATEGIES | Investment period of up to two years | Sector Trade Sales | Early bird investors | Buy back of shares by remaining shareholders | Utilities | IPO (min. 50 MWp) LONG-TERM | Pension funds INVESTORS | … | Investment over whole project life time | Create exit for short-term investors 9
LESSONS LEARNT FROM PROJECT DEVELOPMENT Through the eyes of Finance, a project is Risk Management Overview of project development framework FINANCE ENVIRONMENT PLAYERS Project development “Framework” “human factor” | Mitigate the risks of a | Social Need | Promoters project by PROJECT | Political framework | Technology Land + Rights | Proper project suppliers | Geological documentation conditions | Investors | Scenario | Banks Analysis TECHNOLOGY | EPC “Know-how” Guarantees | Yield check | Technical feasibility | Technical/site risks 10
INTERNATIONAL CO-INVESTORS APPROACH For an equity investor a bad project is a project showing him shadow areas and risks with no answers, no mitigations … Overview Project risks TECHNOLOGY RISK PROJECT INTERNAL RISKS | Potential delays in EPC | PPAS Capacity of local institutions to honor PPAs | Previous References project implementation (Shareholders/EPC) in the country | PPAs duration and renegotiation risk | Degradation factor of modules (generation) over the years | Land lease risks | Efficiency of components (Modules Inverters) | Guarantees on performance/yields | O& M issues | Political stability and energy | Clear shareholding structure of SPV with framework clear leadership Clear ownership rights | Project geological location | One Majority shareholder mastering with track record | Project administrative environment | Clear exit strategies ENVIRONMENT RISK PARTNERSHIP RISK 11
Lessons learnt from Project Development The choice of the EPC contractor is key as it is seen by the project players as the main guaranty of project returns Overview of risk-limiting function of EPC Provider for the project PROMOTERS BANKS | Individuals | Local | Utilities | International EPC | Development CONTRACTOR | Quality | Time REGULATORY INVESTORS AGENCY | Family office | Utilities | Funds | Regulatory Energy Commission | Utilities | Municipalities | Banks 12
PROJECT OPTIMIZATION / CASE STUDY OF A 10 MWP SOLAR POWER PLANT The example project is a 10 MWp-Project, financed by 30% Equity and 70% debt Project example: Details and key figures Project Details Capital Structure Reference by figures | Installed capacity: | Inflation rate: usually between 3 to 6% � 21 M USD � � � 7 MUSD 10 MWp | Actualization rate: 10% CAPEX: | Loan interest rate: between10 % to | Debt Funds USD 2.1m / MWp Equity 14% 70% 30% Equity Investors | Development costs: | Loan Duration: from 7 to 12 years ~15 KUSD / MWp Dev. banks | Equity portion asked by banks: From Promoters | Civil engineering : 20 to 40% ~10% of CAPEX | PPA duration: from 10 to 15 years | O&M: | PPA FIT: from 20 to 30 USD cts / kwh ~1% of CAPEX per year | Equity IRR: from 10 to 16% | Equity held by mix of investors | Debt provided either by | Project IRR: always inferior to equity IRR (as if equity is 100%) | Local banks (recourse) or | DSCR : min required by banks : 1.3 | International banks (mix of local currency / international hedge loans | Non recourse 13
PROJECT OPTIMIZATION / CASE STUDY OF A 10 MWP SOLAR POWER PLANT There are several important variables that determine the equity IRR of a project Key Factors For Project Optimization Ranked by importance weight on EQUITY IRR 1 Equity portion required by banks 2 FIT 3 Project CAPEX 4 Power generation efficiency (Modules / Inverters) 5 Distance to Substation Meter (losses) 6 Interest rate 7 Duration of loan 14
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