financial analysis for a 50 mw power project

Kristjn B. lafsson [email protected] 128.5.2014Fjrmlagreining jarhitavirkjanaKristjn B. lafsson

WORKSHOP FOR GEOTHERMAL DEVELOPMENT DONORSReykjavik Iceland May 2014

Financial analysis for a 50 MW power projectCase Study: Africa and Iceland

Investment, O&M, Risk, IRR, ROE, LCOE, Tariff, Financing, etc.

Kristjn B. lafsson Senior Financial Analyst [email protected]

Kristjn B. lafsson [email protected] 2

Kristjan B Olafsson

Senior Financial Analyst

Economist from the University of Iceland.

MBA from Copenhagen Business School.

Tel. + 354 892 9200 e-mail: [email protected]

Consent Energy LLC Washington DC - partner

Consultancy and energy project development

www.consentenergy.com

Geothermal experience from Reykjavik Energy and Reykjavik Energy Invest:

Hellisheidi power plant

Nesjavellir power plant

Hverahlid 90 MW geothermal project

Djibouti Assal geothermal project (2008-2010): REI and Djibouti

A. Financial analysis

B. Operational analysis

C. Risk analysis and risk mitigation

D. Project Finance

E. Corporate Finance

F. Contract structure

G. Pre-feasibility and Feasibility studyH. PA and PPA I. Tender for drillingJ. JDA

Consultancy for: MFA (Ministry for Foreign Affairs / Benedikt Hskuldsson), Mannvit, Verkis, NEA (National Energy Authority / Orkustofnun), Icelandic Power Companies, Banks, Investors, etc.

Kristjan B Olafsson


Nesjavellir CHP 300 MW thermal and 120 MW electricity = 420 MW

Separation station, steam, gas and effluent water.

Steam vent station:

Steam pipelines:

Two phase flow from wells (steam and liquid):

Power Plant:Cooling towers:

Turbine and generator: Wells:

Nesjavellir


Iceland: The power system totals 2.637 MW and its 100% renewable from hydro and geothermal

The Icelandic power system totals 2.637 MW and its 100% renewable from hydro and geothermal resources

Transmission cost in Iceland:

Example:50 MW and 98% utilization

Cost: 0,6 cent/kWh

National Power Company

12.838.23671%

Reykjavik Energy;

3.421.772; 19%

HS Energy; 1.349.743; 7%

Total Generation 201318.116.099 MWh

National Power Company Reykjavik Energy HS Energy A B C D E F G

Hydro12.862.843

71%

Geothermal5.245.021

29%

Wind5.485

0%

Fossil2.750

0%

Total Generation 201318.116.099 MWh

Hydro Geothermal Wind Fossil


Iceland: Installed Power Plants 1960-2014

It was a political decision in 1961 to seek ways how Iceland could best use its energy resources and what kind of power intensive industry could be build in the country. The National Power Company (Landsvirkjun) was formed in 1965 and the first new power plant, Burfell, was commissioned 1969.

13 17 1 0

105

3 1 3570

4 8 0 8 6 2 3050

2 1

100

670

140

0 450

3 0

100

5 540 30 20

600

60 30 260 30 45 45 0 1 3 30

9010033

690

19 1 1 0 30 690

3 2

90

0 0

95

0

1.500

3.000

Stei

ngr

mss

t

196

0

1961

1962

raf

oss

19

63

ve

r 1

964

Mr

ar

196

5

B

rfel

l 196

9 1

972

Nm

afja

ll 19

69

Smyr

lab

jarg

a 1

969

1970

B

rfel

l 197

1

B

rfel

l 197

2

An

dak

ll 1

973

Lax

19

73

1974

Bl

vard

als

197

5

Laga

rfo

ss 1

975

Mj

lk

197

5

Skei

sf

oss

19

76

Kra

fla

197

7

Siga

lda

1977

Svar

tsen

gi 1

977

Sn

gurf

oss

19

77

Siga

lda

1978

1979

Svar

tsen

gi 1

980

Hra

un

eyja

foss

198

1

Hra

un

eyja

foss

198

2

Bl

vard

als

198

3

1984

1985

1986

1987

1988

Svar

tsen

gi 1

989

1990

Bla

nd

a 1

991

Lax

19

91

Rei

h

jalli

199

1

Bla

nd

a 1

992

Svar

tsen

gi 1

993

Lax

19

94

1995

1996

B

rfel

l 199

7

Kra

fla

199

7

B

rfel

l 199

8

Nes

jave

llir

199

8

Rey

kjan

es 1

998

Sult

arta

ngi

19

99

Svar

tsen

gi 1

999

H

sav

k 20

00

Sult

arta

ngi

20

00

Nes

jave

llir

200

1

Vat

nsf

ell 2

001

Vat

nsf

ell 2

002

ve

r 2

002

2003

Smv

irkj

anir

200

4

M

lavi

rkju

n

Nes

jave

llir

200

5

Hel

lish

ei

i 200

6

Rey

kjan

es 2

006

G

ngu

skar

s

200

7

Hel

lish

ei

i 200

7

Kr

ahn

jka

virk

jun

200

7

Laga

rfo

ss 2

007

Lin

d

200

7

Lj

s 2

007

Sel

rvir

kju

n 2

007

Svar

tsen

gi 2

007

Bj

lfsv

irkj

un

200

8

Hel

lish

ei

i 200

8

G

lsvi

rkju

n 2

009

Mj

lk

201

0

Hel

lish

ei

i 201

1

Bre

iad

alsv

irkj

un

201

2

Sk

garg

er

i 20

12

2013

B

ar

hl

s 20

14

Installed power plants in Iceland 1960-2014 Hydro 1972 MW (75%) and Geothermal 665 MW (25%) = 2.637 MWTotal generation: 18.116.099 MWh = 18,1 TWh Utilization 78,4%


Iceland: Geothermal power plants and electricity generation

330 30

2

6 4 5

30 30

60

30 30

2

100

90

33 90 90

0,0

3,0

6,0

0

150

300

19

69

19

70

19

71

19

72

19

73

19

74

19

75

19

76

19

77

19

78

19

79

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

Electricity gen. per year in TWh Bjarnarflag 3,2 MW 1969 National Power Company

Krafla 2x30=60 MW 1977-1997 National Power Company Svartsengi several units 76,4 MW 1997-2007 HS Energy

Nesjavellir 4x30=120 MW 1998-2005 Reykjavik Energy Husavk 2 MW 2000

Reykjanes 2x50=100 MW 2006 HS Energy Hellisheidi 6x45+33=303 MW 2006-2011 Reykjavik Energy

Installed geothermal capacity: 665 MW electricity. Utilization 90% and yearly generation 5,2 TWh

The main causes of rapid geothermal growth in electricity generation: New Electricity Act 2003: Its main objective was to liberalize the market for generation of electricity and retail. Nordural Grundartangi aluminum production. PPA contracts with HS Energy and Reykjavik Energy. Nesjavellir 120 MW, Reykjanes 100 MW and Hellisheidi 303 MW. Most of the energy goes to the aluminum smelter.

MW TWh


14,60

11,63

4,90

2,584,21

0,6

30,00

0

20

40

ReykjavikEnergy:

Householdincl. 25,5%

VAT.

ReykjavikEnergy:

Householdexcluding

25,5% VAT.

NationalPower

Company:Heavy Industry

includingtransmission.

NationalPower

Company:Heavy

Industry, oldcontracts,

partlyincluding

transmission.

EstimatedTariff from a

newgeothermal

power plant.

Transmissioncost

Household inCountry X:Estimatedtariff 30

cent/kWh oreven higher.

Electricity tariffs in IcelandCalculated to cent/kWh (US$)

Transmission and distribution

4,9234%

Fixed charge2,1815%

Energy price4,4230%

Energy tax0,111%

Value Added Tax2,9720%

Reykjavik Energy Household 14,60 cent/kWh including VAT

Per year: 4.800 kWh x 14,60 cent/kWh = 700 US$

Electricity Tariffs in Iceland calculated to cent/US$

ISK/US$: 115,00

Kristjn B. lafsson [email protected]

Well 1 Well 2 Well 3 Well 4 Well 5 Well 6

MW per drilled well 6 0 7 17 20 0

Accumulated MW 6 6 13 30 50 50

6 6

13

30

50 50

0

30

60

Figures from a drilling project in Iceland

8

Drilling is the primary risk factor in geothermal projects

The figure shows real figures from a drilling project in Iceland. 6 wells have been drilled and estimated 50 MW have been secured. Average 50/6 = 8, 3 MW/Well The first three wells yield a total of 13 MW. Then there are two robust wells and finally well 6 with 0 MW. This case clearly describes the situation that may arise during drilling for a new plant, one the management of the project should be aware of. This may be analysed further in a decision tree analysis.

MW


Geosciences

Legal and institutional framework

Finance

Engineering

Cooperation between disciplines


A: PPPublic project

ICELAND

C: IPPThe private sector

B: PPPPublic Private Partnership

D: Separation of

steam collection and power generation

Financial Models


OperatorReykjavik Energy

Operations and Maintenance Contract

LendersFinancing Agreements

IFC and MDBs

ContractorReykjavik Energy

Construction Contract

Sponsors / InvestorsEquity

Reykjavik Energy Invest, IFC and MDBs

Project Finance model: REI Djibouti model 2008

PPA

& PA

Project Company Djibouti

Off-takerEDD Djibouti

InsurersRisk Mitigation


The Icelandic Approach in Development of Geothermal Projects

Geothermal development

R & D Exploration Drilling Confirmation Engineering Construction O & M +25 Y

ISOR Icelandic Geothermal Companies (*)

Iceland Drilling Mannvit

Verkis

Efla

Worldwide: Only a few companies cover all phases of geothermal development

(*) Not using EPC contracting approach. EPC: Engineering, procurement and construction.

Icelandic Power Companies 2014: Landsvirkjun: State ownership Reykjavik Energy: City of Reykjavik and municipalities HS Energy: Privatized 2007


Africa: Estimated investment 4 MUS$/MW vs Iceland 3 MUS$/MW

45

25

76

19

5

150

30

75

100

176

195200

0

150

300

Pre-feasibility and 4exploration &

production wells

Additional Productionwells

Re-injection wells Power plant, turbines,rotor, etc.

Piping, substation,etc.

Start up andcommissioning

Iceland Total 150MUS$

Estimate for Africa: 4 MUS$/MW x 50 MW = 200 MUS$ (Estimates from 3-7 MUS$/MW)Estimate for Iceland: 3 MUS$/MW x 50 MW = 150 MUS$ (Estimates from 3-4 MUS$/MW)

Project cost heavily depending on the total cost of drilling

MUS$ Iceland Accumulated cost

MUS$

Page 41:Low estimate: 2,8 MUS$/MWMedium estimate: 3,9 MUS$/MWHigh estimate: 5,5 MUS$/MW


0,25

0,50

0,25 0,25

0,75

2,00

0,00

1,50

3,00

Fixed Cost:Supervision of

machines

Fixed Cost:Maintenance

work

Variable Cost:Superv. ofReservoir

Variable Cost:Operational

supplies

Variable Cost:Make-up or

maintenancedrilling

Estimated operating expenses, including make-up, from 0,85 - 2,00 cent/kWh

O&M cent/kWh Accumul. cent/kWh

0,2512%

0,5025%

0,2512%

0,2513%

0,7538%

Estimated operating expenses 2,00 cent/kWh

Fixed Cost: Supervision ofmachines

Fixed Cost: Maintenancework

Variable Cost: Superv. ofReservoir

Variable Cost: Operationalsupplies

Variable Cost: Make-up ormaintenance drilling

O&M including make-up

Cent/kWh


6,0 12,0

40,224,0

48,0

19,8

140,0

30,0

60,0

0,0

60,0

140,0

0

100

200

First drilling and scientificwork

Financial Close: 75% of power Grant 0% Equity Debt

50 MW Geothermal Project: 200 MUS$: Grant 0%IPPs and Investors not willing to taka 100% risk to prove the resource

Example: Djibouti 2008-2010

IPP Company Multiple Donors MDBs Equity 30% Debt 70% Total

A: First step B: Second step C: Total financing

Project finance model without Grant

MUS$


15,0

34,230,0

30,0

30,0

15,0

16,8

119,0

30,0

60,0

30,0

51,0

119,0

0

100

200


Financial Close: 75% of power Grant 15% Equity Debt

50 MW Geothermal Project: 200 MUS$: Grant 15% or 30 MUS$Example: Djibouti with WB/Multidonors support

IPP Company Multiple Donors Others MDBs Equity 30% Debt 70% Total

Project finance model including grant 15% or 30 MUS$

MUS$



45,0

105,0

0,0

45,0

105,0

0

100

200


Financial Close: 75% ofpower

Grant 0% Equity Debt

50 MW Geothermal Project: 150 MUS$Public Power Companies: Understanding and accepting the geothermal risk

Power Company MDBs and Commercial Banks Total

Corporate Finance model for Iceland

MUS$



30 30 30 30

3051 51

19

119

2 5

30

60

100

200

0

50

100

150

200

250

Pre-feasibility Pre-feasibility andFeasibility Study

Feasibility Study and firstdrilling

Drilling and to reachFinancial Close

Total drilling and re-injection

Power plant, equipment,steam supply system, etc.

Operation period

Accumul. GRANT 30 MUS$

Accumul. Equity 51 MUS$

Accumul. Debt 119 MUS$

Accumul. Capex 200 MUS$

Risk profile from high to low

50 MW Geothermal Power ProjectRisk profile and major steps in financing

Financial Close: 60 MUS$

Risk profile: From high to low

2) Financial Close 60 MUS$

1) First drilling 30 MUS$

4) CapEx 200 MUS$

3) Total drilling 100 MUS$

Steps in financing a geothermal project and project risk

MUS$


13,27

8,78

4,21

25,0%

20,0%

11,0%

0,0%

12,5%

25,0%

0,00

10,00

20,00

A: Africa: No grantTariff 13,27 cent/kWh

Project Finance.

B: Africa: Grant 30 MUS$Tariff 8,78 cent/kWh

Project Finance

C: Iceland: No grantTariff 4,21 cent/kWh

Corporate Finance

Return on equity, Grant and Tariff

Tariff cent/kWh ROE

Key findings

Cent/kWh ROE %

Transmission cost:0,6 cent/kWh.


CASE STUDY: Financial assumptions and conclusions

Corpor. Fin.

1 A B C

2 Plant size MW 50 50 50

3 Capital expenditures: CAPEX over six years MUS$ 200 200 150

4 Capital expenditures: Capex per MW MUS$/MW 4,0 4,0 3,0

5 Exploration and production wells Nr. 12 12 9

6 Average well productivities (success rate included in calculation) MWe 4,2 4,2 5,6

7 Re-injection wells Nr. 6 6 6

8 Financing of first drilling & scientific work MUS$ 30 309 Financial Close in Project finance reached at MUS$ 60 60

10 Total scientific work, drilling and re-injection MUS$ 100 100 5811 Power plant, turbines, steamfield, etc. 100 100 9312 A B C13 Equity: 30% MUS$ 60 51 4514 Debt: 70% MUS$ 140 119 10515 Loan guarantee Project finance Project finance State/Municipality16 Grant MUS$ 0 30 017 Grant % of CAPEX 0% 15% 0%18 Interest on debt: % in real terms % 6% 6% 3%19 Required rate of return on equity % 25% 20% 11,0%20 WACC: Before tax % 11,7% 10,2% 5,4%21 WACC: After tax % 10,9% 9,4% 5,0%22 A B C23 Plant capacity factor % 90% 90% 92,5%24 Maintenance and internal power consumption % 10% 10% 7,5%25 Generation (MW x capacity x 365 x 24) GWh/Year 394,2 394,2 405,226 Annual revenues MUS$ 52,3 34,6 17,027 A B C28 OPEX incl. Make-up. Annual prod. decline 2-3%. cent/kWh 2,0 2,0 0,8529 OPEX incl. Make-up. Annual prod. decline 2-3%. % of CAPEX 3,9% 3,9% 2,3%30 OPEX incl. Make-up. Annual prod. decline 2-3%. MUS$/Year 7,9 7,9 3,431 5. Tax, depreciation and years in calculation A B C32 Income tax % 20% 20% 20%33 Depreciation, straight line Years 25 25 2534 Loan maturity period Years 25 25 2535 Operating life time Years 25 25 2536 A B C37 Tariff cent/kWh 13,27 8,78 4,2138 Project IRR (from free cash flow to firm: FCFF) % 15,3% 9,3% 5,7%39 Project NPV MUS$ 53,9 -1,3 9,740 Equity IRR (from free cash flow to equity: FCFE) % 25,0% 20,0% 11,0%41 Equity NPV MUS$ 0,0 0,0 0,042 Pay-Back Years 6,0 9,1 13,143 Discounted Pay-Back (disc. at WACC) Years 11,0 22,144 Levelized Cost of Energy cent/kWh 5,15 5,00 2,8245 Levelized Cost of Energy after Grant cent/kWh 5,15 4,34 2,8246 a) LCOE Capital cent/kWh 3,95 3,72 2,1647 b) LCOE O&M cent/kWh 1,19 1,28 0,6748 No resource tax, tax holidays or carbon credit revenues.

3. Plant capacity factor and annual generation (+/-)

High temperature reservoir single flash geothermal project Africa IcelandProject finance

1. Capital expenditures, wells and steps in financing (+/-)

2. Capital structure, interest, return on equity and WACC (+/-)

4. Operation and Maintenance costs including make-up (+/-)

6. Financial calculations: Tariff, IRR, Payback and LCOE

7. Other assumptions:

Iceland: No direct grant Loan guarantee from owner No resource tax Return on equity 11% WACC after tax 5%


2,00

2,03

0

5

10

15

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

O&M incl. Make-up Depreciation Interest Net Income Income tax

Tariff per year calculated to cent/kWhTariff 8,78 cent/kWh

O&M incl. Make-up

2,0022,8%

Interest1,25

14,3%

Income tax0,708,0%

Depreciation2,03

23,1%

Net Income2,79

31,8%

Tariff in cent/kWh and %Tariff 8,78 cent/kWh

Tariff 8,78 cent/kWh


Levelized Cost

2,00

0,00

1,250,70

2,03

2,79

8,78

5,00

4,34

0,0

5,0

10,0

15,0

O&M & M-up

Royalties Interest Income tax Depreciation Net Income Tariff LevelizedCost

LC afterGrant

Tariff 8,78 cent/kWhLCOE 5,00 cent/kWh

LCOE after Grant 4,34 cent/kWh

cent/kWh

3,72

0,510,77

5,00

0,0

5,0

10,0

15,0

LCOE Capital LCOE O&M Fixed 40% LCOE O&M Variable 60% LCOE Total

LCOE 5,00 cent/kWhCapital: 3,72 cent/kWh

O&M Fixed: 0,51 cent/kWhO&M Variable: 0,77 cent/kWh

cent/kWh


Project IRR 9,26% and Equity IRR 20%

-1,3

9,26%

-20%

0%

20%

-150

0

150

1 2 3 4 5 6 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

Free Cash Flow to Project, accumulated Project IRR and accumulated NPV: Tariff 8,78 cent/kWh

Equity Debt

GRANT Free Cash Flow to Project

Acc. Cash Flow at WACC a.tax Acc. Project IRR

Million US$ and %

WACC after tax: 9,4%Iceland: WACC 5,0%

20,00%

-20%

0%

20%

-150

0

150

1 2 3 4 5 6 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

Free Cash Flow to Equity, accumulated Equity IRR and accumulated NPV: Tariff 8,78 cent/kWh

Equity Debt

GRANT Free Cash Flow to Equity

Acc. Disc. Cash Flow to Equity Acc. Equity IRR

Million US$ & %

ROE 20%Iceland: ROE 11%


1. Favorable geothermal conditions, strong infrastructure and local support.

2. Power plants located close to transmission lines and market.

3. Years of experience from geothermal central heating projects.

4. New Electricity Act 2003 and increased demand from aluminum industry willing to sign long term PPA.

5. High utilization (90%) lowering the Levelized Cost of Electricity.

6. State and municipal ownership of power companies.

7. A loan guarantee from owners.

8. Power companies understanding and accepting the risk in geothermal projects.

9. Corporate Finance and access to finance.

10. Local geothermal capacity building (UNU, ISOR, NEA (Orkustofnun), Engineering companies, etc.) and a local geothermal drilling company.

Iceland would be facing a different geothermal picture without State/Municipal Power Companies, Corporate Finance instead of Project Finance, local know-how, local drilling company, experience from central heating projects and increased demand from aluminum industry.

Key success factors for rapid geothermal development in Iceland


Long term PPA

Long operational life cycle

Renewable energy

No reliance on fossil fuel, rain, wind or sun

Reliable

energy

Generation capacity factor > 90%

Tariff 8,78-13,27 cent/kWh

Financing is a difficult step

African Rift Valley and Geothermal Energy

Estimate for Africa:

10 x Iceland installed geothermal capacity in the coming years.


Kristjan B OlafssonSenior Financial AnalystReykjavik IcelandE-mail: [email protected]: +354 892 9200

financial analysis for a 50 mw power project

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