gtm, make & wood mackenzie form the we guide · 2018-06-08 · •vietnam: dispute resolution...

0PPA Bankability in APAC Markets

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Outlooks

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Analysis

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Performance Outlooks

Wind, Solar, Storage, and Grid

Edge Competitive Landscapes


Rishab Shrestha

Analyst, Global Solar Markets

[email protected]

Solar Project Investment Viability in APAC MarketsAsia Clean Energy Forum 2018


• Demand and costs

• Challenges

• LCOE and cost levers

• Market attractiveness

• Take aways

Outline


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2015 2016 2017 2018 2019 2020 2021 2022

APA

C P

ow

er d

eman

d (

TWh

)

GW

dc

China JapanIndia South KoreaTaiwan ThailandPakistan VietnamMalaysia PhilippinesOther Asia Rest of the worldGlobal Power

Positive Project Viability Fundamentals – Rising Demand and Reducing Costs – Provide

Significant Opportunities for Solar Deployment in APAC Region

Source: GTM Research, Wood Mackenzie

~67 GW of annual installs will help meet rising power demand through 2022

Power CAGR 2.5%

Source: GTM Research

Auctions, whilst reducing prices, also tend to push project viability boundaries

-50

0

50

100

150

200

250

300

2007 2010 2013 2016 2018

USD

/MW

h

Africa Europe LATAM

Middle East North America Asia

Global average coal and gas LCOE range

Key facts - Average PPA tariff

2011-14 US$101/MWh

2015-17 US$61/MWh


Bankability Concerns Vary Across the APAC MarketsBankability Concerns Vary Across the APAC Markets

ChinaJapan

Singapore

Australia

South Korea

India

Philippines

Indonesia

Vietnam Vietnam - dispatch risk / dispute resolution

Indonesia - returns risk

India - regulatory risk

China - subsidy payment / curtailment risk

Japan - returns / interconnection risk

Taiwan

Low degree of policy uncertainty

High degree of policy uncertainty

Australia – policy risk


Permitting and Land Acquisition Are Common Challenges in APAC Markets

ChinaJapan

Malaysia

Australia

India

Philippines

Indonesia

Vietnam

40 GW+ of solar park in implementation or planning phase and have accelerated permitting and land acquisition process

Small Project size Large project size

50+ MW

50+ MW

Pakistan

50 MW

50 MW

45 MW

10 MW

13 MW

Thailand

6 MW

Median project size in APAC region

24 MW

60 MW

Challenges

Large, ideally flat, land requirement (1.5 hectares per MW)

Competing land usage (irrigation, vegetation)

T&D, power evacuation infrastructure

Fragmented land owners


$30

$35

$35

$36

$42

$45

$48

$50

$50

$53

$55

$56

$60

$60

$66

$87

$110

$50

$65

$72

$50

$58

$99

$80

$85

$90

$110

$95

$81

$91

$91

$90

$115

$151

$20 $40 $60 $80 $100 $120 $140 $160

Mexico

Pakistan

United States

India

Philippines

Germany

Australia

France

Thailand

Indonesia

Brazil

South Africa

Italy

UK

Netherlands

Turkey

Japan

USD/MWh

Solar Costs Vary Significantly Across APAC Markets

Source: GTM Research, MAKE, Wood Mackenzie

Utility-Scale Solar LCOE Ranges for Key Countries, 2017

Source: GTM Research, MAKE

Solar LCOE is most sensitive to capacity utilization factor and CAPEX cost


Despite Low Renewable Penetration, External Factors Pose Risks for Dispatchability

CountriesCurtailment

compensationmechanism

China Guaranteed hrs.

India Guaranteed hrs.

Vietnam Unclear

Pakistan Take or pay

Thailand Take or pay

Philippines Take or pay

Bangladesh Take and pay

Malaysia Take or pay

Indonesia Take or pay

Note: In “take-or-pay” the offtaker provides an assured revenue stream for the project by guaranteeing specific compensation if electricity is not taken. * basedon % of power mix


Grid congestion and weak T&D infrastructure, although improving, are potential risks in the region

0% 1% 1% 2% 2% 2%3%

6% 7%

20%

18% 18% 19%17%

27%

19% 19%

26%

30%

18%

0%

5%

10%

15%

20%

25%

30%

35%

0%

5%

10%

15%

20%

25%

Cap

acit

y fa

cto

r

Sola

r an

d W

ind

pen

etra

tio

n

Solar and Wind penetration Solar capacity factors


0

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4

6

8

10

0 10 20 30 40 50 60 70 80

Bankability Is Not Necessarily Correlated to Market Attractiveness

Note: Higher bankability scores are better. Bankability scores are calculated for each market based on the risksassociated with returns, currency, dispute resolution, offtaker payment support, dispatch regulations, land acquisitionand permitting. Market attractiveness includes a broader range of criteria including market size, policy strengths,business competitiveness landscape.


Development Bank Financing Has Been Crucial in Filling the Bankability Gap

Source: GTM Research Market Attractiveness Tool

But long-term market attractiveness is dependent on bankability

Market Attractiveness (Rank)

India

PP

A b

anka

bili

ty s

core

s (o

ut

of

10

)

China

Japan Australia TaiwanSouth Korea

Vietnam

Pakistan

ThailandSri Lanka

Philippines

Bangladesh

KazakhstanMalaysia

Indonesia

Low activity of development banks High activity of development banks

Less attractive

More attractive

0 1 2 3 4 5

Mongolia

Nepal

Vietnam

Sri Lanka

Thailand

Pakistan

Taiwan

Philippines

Singapore

Indonesia

South Korea

Malaysia

China

Japan

India Solar Resource

CurrencyStabilityPolitics andGovernanceEconomicStrengthBusinessClimateEnvironmentalFocusSolar MarketSizeSolarEconomicsSolar PolicyOutlookSolar PolicySupportSolar MarketConcentration

Q1 2018 Market Attractiveness Score (out of 5)


Take Aways

•Positive project viability fundamentals from macroeconomic and financial perspective

provide significant opportunities for solar deployment in APAC markets

•Bankability concerns exist but are improving in the APAC region; sharing cross-country

learnings will accelerate costs improvements

•Higher margins are necessary to factor in increased risks such as off-taker credit quality

•Bankability is not necessarily correlated to market attractiveness but in the long-term

market attractiveness is dependent on bankability

•LCOE is expected to decline by ~13 % in 5 years. As bankability concerns are addressed,

further reduction in financing costs will lead to additional reductions in LCOE


Rishab Shrestha

Analyst, Global Solar Markets

[email protected]

Thank You!

PPA Bankability in APAC Markets

Appendix


0

2

4

6

8

10

12

0 1 2 3 4 5 6 7 8 9 10 11 12 13

Equity risk premium (%)

Vietnam

China

Japan

India

Korea

ThailandAustralia

Indonesia

Philippines

Mexico

WACC (%)

United States

United Kingdom

NetherlandsFrance

Germany

Appendix - Cost Reduction Trends Continue to be Promising

Source: GTM Research, MAKE

IRR-WACC spreads of 200+ basis points will be important for project viability

Europe North America LATAM Asia

0

20

40

60

80

100

120

140

160

2018 2022

APA

C L

CO

E (U

SD/M

Wh

)


Appendix: India - Developers Without Clear Change-in-Law Clauses in PPAs Risk Suffering Damages

Feb. ’17: Rewa Solar Park bid of 3.30 INR/kWh

Apr. ’17: Engie Solar bid3.15 INR/kWh

May ’17: Acme bid 2.44 INR/kWh

July ’17: GST implemented; confusion persists on the rate applicable for solar components. Capital costs on the rise (~4%).

Nov. ’17: Port customs officials classify solar as electric motors and generators (which have 7.5% import duties) instead of diodes/semiconductor devices (which have none). Costs increase by an additional ~4%.

Sept. ’16: First Goods and Services Tax (GST) Council meetings held

Jan. ’18: Directorate General of Safeguards Customs and Central Excise gives preliminary recommendation of imposing 70% safeguard duty on solar cells and imports from China and Malaysia

Feb. ’18: India auctions more than 5 GW of solar for 2018

Note: 2017 USD/INR = 64.78

Source: GTM Research, MNRE

India Case study - Navigating through the uncertainty

.....

10.1

12.0

1.9

0

1

2

3

4

5

6

7

8

9

10

11

12

EffectiveIRR

IRR @ 3 INR/kWh

Effect of 6% CAPEX increase on IRR

(%)


Appendix: Contract Enforcement Can Be Difficult, but Clear Dispute-Resolution Clauses Reduce Risks

• India: State utilities in Tamil Nadu, Jharkhand and Uttar Pradesh have been keen on

revisiting the solar PPAs previously signed as a result of plummeting solar tariffs. The

central government is tightening PPA terms by including debt payments and 150%

equity payments in case of termination.

• Termination clauses vary across the region. Malaysia, for instance, has a clear

termination clause providing the option to purchase/sell the project for the

counterparty in event of default.

• Bid bonds are generally cheaper in mature markets: current levels are approximately

$12,500/MW in India, $33,000/MW in Bangladesh and $96,750/MW in Sri Lanka (all

values USD). Despite lower bid bonds in India, project cancellation from the developer

side has not been an issue.

• Vietnam: Dispute resolution through international arbitration and protection against

changes in the law are not specifically provided for under the current PPA; this is a

source of grave concern.

Source: GTM Research, TNB, TN ERC, NWPGCL, CEB

Absence of termination payments puts both debt and equity investment at risk

Note: Bubble size refers to individual winning bids, July 2017 USD/INR = 64.45

Source: GTM Research, TN ERC

Tamil Nadu, India: Price Renegotiations Reduced PPA Prices by 11% in July 2017

3.6

0.0

3.5

3.7

3.8

3.9

4.0

4.1

INR

/kW

h

100MW

Negotiated price forall projects after auction3.47 INR/kWh

Upper limit tariff4 INR/kWh

Weighted averagetariff during auction3.9 INR/kWh

-11%


Appendix: 15 APAC Currencies Have Depreciated an Average of 16% Against USD Over the Past 5 Years

Majority of Markets Have Local Currency-Denominated PPAs

-50% -45% -40% -35% -30% -25% -20% -15% -10% -5% 0%

Bangladesh

South Korea

Australia

China

Vietnam

Thailand

Pakistan

Sri Lanka

Philippines

India

Taiwan

Japan

Malaysia

Indonesia

Kazakhstan

Note: * PLN may be reluctant to offer USD guarantee for small-scale projects


Local currency PPA USD indexed PPApayable in LCR


Appendix: Cross-Subsidies and Insufficient Tariff Revisions Have Led to Poor Rates of Cost Recovery for Utilities

Market-oriented

Source: GTM Research, Wood Mackenzie, state utilities, state electricity regulatory commissions

Tariffs have implication on credit ratings of the off taker and costs savings offered by solar projects

7459

81

126

169

357

8399

8068

135

178

Philippines IndiaMalaysiaGermany US

-1%

-20%

+12%-46%

+68%

Indonesia

-50%

Residential Industrial

Power Price (USD/MWh)


Appendix: Numerous Bankability Criteria Are Important for Securing Project Finance

Bankability Criteria Details

Dispatch risk The risk that the generation plant won’t be dispatched by the offtaker. Could be take-or-pay or take-and-pay.

Returns risk Revenue needs to have fixed PPA (or hedged) for debt and equity return requirements.

Foreign exchangeRisk of volatile currency prices and restriction on transferring funds offshore. PPA should be linked to the currency of the debt issued or hedged. (Only applicable to foreign investors.)

Dispute resolutionAgreement for offshore arbitration should be provided under generally acceptable terms to the international community.

Termination paymentPPA should clearly define the basis on which termination may be carried out and outline clear termination payment mechanism.

AssignmentCollateral assignment for the lenders should be allowed with the right to receive notice of any default and to remedy such default.

Offtaker payment supportDepending on the size of the project, the creditworthiness of the offtaker and the country’s energy sector, a short-term payment facility or sovereign guarantee would be required to support offtaker payment obligations.

Transmission/ interconnection PPAs should clearly indicate the party that bears the risk of connection and interconnection.

Regulatory risk Risk associated with changes in law and taxes should be clearly allocated in the PPA document.

Force majeurePower producer’s obligations should be excused in a situation which is beyond the reasonable control of the power producer.

Source: GTM Research, World Bank

• PPA bankability is critical for financing

renewable energy projects, as well as

for lowering the cost of financing

renewable energy projects.

• Bankability involves fair allocation of

risks among various stakeholders (e.g.,

power producer, offtaker, policymakers),

making key elements such as revenues

and responsibilities predictable,

providing mechanisms and procedures

for addressing risks.

• Disruption of cash flows and the

credibility of the offtaker throughout the

PPA duration are key concerns of lenders.


Appendix: Methodology

Bankability Criteria Details

Dispatch riskBased on solar and wind penetration, curtailment and transmission infrastructure. 10: Guaranteed revenue for deemed generation, 0: Highly prone to curtailment and revenue not guaranteed

Returns risk10: PV LCOE highly competitive against wholesale power prices and alternative generation technology0: PV not competitive against wholesale power prices

Foreign exchange10: Currency hedges available, low volatility/convertibility and pegged exchanged rate 0: Very high degree of currency volatility and convertibility risk and scant or absent hedging options

Dispute resolutionBased on strength of investor protection and offshore arbitration. 10: Option for offshore arbitration according to reasonable international standards0 : No offshore arbitration available and precedent of unfair practices

Termination paymentBaked into regulatory risk, which is determined by rule of law and policy stability index. 10: Termination payment available and clauses clearly defined, rule of law strongly respected, 0: No provision for termination payment and little respect for rule of law

Credit riskBased on availability of payment support and credit profile of the offtaker. 10: Market-oriented tariff structure and availability of offtaker payment support, 0: High degree of subsidies and unavailability of offtaker payment support

Transmission/ interconnectionAdjusted based on transmission infrastructure. 10: Very low level of transmission constraint; interconnection responsibility and timeline clearly defined, 0: High levels of transmission bottlenecks and interconnection clauses that are vague and unclear

Regulatory riskAdjusted based on stability of renewable energy related policy. 10: Stable policy environment, 0: Highly uncertain policy environment with historical precedent of retroactive policy changes

Force majeureBased on rule of law index. 10: Rule of law strongly respected, force majeure clauses (risk allocation and responsibility for addressing damages clearly specified), 0:

Weak rule of law and force majeure clauses

Others Degree of subsidization is used as a proxy for credit quality of the offtaker, land acquisition and permitting are also taken into account.

Bankability Scores (Out of 10)


0

2

4

6

8

10Economics

Currency risk

Dispute resolution

Credit riskDispatch risk

Regulatory risk

Land acquisition &Permitting

South Korea (7.9) Vietnam (4.7) Pakistan (5.3)

Thailand (6.3) Philippines (6.3)

Appendix: Bankability Scores for Top 10 Markets

0.0

2.0

4.0

6.0

8.0

10.0Economics

Currency risk

Dispute resolution

Credit riskDispatch risk

Regulatory risk

Land acquisition &Permitting

China (5.9) India (5.3) Japan (7.3) Australia (8) Taiwan (8.1)

gtm, make & wood mackenzie form the we guide · 2018-06-08 · •vietnam: dispute resolution...

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