modelandum Curso Renewable Energy

Renewable Energy Financial Modelling

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Basics of Renewable Energy: Sources

The Business Process

PV Financial Model

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M&A

Questions

1. Basics of Renewable Energy: Sources 1.1 Solar PV: a) System

A Solar PV System consists of: → Electrically connected PV modules containing many individual solar cells integrated with hardware components (inverters, transformers, wires, boxes,‌) that convert the LV DC output of PV modules into HV AC power fed into the grid

1. Basics of Renewable Energy: Sources 1.1 Solar PV: b) Module Datasheet (Characteristics) Silicon PV modules consist of: A glass sheet (mechanical support and protection) Laminated encapsulation EVA layers (UV protection) Solar cells, each capable of producing 4–5 Watts under peak illumination (Wp) A fluoropolymer backsheet (environmental protection) Aluminum frame (mounting) Common dimensions: 100cm x 150cm x 4cm Peak power ratings: [260 W- 320 W].

1. Basics of Renewable Energy: Sources 1.1 Solar PV: c) Power Generation

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Module Front surface is illuminated by sunlight.

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Solar photons are transmitted into each cell.

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The photons are absorbed.

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An absorbed photon transfers its energy to an electron and its positively charged counterpart (a hole).

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An internal electric field pulls electrons toward one electrode and holes toward the other, resulting in a dc electric current.

1. Basics of Renewable Energy: Sources 1.2 Concentrated Solar Power

CSP systems generate electricity by using sunlight to heat a fluid.

The heated fluid creates steam that drives a turbine-generator.

CSP systems employ mirrors to direct and focus solar radiation on a heat transfer fluid (synthetic oil, molten salt,‌) which is used to generate electricity either by direct expansion through a turbine.

2 steps determining efficiency:

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Solar-to-heat within the solar collector

Heat-to-electricity in the power generation block

1. Basics of Renewable Energy: Sources 1.2 Concentrated Solar Power

1. Basics of Renewable Energy: Sources 1.3 Wind Power

Use of air flow through wind turbines to mechanically power generator for electricity.

Wind turbines are distributed over an extended area, connected to a MV collection system.

At the substation, a transformer increases the voltage of the current and a transmission line transports the electricity to the grid.

1. Basics of Renewable Energy: Sources 1.3 Wind Power

1. Basics of Renewable Energy: Sources 1.4 Other sources

BioMass and GeoThermal graphics to be delivered via Dropbox

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Basics of Renewable Energy: Sources

The Business Process

PV Financial Model

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M&A

Questions

2. The Business Process 2.1 Business Cycle: Overview  Company strategy (internal decission, external advice/offering)  On-Site Research (visits, fairs, consulting companies,…) → 1st Pro Forma Analysis (Resource, Capacity, Retribution System)  Decission to Start Activities  Contact with Local Advisors/Developers → Business Plan Modeling (Local Advisors must inform about inputs to consider in the model)  Development → Business Plan “Sculpture”  Authorization to Build → Business Plan Analysis: Board Decission

2. The Business Process 2.2 Business Cycle: Development Stages Pre-Feasibility Analysis (Technical) Land Lease Public Authorities Assessment (Construction Permit):

Environmental Connection Request PPA Negotiation Ready-to-Build

Archaelogical

Legal assessment

Other

2. The Business Process 2.3 Business Cycle: Construction Pv Solar Plant (example)

2. The Business Process 2.4 Business Cycle: Exit Strategies

 Sale “Ready-to-Build”: sale of licenses, plant not built yet.

Gain: Developer`s Margin  Sale after COD Gain: Developer’s Margin + EPC Margin  Operation / Sale while Operation Gain: Opportunity Cost (Risk and Return analysis)

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Basics of Renewable Energy: Sources

The Business Process

PV Financial Model

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M&A

Questions

3. PV Financial Model 3.1 First Steps First step in constructing the model:

a) Identifying the modeller

b) Naming the project

Where?

c) Setting the currency

Assumptions Sheet

d) Defining the temporality of our model

3. PV Financial Model 3.1 Basic Information Plant Connection Date

Income Source* Dismantling Date***

Plant Capacity

Where?

Construction Period

Time Horizon**

Assumptions Sheet

*Revenues come from the sale of the produced electricity, but the production can be retributed in many ways. **Typical life span [25-30] years for PV Plants. ***Plant may still be able to produce electricity, but environmental regulations prevail over profitability.

Grid Operator will "disconnect" the plant from the system.

3. PV Financial Model 3.2 Electricity Production

Solar Irradiation*

Trackers Efficency Increase

Plant Capacity (Already an Input!!)

Trackers**

Modules Deration***

*Equivalent Hours per Year **Yes/No (Higher Irradiation, Higher Cost) ***Range [0.4%-0.8%] (annually)

Where?

Assumptions Sheet

3. PV Financial Model 3.3 Project Cost (CAPEX) Information on the project's cost:

Land4

Trackers Cost2

Developer's Fee5

EPC Price1

Plant Capacity Trackers (Yes/No) 1 Cost

Advisors: Legal, technical,...

of construction of the plant (Not considering trackers

2 Hours of

irradiation ↑; Cost of construction ↑.

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incurred when developing projects from greenfield.

4 Land 5 Cost

Licenses3

rental may come as an Opex or as a CAPEX cost

paid when "buying" the project from a prior developer.

Where?

Assumptions Sheet

3. PV Financial Model 3.4 Time Horizon

There are many ways to model the timing of the project.

The items listed in previous slide are the most arguable when dealing with a transaction, and will be submitted to a deep analysis during the technical part of a Due Diligence.

When dealing with "brief" models, it is desirable to not model and manually write down instead the time periods.

Where?

P&R Sheet

3. PV Financial Model 3.5 Retribution Models

1. Power Purchase Agreement (PPA): It is a contract between two counterparties for the provision of energy. Since it is set up privately* (yet some standard rules can be established by the Grid Operator) prices and time horizons can vary significantly.

We will model the following PPA: - Fixed Price increased every year to a escalating rate or "Escalator".

2. Feed-In Tariff: The most typical state-sponsored retribution model. It consists, basically, on selling the energy at pool (market) prices, with a Public entity (Grid Operator, Energy Agency) paying an extra price to the energy producer.

The inputs we need to model this retribution system are: a. Feed-In Tariff value: same value during all the life cycle of the plant. b. Pool Prices during the life cycle of the plant (we get these prices from a consulting firm)

Where?

Assumptions Sheet, P&R Sheet

3. PV Financial Model 3.5 Retribution Models

RETRIBUTION MODELS We have included a "Switch Button" just in order to have the option of choosing between two different retribution systems, thus having available our first sensitivity analysis.

Where?

Assumptions Sheet, P&R Sheet

3. PV Financial Model: P&L 3.6 OPEX In order to get the EBITDA values of the SPV, we need now to model the current costs of the Plant. → O&M Services: It is the most important cost of a PV Plant. Operation and Maintenance expenses arise from a contract which establishes a fixed price per MWp and year, with an escalator negotiated between both parties. → Asset Management: Accounting and Administration costs of the SPV. They are outsourced to a different company in order to decrease costs. → Insurance policies are charged according to capacity of the plant. → Land Lease: Annual rent for the land where the plant will be built. → Security: PV plants are constantly exposed to thefts. → Telecommunications: Internet services, monitoring services, data transmission. → Others: Aggregating all minor costs (Energy consumption, Minor & Local Taxes, Environmental Mitigation,...)

Where?

Assumptions Sheet, Opex+P&L, P&R Sheet

3. PV Financial Model: P&L 3.7 P&L

In order to go down in the P&L Statement, we only need, FOR THE MOMENT, to model up depreciation and corporate tax levels. → Depreciation. We use the "final balance" figure to have modelled no depreciation when residual value is cero. → IMPORTANT: We will fill the interest line later, for the moment we just let the cells blank. → Corporate Tax: We calculate the Tax Base taking into account possible negative tax bases (ESP: BIN's) and its role as a "Tax Shield" for the following years after they happen.

Note that formula in year 1 is different to formula in year 2.

We can solve this if you (your Boss) is not comfortable with this.

Where?

Assumptions Sheet, Opex+P&L Sheet

3. PV Financial Model: P&L 3.8 Financing We have the whole P&L, we start modelling the Cash Flow sheet, jointly with the Financing and Financing Assumptions sheets.

This is the most difficult part of the model in terms of attention, as we will be switching sheets in almost every step.

Inputs for Debt modeling: 1. Financing Structure: Debt/Equity ratio. Good old times of 85-15 have long passed away. Most common rates nowadays are more on the range of 65-35.

2. Underwriting fees: We will put an input value for now, but we will not use it in our first analysis.

3. Margin Spread: Spread over the reference interest rate that the bank charges. It is the "fixed" part of the interest cost.

4. Reference Interest Rate: Our interest cost is linked (indexed) to a market interest that serves as reference. Euribor, Libor, TIIE... (Bloomberg, Banks,...).

5. DSCR, Debt Service Coverate Ratio: Minimum Cash Flow level that the plant has to achieve. It is a ratio over the payments the SPV has to make to the bank (the SPV "services" both principal payments and interest payments).

Where?

Financing Assumptions Sheet, Financing Sheet

3. PV Financial Model: P&L 3.8 Financing

Inputs for Debt modeling: 6. DSRA, Deft Service Reserve Account: Initial cash contribution that the SPV has to make to serve as a guarantee for future Debt Services, in order to protect the Creditor from future negative conditions that may result in the SPV not meeting its financial obligations. When we cannot cover the DSCR, money will be deducted from the DSRA and the owner of the plant will be obliged to make an additional cash contribution to move back the DSRA To its initial level.

7. Swap Rate: In order to protect the payment of the Debt Service against future adverse financing conditions (higher reference interest rate) the bank may oblige the SPV to hedge its financing cost by buying a Swap.

8. % Debt under Swap Rate: We can have a swap on 100% of the debt or just on a part of it.

Where?

Financing Assumptions Sheet, Financing Sheet

3. PV Financial Model: P&L 3.9 Cash Flow → EBITDA: We get this value from the P&L sheet. → Working Capital Requirements: We include this line because it is a step in all formal calculations of Free Cash Flow. However, it is not typically included in Solar PV models.

After this deduction, we have the Operating Cash Flow of the Project → Capex Expenditures. Once deducted from the Operating Cash Flow, we get the Pre-Tax Project Cash Flow.

This values are used as a reference when giving details of the project, since they are the values from which we will calculate the Project IRR. → Corporate Taxes: We get this value from the P&L Sheet. Once deducted from the Project Cash Flow, we have the After-Tax Project Cash Flow. → Inflows of the project to fund the plant's construction, Debt and Equity.

Added to the After-Tax Project Cash Flow, we have the Cash Flow for Debt Service. → Debt Service Coverage Ratio (DSCR). This is the minimum Cash Flow over the Debt, that the Project must generate. The higher it is, the lower cash it is available for shareholders.

In our model, dividing the Cash Flow for Debt Service by the DSCR, we get the theoretical value of the Debt Service (payments made to the bank) every year. We go back to our Financing Sheet.

Where?

Cash Flow Sheet, Financing Sheet

3. PV Financial Model: P&L 3.9 Cash Flow Financing Sheet: → Interest Expense: Now that we have a value for the Debt Service, and a value for the Debt Principal (within our model, we are considering only one principal repayment per year), then we calculate which part of the Debt Service corresponds to interest expense.

Remember also, that we have two different interest rates: 1.a) Bank spread + Reference Rate 1.b) Swap rate In order to get the correct interest expense, our formula for calculating interest must include both interest rates. → Principal Repayment: We had calculated a Debt Service value, and now we have also the Interest part in that Debt Service. As a result, the difference between them is the Principal Repayment's part in the Debt Service.

Now, we go back to the Cash Flow Sheet.

Where?

Cash Flow Sheet, Financing Sheet

3. PV Financial Model: P&L 3.9 Cash Flow Cash Flow Sheet: → Real Debt Service: Instead of just getting the values of the Theoretical Debt service, to avoid generating a circular reference, we will use this to add the values in Financing Sheet. → Free Cash Flow: Finally we can get the FCF of the SPV, freed of every service. It is the money available for equity investors.

HEY! We had done a trick in the past. Do you remember? We did not include the interest expense in the OPEX+P&L sheet. We have to put it now.

Where?

Cash Flow Sheet, Financing Sheet

3. PV Financial Model: P&L 3.9 Cash Flow We go back to our OPEX+P&L sheet and include the interest expenses. NOW, we are going to assess our project, going back to the Cash Flow sheet → Debt Tenor: In our model, the sole condition of the bank we have included in our model is the Debet Tenor (Time horizon for full reapyment of Bank Debt). Not meeting this condition means the bank will not support the financing of the project. → Project IRR: We calculate this taking into account total Capital Expenditures INDEPENDENT of the costs of each funding sources (Debt+Equity), and the full cash flow generated by the project, meaning we do not consider the interest paid to the bank and the principal repayments. → Equity IRR: We calculate it taking into account the Capital invested by shareholders (Equity) now considering the cost of Bank Debt (Leverage Effect). → Project VAN: Measure of the selling price of the assets.

Selling on Year One: Developer’s Fee, EPC Margin Where?

P&L Sheet, Cash Flow Sheet, Financing Sheet

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Basics of Renewable Energy: Sources

The Business Process

PV Financial Model

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M&A

Questions

4. M&A 4.1 M&A Process We defined 3 strategies: Gain: Developer`s Margin

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Sale “Ready-to-Build”

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Sale after COD

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Operation / Sale while Operation

Gain: Developer’s Margin + EPC Margin Gain: Opportunity Cost (Risk and Return) 0 Decision to Sell 1 Teaser Preparation 2 Contacts with potential investors (both directions)

M&A Process

3 NDA (Confidentiality) 4 Model Comparison & Data Exchange 5 Non-Binding Offer 6 Exclusivity Agreement 7 Due Diligence 8 Price & Conditions Negotiation (Share Purchase Agreement)

4. M&A 4.2 SPA & Execution

A Share Purchase Agreement establishes the conditions under which the control of the SPV is going to take place.

SPV under operation: Working Capital Valuation Liability Period Conditions to the Closing Due Diligence Flags

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Basics of Renewable Energy: Sources

The Business Process

PV Financial Model

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M&A

Questions