financing hydropower development in emerging power...

1

"Financing Hydropower Development in Emerging Power Markets - Lessons of Experience from Brazil“

Christian Biebuyck, Tractebel EGI, BelgiumMauricio Bähr, Tractebel Brasil, Brazil

Jan, 24th 2005

The World Bank GroupEnergy Lecture Series 2005

2

Financing hydropower in emerging countries

Summary Content

1. Plus and minus of hydropower

2. Key characteristics of hydropower assets vs. thermal

3. Major risks

4. Specifics of emerging countries relevant to hydropower

5. What expert private sponsors can do well

6. Room for PPP’s

7. How can WBG help

8. Conclusion

3

1a. Qualities of Hydropower

n Renewable and clean energy

n Very long asset lifetimeSlow spinning velocity, low temperature…

n Low O&M cost

n May produce cheap electricity (not always…)

n Potential mainly located in emerging countries

n Well-proven and simple technology

n No dependence on fuel prices

n Availability for immediate load changes

4

Qualities of Hydropower (ctd)

n Large range of project size, from micro to mega

n Construction largely related to civil worksz intensive domestic employment/materialz should ideally be paid in local currency (but…)

n Water storage can be multi-usagez drinking water, irrigation, river flow regulation…

n May attract secondary activitiesz tourism, sports…

n Often benefits remote and less developed regions

5

1b. Issues with Hydropowern May lead to (variable) population displacementn Reservoirs change landscape (better or worse)n May flood agricultural or cattle landn Possible impact on wildlifen Possible cross-border issues (river flow changes)n Strong opposition by some NGO’sn Not entirely predictable/dependable energy

z rainfall (ST and LT), possibly other prioritiesn Often far away from consumer centresn Sensitivity to interest rates

6

2. Characteristics of Hydropower Assets

35-4020-25?up to 100Useful lifetime (y)

3-423-5Construction time (y)

2-31-22-5Development time (y)

859025-95Load Factor (%) (base)

1100-1300500-600700-2000Specific inv. Cost

(USD/installed kW)

COALCCGTHYDROTypical ranges for power plants / kind

7

Characteristics of Hydropower Assets (ctd)

49

8

19

22

44

3

30.5

10.5

34.5

2

0

32.5

16%7%5%O&M (ex-fuel)

Total cost of MWh

39%69%Fuel

45%24%95%Capital

COAL (US)CCGT (US)HYDROTypical Cost Structure

(USD/MWh)

8

Typical kWh Cost Structure (base load)

0%10%20%30%40%50%60%70%80%90%

100%

hydro CCGT coal

capitalfuelO&M

9


Assumptions behind previous table:n Specific investment cost for hydro = 1,000 $/kWn Base load factor: 50% (hydro), 85% (thermal)n WACC: 10%n Amortization: 40 y (H), 20 y (CCGT), 25 y (coal)n Efficiency: 55% (CCGT), 38% (coal)n Gas price: 5 $/MMBTUn Coal price: 2.1 $/MMBTU (50 $/T)n No water rights considered for hydron No CO2 cost/benefit considered

10


n Long development time + construction time

n High variability of development/construction cost

⇒ higher contingency provisions

⇒ lower certainty in return forecast

n May add more capacity than energy

z depends on the kind of plant

z run-of-the-river vs. reservoir

n Production cost heavily weighted on

z capital cost

z fixed cost

11


n Wide range of specific construction cost

z depends mostly on site characteristics and geology

z tailor-made

z small size ⇒ higher specific cost

n If no fixed price turnkey EPC contract (difficult)

z impact on project financing

z track record of significant cost and time overruns

n Amortization

z over a long time, if allowed by concession structure…

z on a relatively high basis

12

Key Parameters for Hydropower Output Price

n Total Investment Cost

z development cost highly unpredictable

z sensitive to environmental cost

z interest during construction can be significant

n Rainfall

z volume x head

z regularity (over year and LT) ⇒ load factor

n Financial cost

n Concession terms (amortization time, water rights…)

13

$

y

amortization

debt

equity

water rights

40

water rights

10

taxes

taxes

equity

investment

Hydropower – Schematic Cost Structure Profile Over Time

0-5-7

14

Hydropower – Typical Cashflow Allocation

(300)

(200)

(100)

-

100

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 ....upto xx

Years

Mil

lion

$

O&M Water rights Taxes Financing Dividends Civil works Equipment Engineering Environmental

15

3. Major Risks

n Development/construction cost overrun

z geological “surprises” may require costly cure/changes

z social environmental impact, NGO’s actions

z time is of the essence (IDC)

z hydropower development/construction more difficult to keep within budget/timetable and under control

n Rainfall

z available reliable historical data = key to optimal design

z climate and predictability (el Niño…)

z distribution of water flow over time (ST and LT)

16

Major Risks (ctd)

n Financial

z interest rates

z foreign exchange

n Regulatory

z lack of completeness and/or clarity

z instability

n Market

z hedging instruments for contractual supply obligation

n Damage to corporate image by biased public actions

17

4. Emerging Countries – Specific Advantages

n Most undeveloped hydro potential is there

n Often lower population density on potential sites

n Lower labour cost while heavy relative weight of civil works in construction

n Equipment can sometimes be manufactured locally

n Hydropower projects improve local infrastructure

n Usually positive repercussions for local community more than offset negatives

18

Emerging Countries – Specific Hurdles

n Access to financing, currency mismatchn High cost of financing, enhanced by high proportion of

capital cost in overall costn Often lack of electricity market sophistication n Cost of kWh to end-consumer must be affordablen Permitting may face strong bureaucracyn Strong opposition/lobbying by some NGO’sn Lack of access infrastructure ⇒ construction difficultyn Regulatory risk enhanced by long pay-back timen International arbitration often denied or opposed

19

5. What Expert Private Sponsors Can Do Well

n Efficient development/construction management

z within budget

z within timetable

z technical and economic optimisation

n Secure funding

n Efficient operation and maintenance

n Commercial expertise

20

6. Room for PPP’s: Role of Private Sponsor

n Bring best management practice

n Bring up-to-date technical expertise

n Bring commercial and free market expertise

n Secure funding

n Commit to minimal and acceptable environmental impact

n Commit to fair treatment of displaced population

21

Room for PPP’s: Role of Government

n Secure timely granting of licenses and permits

n Make available existing historical data

n Facilitate resettlement of displaced population

n Set rules for use of water and abide by them

n Set fair and balanced regulatory framework

n No undue interference with market

n Enforce rule of law

n Limit unjustified actions by NGO’s

n Favor development of domestic investment funds

22

7. How Can WBG Help? Be a Partner

n Reduce risks

z support to rule of law, international arbitration

z support to fair and balanced regulatory framework

z help secure government compliance with commitments

z educate public opinion/NGO’s to benefits of hydropower

n Help secure fair and balanced environmental standards

z sponsor fair assessment of previous environment

z sponsor fair and balanced agreement on impact mitigation plan

z be “guarantor” of implementation

z be “protector” against excessive opposition actions

23

How Can WBG Help? Be a Partner

n Participate to funding, umbrella for commercial lenders

n Help develop domestic funding in local currency?

n Innovative instruments to reduce long pay-back time?

n Innovative instruments to mitigate currency gap?

n LT: support historical data collection in emerging countries

24

8. Conclusion: GREAT, BUT…n Main challenges:

z make it cheap enough by lowering financial cost

z make it acceptable to/accepted by public opinion/NGO’s

z long term regulatory stability and FOREX hedging

n Several key paradoxes must be worked out

z main price component = financial vs. high cost of funding in emerging countries

z abundant and clean vs. opposition by “public opinion”

z LT regulatory stability need vs. ST political horizon

z LT financing need vs. ST pricing predictability

25

Case Study – Tractebel Experience in Brazil

1. Initial motivation to invest

2. Investments: Track record of Tractebel in Brazil

3. Cana Brava hydropower plant

4. New Regulatory framework

5. Major Risks

6. Perspectives / challenges

26





5. Major Risks


27

• Brazilian electricity market growth perspectives

• Expected Free Market to sell electricity

• Improvement of macro-economic conditions

• Regulatory framework allowing private investors

• Tractebel expertise

1. Initial motivation to invest in Brazil

28





5. Major Risks


29

2. Tractebel’s Investment in BrazilThe Time Line of the electricity sector

1998 1999 2000 2001 2002 2003 2004

Jun

Feb

RevitalizationCommittee

Elections

Oct

Rationing

ON

S –

Nat

iona

l Ope

rato

rM

AE

-W

hosa

lem

arke

t

1995

–E

lect

ricity

Sec

tor r

eest

ruct

urin

g–

FH

C19

96 –

Cre

atio

n of

Ane

el(R

egul

ator

y ag

ency

)19

97 –

Firs

t Hyr

doP

lant

con

cess

ion

for

IPP

New ModelProposalBy MME

New Modelimplemented

Adjusts

Jul

Mar

Over 12.000 MW of hydro plants concessions awarded

PrivatizationDistribution~80% / Generation~20%

Elections

Oct

30

The Time LineTractebel´s experience in Brazil


1998 1999 2000 2001 2002 2003 2004

Jun

Feb


Elections

Oct

Rationing

ON

S –

Nat

iona

l Ope

rato

rM

AE

-W

hosa

lem

arke

t

1995

–E

lect

ricity

Sec

tor

rees

truc

turin

g–

FH

C19

96 –

Cre

atio

n of

Ane

el(R

egul

ator

y ag

ency

)19

97 –

Firs

t Hyr

doP

lant

con

cess

ion

for

IPP



Adjusts

Jul

Mar



1998 1999 2000 2001 2002 2003 2004

Jun

Feb


Elections

Oct

Rationing

ON

S –

Nat

iona

l Ope

rato

rM

AE

-W

hosa

lem

arke

t

1995

–E

lect

ricity

Sec

tor

rees

truc

turin

g–

FH

C19

96 –

Cre

atio

n of

Ane

el(R

egul

ator

y ag

ency

)19

97 –

Firs

t Hyr

doP

lant

con

cess

ion

for

IPP



Adjusts

Jul

Mar


ConcessionSão Salvador241MW

ConcessionEstreito1,087MW (30%)COD of ITA

1,450MW

COD of Lages28MW

COD of Machadinho1,140MW

COD of William Arjonaon Gas

COD of Cana Brava450MW

Tractebel5,896 MW

~8% of Brazil

Concession ofCana Brava450MW

Acquisition of GerasulToday Tractebel Energia3,719MW

31

Including Itaipu

Generation94,772 MW*

Transmission79,935km*

Distribution383,657 GWh*

Industrial 46%Residential 24%Commercial 15%Others 15%

Final Consumption322,336 GWh*

20% Private80% State Owned




70% Private30% State owned

70% Private30% State owned

Brazil Electricity Market Structure and Players

* Preliminary numbers for 2004 year

32

Tractebel: Expansion in Brazil

Not considering Import parcel of 305MW started on year 2000

-

1.500

3.000

4.500

6.000

1998 1999 2000 2001 2002 2003

MW

inst

alle

d

Acquis itio n Gera s ul3 . 7 19 M W

William Arjo na8 0 - 19 0 M W

ITA9 0 1 - 112 7 M W

Machadinho - 3 8 2 M WCana Brava - 4 5 0 M W

Lages2 8 M W

1998 1999 2000 2001 2002 20033.719 3.799 4.700 4.966 5.868 5.896

2,2% 26,4% 33,5% 57,8% 58,5%2,2% 23,7% 5,7% 18,2% 0,5%Annual Growth

Installed Capacity (MW)Accumulated Growth

Year

33





5. Major Risks


34


Ø Installed capacity: 450 MW Ø Assured energy: 273.5 MWavgØ Reservoir area: 139 Km2

Ø TIC: USD 400 millionØ 2,000 jobs during construction

35

Plant LocationUHE Cana Brava

Barragem da UHESerra da Mesa

Cana Brava Hydro Power Plant

36

Cana Brava: Main characteristics• Main milestones

Ø Apr/98 – Concession of CanaBrava

Ø May/99 – notice to proceed

Ø Apr/02 – Commercial operation

• Concession period: 35 years

• At the end: Concession can be extended; or devolved to the government with reimbursement of the non-depreciated assets

• Positive impacts:

Ø Favorable hydrological conditions

Ø Strong EPC contract

Ø First “project financing” closed in the electricity sector (During construction -> BNDES: May/99; IADB: Dec/00)

Ø Almost 100% costs in BRL

Ø Anticipation COD (5 months)

• Main concerns:

Ø Currency mismatch (financing in USD)

Ø Commercial risk

Ø Environmental issues

37

Cana Brava structure

BNDES

IADB

Fortis Bank

ANZ

DrKW

CEM

Tractebel Energia

Tractebel Energia

CNO, AG, Voith-siemens

Insurance co’s

Tractebel Energia

Operator

EPC

Main off taker Aneel

Concession

70%

DEBT

Equity 30%

38

Financing structure - Main characteristicsCana Brava Hydro Power Plant

IDB Loan spread reduces 0.25% after completion + 0.25% 2yrs after completion

Main Characteristics Equity BNDES IDB A-Loan IDB B-Loan

Amount (USD Million) 107.8 105.9 67.2 80.6

Interest rate - TJLP+4% Libor+4.375% Libor+4%

Amortization period (years) - 10 12 9

First amortization - 15/Aug/2003 15/nov/03 15/nov/03

Last amortization - 15/Apr/2013 15/May/2015 15/nov/12

Amortization - Semi-annually Quarterly Quarterly

39

Population involved and Area of the Reservoir

Source: IBGE, Census 2000 - IBGE is the Brazilian institute of Geography and Statistics

258

4

103

151

FamiliesCities Area (km2)Population

Cities

124,47

22,29

41,88

60,30

Flooded

1,9

0,2

3,7

1,6

( % )

875

8

338

529

Involved

1,111.565,646.460TOTAL

1,31.7083.702Colinas do Sul

0,66.9549.150Cavalcante

2,12.86133.608 Minaçu

( % )Total2000


40

Some of Extraordinary Social Actions Implemented

- School Materials for public schools

- “Vaga-lume” project - Adults education

- Musical Instruments, TV sets, VCRs and Sound Systems for schools in Minaçu

- Minaçu’s Sewage Treatment Station & System for around 95.000 inhabitants

- Computer equipment for schools in Minaçu and Cavalcante

- “Lar Menino Jesus” - children day care center in Minaçu

- School bus for the families in Limoeiro, Vila Vermelho and Rocinha

- Construction of the rural school in Cavalcantecity

EducationWorks


Improvement of Minaçu’s airport and runway

Artificial Beach Minaçu’s Sewage Treatment Station & System

41

Future Projects: Social agreement

Present situation: The obligation criteria for social and environmental issues are

not clear and the involved parties (Ministries, NGO´s, MP, society and others)

have different requests.

Proposal: Agreement between: Federal and State Government, municipalities,

entrepreneurs, Civil House, MP and society to pre-define and formalize the

social / environmental objectives of the project.

Main Objectives:

1. Investors, government and society work in cooperation with more efficiency in order to increase region's HDI

2. Reduce conflicts

3. Create a permanent and official open channel

4. Reduce risks of costs overrun

42





5. Major Risks


43

• July 2003 – MME issued a proposal for a new regulatory framework

• From July to September 2003 – Interaction between private and state owned companies with government

• December 2003 – The government officially issued a “MP - MedidaProvisória” (Provisory law)

• From Dec/03 to Mar/04 – Amendments on the MP made by players and congressmen

• March 2004 – The government finally approved the new model through

the Laws 10.848 and 10.847

4. New regulatory framework - timeline

44

• Distco’s must purchase 100% of their energy through centralized auctions (Pool)

• Market for generators were segmented between existing energy andnew energy1

• New concessions for hydro plants will be awarded in a lowest tariff scheme with long term standard PPA and Previous environmental license issued

• Concessions already awarded in the previous auction scheme (Highest yearly installments - UBP) might be compensated in the auctions (Details still need adjustments)

New regulatory framework – Main points

1 Power plants with COD after Jan/00 and uncontracted energy

45

Projects with different investment cost were equalized through UBP payments (Yearly installments)

Previous auction scheme - UBP concept

UBP and Investment

1.100

1.300

1.500

1.700

1.900

2.100

2.300

2.500

Ser

ra d

o F

acão

Cou

. Mag

alhã

es

Ped

. do

Cav

alo

C. F

. St.

Cla

ra

Sal

to P

ilão

Tra

íra

II

São

Sal

vado

r

San

ta Is

abel

Bau

I

Mon

jolin

ho

C. S

Joã

o/C

ach.

Pei

xe A

ngic

al

Cor

umbá

III

Sim

plíc

io

C. C

açu

B.C

oq.

Sal

to

Tra

íra

II

Sto

R. V

erdi

nho

São

Dom

ingo

s

Olh

o D

'águ

a

Est

reito

Inve

stm

ent

(Th

ou

san

d U

SD

) / M

Wm

ed

-

2,00

4,00

6,00

8,00

10,00

12,00

14,00

16,00

UB

P (U

SD

) / M

Wh

Investment: Source Eletrobras UBP

July/2002Low Competitiveness

2001

46

Electricity sector – New modelConclusions

Main concerns• The perspective of selling energy freely

to selected distributors has changed to a regulated environment (Distribution companies credit risk)

• Independence of regulator

• Segmentation of the electricity auction in “new energy” and “existing energy”

• Mismatch between expenses and revenues

• The concessions already granted (with concession fee – UBP payment) will have to compete against new projects without UBP

Positive impacts

• Long term planning

• Long term PPA´s might facilitate financing before NTP

• End of self-dealing with distribution companies may induce IPP investments

• New power plants concessions awarded with environmental licenses issued will reduce risks

47





5. Major Risks


48

• Rainfall – MRE mechanism mitigates that risk

• Construction – Obtaining EPC turnkey contract for construction is key to appropriate risk allocation

• Social / environmental - In order to establish the needs for investments on social / environmental aspects the institutions involved should specify in advance the correct scope to be covered

• Regulatory framework - The stability of a regulatory framework is key for attracting the investors and creating a competitive environment

5. Hydro plants in BrazilWhat are the major risks?

49

• Timing of financial close

• Legal costs

• Sponsor guarantees

• Currency mismatch

• Environmental compliance

Financing Related issues

50





5. Major Risks


51

6. PerspectivesElectricity sector: Supply x demand

20.000

30.000

40.000

50.000

60.000

70.000

80.000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

MW

avg

Offer Reference scenario(5.2% a.a.)

High scenario(6.2% a.a.)

52

PerspectivesElectricity sector: Supply

From the 12.000 MW of concessions awarded since 1997:

Works started35%

Started operation22%

Works not started43%

53

Electricity sector: Expansion

Transmission16%

Generation50%

Distribution34%

Annual investment: US$ 5.7 billion

Annual expansion estimated: 3.000 MW

54

Generation expansion

u Brazil uses only 24% of the potential available of hydroelectric energy while in developed countries the average is about 70%

u Brazil generation is traditionally based on hydro power plants, representing about 91% of the total generation

55

Generation expansionHydro plants to be auctioned in 2005

17 Hydro plantsTotal Power: 2.829 MW

56

Tractebel perspectiveProjects under development

Estreito 1,087MWSão Salvador 241MW• Investment: BRL 600 million• Reservoir: 77,4 km2

• Previous environmental license issued

• Investment: BRL 2,2 billion• Reservoir: 194 km2

Partners30%Tractebel EGI

4,44%Camargo Correa 16,48%BHP Billiton19,08%ALCOA30%CVRD

Partners30%Tractebel EGI

4,44%Camargo Correa 16,48%BHP Billiton19,08%ALCOA30%CVRD

57

Challenges

• New regulatory framework consolidation and stability –Transition phase needed

• Appropriate treatment of segmentation between ”new energy” and ”old energy”

• Competitiveness of hydro concessions awarded in the previous model (UBP)

• Auctions transparency

• Social agreement

• Maintenance of the current indexation (IGP-M)

58

Wrap Up

n Any comments, questions, contributions from audience ?

The World Bank GroupEnergy Lecture Series 2005

financing hydropower development in emerging power...

Documents