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0PPA Bankability in APAC Markets
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1PPA Bankability in APAC Markets
Rishab Shrestha
Analyst, Global Solar Markets
Solar Project Investment Viability in APAC MarketsAsia Clean Energy Forum 2018
2PPA Bankability in APAC Markets
• Demand and costs
• Challenges
• LCOE and cost levers
• Market attractiveness
• Take aways
Outline
3PPA Bankability in APAC Markets
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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
4PPA Bankability in APAC Markets
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
5PPA Bankability in APAC Markets
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
6PPA Bankability in APAC Markets
$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
7PPA Bankability in APAC Markets
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
Source: GTM Research
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
8PPA Bankability in APAC Markets
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2
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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.
Source: GTM Research
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)
9PPA Bankability in APAC Markets
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
10PPA Bankability in APAC Markets
Rishab Shrestha
Analyst, Global Solar Markets
Thank You!
PPA Bankability in APAC Markets
Appendix
12PPA Bankability in APAC Markets
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
)
13PPA Bankability in APAC Markets
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
(%)
14PPA Bankability in APAC Markets
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%
15PPA Bankability in APAC Markets
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
Source: GTM Research
Local currency PPA USD indexed PPApayable in LCR
16PPA Bankability in APAC Markets
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)
17PPA Bankability in APAC Markets
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.
18PPA Bankability in APAC Markets
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)
19PPA Bankability in APAC Markets
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)