Finance 663: International Finance Cambell Harvey 2/27/2014. Tsiri Agbenyega Rafael Andreata Crystal Bai Richard Bethune

Transcription

1 Finance 663: Cambell Harvey 2/27/2014 Tsiri Agbenyega Rafael Andreata Crystal Bai Richard Bethune

2 Outcomes for the case and discussions about obstacle Changes in the partnership between Desertec Foundation and DII In 2011, the World Bank approved $297 million in loans to support the 500MW Ouarzazate CSP project giving hope to Desertec backers. 1 However, by 2013, Bosch and Siemens left the Desertec project. Bosch communicate said that "The economic conditions (do) not allow a continuation of its membership." In the case of Siemens, the company announced that was pulling the plug on its loss- making solar business as part of a drive to improve profitability. Another relevant event that impacted the project in 2013 was the split up between Desertec Foundation and DII due to poor communication. Both the Desertec Foundation and the Desertec Industrial Initiative (Dii) said their plans to generate power from deserts across the world remains uncompromised despite the decision. With less support from Europe, the focus has shifted to generating power for North African countries. Obstacles for the Desert Power 2050 project Among the risks for the project, we can note that centralized solar energy plants and transmission lines may become a target of terrorist attacks. Also, many specialists have raised concerns regarding the political obstacles to the project. Generating so much of the electricity consumed in Europe in Africa would create a political dependency on North African countries. These countries have corruption, polticial instability (Arab Spring) and a lack of cross- border coordination are considered. Also, Desertec projects would require extensive economic and political cooperation between Algeria and Morocco, which is at risk as the border between the two countries is closed due to a disagreement over the Western Sahara. Cooperation between the states of Europe and the states of the Middle East and North Africa is also certain to be challenging. Large scale cooperation necessary between the EU and the North African nations on the project may be delayed due to bureaucratic red tape and other factors such as expropriation of assets. There are also concerns that the water requirement for the solar plant to clean dust off panels and for turbine coolant may be detrimental to local populations in terms of the demand it will place on the local water supply. Transmitting energy over long distances has been criticized, with questions raised over the cost of cabling compared to energy generation, and over electricity losses. Modeling Morocco 1 bank- group- co- finances- moroccos- ouarzazate mw- solar- thermal- power- project/

3 It is understandable why the World Bank was required to provide cheap funding for the 2011 Moroccan CSP project. If just 0.5% of the 395 billion Desertec project was invested in Morocco, it would cost nearly 2.0 billion and generate a negative NPV of nearly 150 million (see Exhibits 1 and 2). Thus, a subsidy would be required. Exhibit 3 shows how the 12.64% project cost of capital was calculated. It is assumed that there are no existing subsidies (carbon credits) to support the project. All of the Moroccan projects costs are spent upfront when a smaller investment may be possible to generate income before larger investments come on board. Such a staggered approach would also benefit from rapid gains in efficiency and cost reduction in CSP. We shall see what s next for Desertec. Sources and Further References: 1. Desert solar power partners Desertec Foundation and Dii split up ( energy- desertec- foundation- dii/print ) 2. Germany's Bosch pulling out of Desertec renewable energy project ( desertec- idusl5e8mci0t ) 3. Quagmire in the Sahara: Desertec's Promise of Solar Power for Europe Fades desertec- solar- energy- project- has- run- into- trouble- a html 4. Siemens to sell solar power business 1c2c- 11e2- a14a feabdc0.html 5. Siemens to auction its CSP assets in Israel world.com/news/ /001156/siemens- auction- its- csp- assets- israel 6. Siemens sells CSP assets sells- csp- assets/ 7. Germany's Bosch pulling out of Desertec renewable energy project desertec- idusl5e8mci0t Bosch quits Desertec quits- desertec.html

4 9. Bosch follows Siemens out the door of Desertec renewable energy project, bosch- siemens- door- desertec- renewable.html 10. Integrated Solr Combined Cycle Power Project- a world bank project in Morocco, solar- combined- cycle- power- project?lang=en&tab=overview 11. MA- Ouarzazate Concentrated Solar Power- a world bank project in Morocco, Desertec abandons Sahara solar power export dream, abandons- sahara- solar- p- news Desertec: A Fata Morgana?, a- fata- morgana/ 14. Desertec fails, but North Africa remains interested in solar energy africa.com/desertec- fails- but- north- africa- remains- interested- in- solar- energy/

5 Exhibits Exhibit 1 Model Inputs & Results!"#$%& %'()*+,-!"./(/00/*#(/1'02* ,*+.7- %%%%%%%%%%%%%%%%%%%%%%%%%%%%% #$$ %/248*9':'(2'0*#(/1'02*3/:2*+*;*- &%'$()""")""")""" <*=22(6>?2'@*2/*./(/00/ "*(+,-./%0%12./(/00/*#(/1'02*3/:2*+*;*- &%3)$#()""")""" &%!)4#3)(#3 96:0/?A2*B42' CDEFG< =AA?48*HI.*3/:2J%/248*3/:2 3*!(+ "'2* ,*K402/(*+6A08?@6AL*2(4A:)6::6/A*8/::':- ("*"+ ##=*+*;*J.7M- &%54*"" 34(>/A*3('@62*+*;*J.7M- 6" %4N*B42' '"*"+ 9'5('06426/A*B42' (*""+ PA'(L,*#(/@?026/A*+.7MJ,- P8'02(6062,*B'U'A?'*+*;*J,- HI.*3/:2*+*;*J,- %4N':*+*;*J,- 9'5('06426/A*+*;*J,- 34(>/A*3('@62*B'U'A?'*+*;*J,- "'2*B'U'A?'*+*;*J,- "#Z*+*;*-!BB.!BB BH! =AA?48*BH! #(/[624>6862,*!A@'N 3=O3$O=%!H"& ******************* QRSTTRTTT ;*DDGRTTTRTTT V;*CRDQGRQWS V;*FWRSWTRQCQ ;*XYRWSTRTTT ;*T ;*DSQRXGSRQCQ H$%#$%& V;*CGFRYGYRDXC CCEGC< CDEXQ< CSWEXC< WEXT< XDESF<

6 Exhibit 2 Model Cash Flows (First Five Years) Finance 663

7 Exhibit 3 Cost of Capital Calculation Cost of Capital Worksheet Worksheet calculates cost of equity capital in nominal U.S. dollar terms. Convert local currency cash flows to USD by the assumption of Purchasing Power Parity, i.e. the expected annual depreciation in the FX rate is exactly equal to the difference between local and U.S. inflation rates. Risk Premium Calculation (as of 01/01/2008) Inputs Output Category 3.91 U.S. risk free in % 3.37 U.S. risk premium in % Current U.S. Credit Rating Institutional Investor country credit rating (0-100) Anchored Cost of Equity Capital for project of average risk in country (ICCRC) 9.42 Country Risk Premium Industry Adjustment 1.00 Beta (Industry) 0.00 Sector adjustment Project Risk Mitigation (-10 to 10; where 10=risk completely eliminated, 0=average for country) Impact on Country Weights Score Premium Sovereign Notes Currency (direct, e.g. convertibility) Built in euros, electricity paid in Euros Currency (indirect, e.g. political risk caused by crisis) Expropriation (direct, diversion, creeping) Commercial International partners Siemens, etc Involvement of Multilateral Agencies Club of Rome? Sensitivity of Project to wars, strikes, terrorism Blow up installations or HVDC Sensitivity of Project to natural disasters Operating Resource risk Irradiance steady Technology risk CSP not scaled up, yet. Financial Probability of Default Lose European subsidies for renewable power purchases Political Risk Insurance Power politics Sum of weights (make sure = 1.00) Project Cost of Capital 12.64