Solar PV Business Models & Investment Singapore s Future Solar PV Strategies Conference 9 th April 2015 Presentation By: Shiva Susarla shiva.susarla@renergii.com
About Singapore-based business and policy advisory company focused on Smart Energy ; Geographical Focus: South and South-East Asia Niche advisory in areas of: - Energy Policy (informed by rigorous Energy System and Economic Modelling for data-driven decisions) - Intelligent Micro-grids (a: Policy b: Grid Optimization Solutions) - Investment Decision Analysis in Energy Infrastructure (Financial and Economic Analysis under conditions of uncertainty) 2
Solar PV in Singapore (a) Installed Capacity about 20 MWp-21 MWp by end of 2014; About 500+ installations; Expected to increased to about 60 MWp- 62 MWp by 2015? Expected to grow to about 300 MWp by 2020 (5% of total power system capacity); 600 MWp eventually Largely dominated by tenders by Government Agencies: HDB primarily, but a few others as well First HDB Tender of 2 MWp in 2011; 30% CAPEX Assistance by HDB; Latest HDB Tender of 38 MWp in 2014; No Government Assistance Pre-dominant Business Model: Solar Leasing, what I call Solar PV as A Service 3
Solar PV in Singapore (b) What is Singapore s Appeal as a Solar PV Market? Competitive, Market-driven Tariffs even in the absence of FiT Measured Policy to promote Competitive Solar PV Market and avoiding Market distortions through subsidies Driven by Government tenders, so AAA-class counterparty and credit ratings Long-term receivables in SGD, relatively stable with modest hedging costs; Friendly business environment Even if the Singaporean asset base is a small component of overall asset portfolio, it increases value significantly 4
Solar PV in Singapore (c) Singapore Turf Club Tender Results: Tenderer 1 Offer: Fixed or Escalating Tariff; Total Range S$0.189/kWh to S$0.235/kWh; Alternatively Outright Sale of System Tenderer 2 Offer: Discount on Prevailing Tariffs; Total Discount Range 4.5% to 20% 5
Solar PV- Key Success Factors Success Factors: Business Model and Project Structuring Cost of Equity, Debt and Construction Capital Successful Re-financing and/or Exit Minimal Technology Complexity in Application Development, unlike other Renewable Technologies (Biogas, Run-of-the-River Hydro or even Wind) The variables are solar yields and electricity tariffs; Solar yield volatility can be modelled to an acceptable level given sufficient data 6
Solar PV as a Service (a) Holds Asset; Signs PPA; Holds Debt and Equity Solar PV App Developer Develops Project; Raises Financing; Completes Installation; Provides Guarantees Negotiation Aspects: Tariffs: Fixed with escalation; Pegged to Index; Pegged with Floor and Cap, PPA Tenor Solar PV Project Aggregator General model kwh and $$ Energy Offtaker Signs PPA; Consumes Energy; Makes Payments O&M; Performance Guarantees End of Tenor: De-commission; Sale; Transfer; Renew General model (contd.) App Developer installs Solar PV System on Off-taker s Rooftop (or third-party Rooftop) at low or zero up-front Cost to Off-taker App Developer raises funding for Solar System; May charge a Development Services Fee Off-taker agrees to buy energy from system at pre-determined tariff formula App Developer may provide in-house EPC & O&M or Outsource App Developer provides guarantees, manages risks App Developer and Co-Investors may Capitalize an SPV ALLOWING AGGREGATION, A CRITICAL POLICY TOOL! 7
Solar PV as a Service (b) Some important aspects of a HDB Lease Program (1):.. Purchase Price. The Town Council shall pay to the Contractor an amount "equal" to the Energy Output based on the prevailing SP electricity tariff rates multiplied by the rates P1 and P2 (as set forth in Schedule B) per kwh AC: (1) solar energy generated and consumed by common services at the Site, P1; and (2) energy generated and sold by the Town Council to SP Power grid, P2. Schedule B excerpt:.. Purchase Price: 5(a)(i) (a) For solar energy generated and consumed by the common services during the day [in S$/kWh] prevailing SP electricity tariff rate X P1 (b) For the energy generated and sold by the Town Council to SP PowerGrid [in S$/kWh] prevailing SP electricity tariff rate minus associated grid charges X P2 8
Solar PV as a Service (c) 2. Solar Energy Tariff Rate (a) Total Energy consumed by the Town Council I + (S E) (b) (c) (d) (c) (d) (e) Solar Energy generated and consumed by the Town Council during daytime Solar Energy Tariff Rate T1, for solar energy generated and consumed by the common services during the day Solar Energy Tariff rate T2, for solar energy generated and sold by the Town Council / Building Manager to SP PowerGrid Energy Cost payable by Town Council / Building Manager for the Solar Energy generated P1 (Input by Tenderer, minimum value of 0.001 and maximum value of 0.83) P2 Tenderer s are NOT required to input any value for P2 (S E) S$T x P1 S$(T G) x P2 S$T x P1 x (S E) + S$(T G) x P2 x E 1.0 I is the energy Imported from SP PowerGrid (in KWh) S is the Total Solar Energy generated (in KWh) E is the Exported solar energy (in KWh) T is the prevailing SP Electricity Tariff rate (in S$/kWh) G is the Grid charges (in S$/kWh) P1 is the factor to be input by the tenderers P2 is the factor of T2. Tenderers are NOT required to input any value for P2. 9
Solar PV as a Service (d) Some important aspects of a HDB Lease Program (2): Guaranteed Energy Output. The Contractor shall provide a Guaranteed Energy Output from the Generating Facility (as set forth in Schedule B) commencing on the date of Operation and continuing for the first (1st) anniversary of the Operation. In the event that the Guaranteed Energy Output is not achieved as described above during the Term of this Agreement (the "Guaranteed Energy Output Shortage"), the Contractor shall (1) Pay the Town Council liquidated damages amounting to the Guaranteed Energy Output Shortage in kwh AC multiplied by prevailing SP electricity tariff rates multiplied by the rates P1 and/or P2; and. My Thoughts: Modelling Accurately is absolutely critical; penalties for shortfalls and below par performance steep Important to avoid Winner s Curse by offering too low P1 Value Ultimate Economics driven by the system capacity vis-à-vis the load of common areas; Less profitable when exported to grid because of grid charges Again, Modelling is critical! 10
Solar PV as a Service (e) Some Numbers, Assumptions: CAPEX 1.85 to 2.15 USD mil/mwp DEBT: EQUITY 0.7 to 0.8 PPA TENOR 18-22 Years DEBT COST/TENOR 6.5-8.5%/12-15 LEVELIZED YIELD (AC)- 14 to 16% TARIFFS- LT= SGD 0.19 to 0.22 /kwh -HT= SGD 0.17 to 0.20 /kwh P1 LT= MINIMUM PRESCRIBED Some Numbers, Results: LCOE 0.1 to 0.15 USD/kWh PROJECT IRR- 7% to 9.3% EQUITY IRR 9% to 12% SIMPLE EQUITY PAYBACK- 10 to 14 yrs IS THIS GOOD ENOUGH?!! 11
Solar PV as a Service (f) LCOE Breakdown Equity IRR v/s CAPEX 21% 55% 21% Investment O&M Expenses Insurance Depreciation Interest On Loan 3% 0% Equity IRR CAPEX Equity IRR v/s Tariff Equity IRR v/s P1 Equity IRR Tariff Equity IRR P1 12
Solar Leasing/ Merchant Power Solar Leasing: Works exactly like a Capital Lease; Also called as Hire Purchase No Market Risk or Variability for Lessor; Assured of Returns; Lease Amount independent of energy generation Some challenges on Accelerated Depreciation Works well when Aggregation under Solar as A Service Model is a challenge Leasing Company Cost of Capital is typically lower, Lower risk & lower variability of returns Distributed Hybrid Merchant Power Systems: Wholesale Generation Licensee Develop Solar Systems at different locations under the Licence Sell Aggregated Energy to PPA holders and excess into market at prevailing prices Economics unclear as yet to me; Working on a model to analyze this; Could be a game-changer 13
How does one exit! Options Trade Sale of Assets: Yield Compression to play on yield Differentials; Can increase Equity IRR to about 14%+ List on Capital Markets: Well. Covered or Unsecured Bonds: Very good for refinancing and continued investment in new assets; Low Cost of Debt; Covered Bonds can lower cost dramatically Corporate Debt Refinancing: Suboptimal compared to bond issuance Securitization: Potentially lucrative at high volumes; Could increase Equity IRR to 30%+ 14
Conclusion Future Areas of Work: Economics of Solar Merchant Power Systems (Hybrid or Pure Play) Securitization & Cash Waterfall Models for Solar PV Portfolios; Role of Policy & Government Singapore: Asia s largest secondary market to trade Solar-backed financial instruments?! 15