One of the objectives of this course was to develop a thorough understanding of project financeâ€”specifically non-recourse project financing of energy projects in emerging economiesâ€”and to challenge you to consider real world problems. To do so, we have discussed, and I have asked you to explore the cost generation model and the LCOE models.
One of your first assignments at a NYC financial institution may be assessing the viability and attractiveness of different energy projects. Using the cost of generation model, assess whether to invest in the following project. In doing so, answer the four questions following the project description.
Case study: Orascom Wind Project in Egypt. January 1, 2016â€”
Â The proposed project design calls for 40 2.5MW Suzlon turbines to be sited offshore in the Red Sea. Our preliminary data collection suggests a project average wind speed of 18 miles per hour suggesting 219,000 MWh of production.
Â Due to the projectâ€™s close proximity to India, we anticipate buying the turbines from Suzlon Energy for $200 million CIF. Because of the offshore location, it will cost an additional $20 million to build the offshore pylons and to interconnect the turbines. This construction phase of the project will take 19 months and is scheduled to start January 1, 2016.
Â Suzlon will be providing 50 percent of the financing and European Investment Bank (EIB) the balance. There will be a debt financing fee from both EIB and Suzlon of $300,000 provided that project debt does not exceed 70% of the total project cost for equipment, balance of system, and project/utility integration. The project should qualify for a 10% investment tax credit, and any tax benefits earned, may be used to offset other income.
Â The development group estimates that fixed annual operations and maintenance will cost $3million and that the variable operational management of the facility will be an additional (.007$kWh). Initial site preparation, design studies, and regulatory and environmental permitting will cost $4 million. Insurance is estimated at three percent of equipment and balance of system costs.
Â The developers anticipate a 20-year lifetime for the project. What can we model as an appropriate interest rate for both the construction loan and project loans from EIB and from Suzlon.
Although estimates vary, the international financial community now anticipates higher inflation rates of 7-9%. In Egypt, the developers anticipate a 20% corporate federal tax rate. What is an appropriate cost of equity and what is an appropriate discount rate?
The Egyptian Electrical Authority (EEA), which controls the lease for the offshore site, has agreed to connect the wind farm to their distribution grid at their cost. They will charge us a three percent annual lease royalty.
We are in the process of negotiating a cost for the electricity delivered to the grid. Egyptian electrical prices are typically subsidized with recent wind farm electricity costs estimated to be about 700EGL/MWh according the Egyptian-German High Level Joint Committee on renewable energy. Energypedia suggests a price of Euro .06 cents/KWh
Â Because of the recent political unrest in Egypt, our board of directors is seeking a higher IRR than we would generally be willing to accept. Our concern is that a higher level of return may result in too high a price for the EEA.
Â Please review the following document on MACR depreciation and select the mostÂ appropriate MACR of 5, 7, 15, 20 years. Depreciate at 100%, unless you think a different percentage is warranted.
Â Questions to be answered:- Â
1) Given the underlying assumptions, what will the price of electricity for sale to the
EEA have to be to deliver a 15% and 20% IRR. What price escalation do you
consider relevant? E
2) If the price is too high, what strategy do you suggest we take in negotiating with
the EEA for them to agree to the consequent price of electricity necessary for our
15 and 20% IRRs?
3) Given the unfolding situation in Egypt, what additional economic and financial
risk factors exist for the project. If the Egyptian government agrees to the PPA
that results in a 15%, or even better a 20% return, should we go forward with the
4) Using the LCOE model, calculate what the LCOE of the generated electricity will
Print out your cash flow results and assumptions on a single one page. Submit on no more than two pages the answers to questions 1-3 detailing any assumptions. You can add additional assumptions/analysis pages to support your recommendations.