Bijeenkomst I

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Jan H Jansen,

Senior lecturer Management Accounting & (International) Finance Researcher Chair of TQM in Organisational Networks

Minor Wind Energy Project Management

Research Group TQM in Organisational Networks

Minor Wind Energy Project Management Finance Commercial Energy Law

Project

Mechanical Engineering Supply Chain Management Construction Engineering

Wind Energy Project Management

The exchange course in Wind Energy Project Management at HAN University of Applied Sciences is delivered in cooperation with OutSmart wind professionals. This course deals with every aspect of harvesting wind energy using offshore wind farms. It is a unique study designed for Engineering, Economics and Management students.

(www.han.nl/opleidingen/exchange-courses/wind-energy-project-management)

Research Group TQM in Organistional Networks

http://wepmprojectfinance.wikispaces.com/

Research Group TQM in Organistional Networks

Agenda

Research Group TQM in Organistional Networks

Agenda

• • • • •

Project finance Markets for energy and renewable energy ETO’s & Engineering Sustainable Investment Decisions (DOSIT) Investment Model

Research Group TQM in Organistional Networks

Agenda

Project finance Energy market

• • •

Macro Meso Micro ETO’s & Engineering

• • • • •

QC, TCO & LCC Foundation Mechanical Engineering Energy Risk Management Sustainable Investment Decisions

DOSIT Investment Model

• • •

Data & Assumptions Cash Flows Decision Criteria

Research Group TQM in Organistional Networks

Agenda

Project finance Energy market

• • •

Macro Meso Micro ETO’s & Engineering

• • • • •

QC, TCO & LCC Foundation Mechanical Engineering Energy Risk Management Sustainable Investment Decisions

DOSIT Investment Model

• • •

Data & Assumptions Cash Flows Decision Criteria

Research Group TQM in Organistional Networks

Characteristics Project Finance

• • • • • • • •

Economic life > 20 years PPP (Private Public Partnership) Large investments

– –

Equity providers (Sponsors) Debt providers (Banks) Off taker contract S.H.E.Q.

People, Planet & Profit (PPP) Ring fencing construction

SPV ( Special Purpose Vehicle) …

Research Group TQM in Organistional Networks

Ring Fencing

Contractor (Construction) Finance

• •

Equity Investors Lenders Operator (O&M) Project Company Input Supplier Off taker (Power Distribut er) Government Concession / License

Research Group TQM in Organistional Networks

Government Support Agreement

Project Risk (Source: Yescombe)

Project Risks Commercial Risks Macroeconomic Risks Political Risks Completion Risk Environmental risk Operating Risk Revenue Risk Inflation Risk Interest Rate Risk Currency Convertibility Risk Transfer Risk Expropriation Risk War & Civil Disturbance Risk Input Supply Risk Force majeure risk Exchange Rate Risk Change of Law Risk Quasi-political Risks Contract mismatch risk Sponsor support Risk

Research Group TQM in Organistional Networks

International Business Risk (Source: Eiteman) International Business Risk Firm Specific Risks Governance Risks Transfer Risks (Blocked funds) Country Specific Risks Cultural & Institutional Risks Global Specific Risks Terrorism & war Cyber attacks Environment

Research Group TQM in Organistional Networks

Agenda

Project finance Energy market

• • •

Macro Meso Micro ETO’s & Engineering

• • • • •

QC, TCO & LCC Foundation Mechanical Engineering Energy Risk Management Sustainable Investment Decisions

DOSIT Investment Model

• • •

Data & Assumptions Cash Flows Decision Criteria

Research Group TQM in Organistional Networks

Complexity Electricity Market

Sources:

Traditional:

Oil

Gas

Coal

Nuclear

Renewable:

Wind

Hydro

Solar

Biomass

• •

Geothermal

(D irect) Storage of electricity Losses during transport

Research Group TQM in Organistional Networks

Energy Prices in the future

Annual Energy Outlook 2010 of the U.S. Energy Information Administration: The average annual increase in real electricity prices till 2035 is calculated; the expected annual increase is

0.85%

for real electricity prices per KWh

0.85% = [ {(10.2 / 8.6) (1/27) -1)*100 ]

Research Group TQM in Organistional Networks

Research Group TQM in Organistional Networks

Agenda

Project finance Energy market

• • •

Macro Meso Micro ETO’s & Engineering

• • • • •

QC, TCO & LCC Foundation Mechanical Engineering Energy Risk Management Sustainable Investment Decisions

DOSIT Investment Model

• • •

Data & Assumptions Cash Flows Decision Criteria

Research Group TQM in Organistional Networks

ETO’s & Engineering

Research Group TQM in Organistional Networks

ETO’s & Engineering

Some abbreviations and concepts

• • •

QC: Quality Costs TCO: Total Cost of Ownership LCC: Life Cycle Costing

Research Group TQM in Organistional Networks

Quality Costs

• • • •

Prevention Costs

Engineering

Supplier evaluation

– – –

Preventive maintenance of equipment Testing of new materials Etc Appraisal Costs

Inspection (manufacturing process)

Product testing Internal Failure Costs

Rework

– –

Scrap Spoilage

– –

Additional engineering Etc External Failure Costs

Customer support

Additional repair and/or engineering

• •

Warranty Liability claims

Research Group TQM in Organistional Networks

Engineering

• • •

We distinguish three main technical aspects of wind farms: Foundation

– – –

Soil Jacket Currents / Stream Mechanical Engineering

Corrosion

– –

Fatigue Performance (long term) Electricity & Energy

Power generators

– –

Power electronic converters Power cables

– –

Grids Sensors

– –

Controllers Converters

– –

Computers Batteries

– – –

Motors Lighting Climate control

Research Group TQM in Organistional Networks

Risk Management

Risk categories Enterprise Risk Management - Integrated Framework (COSO) :

Strategic

Operational

Compliance

Financial

Research Group TQM in Organistional Networks

Risk Modelling Process (EQECAT)

Research Group TQM in Organistional Networks

Agenda

Project finance Energy market

• • •

Macro Meso Micro ETO’s & Engineering

• • • • •

QC, TCO & LCC Foundation Mechanical Engineering Energy Risk Management Sustainable Investment Decisions

DOSIT Investment Model

• • •

Data & Assumptions Cash Flows Decision Criteria

Research Group TQM in Organistional Networks

PPP principle

Principle of ‘rentmeesterschap’ /Stewardship DOSIT (Dutch) Duurzaam Ondernemen Selectie Innovatieve Technologie SESIT (English) Sustainable Entrepreneurial Selection Innovative Technology

Research Group TQM in Organistional Networks

DOSIT triangle

Research Group TQM in Organistional Networks

Sustainable Supply Chain

Supply Chain → Aspects ↓ People Planet Profit

Research Group TQM in Organistional Networks

Agenda

Project finance Energy market

• • •

Macro Meso Micro ETO’s & Engineering

• • • • •

QC, TCO & LCC Foundation Mechanical Engineering Energy Risk Management Sustainable Investment Decisions

DOSIT Investment Model

• • •

Data & Assumptions Cash Flows Decision Criteria

Research Group TQM in Organistional Networks

SIM model

Research Group TQM in Organistional Networks

Structure Excel model

Research Group TQM in Organistional Networks

• • • • • • • • • • • • • • • •

Assumptions & Data

Investment amount (From the Cash Outflow section / CAPEX) Required Financial Structure for the total investment (100%)

Equity share or ε (For instance: 30%)

Debt share or λ (For instance:70%) Expected Energy prices Expected Inflation Expected Increase in labour rate (wages) Expected increase in maintenance costs Project Risk Beta ( β p ) Risk free interest rate (R RF ) Interest rate Debts (R D ) Required Return on Equity (R E Exchange rates Tax rate = τ (30%) ) Governmental policies

Tax facilities

Subsidies

Per kWh produced

Investment amount Straight-line depreciation (Economic life wind farm: 20 years) Straight-line repayment schedule (Duration loan: 15 years) Of course the corporate tax rate can differ per country (we assumed no VAT in the model)

Research Group TQM in Organistional Networks

Cash Outflows

• • •

Investment (CAPEX)

License & Concessions

Foundation & Construction

Mechanical equipment

• •

Gearing box Transmission system

Energy

Computer & Communication system

Electricity system

• • •

DC > AC High voltage Cable Scrap value (CAPEX)

Remove fee (negative / positive value)

Upgrade for new investment Maintenance (OPEX)

Volume

Price

Research Group TQM in Organistional Networks

Cash Inflows

• •

Wind production (with a link to Volume) Revenue (Energy contract with the Off taker, normally energy distributer))

– –

Volume (with a link to Wind production) Price per kWh

Research Group TQM in Organistional Networks

Some nasty financial assumptions • Required Return on Equity (Based on CAPM model): R

E

= R

RF

+ β

P

* (R

M

– R

RF

) • Project WACC:

R PWACC = R E * ε + R D * (1 – τ ) * λ Research Group TQM in Organistional Networks

Financial decision criteria

• •

Equity providers (sponsors)

– –

Pay Back Period (PBP) Break Even Time (BET)

– – –

Return On Investment (ROI) Net Present Value (NPV) Profitability Index or Net Present Value Investment Ratio (NPV / INV)

Internal Rate of Return (IRR) Providers of loans (banks)

Debt Service Coverage Ratio(DSCR)

Research Group TQM in Organistional Networks

Scenarios

MR: Middle of the road (12% R PWACC )

PS: Pessimistic Scenario (<12% R PWACC )

OS: Optimistic Scenario (>12% R PWACC )

Research Group TQM in Organistional Networks

Scenario analysis

25% 20% 15% 10% 5% 0% 0 5 10 15 20 Research Group TQM in Organistional Networks 25 PP NP_MR NP_PS NP_OS

Agenda

Project finance Energy market

• • •

Macro Meso Micro ETO’s & Engineering

• • • • •

QC, TCO & LCC Foundation Mechanical Engineering Energy Risk Management Sustainable Investment Decisions

DOSIT Investment Model

• • •

Data & Assumptions Cash Flows Decision Criteria

Research Group TQM in Organistional Networks

r = R PWACC

Some financial formulas

r = IRR DSCR = (NCF + Interest Payments) / (Installments + Interest Payments)

Research Group TQM in Organistional Networks

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