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

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

• 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