Week 5-6 Flashcards
Project Finance
In contrast to balance sheet finance, project finance is where the assets can be carved out into a separate entity and financed on their own merits.
Sponsor
Holds the equity and is either
o Organization that puts up the initial risk capital
o Developer of the asset
o Vendor that sells the equipment
o Some other stakeholder who controls the completion of the project
Equity
Financial capital in the form of ownership, more expensive than debt
Debt
Financial capital in the form of borrowing, cheaper than equity
IRR
Internally determined WACC/ hurdle rate. Discount rate that sets NPV equal to 0.
PPA
a long-term fixed price financial agreement with a seller, i.e. power supplier, and a buyer, who buys the power
REC
Certificate that shows how much energy was produced from renewables sources that met the renewables portfolio standard. RECs can be traded.
Offtaker
entity/person who commits to buy the power, just like a customer/purchaser
Merchant Power
o non-utility generation plant that sells electricity on a wholesale basis to other companies, who then sell the power on a retail basis to individual residential, commercial, and industrial customers.
o Usually merchant power plants have no PPAs
Warranties
performance guarantees, insurances etc. for operational risk mitigation
Coverage Ratio
Debt Service Coverage Ratio = ratio of cash available for debt servicing to interest, principal and lease payments. It is a popular benchmark used in the measurement of an entity’s (person or corporation) ability to produce enough cash to cover its debt (including lease) payments
PTC
=Production Tax Credit
Federal incentive for renewables
o Companies that generate electricity from RE are eligible for a federal PTC, which provides a 2.3-cent per kilowatt-hour (kWh) incentive for the first ten years of a renewable energy facility’s operation.
ITC
=Investment Tax Credit
Investment incentive up to 30% credit of the cost of development
Accelerated depreciation
A firm depreciates a fixed asset in such a way that the amount of depreciation taken each year is higher during the earlier years of an asset’s life. This creates a tax benefit, as it reduces taxable income.
Project finance waterfall
A project’s cash flow is summarized using a cash flow waterfall, which shows the priority of each cash inflow and outflow. The cash flow waterfall ensures that each cash flow item occurs at the correct seniority to other items.
Nominal interest rate
interest rate before taking inflation into account, it includes inflation. The nominal interest rate is the rate quoted in loan and deposit agreements.
Real interest rate
adjusted to remove effects from inflation
Real Rate = Nominal Rate – Inflation Rate
Risk in generation investment
- Construction Cost risk: unplanned cost increase, delays..
- Fuel and Operating Cost Risk
- New Regulation Risk
- Carbon Price Risk
- Water Constraint risk
- Capital Shock risk: availability & cost of capital
- Planning risk: inaccurate load forecast
Ancillary services
to ensure certainty ST & LT reliability services are provided by of utility, frequency regulation
Energy Efficiency
intentional process of changing the performance of devices in energy terms (not power characteristics, which are change through demand response), in other words doing more with less. Managing the load down
Problems with Energy Efficiency
- New build is cheaper than retrofit
- Lack of good business models – ESCOs
- Problem with invisibility
- Lack of certainty problem
- Utility resistance?
- Rebound effect
o EE can push the bid stack, reduces the price
ESCO
=Energy Service Companies • have access capital • they do EE on behalf of customer • get paid through savings • Problem: baseline – if load changes, how to estimate what ESCO gets paid?
Rebound effect
Increase in efficiency will lead to increase in consumption, as lower costs encourage more consumption, and as greater efficiency accelerates economic growth and thus greater energy demand)
Decoupling
disassociation of a utility’s profits from its sales of the energy commodity. You decouple the amount of revenue the generators can receive from the volume they sell. It improves EE and distributed generation ability at utility level.
