Financial Evaluation for PV Solar

Projects

ToT PLN
10 Juni 2020

Prepared by Dhiah Karsiwulan

Sustainable Finance Program Manager
 Table of Contents
1. Solar Power Plant Costs Breakdown
2. Investment, Risks & Returns
3. Financial Reports
4. Financial Parameters & Evaluation

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 1. Solar PV Cost Breakdown

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 2019 - 2050
2010 2019 2050
Wind
$ 5.3 billion 40% 36%
Fossil fuel
plants
Solar
Renewables $ 4.2 billion 89% 34%
$ 13.3 Trillion
15,145 GW
Batteries
$ 0.8 billion 84% 64%

• 40% share of individual

application in 2050 ($10.7 billion)
• Virtual market plants

Source: Bloomberg Energy Finance, 2019

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 Solar Market
• Major drivers of cost reduction are module prices and installation cost, accounted of
average for 49% and 42% (in US$/kW)
• Lower financing cost
• Improved panel efficiency from 13% in 2012 to 17% in 2017

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 Cost assumptions ($/kW) 2018 2023 2030
Capex Continental Europe 665 499 433
Capex UK 802 601 420

Opex Continental Europe 12.0 11.7 10.9

Opex Nordics 12.6 12.3 11.5
Opex UK 15.0 14.6 13.6

Source: Goldman Sachs, 2019

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 Cost Components & Breakdown
Capex - EPC % to Capex

Civil works (Preparation, civil construction,

racking system)
Solar PV Panel 38% - 41%

Inverter 5% - 6%

Balance of system 48% - 52% Opex Costs

Control & instrument Labor costs
Interconnection facility Routine maintenance
- TD line, transformer, sub-station
- weather forecast Insurance
- communication system
Inverter
Capex - Non-EPC Costs

Land

Development costs Feasibility study, permit & license, environment

study, etc.
Financing costs IDC, upfront fee & commitment fee, DSRA

Working capital

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 Solar Procurement
• Close coordination and cross-
Key Enabling Factors
cutting works between
Project development and government bodies and utilities
investment environment • High utilization of facilitation
incentives
• Pre-granting permits to the bid
winner
• Free import and complete customs
Regulatory conditions
removal
• Removal all local financial and
content requirements
• Tax exemption (≤ project lifetime)
Cost structure • Tax rebates & accelerated
depreciation
• PPA’s 100% take or pay
Insulation >>> PV Out
• Provision of sovereign warranties
Dubai 1793 kWh/kWp
Kupang 1685 kWh/kWp • Some BOT/BOOT schemes: Cash-
Sumbawa 1673 kWh/kWp up-front shares in project company
by utility, etc. 8
India
• RPO (Renewable Purchase Obligation)
• Project Package approach (land rights, project finance, interconnection point
and rights, operation license, building license, permits & rights)
• Land is leased to the local government, lease fee paid by company
• Use of local potential suppliers is incentivized by the granting of VGF
• Government arranged soft loans with national banks (< mortgage rates; tenor
= project cycle)
• 25 years PPA with option to extend
• Real-time auction platform

0.08 $/kWh in 2014  0.03 $/kWh in 2018

9
Mexico
• Exclusive area operator for remote unserved areas (24/7 generation
mix supply)
• Project package + Multiple sourced PPA (exclusive operator &
guaranteed minimum income/energy source)
• Permitting requirements were removed or pre-approved
• Land provided by government
• Interconnection provided by utility; competitive kWh rate for back-up
power and cost sharing
• Soft-term project finance (rate <3%, tenor >15 years)
• Real-time on-line platform of auction

10
UAE
Total package + Finance facilitation
> 0.025 $/kWh

• Free land access BOOT schemes:

• Pre-granted permits Cash-up-front the 60% of project’s
• No import requirements company & capex by utility
• Free infrastructures & Guaranteed by the government
telecom facilities and utility (both AAA rating)
• 100% profit repratiation
• Tax-free for lifetime
• Loan interest 0.5% in 30
years tenor with yearly
decreasing payments
11
Brazil

• Free land access

• Pre-granted or removal of
permits
• No customs
• 100% foreign ownership
Brazillian Development
• Tax exemptions
Bank
• No local components
Project finance 80% at 0.9% in
required, but incentivized
24 years tenor for the
utilization of local production

12
Cost Drivers Structure
Item $/kWp Importance Effect in kWh price & LCoE
Panel 250 8 Key driver
Inverter 60 1 Irrelevant
Structure (fixed) 30 2 Irrelevant
BoS & labor 126 5 Irrelevant
Value
Project development 50 10 Time & cost risk = project risk
PPA > 25 years 0 10 Profits, + 25 => - PPA
BOOT 0 5 + PPA
Land rights: buy TBD 10 buy => + LCoE => + PPA
Land rights: lease 0.5% net 10 Lease => - LCoE => - PPA
Interconnection study cost 0 10 Need => bad utility => +PPA
Permitting 30 10 Time & cost risk => + PPA
Local ownership required 0 10 Control risk => + PPA
Free origin of capital < 3% 10 Cost & time risk => + PPA
Tax exemption TBD 5 Cost => + PPA
Customs free transit TBD 7 Cost & time risk => + PPA
Local content required 700 10 Cost & quality risk => - bankable
Ease of project finance TBD 8 Cost risk => + PPA
IRR > 15% 10 Lender & equity risk => + PPA / Key
DSCR > 1.30 10 Lender risk => + PPA

13
Simulation

UAE Indonesia
PV Output 1673 kWh/kW
PV Output 2836 kWh/kW
EPC cost 2.15 USD/kW
EPC cost 0.86 USD/kW
Debt to Equity 70 : 30
Debt to Equity 80 : 20
Loan tenor 7 years
Loan tenor 25 years
Loan interest 11 %
Loan interest 0.9 %
Inflation 4.5 %
Inflation 2.7%
Land, permit & license at cost
Land, permit & license Free
Equity IRR 14.19%
Equity IRR 18.86%
Average DSCR 1.22
Average DSCR 2.10
Generation cost 0.081
Generation cost 0.021

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 Capex & Opex
CAPEX OPEX
• Costs are changing over years • Can be expressed in per
and site specific, kW/year or per kWh
• Costs reference: Lawrence • Long term (5 to 10) years O&M
Berkeley, National lab in USA,
IRENA, REN 21, Global Wind contract can provide a good
Energy Council, American Wind estimate
Energy Association, European • OPEX normally escalate each
Wind Energy Association, Indian year at the inflation rate
Wind Manufacturer Association,
etc.,
• Re-check costs of past project
with proposed costs.

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 1. Investment, Risks & Returns

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Risk and Return

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 27 Years

IHSG 1992 IHSG 2019

Rp 321.54 Rp 6,299.54

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 Beta

Sp

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 https://pusatdata.kontan.co.id/bungadeposito/

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 Risk and Return

SBN (IDR) Deposito Private Emerging Developed Real assets US Bonds

(IDR) Equity Equity Equity
Expected 6.75% 6.5% 12.0% 8.0% 6.0% 6.0% 2.0%
return
Standard n/a n/a 30.0% 25.0% 20.0% 15.0% 10.0%
deviation

Source: Yale University, Investment Office,

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Skema Umum Bisnis IPP di Indonesia
Equity

Project Sponsors

Shareholders
Loan Agreement

Loan Agreement Power Purchase

Special Purposes Agreement
Lenders
Company

Fuel Supply O&M EPC

Agreement Contract Contract

Fuel O&M EPC

Suppliers Contractor Contractor
 - Proposed price vs. PLN HPP
- Which one is more economical
- Credibility of IPP

Lender (Banks)
IPP PV Solar Projects
- DSCR
- IRR - Debt to Equity Ratio
- Payback period - 5C
- NPV - Sponsor

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 Cash In – Cash Out = ?? Healthy
Check

Equity
Cost of Equity Interest
(Ke)

Debt
Initial Revenues
(Power x Tariff) Repayment
Investment
Debt Tax
Cost of Debt
(Kd)

Project data Parameters & Assumptions

(technical, economics, financial)

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 Financing for Power Projects

Corporate Finance Project Finance

• Credit worthiness : 5 C (Character, Capacity, Condition, Capital, Collateral)

• Cash flow
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 Financing Sources

- Government of Indonesia - Own Equity

- PLN Equity - State owned Banks (BUMN)
- Development Banks - Private Financial Service
- State owned Banks (BUMN) Institutions
- Private Financial Service - IPO (Initial Public Offering)
Institutions - Bonds issuance
- IPO (Initial Public Offering) - Private Equity
- Bonds issuance - Etc.
- Etc.

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 2. Financial Report

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 Flow Chart of Financial Report
1. Laporan Laba Rugi/ Income Statement
2. Laporan Arus Kas/ Cash Flow Statement
3. Laporan Perubahan Ekuitas/ Equity Statement
4. Neraca/ Balance Sheet

+ Revenues + Equity + Debt

Cash Flow
Income Statement Balance Sheet
Statement

- Opex - Capex
Asset Debt
- Interest expense - Debt
Equity
- Tax repayment

Net income Retained earnings

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 Income Statement
Shows company’s ability to generate revenues, manage expenses, and create profits.

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 Cash Flow Statement
Provides aggregate data regarding cash inflows and
cash outflows from operation, investment and
financing activities.

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 Cash Flow Statement
Provides aggregate data regarding cash inflows and
cash outflows from operation, investment and
financing activities.

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 Free cash flow

Loan interest Payment

Loan repayment

DSRA

Cash
Sweeps

Dividend

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 Balance Sheet
A financial statement that reports a company’s assets, liabilities and shareholder’s equity at a specific point in time.

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 Arus Kas dari
Aktivitas Operasi

Arus Kas dari

Aktivitas Investasi

Arus Kas dari

Aktivitas Pendanaan

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 3. Financial Evaluation &
Parameters

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What is Financial Modelling?
Financial modelling combines accounting, finance, and business
metrics to create an abstract representation of a company or project in
Excel, and forecasted into the future (forward looking).

• Business decisions at a company

• Making investment in a private or public company
What is it for? • Pricing securities
• Corporate transaction : merger, acquisition,
divestiture, capital raise

Components
3
1 Results
Data Sheet
Technical data & assumptions Financial results
Financial data & assumptions Sensitivity analysis
Economics data & Scenario analysis
2 assumptions
Financial Calculation

Income Statement
Cash Flow Statement
Balance Sheet
 Components of Financial Modelling
‘What to check & verify’’

Historical Data Exchange rate, inflation, tax rate, etc. Historical vs. Projection

Ratios & Metrics Loan interest, discount rate, DER, expected DSCR, loan tenor, etc.

Assumptions Capacity factor, power generation, tax rate, depreciation, PPA period,
electricity price, etc.

Forecast Income statement, Balance Sheet, Cash flow statement

Valuation Payback period, NPV, IRR project, IRR Equity, DSCR

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 List of Parameters
Parameter, Where to find?
Assumption
Inflation www.bi.go.id
Exchange rate www.bi.go.id
Company tax rate https://www.pwc.com/id/en/pocket-tax-book/english/pocket-tax-book-
2019.pdf
VAT UU No. 8 Tahun 1983 perubahannya UU No. 11 Tahun 1994, UU No. 18
Tahun 2000, dan UU No. 42 Tahun 2009
Escalation rate www.bi.go.id; reference of other project
Loan interest, tenor https://www.ojk.go.id/en/kanal/perbankan/Pages/Suku-Bunga-Dasar-
Kredit.aspx
Depreciation PSAK 16; https://www.pajak.go.id/id/penyusutan-dan-amortisasi
Discount rate Company internal reference, sector/ industry reference
Electricity price Permen ESDM, PPA
PPA period PPA

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 Inflasi

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 Suku Bunga

https://www.ojk.go.id/id/kanal/perbankan/Pages/Suku-Bunga-Dasar.aspx

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 Principles in Financial Evaluation
• Only cash flows are
relevant
• Only incremental future
cash flows should be Financial Parameters
included
1. IRR (IRR Project & IRR Equity)
• Timing of cash flows has to 2. NPV
be identified 3. Payback Period
• Need an appropriate 4. DSCR
discount rate to apply to
cash flows

Determining factors:
- Purchasing power of cash
- Interest rates available
- Particular preference profile/ risk &
return attitudes

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 Investment and Cash Flow Profile

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 Typical Profit and Loss Profile of RE Project

450
400
350
300
250
Currency

200
150
100
50
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Year after installation
Depreciation Operating costs Taxes Interest results Profit Revenues

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 Financial Parameters

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 NPV (Net Present Value)

NPV is present value of incremental future cash flows discounted at the

appropriate cost of capital.

• Any project with a positive NPV should be accepted, negative NPV

should be rejected

• For mutually exclusive projects, accept the project with higher(est) NPV.

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 NPV (Net Present Value)
If you have $2000 today, how much you expect it to be in five years from now?
Knowing interest rate is 8% p.a.

Future Cash flow = $ 2000 x (1+ 8%)5 = 2939

Y0 Y1 Y2 Y3 Y4 Y5
2939

NPV
$ 2000 Cash
(1+r)t

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 NPV (Net Present Value)
You are offered to receive $2500 today or $1200 in year 2, year 4 and year 5.
Knowing interest rate is 8% p.a, which offer will you choose?

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 NPV (Net Present Value)
You are offered to receive $2500 today or $1200 in year 2, year 4 and year 5.
Knowing interest rate is 8% p.a, which offer will you choose?

Y0 Y1 Y2 Y3 Y4 Y5
1200 1200 1200

NPV $ 1029

NPV $ 882

NPV $ 817
Cash
Total $ 2728 (1+r)t

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 NPV (Net Present Value)

Someone gives you a proposal to invest to a five year project with annual
revenues of $35,000 with annual cost of $ 8,000. Initial investment required is
$100,000.

Would you invest in this project under assumption of discount rate of 8%, 10%,
and 15%?

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 NPV (Net Present Value)

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 IRR (Internal Rate of Return)

IRR is rate of return that gives the project’s cash flows a zero NPV.

• Project with an IRR greater than the required rate of

return should be accepted.
• Benchmark or required rate of return is needed to make
investment decision.
• Apply sensitivity measures that the project has to change
in certain circumstances.

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 IRR (Internal rate of return)

Someone gives you a proposal to invest to a five year project with annual
revenues of $35,000 with annual cost of $ 8,000. Initial investment required is
$100,000.
What is IRR of this project?
You only accept investment with minimum return of 10%, would you invest in
this project?

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 Payback Period

Payback period is the time required to earn back the amount invested in
an asset from its net cash flows, expressed in years and fraction of years.

Initial Investment or Cost of the Asset

Payback Period =
Cash Inflows

Shorter payback period is considered to be better, since the investor’s initial

outlay is at risk for a shorter period of time.

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 Payback Period

Payback period = (100,000) / 135000

= 0.74

Year = 0.74 x 5 years

= 3 years 8 months

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 Project and Equity Return

Project return
use project cash flows and discount at the risk adjusted discount rate
appropriate for the project

Equity return
use adjusted project cash flows with any borrowing that the company can raise to
fund project; include debt raised, interest paid, and debt repayment.
Discount the equity cash flows at the cost of equity.

Equity IRR > Project IRR

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 Project and Equity Return

Considering a 5 years project taking a commercial credit from the bank at 75%
of the total investment, loan interest is 3% with 3 years loan tenor. Loan
payment is agreed at $25,000 pa.

Calculate Project IRR and Equity IRR of the project.

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 Taxation
Why include tax in analysis?
- Tax is a relevant cash flow.
Only post tax cash flows
$$ can be added to
shareholder wealth
- Tax is not neutral;
spending on capex and
revenues have different tax
treatment thus presents
different value cost. Important factors:
• Definition of taxable profit
• Tax rate
• Timing of tax payments
• Treatment of tax losses
• Tax holidays

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 Discount Rate

Discount rate refers to the interest rate used in discounted cash

flow (DCF) analysis to determine the present value of future cash flows.

Discount rate:
• Hurdle rate or MARR (Minimum Acceptable Rate of Return) : minimum rate
that a company expects to earn when investing in a project. Hurdle rate is a
blend of company cost of debt and cost of equity.
• WACC (Weighted Average Cost of Capital)
• Refer to sector
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 WACC

WACC = (Kd * (1- tax rate) * Debt portion) + (Ke * Equity portion)

Note:

Kd Cost of Debt

Debt portion Debt portion to total investment

Ke Cost of Equity

Equity portion Debt portion to total investment

Kd < Ke

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 Kd (Cost of Debt)
Sources of Data:
- Internal (Company Cost of Debt)
- Bloomberg
- Academic studies
- Broker’s note
- Bank Indonesia
- Indicative rates from banks
- Etc.

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 Ke (Cost of Equity)

Sources of Data:
- Internal (company cost of equity)
- CAPM (Capital Asset Pricing Model)

CAPM

ke = Rƒ + (ß x (Rpm + λ)) + Sp

ke = Cost of equity financing

Rƒ = Risk-free rate of return
ß = Beta, a measure of systematic risk.
Rpm= Equity market risk premium
λ = Country Risk Premium
Sp = Small Investment Premium & Specific Risk Adjustment

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 Ke (Cost of Equity)
Rƒ Risk free rate Rate of return of investment with no risk.
Deposit rate, Government bond (ex: SUN, ORI,
US treasury bond)
ß Measure of systemic Measure of stock’s volatility in relation to the
risk market (Yahoo Finance, Bloomberg, calculation)
Rpm Equity market risk Excess return that investing in the stock market
premium (Rm-Rf) provides over a risk-free rate
λ Country risk Additional return demanded by investors to
premium compensate them for the higher risk associated
with investing in a specific country
Sp Small investment Additional return demanded by investors to
premium & specific compensate for the higher risk associated with
risk adjusment investing in a specific sector

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 Required Project IRR to invest in Indonesian
Fossil Fuel & renewable IPPs

16% - 23% does not answer due

to not applicable (no investment
in the sector)

Gearing target (debt to cape ratio) for

Cost of Debt (USD) for investment in investment in IPPs
IPPs (10-15 y tenor, recourse to sponsor)

2018 Power Survey, PwC

Thank You

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 Beta – what is a Beta?
• A measure of SYSTEMATIC risk

Specific Risk
40%

Risk 30%

20%
Systematic
10% Risk

1 2 3 4 5 6 7 8 9 10 11 12

Number of Securities

71
Beta (contd)
• β = σim / σ2m

• σim = covariance between stock returns and market returns

• σ2m = variance of the returns of stock market

• In English –
– if β = 1 then systematic risk of stock = market systematic risk
– if β = > 1 then systematic risk of stock > market systematic risk
– if β = < 1 then systematic risk of stock < market systematic risk

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 Beta (contd)
• The average β of a portfolio will determine the
systematic risk

β = 1.5
Specific Risk
40%

Risk 30%
β = 1.0
20%
Systematic
10% Risk

1 2 3 4 5 6 7 8 9 10 11 12

Number of Securities

73
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 http://people.stern.nyu.edu/adamodar/New_Home_Page/datafile/ctryprem.html
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