Financial Analysis For A 50 MW Power Project

WORKSHOP FOR GEOTHERMAL DEVELOPMENT DONORS
Reykjavik Iceland May 2014

Financial analysis for a 50 MW power project
Case Study: Africa and Iceland
Investment, O&M, Risk, IRR, ROE, LCOE, Tariff, Financing, etc.
Fjrmlagreining jarhitavirkjana
Kristjn B. lafsson
28.5.2014
Kristjn B. lafsson
Senior
Analyst
Kristjn
B. Financial
lafsson kbo@simnet.is
kbo@simnet.is
Kristjan B Olafsson
Kristjan B Olafsson
Senior Financial Analyst
Economist from the University of Iceland.
MBA from Copenhagen Business School.
Tel. + 354 892 9200 e-mail: kbo@simnet.is
Consent Energy LLC Washington DC - partner
Consultancy and energy project development
www.consentenergy.com
Geothermal experience from Reykjavik Energy and Reykjavik Energy Invest:
Hellisheidi power plant
Nesjavellir power plant
Hverahlid 90 MW geothermal project
Djibouti Assal geothermal project (2008-2010): REI and Djibouti
A.
B.
C.
D.
E.
F.
Financial analysis
Operational analysis
Risk analysis and risk mitigation
Project Finance
Corporate Finance
Contract structure
G.
H.
I.
J.
Pre-feasibility and Feasibility study

PA and PPA
Tender for drilling
JDA
Consultancy for:
MFA (Ministry for Foreign Affairs / Benedikt Hskuldsson), Mannvit, Verkis, NEA
(National Energy Authority / Orkustofnun), Icelandic Power Companies, Banks, Investors,
etc.
Kristjn B. lafsson kbo@simnet.is
Nesjavellir CHP 300 MW thermal and 120 MW electricity = 420 MW
Cooling towers:
Steam pipelines:
Power Plant:
Turbine and generator:
Wells:
Steam vent station:

Two phase flow from
wells (steam and liquid):
Separation station, steam,

gas and effluent water.
Nesjavellir
Iceland: The power system totals 2.637 MW and its 100% renewable from hydro and geothermal
The Icelandic power system totals 2.637 MW and its 100% renewable
from hydro and geothermal resources
Transmission
cost in Iceland:
Example:
50 MW and
98% utilization
Cost: 0,6
cent/kWh
Total Generation 2013

18.116.099 MWh
Reykjavik
Energy;
3.421.772;
19%
Total Generation 2013

18.116.099 MWh
HS Energy;
1.349.743; 7%
Geothermal
5.245.021
29%
Wind
5.485
0%
Fossil
2.750
0%
National Power
Company
12.838.236
71%
National Power Company
Reykjavik Energy
HS Energy
Hydro
12.862.843
71%
Hydro
Geothermal
Wind
Fossil
0
Steingrmsst 1960
1961
1962
rafoss 1963
ver 1964
Mrar 1965
Brfell 1969 1972
Nmafjall 1969
Smyrlabjarga 1969
1970
Brfell 1971
Brfell 1972
Andakll 1973
Lax 1973
1974
Blvardals 1975
Lagarfoss 1975
Mjlk 1975
Skeisfoss 1976
Krafla 1977
Sigalda 1977
Svartsengi 1977
Sngurfoss 1977
Sigalda 1978
1979
Svartsengi 1980
Hrauneyjafoss 1981
Hrauneyjafoss 1982
Blvardals 1983
1984
1985
1986
1987
1988
Svartsengi 1989
1990
Blanda 1991
Lax 1991
Reihjalli 1991
Blanda 1992
Svartsengi 1993
Lax 1994
1995
1996
Brfell 1997
Krafla 1997
Brfell 1998
Nesjavellir 1998
Reykjanes 1998
Sultartangi 1999
Svartsengi 1999
Hsavk 2000
Sultartangi 2000
Nesjavellir 2001
Vatnsfell 2001
Vatnsfell 2002
ver 2002
2003
Smvirkjanir 2004
Mlavirkjun
Nesjavellir 2005
Hellisheii 2006
Reykjanes 2006
Gnguskars 2007
Hellisheii 2007
Krahnjkavirkjun 2007
Lagarfoss 2007
Lind 2007
Ljs 2007
Selrvirkjun 2007
Svartsengi 2007
Bjlfsvirkjun 2008
Hellisheii 2008
Glsvirkjun 2009
Mjlk 2010
Hellisheii 2011
Breiadalsvirkjun 2012
Skgargeri 2012
2013
Barhls 2014
Iceland: Installed Power Plants 1960-2014
It was a political decision in 1961 to seek ways how Iceland could best use its energy resources and what kind of power intensive industry could be build in the country.
The National Power Company (Landsvirkjun) was formed in 1965 and the first new power plant, Burfell, was commissioned 1969.
Installed power plants in Iceland 1960-2014

Hydro 1972 MW (75%) and Geothermal 665 MW (25%) = 2.637 MW
Total generation: 18.116.099 MWh = 18,1 TWh
Utilization 78,4%
3.000
1.500
690
13
17 1 0
105
3 1
35
70
4 8
50
2 1
0 8 6 2 30
100
6
70
140
0
4
50
3 0
100
5 5
60 30
60 30 45 45
40 30 20 60
2
0
0

1 3 30
90 100
33
19 1 1 0 30 6
90
3 2
90
0 0
95
Iceland: Geothermal power plants and electricity generation

Installed geothermal capacity: 665 MW electricity.
Utilization 90% and yearly generation 5,2 TWh
MW
TWh
300
6,0
Electricity gen. per year in TWh
Bjarnarflag 3,2 MW 1969 National Power Company
Krafla 2x30=60 MW 1977-1997 National Power Company
Svartsengi several units 76,4 MW 1997-2007 HS Energy
Nesjavellir 4x30=120 MW 1998-2005 Reykjavik Energy
Husavk 2 MW 2000
Reykjanes 2x50=100 MW 2006 HS Energy
Hellisheidi 6x45+33=303 MW 2006-2011 Reykjavik Energy
150
3,0
90
100 33
90
2
60
30
30
6
30
30
30
30
0,0
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
90
The main causes of rapid geothermal growth in electricity generation:

New Electricity Act 2003: Its main objective was to liberalize the market for generation of electricity and retail.
Nordural Grundartangi aluminum production. PPA contracts with HS Energy and Reykjavik Energy.
Nesjavellir 120 MW, Reykjanes 100 MW and Hellisheidi 303 MW. Most of the energy goes to the aluminum smelter.
Electricity Tariffs in Iceland calculated to cent/US$

ISK/US$: 115,00
Electricity tariffs in Iceland

Calculated to cent/kWh (US$)
Reykjavik Energy Household 14,60 cent/kWh

including VAT
Per year: 4.800 kWh x 14,60 cent/kWh = 700 US$
40
30,00
20
14,60
Energy tax
0,11
1%
11,63
4,90
Transmission
and distribution
4,92
34%
4,21
2,58
0,6
0
Reykjavik
Energy:
Household
incl. 25,5%
VAT.
Value Added
Tax
2,97
20%
Reykjavik
National
National
Estimated
Transmission Household in
Energy:
Power
Power
Tariff from a
cost
Country X:
Household
Company:
Company:
new
Estimated
excluding Heavy Industry
Heavy
geothermal
tariff 30
25,5% VAT.
including
Industry, old power plant.
cent/kWh or
transmission.
contracts,
even higher.
partly
including
transmission.
Energy price
4,42
30%
Fixed charge
2,18
15%
Drilling is the primary risk factor in geothermal projects

The figure shows real figures from a drilling project in Iceland.
6 wells have been drilled and estimated 50 MW have been secured.
Average 50/6 = 8, 3 MW/Well
The first three wells yield a total of 13 MW. Then there are two robust wells and finally well 6 with 0 MW.
This case clearly describes the situation that may arise during drilling for a new plant, one the management of the project should be aware of.
This may be analysed further in a decision tree analysis.
Figures from a drilling project in Iceland
MW
60
50
50
30
30
13
6
Well 1
Well 2
Well 3
Well 4
Well 5
Well 6
MW per drilled well
17
20
Accumulated MW
13
30
50
50
Cooperation between disciplines
Geosciences
Legal and
institutional
framework
Engineering
Finance
Financial Models
A: PP
B: PPP
Public project
Public Private
Partnership
ICELAND
C: IPP
The private sector
D:
Separation of
steam collection
and power
generation
10
Project Finance model: REI Djibouti model 2008
Sponsors / Investors
Lenders
Equity
Reykjavik Energy Invest, IFC and
MDBs
Financing Agreements
IFC and MDBs
Project
Company
Djibouti
PPA
& PA
Contractor
Operator
Reykjavik Energy
Construction Contract
Reykjavik Energy
Operations and Maintenance
Contract
Off-taker
EDD Djibouti
Insurers
Risk Mitigation
11
The Icelandic Approach in Development of Geothermal Projects
Geothermal development
R&D
Exploration
Drilling
Confirmation
Engineering
Construction
O & M +25 Y
Icelandic Geothermal Companies (*)
ISOR
Iceland Drilling
Mannvit
Verkis
Efla
Worldwide: Only a few companies cover all phases of geothermal development

(*) Not using EPC contracting approach. EPC: Engineering, procurement and construction.
Icelandic Power Companies 2014:
Landsvirkjun: State ownership
Reykjavik Energy: City of Reykjavik and municipalities
HS Energy: Privatized 2007
12
Africa: Estimated investment 4 MUS$/MW vs Iceland 3 MUS$/MW

Estimate for Africa: 4 MUS$/MW x 50 MW = 200 MUS$ (Estimates from 3-7 MUS$/MW)
Estimate for Iceland: 3 MUS$/MW x 50 MW = 150 MUS$ (Estimates from 3-4 MUS$/MW)
Project cost heavily depending on the total cost of drilling
MUS$
300
Page 41:
Low estimate:
2,8 MUS$/MW
Medium estimate: 3,9 MUS$/MW
High estimate:
5,5 MUS$/MW
195
200
176
150
150
100
75
76
45
30
25
19
5
0
Pre-feasibility and 4 Additional Production
exploration &
wells
production wells
Re-injection wells
MUS$
Power plant, turbines, Piping, substation,

rotor, etc.
etc.
Iceland
Start up and
commissioning
Iceland Total 150

MUS$
Accumulated cost
13
O&M including make-up

Estimated operating expenses, including make-up,
from 0,85 - 2,00 cent/kWh
Estimated operating expenses 2,00 cent/kWh
3,00
Cent/kWh
Fixed Cost: Supervision of
machines
2,00
1,50
0,75
38%
0,50
25%
0,75
0,50
0,25
0,25
0,00
Fixed Cost:
Maintenance
work
O&M cent/kWh
Variable Cost:
Superv. of
Reservoir
Variable Cost:
Operational
supplies
Variable Cost: Superv. of

Reservoir
Variable Cost: Operational

supplies
0,25
0,25
13%
Fixed Cost:
Supervision of
machines
Fixed Cost: Maintenance

work
0,25
12%
Variable Cost:
Make-up or
maintenance
drilling
0,25
12%
Variable Cost: Make-up or
maintenance drilling
Accumul. cent/kWh
14
Project finance model without Grant

50 MW Geothermal Project: 200 MUS$:
Grant 0%
IPPs and Investors not willing to taka 100% risk to prove the resource
Example: Djibouti 2008-2010
MUS$
200
A: First step
B: Second step
C: Total financing
140,0
100
60,0
140,0
60,0
19,8
30,0
48,0
40,2
24,0
0
6,0
12,0
0,0
First drilling and scientific

work
Financial Close: 75% of power
Grant 0%
IPP Company
Multiple Donors
MDBs
Equity
Equity 30%
Debt 70%
Debt
Total
15
Project finance model including grant 15% or 30 MUS$

50 MW Geothermal Project: 200 MUS$: Grant 15% or 30 MUS$
Example: Djibouti with WB/Multidonors support
MUS$
200
A: First step
B: Second step
C: Total financing
119,0
100
60,0
51,0
119,0
15,0
30,0
16,8
30,0
30,0
30,0
30,0
34,2
Grant 15%
Equity
15,0
0
First drilling and scientific

work
IPP Company
Financial Close: 75% of power
Multiple Donors
Others
MDBs
Equity 30%
Debt
Debt 70%
Total
16
Corporate Finance model for Iceland

50 MW Geothermal Project: 150 MUS$
Public Power Companies: Understanding and accepting the geothermal risk
MUS$
200
A: First step
B: Second step
C: Total financing
105,0
100
45,0
105,0
45,0
0,0
0
First drilling and scientific Financial Close: 75% of

work
power
Power Company
Grant 0%
MDBs and Commercial Banks
Equity
Debt
Total
17
Steps in financing a geothermal project and project risk

50 MW Geothermal Power Project
Risk profile and major steps in financing
Financial Close: 60 MUS$
MUS$
250
Risk profile:
From high to low
200
200
4) CapEx 200 MUS$
Accumul. GRANT 30 MUS$

Accumul. Equity 51 MUS$
150
119
Accumul. Debt 119 MUS$
Accumul. Capex 200 MUS$
100
Risk profile from high to low
100
19
3) Total drilling 100 MUS$
60
50
51
51
30
30
30
30
30
30
Pre-feasibility and
Feasibility Study
Feasibility Study and first

drilling
Drilling and to reach

Financial Close
Total drilling and reinjection
Power plant, equipment,

steam supply system, etc.
2) Financial Close 60
MUS$
1) First drilling 30 MUS$
0
Pre-feasibility
Operation period
18
Key findings
Return on equity, Grant and Tariff
Cent/kWh
ROE %
25,0%
20,00
25,0%
20,0%
13,27
10,00
11,0%
8,78
12,5%
4,21
0,00
0,0%
A: Africa: No grant
Tariff 13,27 cent/kWh
Project Finance.
B: Africa: Grant 30 MUS$

Project Finance
Tariff cent/kWh
ROE
C: Iceland: No grant
Corporate Finance
Transmission cost:
0,6 cent/kWh.
19
CASE STUDY: Financial assumptions and conclusions

High temperature reservoir single flash geothermal project
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
1. Capital expenditures, wells and steps in financing (+/-)

Plant size
Capital expenditures: CAPEX over six years
Capital expenditures: Capex per MW
Exploration and production wells
Average well productivities (success rate included in calculation)
Re-injection wells
Financing of first drilling & scientific work
Financial Close in Project finance reached at
Total scientific work, drilling and re-injection
Power plant, turbines, steamfield, etc.
2. Capital structure, interest, return on equity and WACC (+/-)
Equity: 30%
Debt: 70%
Loan guarantee
Grant
Grant
Interest on debt: % in real terms
Required rate of return on equity
WACC: Before tax
WACC: After tax
3. Plant capacity factor and annual generation (+/-)
Plant capacity factor
Maintenance and internal power consumption
Generation (MW x capacity x 365 x 24)
Annual revenues
4. Operation and Maintenance costs including make-up (+/-)
OPEX incl. Make-up. Annual prod. decline 2-3%.
5. Tax, depreciation and years in calculation
Income tax
Depreciation, straight line
Loan maturity period
Operating life time
6. Financial calculations: Tariff, IRR, Payback and LCOE
Tariff
Project IRR (from free cash flow to firm: FCFF)
Project NPV
Equity IRR (from free cash flow to equity: FCFE)
Equity NPV
Pay-Back
Discounted Pay-Back (disc. at WACC)
Levelized Cost of Energy
Levelized Cost of Energy after Grant
a) LCOE Capital
b) LCOE O&M
7. Other assumptions:
MW
MUS$
MUS$/MW
Nr.
MWe
Nr.
MUS$
MUS$
MUS$
MUS$
MUS$
MUS$
% of CAPEX
%
%
%
%
%
%
GWh/Year
MUS$
cent/kWh
% of CAPEX
MUS$/Year
%
Years
Years
Years
cent/kWh
%
MUS$
%
MUS$
Years
Years
cent/kWh
cent/kWh
cent/kWh
cent/kWh
Africa
Iceland
Project finance
Corpor. Fin.
A
B
C
50
50
50
200
200
150
4,0
4,0
3,0
12
12
9
4,2
4,2
5,6
6
6
6
30
30
60
60
100
100
58
100
100
93
A
B
C
60
51
45
140
119
105
Project finance
Project finance
State/Municipality
0
30
0
0%
15%
0%
6%
6%
3%
25%
20%
11,0%
11,7%
10,2%
5,4%
10,9%
9,4%
5,0%
A
B
C
90%
90%
92,5%
10%
10%
7,5%
394,2
394,2
405,2
52,3
34,6
17,0
A
B
C
2,0
2,0
0,85
3,9%
3,9%
2,3%
7,9
7,9
3,4
A
B
C
20%
20%
20%
25
25
25
25
25
25
25
25
25
A
B
C
13,27
8,78
4,21
15,3%
9,3%
5,7%
53,9
-1,3
9,7
25,0%
20,0%
11,0%
0,0
0,0
0,0
6,0
9,1
13,1
11,0
22,1
5,15
5,00
2,82
5,15
4,34
2,82
3,95
3,72
2,16
1,19
1,28
0,67
No resource tax, tax holidays or carbon credit revenues.
Iceland:
No direct grant
Loan guarantee from owner
No resource tax
Return on equity 11%
WACC after tax 5%
20

Tariff in cent/kWh and %
Tariff per year calculated to cent/kWh

15
Income tax
0,70
8,0%
Depreciation
2,03
23,1%
10
Interest
1,25
14,3%
2,03
2,00
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
O&M incl. Make-up
Depreciation
Interest
Net Income
O&M incl.
Make-up
2,00
22,8%
Net Income
2,79
31,8%
Income tax
21
Levelized Cost
LCOE 5,00 cent/kWh
LCOE after Grant 4,34 cent/kWh
15,0
LCOE 5,00 cent/kWh

Capital: 3,72 cent/kWh
O&M Fixed: 0,51 cent/kWh
O&M Variable: 0,77 cent/kWh
15,0
cent/kWh
cent/kWh
10,0
10,0
8,78
5,00
5,0
5,00
4,34
5,0
3,72
2,79
2,03
2,00
1,25
0,70
0,51
0,77
0,00
0,0
0,0
O&M & Mup
Royalties
Interest
Income tax Depreciation Net Income
Tariff
Levelized
Cost
LC after
Grant
LCOE Capital
LCOE O&M Fixed 40%
LCOE O&M Variable 60%
LCOE Total
22
Project IRR 9,26% and Equity IRR 20%

Free Cash Flow to Project, accumulated Project IRR
and accumulated NPV:
Free Cash Flow to Equity, accumulated Equity IRR

and accumulated NPV:
150
20%
150
Million US$ and %
20,00%
20%
Million US$ & %
WACC after tax: 9,4%

Iceland: WACC 5,0%
ROE 20%
Iceland: ROE 11%
9,26%
0%
1
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
-150
Debt
0%
1 2 3 4 5 6 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
-20%
Equity
-1,3
-150
-20%
Equity
GRANT
Free Cash Flow to Project
Acc. Cash Flow at WACC a.tax
Acc. Project IRR
GRANT
Acc. Disc. Cash Flow to Equity
Debt
Free Cash Flow to Equity
Acc. Equity IRR
23
Key success factors for rapid geothermal development in Iceland
1.
Favorable geothermal conditions, strong infrastructure and local support.
2.
Power plants located close to transmission lines and market.
3.
Years of experience from geothermal central heating projects.
4.
New Electricity Act 2003 and increased demand from aluminum industry willing to sign long term PPA.
5.
High utilization (90%) lowering the Levelized Cost of Electricity.
6.
State and municipal ownership of power companies.
7.
A loan guarantee from owners.
8.
Power companies understanding and accepting the risk in geothermal projects.
9.
Corporate Finance and access to finance.
10. Local geothermal capacity building (UNU, ISOR, NEA (Orkustofnun), Engineering companies, etc.) and a local
geothermal drilling company.
Iceland would be facing a different geothermal picture without State/Municipal Power Companies, Corporate
Finance instead of Project Finance, local know-how, local drilling company, experience from central heating
projects and increased demand from aluminum industry.
24
African Rift Valley and Geothermal Energy
Tariff 8,78-13,27
cent/kWh
Financing is a difficult
step
Reliable
Long term PPA

Long operational life
cycle
energy
Renewable
energy
Generation capacity
factor > 90%
No reliance on fossil
fuel, rain, wind or sun
Estimate for Africa:

10 x Iceland installed
geothermal capacity in the
coming years.
25
Kristjan B Olafsson
Senior Financial Analyst
Reykjavik Iceland
E-mail: kbo@simnet.is
Tel: +354 892 9200
26

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WORKSHOP FOR GEOTHERMAL DEVELOPMENT DONORS

Reykjavik Iceland May 2014

Pre-feasibility and Feasibility study

Kristjn B. lafsson kbo@simnet.is

Nesjavellir CHP 300 MW thermal and 120 MW electricity = 420 MW

Turbine and generator:

Steam vent station:

Separation station, steam,

Kristjn B. lafsson kbo@simnet.is

Total Generation 2013

Total Generation 2013

National Power Company

Kristjn B. lafsson kbo@simnet.is

Iceland: Installed Power Plants 1960-2014

Installed power plants in Iceland 1960-2014

Kristjn B. lafsson kbo@simnet.is

Iceland: Geothermal power plants and electricity generation

Bjarnarflag 3,2 MW 1969 National Power Company

Krafla 2x30=60 MW 1977-1997 National Power Company

Svartsengi several units 76,4 MW 1997-2007 HS Energy

Nesjavellir 4x30=120 MW 1998-2005 Reykjavik Energy

Reykjanes 2x50=100 MW 2006 HS Energy

Hellisheidi 6x45+33=303 MW 2006-2011 Reykjavik Energy

The main causes of rapid geothermal growth in electricity generation:

Electricity Tariffs in Iceland calculated to cent/US$

Electricity tariffs in Iceland

Reykjavik Energy Household 14,60 cent/kWh

Kristjn B. lafsson kbo@simnet.is

Drilling is the primary risk factor in geothermal projects

Figures from a drilling project in Iceland

MW per drilled well

Kristjn B. lafsson kbo@simnet.is

Cooperation between disciplines

Kristjn B. lafsson kbo@simnet.is

Kristjn B. lafsson kbo@simnet.is

Project Finance model: REI Djibouti model 2008

Kristjn B. lafsson kbo@simnet.is

The Icelandic Approach in Development of Geothermal Projects

Icelandic Geothermal Companies (*)

Worldwide: Only a few companies cover all phases of geothermal development

Kristjn B. lafsson kbo@simnet.is

Africa: Estimated investment 4 MUS$/MW vs Iceland 3 MUS$/MW

Power plant, turbines, Piping, substation,

Iceland Total 150

Kristjn B. lafsson kbo@simnet.is

O&M including make-up

Estimated operating expenses 2,00 cent/kWh

Variable Cost: Superv. of

Variable Cost: Operational

Fixed Cost: Maintenance

Kristjn B. lafsson kbo@simnet.is

Project finance model without Grant

First drilling and scientific

Financial Close: 75% of power

Kristjn B. lafsson kbo@simnet.is

Project finance model including grant 15% or 30 MUS$

First drilling and scientific

Financial Close: 75% of power

Kristjn B. lafsson kbo@simnet.is

Corporate Finance model for Iceland

First drilling and scientific Financial Close: 75% of

MDBs and Commercial Banks

Kristjn B. lafsson kbo@simnet.is