Skills Required for Castalia Analysts

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1 T: +1 (202) T F: +1 (202) F (202) Pennsylvania Ave NW Suite WASHINGTON K Street NW DC Suite WASHINGTON United States of America DC United T: +1 (646) States of America F: +1 (212) Park Ave, Suite 1744 T NEW +61 YORK, (2) 9231 NY United States of America F +61 (2) T: (2) Young 9231 Street 6862 SYDNEY, F: +61 (2) 9231 NSW Young Street Australia SYDNEY NSW 2000 Australia T +64 (4) T: +64 (4) F F: +64 (4) Level 2, 88 The Terrace PO Box PO Box WELLINGTON 6143 WELLINGTON New Zealand New Zealand Carrera 7 No Torre 1, Oficina 1424 T: BOGOTÁ +33 (1) Colombia F: +33 (1) T: Rue +33 Claude (1) Chahu PARIS F: +33 (1) Rue Claude Chahu France PARIS France Skills Required for Castalia Analysts A Case Study from One Project Copyright Castalia Limited. All rights reserved. Castalia is not liable for any loss caused by reliance on this document. Castalia is a part of the worldwide Castalia Advisory Group.

2 Overview: Who We Are, What We Do, and What We Look for in Analysts Castalia advises on how to improve infrastructure services in emerging markets Some questions we are asked to answer for our clients: What should the renewable energy strategy be in Mauritius? How can Jamaica continue to build infrastructure when it has no money? How can India provide a clean and functioning water supply for its rapidly urbanizing population? Skills you need to answer these questions: Finance Economics Sector understanding Clarity of thought and expression Case Study: Sustainable Energy Framework for Barbados 1

3 Case Study: a Sustainable Energy Framework for Barbados A Relatively Well-Developed and Efficient Power Sector... But Increasing Power Costs, and High Dependence on Imported Fuels Renewable Energy Potential Energy Efficiency Potential Sustainable Energy Matrix Barriers to viable RE and EE Projects Recommendations for a National Sustainable Energy Policy 2

4 Barbados: A Relatively Well-Developed and Efficient Power Sector Installed Capacity per Capita (kw/person) Average Fuel Cost (US$/kWh generated) kw US$/kWh Barbados St Lucia St Vincent (2007) Grenada Dominica Jamaica St Vincent (2007) Barbados Jamaica St Lucia Grenada Dominica System Losses (%) EBITDA Margin (%) 25.0% 20.0% 22.9% 65% 40% 46% 46% 15.0% 10.0% 5.0% 6.6% 8.5% 8.8% 10.2% 12.1% 15% -10% 10.9% 11% 16% 0.0% Barbados St Vincent (2007) Grenada St Lucia Dominica Jamaica -35% Jamaica Mauritius (2007) Barbados Dominica Grenada 3

5 But Increasing Power Costs, and High Dependence on Imported Fuel Average Fuel Cost and Generating O&M Costs of BL&P, Electricity Generation by Source, 2008 Diesel, 15.0% Biomass, 1.0% US$/kWh Generation Operating Costs (fuel + O&M costs) Average cost of fuel Heavy fuel oil, 84.0% Residential tariff goes over US$0.30/kWh In 2010 the average household paid US$750 for electricity In less than a year, from November 2007 to 2008, subsidizing the Fuel Clause Adjustment for residential customers cost the Government US$18 million Any potential to do something about it? 4

6 Good Renewable Energy Potential Currently Unrealized Solar Water Heater (2kW) Solar Water Heater (70kW) Biomass Cogeneration (10MW) Already Have Est. long-run avoided cost of generation : US$0.19/kWh Est. Gas Turbines Fuel Cost (non-firm) + 6.6% losses: US$0.21/kWh Wind On Shore (~1MW turbines) Municipal Solid Waste to Energy (13.5MW) Should Develop Commercial Tariff: US$0.27/kWh Thin Film Solar PV (fixed, 50kW) 0.20 Thin Film Solar PV (fixed, 2kW) 0.26 Residential Tariff: US$0.31/kWh High Efficiency Solar PV (fixed, 50kW) 0.27 High Efficiency Solar PV (fixed, 2kW) 0.33 Small Wind (10kW) US$/kWh 5

7 Good Renewable Energy Potential Carbon Abatement Costs Solar Water Heater, 2kW Biomass Cogeneration 20MW Win-win projects Save money Reduce CO 2 e Hybrid PV/Thermal, 2kW Onshore Wind, 10MW Offshore Wind, 10MW Waste to Energy, 13.5MW SWAC, 2MW Globally good projects Good for the planet But cost money Who should pay? Solar PV (Thin Film, Fixed), 50kW Solar Water Heater, 70kW Solar PV (HCPV, Dual Axis), 50kW Solar PV (LCPV, Single Axis), 5kW Solar PV (Thin Film, Fixed), 2kW Solar PV (High Efficiency, Fixed), 50kW Wind, 10kW Solar PV (High Efficiency, Fixed), 3kW Solar PV (HCPV, Dual Axis), 5kW Wind, 1kW US$26 per tco 2 e Non-viable projects (100) (200) SWAC = Seawater Air Conditioning; HCPV = High Concentration PV; LCPV = Low Concentration PV 6

8 Great Energy Efficiency Potential Currently Unrealized Compact Fluorescent Lamps (CFLs) Power Monitors Magnetic Induction Street Lighting Premium Efficiency Motors Efficient Window A/C Systems Variable Frequency Drives Efficient Split A/C Systems T8 Fluorescent Lamps w/occupancy Sensor Efficient Chillers T5 High Output Fluorescent Lamps LCD Computer Monitors Efficient Residential Refrigerators Efficient Retail Refrigerators (Condensing Unit) LED Street Lighting Solar LED Street Lighting Commercially viable Economically viable Estimated all-in All-in generation cost of generation potential cost of generation with LSD/HFO, 0.06 LSD/Natural Gas: and 0.07 US$0.11/kWh average fuel costs of all 0.09 plants: 0.09 US$0.20/kWh Estimated street lighting tariff: US$0.27/kWh Estimated residential tariff: US$0.30/kWh Estimated nonresidential tariff: US$0.33/kWh US$/kWh LSD = Low Speed Diesel plants, and HFO = Heavy Fuel Oil. LSD plants currently use HFO. All-in cost of LSD plants using natural gas estimated and contingent on availability of pipelined natural gas from the planned Eastern Caribbean Gas Pipeline. Generation costs and tariffs estimated based on an assumption of oil prices of US$100 per barrel, and natural gas prices of US$7 per MMBTU. All generation costs are grossed up for losses (6.6%) 7

9 Vision of a Sustainable Energy Matrix with Economically Viable RE/EE 8

10 Barriers What Is Preventing the Uptake of Viable Technologies Renewable Energy (Distributed) Renewable Energy (Utility Scale) Energy Efficiency No commercial viability Tariff distortions Limited access to capital Incomplete information Planning and permitting problems 1 3 NA Lack of grid connection rules 2 0 NA Economic regulatory distortions 0 3 NA Limited supply of equipment Agency problems NA NA 3 0 = not a barrier; 1 = low barrier; 2 = medium barrier; 3 = high barrier; NA = Not Applicable Scale of renewable energy: Distributed = renewable energy generation located at customer premises, close to the load being served; Utility = renewable energy generation plant installed at dedicated site, supplying power through the transmission and distribution grid 9

11 Recommendations for a National Sustainable Energy Policy (NSEP) Require Utility to do least cost expansion planning including reasonable RE Allow Utility to recover capital costs of RE and EE just like it can recover fuel Require Utility to purchase power from third parties when cheaper and reliable Allow sale of excess electricity from distributed RE to Utility at avoided cost Grid code with rules to interconnect large and small RE plant Disaggregated, cost-reflective tariff structure so customers pay or don t pay separately for different services (energy, backup/standby, connection to grid) Technology-specific, standardized permitting and planning for RE Smart Energy Fund giving grants and cheap loans to businesses Building Code mandating EE for new buildings Grants and cheap loans to retrofit existing buildings Awareness and education on EE and RE 10

12 Skills Castalia Looks For in Analysts Finance Skills Economics Skills Sector Understanding Clarity of Thought and Expression 11

13 Finance Skills You Always Have to Use Several of These Tools Understand financial statements Use comparative financial ratios 65% EBITDA Margin operating profitability ratio 46% 46% 40% 16% 10.9% 11% 15% -10% Understand basic corporate finance, Capital Asset Pricing Model -35% Jamaica Mauritius (2007) Barbados Dominica Grenada Calculate financial cost of infrastructure projects Solar Water Heater (2kW) Solar Water Heater (70kW) Biomass Cogeneration (10MW) Wind On Shore (~1MW turbines) Municipal Solid Waste to Energy (13.5MW) Already Have Should Develop Est. long-run avoided cost of generation : US$0.19/kWh Est. Gas Turbines Fuel Cost (non-firm) + 6.6% losses: US$0.21/kWh Commercial Tariff: US$0.27/kWh Apply 3 major valuation techniques (Discounted Cash Flow, Asset, Market Comparables) Financial modeling with full financial statement simulations Thin Film Solar PV (fixed, 50kW) Thin Film Solar PV (fixed, 2kW) High Efficiency Solar PV (fixed, 50kW) High Efficiency Solar PV (fixed, 2kW) Small Wind (10kW) US$/kWh Residential Tariff: US$0.31/kWh Long-run marginal costs of generation (US$ per kwh) based on an annuity

14 Economics Skills at the Very Heart of Analysis and Recommendations Microeconomics - Supply and demand - Equalize at the margin - Price formation - 2 nd and n th round unintended consequences Public Finance - How do markets work? Monopolies Externalities Public goods - How do markets fail? Demand for electricity relatively inelastic in the short term but in the medium/long term consumers can implement EE/distributed RE to reduce consumption (or consume more but more efficiently) Good to have one utility in charge of electricity supply in a small island country but can open up to third party generation options (large, small) that are economically viable 500 Local vs. global externalities what are 400 the costs and benefits for Barbados 300 of doing something about them? - Policy based on government action to correct market failure - How governments fail Compact Fluorescent Lamps (CFLs) Power Monitors Magnetic Induction Street Lighting Premium Efficiency Motors Efficient Window A/C Systems Variable Frequency Drives Efficient Split A/C Systems T8 Fluorescent Lamps w/occupancy Sensor Efficient Chillers T5 High Output Fluorescent Lamps LCD Computer Monitors Efficient Residential Refrigerators Efficient Retail Refrigerators (Condensing Unit) LED Street Lighting Solar LED Street Lighting (100) (200) Solar Water Heater, 2kW Biomass Cogeneration 20MW Solar Water Heater (2kW) Solar Water Heater (70kW) Biomass Cogeneration (10MW) Wind On Shore (~1MW turbines) Municipal Solid Waste to Energy (13.5MW) Thin Film Solar PV (fixed, 50kW) Thin Film Solar PV (fixed, 2kW) High Efficiency Solar PV (fixed, 50kW) Hybrid PV/Thermal, 2kW High Efficiency Solar PV (fixed, 2kW) Onshore Wind, 10MW Small Wind (10kW) Offshore Wind, 10MW Commercially viable Economically viable 0.01 Estimated all-in All-in Estimated street generation cost of generation lighting tariff: 0.03 potential cost of US$0.27/kWh 0.04 generation with LSD/HFO, 0.06 LSD/Natural Gas: and Estimated US$0.11/kWh average fuel 0.07 residential tariff: costs of all US$0.30/kWh 0.09 plants: US$0.20/kWh 0.09 Estimated nonresidential tariff: US$0.33/kWh Waste to Energy, 13.5MW SWAC, 2MW Already Have Should Develop Est. long-run avoided cost of generation : US$0.19/kWh US$/kWh Solar PV (Thin Film, Fixed), 50kW Solar Water Heater, 70kW Solar PV (HCPV, Dual Axis), 50kW US$/kWh Solar PV (LCPV, Single Axis), 5kW Solar PV (Thin Film, Fixed), 2kW 0.20 Solar PV (High Efficiency, Fixed), 50kW Est. Gas Turbines Fuel Cost (non-firm) + 6.6% losses: US$0.21/kWh 0.26 Wind, 10kW 0.27 Commercial Tariff: US$0.27/kWh Solar PV (High Efficiency, Fixed), 3kW Residential Tariff: US$0.31/kWh Solar PV (HCPV, Dual Axis), 5kW Wind, 1kW New Institutional Economics - Transactions costs and information asymmetries - Comprehensive Institutional Analysis Incomplete information, agency problems, limited access to capital 13

15 Sector Understanding to Ensure Sound Recommendations How do power and water systems work? - How is electricity delivered from generation to end user? - How do we increase access to safe water? - How can we organize transportation systems efficiently? Don t just focus on: - Renewables - Climate change These options Are sure clean Don t emit any CO 2 but Barbados shouldn t care about them for now Demand forecast, expansion plan to meet it with least-cost options (firm, non-firm) Sustainable Energy Matrix Disaggregated tariff structure: generation is not the only service you get from a utility also backup/standby, connection to grid (100) (200) Solar Water Heater, 2kW Biomass Cogeneration 20MW Hybrid PV/Thermal, 2kW Onshore Wind, 10MW Offshore Wind, 10MW Waste to Energy, 13.5MW SWAC, 2MW Solar PV (Thin Film, Fixed), 50kW Solar Water Heater, 70kW Solar PV (HCPV, Dual Axis), 50kW Solar PV (LCPV, Single Axis), 5kW Solar PV (Thin Film, Fixed), 2kW Solar PV (High Efficiency, Fixed), 50kW Wind, 10kW Solar PV (High Efficiency, Fixed), 3kW Solar PV (HCPV, Dual Axis), 5kW Wind, 1kW 14

16 Clarity of Thought and Expression... Come in Handy Anywhere, Anytime Essential: Write well Microsoft Excel proficiency The National Sustainable Energy Policy has complex stuff in it, but anybody needs to be able to understand it One can t really talk of a barrier to something that makes no economic sense no public intervention justified Apply basic principles of logic to a problem Understand basic legal principles and frameworks Desired: We had been asked to restructure customs/fiscal incentives we found out they re not even economically justified (since they address no barrier) Foreign languages (Spanish, French, Portuguese) at a professional level (speak/write) Availability to Travel Internationally Similar projects in Colombia (Spanish) São Tomé e Príncipe (Portuguese)..and many other countries 15