Renewable Energy Investment - CSP

The scientific community is showing examples of Climate Change more than 40 years ago, giving examples concerning the existing economic growth is not compatible with the resources in earth. In concrete with the energetic model, which is not adequate, highly centralized, disrupted, unsupportive, polluting and inefficient.

The consequences of Climate Change are well known; increasing of sea level, flooding, reduced freshwater resources, health hazards, modification of ecosystems, fires, and the elevated consequences in economies with high dependence in agriculture and tourism. For more information see the report in 2007 by John Llewellyn “The Business of Climate Change – Lehman Brothers¹”.

For the reasons exposed, Climate Change is not a fad, is a topic which humanity must to include in a list of challenges; like aging, inequality between men and women or globalization. Furthermore, knowing the failure of the international community in the implementation of the measurements yet defined in the different protocols (e.g.: Kyoto).

Figure 1_Left: Example of desertification in Central West Spain, close to the city of Caceres, picture made in August 2014. On the other hand, it is possible to see protection systems for wild birds on the top of the pylon, for being an area of high environmental value_Source: Javier Sanchez Rios.

Right, location of the picture in Google Maps - at 100 km (~ 60 miles) east to the border to Portugal and 400 km ( ~ 250 miles) west to Madrid.

It is well known that a measure for reducing the impact of Climate Change is the Renewable Energies Investments. Normally, it is known these Clean Energies by Technical point of view, but for the development of the technologies is necessary to have the support of the public and private investors, to get the properly technological maturity and reduce the Levelized Cost of Electricity (LCOE).

Figure 2_ Estimated Levelized cost of Electricity (LCOE) for New Generation Resources in operation in 2019_source: U.S. Energy Information Administration, Annual Energy Outlook 2014

For developing Renewable Energy investments, it has been implemented some measurements; regulatory frameworks, definition of rules for giving to the money the security and economic performance, and a defined direction to make these investments. Of course, these conditions must be the most global and homogeneous possible, just for the moving of the capital flows, and being necessary for the transparency and credibility.

Figure 3_ Picture of the book's cover: “Las claves del éxito de la inversión enenergías renovables,” translation to english: The keys of the achievements in the Renewable Energies Investments, by José Ignacio Morales Plaza_source: Javier Sanchez Rios

The book “Las claves del éxito de la inversión en energías renovables,” in english; the keys of the achievement in the Renewable Energies Investments, published in 2012, tries to make an economic analysis of the business plan, including the technical, regulatory framework, legal, tax and risk management, in the particular case of Concentrated Solar Power (CSP), for arriving at the conclusions exposed.

The attraction of Renewable Energy Investments is not depending exclusively of a regulatory framework, and having success stories by feed-in-tariff and mixed ways by private investments with Tax Incentives by the Government. Example of that is investments in Wind Energy, which nowadays is sending great signals to the investors and keeping the promises in long-term, independently if there is an “State” which guarantees the return on the investment.
An excessive generosity – by exorbitant incentives – does not guarantee success regarding the attraction of the investments, how the past has shown, cases like Netherland in 2001 and 2002, Portugal, Greece or Ireland, which has not achieved the attraction of the investments, for insufficient credibility and / or instability.

The experience shows that the investor is looking at a system properly managed, reliable and stable in long-term.

If it is analysed the top ten countries with higher Wind Power installed; with feed-in-tariff for Europe, Power Purchase Agreement (PPA) with Tax Credit for US, or by government incentives like accelerated depreciation, subsidies and tax credits, model implemented in India, shows that the regulatory framework is not the only reason for attracting the investments to Renewable Energies.
The most important is to build permanent credibility and sustainability to the investor, and presenting an attractive proposal in terms of profitability and risk, keeping this proposal in long-term, for being trusted and to help the rest of necessary topics for establishing and maintaining this environment.

A great example is Spain, during 20 years has been a story of success, nowadays is the example of what not to do for attracting the investment to Renewable Energies. During 5 months, it was implemented changes in the regulatory frame, with changes in the feed-in-tariff – for power plants with higher capacity than 50 MW.

The changes in the regulatory frame, created insecurity and made to cancel the projects in progress by the national and international investors. These modifications eliminated Spain in the Investments in Renewable Energies portfolio worldwide. In this scenario, Spanish Administration gave a poor image of transparency, with the consequence of not supporting this kind of investments by the respective loans and insurances, being a critical part in the promotion of investments with great capital leveraging.

The confidence is an asset, an intangible which is complex to get it, but very easy to brake, just with some hearsay for making that the investments ran away to other industries and geographies that can minimize risks and to get higher returns on the investment.

Otherwise, there are more factors needed to achieve for getting a successful model, like financial depending on the technology maturity perception. As an example, for US Financial Sector in 2012, the CSP industry was not an interesting investment – for long payback periods, like it was, in the past for Wind Power or PV investments. 
After the first Utility-scale CSP project in the eighties in California – Nevada Solar One, with a Spanish promoter Acciona, and two Spanish banks leading financing (Santander and BBVA), the second CSP in US came in 2012.

Among other topics, the social awareness in the energetic model that compromises the next generations is also a point for consideration, overall with young generations, more compromised with the climate change.

In both regions (Europe & US) there are enough Industry and human resources to push growth in the Renewable Energies in long-term by a sustainable way, and even to consolidate it. For example, Middle East & North Africa (MENA) has not the qualified professionals and has not a properly developed technological industry.

Similarly, it is necessary to consider the Electric System, not only at National level, to guarantee the integration of these Renewable Energies. The necessity to the renovation and expansion for non creating a bottleneck, and being able to transmit the clean electricity generated to the cities, the big consumption emplacements, which Europe is in better position than US.

It is clear about the failure of the political classes for fixing a global and common regulatory framework for attracting the Renewable Energies Investments. The capital is not welcome to normatives, which are mandatory to know all the details in local terms for getting a conclusion in the viability of the investment. For that, it is essential to create global regulatory frameworks despite locals.

The future normative would be dynamic in front of the actual, considering the maturity of the technologies, and reviewing the regulatory framework depending of the LCOE in the different technologies, with support in the initial phase, and step by step modifying the subsidies. 
This first step, will support the technology in the process to take the plunge from the laboratory tests to the field, and in consequence, from public to private investment, and then, just being supported by tax incentives, like in the US cases. After that process, it is mandatory to create a framework to satisfy all parts, the demand (investor, funders) and the suppliers (Governments, Tax authorities). For that, it is essential to create a competitive Cost of Energy for the different Renewable Energy Technologies, to give the feasibility to insert in Clean Energy in the Electric Pool with the same level of competitiveness like other “conventional” energy resources, which in some cases are not consider all the costs (e.g.; nuclear energy and the cost of its radiology danger and long-term waste management). And in consequence, creating a real competitiveness Clean Energy for the Customer, for having a free of charge raw materials – see example with Wind Power in Spain.

Figure 4_ Map of the CSP installation worldwide_Source: European Solar Thermal Electricity Association (ESTELA) and "Asociación Española de la Industria Solar Termoeléctrica - Protermosolar

In terms of perspectives, Europe is the present of the CSP and US the future, being MENA the area of more uncertainty.

In terms of Renewable Energies Investments, and related to all different technologies, there are two examples in Europe, which is decisive to mention. First is Denmark, and the respective changed through the application of the feed-in-tariff subsidies to Green Certificates, which are related to the production in MW of clean energy with an obligation of Utilities to buy this low greenhouse gas emissions yield, but it was imperative to come back to the feed-in-tariff due to the unexpected results of the Green Certification implementation.
In addition, Spain was an example of what to do. Nowadays, the actual economic crisis and the price of Electricity, which has increased 60% from 2006 to 2012, have created a social alarm for the cost of the Renewable Energies implementation. And highlighting, the obligation to adapt the Electric Infrastructure to have the properly management of Clean Energies with a reasonable price, which at the end, is affecting the competitiveness of the economy. In this complicated scenario, and for trying to find a solution by the government, it was implemented countermeasures for trying to reduce the Cost of the Electricity. These implementations, which made changes to the law, it break the confidence in the investors with the known results.

From the financial point of view, the conclusions of the book show, that the business plan of CSP with Parabolic Through technology is giving great perspectives in Europe, despite being the Power Tower technology which has better perspectives in the future.

The studies made throughout the book – in 2012 - regarding the business plan for the main three areas, Europe, US and MENA show that the propose of Parabolic Through in Spain has the best cost-effectiveness of 12,5 with 100 % of own funds.

Figure 4_Comparison of different CSP Technologies_source: ESTELA

In terms of risks, in the European case, the risks are technical and of course, the regulatory framework. Regarding the feed-in-tariff, it is well known, among the case of Spain and Germany, where the feed-in-tariff regarding Renewable Energies has suffered a drastic reviewed. In the case of the US, the risk is related to the credit of the PPA – the credit of the signing of the PPA contract during a long-term project, being the cash flow of the PPA the resource. Then, if there is any inconvenience in the credit of the PPA during the project, it is nequired to find other partners. In MENA, the most common risks are the country risk and the currency.

The conclusions exposed in the book, revels that the worst place for investing is MENA, because the cost-effectiveness does not compensate the risks, being Europe the present and US the future. 

Regarding the optimal conditions for the investments, it is mandatory to expose the most important topics: 1) a stable in a long-term regulatory framework, being Spain the example of what is correct and "what not to do," 2) a mature monetary system with the CSP technologies, Wind and PV Power are examples of maturity in the financial system, supporting this kind of investments; it is necessary to have the same concern and maturity by the financial system for providing support to the different technologies in CSP, 3) a concerned consumer with environmental protection, this kind of technologies are reducing greenhouse gases emissions and at the same time, the dependence of third parties with the possible impacts associated on the civilian population and economy (e.g.: Ukrania - Russia conflict affecting Europe, see Figure 5 for knowing the dependence of Europe from Russia in terms of gas, or the price of petrol in the last months), 4) a basic industrial development and human resources, professionals with the minimum technological capacity and experienced required, 5) minimum infrastructure in terms of transport, needed in the development of the projects, understanding that in this kind of projects, the resource, in that situation the sun, normally are placed out of the big consumption emplacements, and it is necessary to have properly transportation systems for installing the infrastructure, 6) the required transparency throughout the process of permissions and licenses by the Administration, having clear systems and processes for helping the promoters and all the companies associated.

Figure 5_Example of a map with the gas pipelines that supplies Europe. A continent with high dependence of the Russian Gas with the exception of southern Europe which are supplied by the gas from Northern Africa, the proposal of the EU directive 2020 is to increase the interconnection of EU members to diversified the suppliers _source: Learneurope

Regarding the financial models, despite being a document-intensive, time-consuming, and expensive to consummate, which included capital intensity Utility-scale Renewable Energies Investments, the project finance has emerged as a leading way to finance large infrastructure for different reasons;

in first term, because project finance is an investment featured on long-term off-take agreements with quality-credit counterparties (e.g.: PPA in U.S., and in most European countries with Feed-in-tariff or Green Certificates). Secondly, the lender loan capital, in some cases the 100% of the project, basically, for non economical availability for the “sponsor,” developing the project with specifics risks and based on the revenues from the future cash flow of selling the electricity yield, and having the lender the position of, no recourse or limited recourse to the capital. Furthermore, for equity investors, project finance model can maximize equity returns, protecting key assets and monetizing tax financing opportunities – case of U.S., with Tax Incentives, by Tax Deduction or Tax Credits; Investment Tax Credit (ITC) or Production Tax Credit (PTC).

In the project finance in power generation context, mostly in Utility-Scale Wind, PV or CSP farms, the revenue is generated from a PPA with the most closed Utility at the point of interconnection to the electric grid. Therefore, is important to check the creditworthiness of the Utility, to reduce the possible impact of default or bankrupt, being PPA a long-term contract.

At the same time, lenders receive assurance of the project's ability to repay its debt by focusing on commodities, collateral values, and the income to be produced based on historical projections changed to the present, because the “sponsor” has only responsibility in the debt of the project, but not in terms of corporation. Another important point regarding “Sponsors,” in terms of revenues, is that the “Sponsors” are able to recover development costs at the closing of the project financing, and put their money into other projects, in terms of internal rate of return, this can increase once the project is fully leveraged.

Regarding lenders, one prerequisite for project financing is the conditions of the enough revenue stream – cash flow generated by electricity yield from the farm - to support a highly leveraged debt financing, which normally is less than US$100 millions.

In terms of risks, about technology risk, normally lenders do not want to support a project which the technology is relatively new or cutting-edge, for being an untested technology, in case of CSP, Solar Tower, Liniar Fresner or Dish-Stirling, are not being supported like Parabolic Through by financial statements. On the other hand, regarding risk to the project, if the project financing is completed, and in case of the project becomes uneconomic and with no possibility to service its debt, the “Sponsor” must turn over the project to the lenders, to sell it or operating it until the debt is repaid.

Similarly, it is necessary to mention that, project finance has other applications. In non-power generation context, the revenue is coming by capacity purchase agreement (e.g.: case of transmission lines), by production sharing agreement (e.g.: in the case of Oil & Gas field), or by operating agreement (e.g.: toll in roads or highways).




In conclusion, Renewable Energy investments are not a fad. It is not a chance that great investment banks have part of the investment portfolio in Renewable Energy. 
This kind of investments are a safe haven, in case of fluctuation, like it happened to the price of petrol in the last months - see Figure 6. 
Due to the nature of Renewable Energies, for using a free of charge raw material, the cost of generation can be reduced. Firstly, for the optimizing of the technology, it is well known the decreasing in the price of the photovoltaic cells and in consequence, the cost of the photovoltaic panels, being nowadays the inverters the most expenditure in a project of PV farm, which in the past it was PV panels. In second term, with the correct management of the Operation and Maintenance (O&M), which is basically the most important topic in the reduction of the cash flow generated with the selling of the electricity yield. It is essential to mention that some companies are exclusively dedicated to optimize the O&M, controlling the company assigned to the project, for giving an assurance to the lenders whom the farm is operated at the maximum yield. Skytron is a company which gives that service, monitoring the PV farm, for watching it and solve whatever issue in the yield for having the maximum capacity to sell the electricity yield and then, to increase the cash flow of this long-term high leveraged investment. 

Figure 6_In the left, indication of Renewable Energy investment which nowadays are representing a tenth of the global power generation and it will be around fifth by 2030. In the right, the Cost of Power Generation in $ for different resources_source: Economist

In future, customers - Millennials or Generation Y, will demand this kind of energy generation with no greenhouse gas emissions, for creating local jobs and revenues. In case of some countries with no "conventional" energy resources, like most European countries, Renewable Energies are part of the Strategic Plans for reducing the dependence of third parties and its possible consequences - e.g.: conflict between Ukrania - Russia.

Notwithstanding green economy has brought great improvements. Some experts are critics with the cost of this energy. It is important to mention some countries in Europe, which has been pioneers in the development of Renewable Energies in its economic plans (e.g.: Denmark, Germany and Spain), nowadays are suffering a high cost of its electricity and in consequence, reducing its competitiveness. Accordingly with this premise, a movement is emerging, a movement called "The Blue Economy," which is proposing an economy where the result of every different operation process, will be used by another process to close the cycle, the properly application of waste.

It may be the green economy, and its energetic model can be improved. Nevertheless, what is known nowadays, is simple, the current model has no continuity? The greenhouse gas emissions and the climate change are increasing, and by the implemented model, in 2050, the humanity will need three Earth planets to maintain the actual activity. 
Consequently, the humanity lives in a limited resources world, and is mandatory to find a solution, to find an energetic model, which is depending the economic and social activity, with the minimum environmental impact. To put in motion this brand new model, is mandatory to investigate and develop these fresh ideas, with the support of the public and private investments.
25 years ago, it was impossible to think about the actual situation for PV industry. Nowadays, nobody doubts about this technology as part of the Energy portfolio. 
Similarly, as it has been implemented with Wind Offshore, the development of Renewable Energy - PV & CSP - projects, connected with the SuperGrids in Sahara desert - see Desertec Foundation proposal, and the capability for the development for North African countries, with the reduction of people who are going to faith with radical groups for non having possibilities to develop any kind of prosperity. And consequently, creating local jobs and the development of the "Smart Rural" emplacements, to complement Smart City, with desalization plants and the development of the agriculture and distributing regional products reducing the greenhouse emissions, with the actual model, bringing food from other parts of the planet with its environmental impact in terms of generation of emissions, and creating a win-to-win relation and dependence from South Europe and North Africa.

Figure 7_Desertec Foundation project, for developing with SuperGrids an interconnection of the different Renewable Energy Technologies to create a interdependent Energetic model of Europe - Asia and Africa.

¹ “The Business of Climate Change – Lehman Brothers¹”, by John Llewellyn (2007). An study of the opportunities and tendencies in the different industries by the consequences of Climate Change; Automotive and the perspective of Electric Vehicles  - e.g.: Renault – Nissan group, Aviation Industry; fuel alternatives and the improvement of engine efficiency, Capital Goods: opportunities for Energy Generation and Water Treatment, Chemicals; with opportunities in low emissions manufacturing process, new materials, carbon capture and biotechnology, Bank with risks of having lower level of economic activity in general, for commercial bank the quality of credits will be also to have in consideration and by geographically point of view; floading in Netherland and desirtification in Iberia. Other industries like Health Care, will have great opportunities with the increasing of diseases, overall respiratory diseases.

Related Blogs:

Electric Systems Challenges, Wind Power Over production, Supergrids - Future of the Electric Systems