System Analysis and Appraisal

Contents

*  Financial Analysis

*  Technical Issues

*  Environmental Impacts

*  Social Issues

 

Financial Analysis

Financial Assumptions

The major assumptions made in developing the financial analysis of the project are given below:

 

·         The financing spreadsheet was obtained from the DTI at http://www.dti.gov.uk/renewable/pdf/Financing_Guide.pdf.

·         Corporation tax at 33%

·         Base lending rate at 6.5% for duration of the project plus 2% lending fees

·         Inflation at 2.5% for the duration of the project

·         CHP costed at £1,400 per kW installed.  This information has been developed from the CHP Club website at http://www.carbontrust.co.uk/energy/startsaving/tech_chp_CHP_club.htm.  Useful information is also provided in DETR Good Practice Guide 234 – Guide to Community Heating and CHP” which can be ordered at www.bre.co.uk/brescu/.

·         Willow costings are based on figures from the Scottish Agricultural College at                www.sac.ac.uk/management/External/diversification/Energy/shortrotationcoppice.htm

·         Energy data pertaining to CHP fuel is available at www.ecn.nl/phyllis/

·         Hydro costings are based on figures at the www.smallhydro.com/more.html.

·         Wind costings were based on information on the turbine manufacturer website at http://www.nordex.dk/.  Additional information was also gleaned from the National Wind Power site at http://www.natwindpower.co.uk/ and the Danish Wind Association website at www.windpower.dk.

·         District heating scheme is costed on figures received from Shetland Heat & Power Company and is costed for 7km of feed line. 

·         The cost of improvement to building fabric is not included in this project as it is assumed that this would come from alternative funding arrangement

·         Depreciation of plant is straight line over the life of the plant

·         This is assumed to be 25 years

·         The loan repayment period is 14 years which was suggested in the www.DTI.gov.uk website

·         Electricity which is surplus to the needs of the village can be sold under NFFO contract to the grid

·         The ratio of debt:equity is manipulated to achieve a gearing ratio of 1.3 (or just above)

·         Energy sales to the village are priced at current average UK price and factored each year for inflation rise.

·         All technologies have factored in the cost of connection so it does not appear as a single item on the sheet.

Summary of Major Findings

 

 

Property

Result

Total Project Cost

£14.373m

Total Borrowing

£8.624m

Total Equity

£5.749m

Cost of Energy

5.52 p/kWh

Cost per kW

£2245

Payback Period

11.9 years

 

 

 

 

 

 

 

 

 

Financial Statement

 

 

 

Possible Financing Routes for Renewable Energy Schemes

As with the project described in the case study, most renewable energy schemes are highly capital intensive and require the developer to raise large amounts of finance in advance to the start of operations.  There are generally 4 possible routes available for financing a project:

·         Use of bank loans secured against other parts of the developer’s business or major assets.

·         Co-development of the project with a financially strong joint venture partner

·         Limited recourse project financing whereby bank loans are secured largely against future cash flows

·         Use of internal company or personal reserves or obtaining funds from friends and business associates.

The two most likely options are on balance sheet finance or limited recourse.  Both typically use bank loans to provide the majority of the capital but it is the lenders security arrangements that differ significantly between the two routes.

 

Factors which affect the financing decision

Do the developer/sponsors have the financial wherewithal to provide the full financing requirement from within their own resources, or do they wish to use then for the project?

Is the magnitude of the potential financial obligations such that, if the project was a failure, there would be serious damage to the financial health of the developer?

Are there specific project risks with which the developer is not comfortable and desires to see laid off in a structured manner to third parties?

Are there a number of developers/companies with different financing requirements involved in the project?

Is the project in a non-core business segment for the developer?

Is the size of the project too small to attract the interest of project finance lenders, who are unlikely to consider a transaction where the debt component is less than £10 million?

 

Suggested finance route for Lochgilphead case study

There are two possible routes available for costing of the Lochgilphead project.

 

Option 1: Limited Recourse Project Financing

The project costs are split between 2 or 3 sources.  These would be lenders, equity providers and possibly subordinated debt.  The latter refers to the possibility that equipment manufacturers would effectively accept on-balance sheet finance arrangements for the purchase of their equipment.

For this to be successful, firm contracts would have to be in place with all major project participants:

Fuel suppliers, equipment suppliers, construction contractor, project operator and consumers.

The chart below indicates the likely structure that would be adopted to facilitate the project given this financing method.

However, the Lochgilphead project is extremely highly geared and would require significant equity to be available for the project to be viable. 

Equity levels of 40% would be required to see the coverage ratio in the 1.35 to 1.6 band in favour with major lenders.  This would make the project high risk.  Either that or the revenue generated would have to be increased to increase cash flow levels.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Figure 1: Suggested Structure of a Limited Recourse Funding Option

 

 

Option 2:  Co-Development

An alternative is that a co-developer could be found to whom an interest (in whole or part) in the project would be sold.  Such companies may be the existing PES or waste disposal company.  With this approach, the developer would be responsible for the initial phase of the project i.e. detailed feasibility study, after which control would transfer to the co-developer.  They would then be responsible for the choice of route.

 

Most Likely Route

Limited recourse funding takes skill, energy and time.  If this skill is contained in the project team then it is possible that this route can be taken.

 

However, it is more likely that co-development will be the most efficient route.  It may see some of the social initiatives of the project being diluted by the need to meet big business payback requirements.  Providing some interest can be maintained in the project by the initial group some of these benefits can still be accrued.

Grants and Subsidies

The European Union has placed a great emphasis on the deployment of renewable energy in future energy requirements in Europe.  This is largely to meet Kyoto requirements but also to address local regeneration and fuel poverty issues.  As a result there are a number of grants and subsidy available to developments in this area.  A brief summary of these is given below.  Further information is available from the Europe website:

Subsidies are also available for the deployment of renewable technologies.  The amounts available for this are project specific but up to 30% of capital costs of a project of this nature can be covered under the ALTENER 100 Communities program.  Further details can be obtained at http://europa.eu.int/en/comm/dg17/altcalbr.pdf.

 

A focus on biomass grants and subsidies is summarised below:

Focus on Biomass

In Europe a large number of financial regulations is available to stimulate bio energy and other renewable energy initiatives.

Examples are subsidies, advantageous tax-rates and low-interest loans. Novem and Pi!MC have produced an overview of all of these resources: "The European financial guide for renewable energy, with a special focus on biomass". This guide was made on behalf of the European Commission, Directorate General for Energy, DG XVII, and financed within the framework of the European Commission Altener programme.

Objectives

The aim of this guide is to help finance European bio energy projects and other renewable energy projects. Renewable energy plays a key role in sustainable development targets of the European Union and its member countries. Bio energy is one of the most potential renewables. As renewable energy is often more expensive than traditional energy, several financial incentives are brought into action in order to change this. The European Financial Resources Guide provides a clear and easily accessible overview of all these incentives. This guide assists project developers in improving the economic feasibility of their initiatives.

 

Contents

The guide includes financial incentives offered by the European Commission, national governments and regional authorities.

Furthermore, funds offered by banks and other financial institutions are included.

 

Means of financial support included in the guide:

 

 

 

 

 

 

 

 

 

 

Sources of Information in the UK

In the UK, there are grants for equipment, machinery, advice, associated woodland management and establishment under schemes such as the Farm and Conservation Grant Scheme (MAFF), Countryside Stewardship (Countryside Commission), and the Woodland Grants Scheme.  The Woodland Grants Scheme (WGS) has its own guidelines.  Details from the Forestry Authority (Conservancy Office or the Grants and Licences Division).  Arable producers who have land eligible for the Arable Area Payments Scheme can grow SRC on set-aside land. Details from MAFF local offices, Scottish Office Agriculture, Environment and Fisheries Department, Welsh Office Agriculture Department (WOAD), or the Department of Agriculture for Northern Ireland.  Specific incentives may be available in designated areas such as National and Community Forests. Details from the Countryside Commission.

Focus on Hydro

The Non Fossil Fuel Obligation

There is a programme for the subsidising of renewable energy (including small hydropower under 5 MW installed) known as the Non-Fossil Fuel Obligation (NFFO), which applies to England and Wales. Similar programmes are run in Scotland (SRO) and Northern Ireland (NINFFO). So far as hydro is concerned these programmes have resulted in the building of 33 small plants to date with a total installed capacity of 20.8 MW. There is no programme for subsidising hydro greater than 5 MW installed.

 

All the renewable energy programmes are funded by electricity consumers through the fossil fuel levy. This is, in effect, a tax on the producers of electricity from coal, gas and oil, which is inevitably passed on to their consumers in the price of energy. it is important to make this point – that it is not taxpayers as a whole who pay for the additional cost of renewable energy. The levy was about 11% of the producers' selling prices for the first 7 years after privatisation, since more than 90% of it was expended on nuclear electricity. Since part of the nuclear industry has been privatised in 1995, the levy has been reduced to about 3%. It is still used to subsidise the part remaining in the Government's hands, together with the additional payments made for renewable energy.

 

The Non-Fossil Fuel Obligation has been introduced in a series of phases, the fourth of which is approaching completion. Developers of hydropower schemes, and other forms of renewable energy, submit proposals for projects with a price for the energy produced. Contracts are then offered on a competitive basis once all the bids have been submitted. The Government decides the upper threshold price for each technology in each successive round. All schemes below this price are awarded a contract provided they can obtain the necessary authorisation from regulatory authorities for abstraction of water and for planning permission. The UK Government places strong emphasis on competition and the requirement for the price of new and renewable forms of energy to converge with the price produced from existing fossil fuel generators. The process is designed to stimulate cost reductions in renewable forms of energy. This has proved difficult for hydropower because of limited opportunities-for savings in capital costs. The main advantage the system has is the prospect of a guaranteed fixed price contract for a period of 15 years, with a 5 year planning window.

This policy has stimulated the development of small-scale hydro in the UK and provided a mechanism for developing other forms of renewable energy.

 

Government Policy and Licensing

The U.K. Government does not discourage hydropower development and indeed claims the converse. However, the process described is rather bureaucratic and is an expensive gamble for the small developer, as experience indicates that no more than one in three bidders is successful.

 

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Technical Issues

 

It has come to our attention through the Local Supply Authority that for embedded generation in the
Kintyre Peninsula area the 132 kV line is highly subject to thermal instability. Hence in order to avoid that the line could either be up-graded / reinforced or a non-firm connection would be accepted. 

In order to guarantee revenue, large-scale renewable energy projects in the Kintyre Peneinsula would only proceed if the line was re-inforced.   The substantial costs associated with this could be deferred by investment in significant small-scale deployment with connection to 11 and 33kV drops.  The PES estimate that up to 75MW of embedded generation can be located in the Kintyre peninsula.  Investment in this technology at this scale would deliver significant social benefits in the region, which are expanded upon under Social Issues.

It is prudent when installing any power system to which a renewable energy system is no exception to consider technical issues as security and quality of supply. The voltage and the frequency should be with limits to maintain common standards and consumer requirements; the voltage should be within ± 5 % and the frequency ±2 %.

Issues relating to harmonics, voltage limits impact on the network may all make connection of such generation technically complex or cost prohibitive.

 

In order to minimize these problem generators with automatic control system, which react to demand variation should be employed.

 

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Environmental Impacts

Environmental Considerations

Unlike large-scale hydro schemes, some of which have proved environmentally disastrous, small-scale systems cause far less disturbance. With proper management any ecological effects are negligible. It is important to consider other users of the watercourse: a sufficient level of flow should be maintained along the section over which the water is abstracted; a safe passage for fish may be required - possibly through the provision of fish ladders. Before installing a hydro scheme, a number of consents and licences may be required from the relevant authorities. In most cases the Environment Agency will charge a small one-off fee for the abstraction of the water; and the Local Authority may require Planning Permission.

Biomass absorbs carbon dioxide during growth, and emits it during combustion. Therefore, it "recycles" atmospheric carbon and does not add to the greenhouse effect. Low levels of sulphur and ash prevent biomass from contributing to the acid rain phenomenon. Nitrous oxide production can be controlled through modern biomass combustion techniques. The environmental impacts associated with wind farms are visual impact, noise, birds and land use. But at small-scale levels coupled with technological advancement the impacts are drastically minimised.

There are two principal concerns regarding the CHP plant as designed.

Dioxin Release

There remains an issue surrounding the release of dioxins during the incineration of MSW.  This, however, is refuted by the industry that claims to have the ability to scrub the air in the smokestack.  Many incineration schemes, much larger than that proposed for Lochgilphead, have been in operation since the 1970’s with no adverse side effects found.

Land Use

The area of willow required will be 199 ha.  This should not present a major problem in an area where 700ha of Norwegian spruce is harvested every year.  The increase in logging traffic should be minimal.  The willow would be grown within 40km of Lochgilphead. 

Survey on Wind Turbines

 

The two following graph analyze the environmental impacts and socio-economic effects of the implementation of a wind farm in the neighborhood of a small village. 

 

 

 

 

This first bar chart shows a survey on the environmental effects of a wind farm. The actual effects are always far less important than they were thought to be.

 

 

 

This second graph shows the economic and social effects of the implementation of a wind farm. As expected electricity is supplied locally and the pollution is also reduced but on the other hand the effect on the price of electricity is very small compared to the effect expected. Only half the jobs expected to be created actually materialized.

 

General Environmental Statement

The global impacts of a marked increase in renewable energy usage have potentially profound benefits and consequences that will affect both the global environment. The current global warming trend caused by greenhouse gasses truly threatens almost every aspect of natural life that we can imagine. A global effort to reduce the trend must include a diversion from dependence on traditional fossil fuels, such as coal and oil, to a more integrated approach utilizing renewable energy technologies.

 

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Social Issues

a) Employment Creation

 

i)                   Biomass

Survey conducted by British Biogen found that 4.2 jobs would be created by biomass fuelled CHP plant per MW installed.  This figure was substantiated by the experience of Border Biofuels who are actually employing 4 people for every MW of plant installed in Carlisle.

It was consequently assumed that the Lochgilphead project, with 4.5MW CHP capacity, would employ 18 people.

 

ii)                Hydro, Wind and Total Project Control

These are grouped, as they are unlikely sources of long-term employment.  The project estimated that 1 person would be employed to maintain each and 1 other to provide control and oversee the total project

 

Total Long-term Employment - 21

 

b) Other Social Issues

No other effects of small-scale deployment were measured during by this project.   The benefits accrued to small-scale deployment are covered elsewhere on this website

 

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