Commercial Development of Gridconnected and Offgrid Small Hydro Schemes

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Commercial Development ofGrid-connected and
Off-gridSmall Hydro Schemes

• Jayantha Nagendran
• Senior Vice President (Project Management)
• DFCC Bank, Sri Lanka
• Energy Week, 6-8 March 2006
• The World Bank, Washington, D.C.

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Presentation Outline

• Introduction
• Policy
• Regulation
• Design
• Implementation
• Financing
• Sustainability
• Results

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Sri Lanka

• Island nation 65,600 sq km 20 m population
• State owned, vertically integrated electricity
  utility
• Electricity demand growing at about 8 p.a.
• Access to grid presently 70 of households
• The WB GEF-assisted Renewable Energy Program
• ESD Project (1997-2002) completed
• RERED Project (2002-2007) on-going

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Business Model

• Demand driven, market based approach
• Create an enabling environment
• Address information, institutional,
  legal/regulatory and financial barriers in an
  integrated manner
• Loans on standard commercial criteria
• Smart subsidies for off-grid projects
• Technical assistance and capacity building
• Program management by an Administrative Unit set
  up within a private development bank

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Policy

• Private investments in the power sector were
  encouraged (mid-1990s) to address
• Lack of public sector investments
• Growth in demand and impending power crisis
• Inability of the utility to develop small hydros
• Utility willing to buy energy from small hydros
  consistent with its least cost generation plan
• Off-grid solutions to complement the grid or as
  pre-electrification measures
• Policy documents Rural Electrification (2002),
  Electricity Reforms (2002), PUC (2002), Renewable
  Energy (under prep)

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Regulation Grid-connected Mini Hydros (GCMH)

• Standard Small Power Purchase Agreement (SPPA)
  signed with the utility for renewable energy
  plants up to 10MW
• Transaction costs minimised
• Tariff determined on commercial principles
  (avoided cost) and announced each year in advance
• Safety net (floor price 90 of first tariff)
• Generous tenure (15 yrs, gt payback period)
• Grid interconnection standards developed through
  technical assistance

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Regulation Off-grid Village Hydros (OGVH)

• Light handed regulation in lieu of licence
• Special arrangements developed by Administrative
  Unit
• No objection letters from local or central
  government agencies land, water, forestry etc
• Central Environmental Authority clearance
• Registration of Electricity Consumer Society
  (ECS)
• Compliance with technical standards (defined by
  Project)
• All consumers are members of ECS and pay
  membership fees no sale of electricity

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Design GCMH

• Run of the river schemes, up to 10 MW
• Built, owned and operated by private commercial
  entities
• Developer identifies site utility issues time
  bound Letter of Intent after evaluation
• Standard Small Power Purchase Agreement (SPPA)
  and Tariff (SPPT) for renewable energy plants up
  to 10 MW
• Loans on market terms, based on independent
  credit assessment and access to long-term funds

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Design OGVH

• Run of the river schemes providing 230V AC power
  through an independent mini grid a typical 10kW
  scheme serves 40 HH within a 2km radius
• Built, owned and operated by the community
  through an ECS
• Technical specifications defined by Project
• Technical assistance and grant through GEF
• Loans on market terms, based on independent
  credit assessment and access to long-term funds

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Implementation GCMH (1/2)

• Non-negotiable SPPA and tariff arrangements
• A critical success factor but
• Disputes on tariff computation (no regulator)
• Interventions by Project independent review TA
  for a new policy framework
• Industry association (GCSPDA) an effective
  watchdog
• A devt bank developer joint venture pioneered
  the first ever GCMH even before WB assistance
• Vision saw business potential
• Capacity and determination to overcome obstacles
• Demonstration effect others followed

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Implementation GCMH (2/2)

• Local knowledge
• Reliable historical data on rainfall
• Local engineering capability avoided expensive
  EPC/turnkey contracts
• Developer includes technocrats in the team to
  manage projects, who receive an equity stake
  based on results
• Project cost typically USD 1.0-1.1 m per MW
• Commercial approach
• Developer identifies and secures site (LOI)
• Developer obtains all required approvals and
  signs SPPA
• Developer negotiates financing
• No subsidies, no special concessions

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Implementation OGVH (1/3)

• Awareness creation
• OGVH potential assessment survey
• Project preparation consultant responsible for
• Site identification
• Technical feasibility
• Socio-economic analysis
• Social mobilisation and society (ECS) formation
• Business plan preparation
• Statutory approvals / no objections
• Bank loan negotiation
• Assistance in procurement, construction
• Training of ECS personnel

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Implementation OGVH (2/3)

• Equity stake by consumers labour and cash
• Compliance with OGVH technical standards
• Liasion with a local testing facility (NERDC) for
  certifying turbines and IGCs (recent development)
• Regular stakeholder consultations
• Needs based TA and capacity building
• Project preparation consultants (engg design,
  social)
• Suppliers/manufacturers (quality)
• ECSs (OM, bookkeeping, general management)
• Productive applications by day

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Implementation OGVH (3/3)

• Management of ECSs
• Model constitution, org structure, bookkeeping
• Participatory management, incl tariff setting
• Consumer voice through Federation of ECSs (FECS)
• Consumer protection
• Clarify stakeholder roles and responsibilities
• Service and warranty arrangements
• Complaint investigation scheme
• Flexible management
• Learn and adapt as you go
• Tighten the screws gradually as the industry
  matures

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Financing GCMH (1/2)

• Development banks led the way
• Familiar with term lending for greenfield
  projects
• Saw business opportunity and national interests
• Innovations in managing credit risk
• Syndicate large loans to mitigate concentration
  risk
• Secure cash flows through an Escrow Account
• Schedule loan amortisation by season
• (rainfall cash flow)
• Be able to take over and transfer the project as
  a going concern
• - Mortgage of project assets and shares
• - Custody of SPPA and all licences, rights etc

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Financing GCMH (2/2)

• Negotiated on-lending terms Use competition to
  drive down financing costs
• Six banks now competing for business
• Interest rates AWDR 3-5
• DebtEquity around 6040
• Tenure 6-8 yrs including 1-2 yrs grace
• Access to long-term funds through WB credit line
  Participating banks receive 80 refinance on
  loans disbursed at the 6-month Average Weighted
  Deposit Rate (AWDR)

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Financing OGVH (1/2)

• No wilful defaulters but
• plant performance determines credit recovery
• Loan secured on project assets and personal
  guarantees only a moral obligation with no
  practical collateral value
• Banks use OGVH as an entry point to provide other
  financial services
• Provincial Councils provide supplementary
  subsidies
• Avg cost USD 1,600-2,000 / kW excluding project
  preparation fees

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Financing OGVH (2/2)

• Typical financing plan
• Equity (cash labour) 20-25
• Commercial loan 40-50
• GEF grant 20-25
• Provincial Council subsidy 20-25
• Negotiated on-lending terms
• Interest rates AWDR 5-8 p.a.
• Tenure 5-6 years
• WB credit line provided access to long-term debt
  capital for banks (80 refinance at 6-mth AWDR)

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Sustainability GCMH

• Standardised arrangements minimise barriers to
  entry
• Rule based tariff
• Credibility of utility in honouring SPPA
• Government facilitates a conducive policy
  environment, but with no role in operations
• Absorptive capacity of grid substations
• Utilitys system stability issues as of
  non-dispatchable generators increase
• Maintain a win-win situation for developer,
  utility and banks

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Sustainability OGVH

• Technical standards (safety, reliability,
  longevity)
• Capacity building developers, suppliers, ECSs
• Demand driven with equity contribution
• Consumer protection
• Cofinancing grant for off grid projects
• Transparent, measurable and output based
• Govt subsidy funds complement GEF grant
• Mainstream credit delivery a viable business
  with opportunities to cross sell other financial
  products
• Commitment and involvement of Provincial Councils

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Results 31 Dec 2005 (1/2)

• GCMH
• 79MW through 35 plants completed
• Another 67MW through 22 plants under construction
• OGVH
• 100 schemes (1,011 kW) serving 4,587 homes
  completed
• Another 47 OGVH schemes under construction
• 50 verified productive applications using
  off-grid electricity more being set up
• Solar home systems
• 83,820 homes electrified
• 600 verified productive applications (mostly
  shops)

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Results 31 Dec 2005 (2/2)

• Private commercial financing
• 2 development banks
• 5 commercial banks
• 2 leasing cos
• an MFI
• ... and more participating indirectly
• Loans over USD 75 m disbursed
• Rs 2 billion (USD 20 m) Renewable Energy Support
  Bond to be issued in 2006
• Large pipeline of projects success breeds
  success

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Contact us

• RERED Administrative Unit
• DFCC Bank
• 73/5, Galle Road, Colombo 3
• Sri Lanka
• www.energyservices.lk