Rural ElectrificationSolar in Mindanao – A Social Business Model                                              Global Envir...
Team Members: Danielle Carille   Lindsey ClarkEsperanza Garcia   Sarah FacklerErin A. McNally  Stefano Vrespa      2
Rural Electrification                                        4   Solar in Mindanao – A Social Business Model              ...
Rural ElectrificationSolar in Mindanao – A Social Business Model e following is an investment proposal for GE to invest i...
is investment is strategically relevant for GE and its Southeast Asian operations since thePhilippines has committed to a...
Social businessA new kind of capitalism e proposed project embraces the idea of social business as pioneered by professor...
Clean Development MechanismEnvironmental market power e Clean Development Mechanism emerged from the Kyoto Protocol in 20...
is type of CDM would provide the financial incentives necessary to make our individual projectscost effective, as well as ...
On-Grid, Off-Grid Financial ModelHow to make a financially sustainable social business.  A cash-flow analysis has been cond...
e off-grid system                  Using the information provided by the Philippine Solar Power Alliance – the average num...
Combined Model Other major assumptions that drove the overall financial results are: straight-line depreciation forthe on-...
160.00                                                                  14                                   140.00       ...
Risks and Mitigations  Risk Assessment In addition to the various uncertainties that may affect the accuracy of our financi...
substantial. Additional environmental risks includea variety of natural hazards, such as earthquakes,landslides, tropical ...
Contract Negotiations orough contract negotiation will allow the sharing of business risks with associated partners.Such ...
ConclusionsLeading business innovation Other multinational companies, including Danone and BASF, have engaged in social bu...
Sources1. Senate Economic Planning Office – Electric power at a glance, 2005 – http://   www.senate.gov.ph/publications/AG%2...
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Sustainable Solar Business, 2012

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Sustainable solar business investment in Philippines for a Sustainability management Class.

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Sustainable Solar Business, 2012

  1. 1. Rural ElectrificationSolar in Mindanao – A Social Business Model Global Environmental Markets Spring 2012
  2. 2. Team Members: Danielle Carille Lindsey ClarkEsperanza Garcia Sarah FacklerErin A. McNally Stefano Vrespa 2
  3. 3. Rural Electrification 4 Solar in Mindanao – A Social Business Model 4Social business 6 A new kind of capitalism 6Clean Development Mechanism 7 Environmental market power 7On-Grid, Off-Grid Financial Model 9 How to make a financially sustainable social business. 9Risks and Mitigations 13Conclusions 16 Leading business innovation 16Sources 17 3
  4. 4. Rural ElectrificationSolar in Mindanao – A Social Business Model e following is an investment proposal for GE to invest in the construction of solar plants to meetunmet demand of both on-grid and off-grid electricity customers in the Philippines. Energy and energy infrastructure is at the core of GE’s success “Solar energy is the most potentialas a multinational corporation and GE’s history in the and appropriate solution to the powerPhilippines dates back to the 1890s, which puts the company crisis in the island.”in a prime position to participate in the projected growth of the Senator Edgardo Angaracountry’s electricity market. e power problem in Mindanao, one of the three main islands in the Philippines, has beenneglected for years, and today, the region suffers from a 160 MW power deficit where residentsexperience power outages of at least two hours a day. In addition, the current energy grid reachesonly 82% of the 94 million people in the Philippines. Demand for power in Mindanao is projected to increase for the foreseeable future and as such isconsidered the fastest growing energy market in all of Southeast Asia. Despite this, no significant power-generating capacities are expected to be added to the grid withinthe next two to three years. is important yet unaddressedproblem presents a tremendousopportunity for GE to undertakea form of social business thatoffers solutions for these issues. e proposed social businessmodel will achieve the dual benefitof gaining first mover advantagesin the renewable energy market inthe Philippines and participatingin the international carbon offsetmarket. 4
  5. 5. is investment is strategically relevant for GE and its Southeast Asian operations since thePhilippines has committed to an ambitious renewable energy target of 50% under its RenewableEnergy Act by 2030. is Act is highly championed by experts as the best renewable energy law crafted in Asia, and thetotal additional power requirements are expected to rise to a new capacity of 4,100 MW by 2017. With increasing energy demand and a skyrocketing cost of electricity (power cost in the Philippinesis 75% more than Korea’s $0.08/kWh, 100% more than Malaysia’s $0.07/kWh, and 180% morethan Taiwan’s $0.05/kWh), the Philippines has recognized that it is crucial to invest in and welcomeforeign investment in the development of renewable energy initiatives. Solar power plants could be deployed in amatter of months instead of the years it wouldtake to build a conventional fossil fuel plant.Along with the minimal impact of solar on theelectricity rate, we believe that solar is the bestoption to help address the above issues. GE – a corporation that has always been at theforefront of the worldwide energy market –should take advantage of the opportunity to enterthe growing local Philippines electricity market aswell as the international environmental carbonoffset market by implementing an innovativesocial business model.   5
  6. 6. Social businessA new kind of capitalism e proposed project embraces the idea of social business as pioneered by professor MuhammadYunus. is type of business model is a non-loss, non-dividend model devoted to solving both a social andan environmental problem that have been identified in the Philippines: the need to electrify off-gridrural barangays and reduce greenhouse gas emissions by transitioning to renewable energy sources. To achieve this, our model entails theconstruction of two 5 MW on-grid power plantson the island of Mindanao to confront unmetenergy demand that will otherwise be met withfossil fuel generation. e project’s profits will be reinvested in ruralelectrification through the construction of smalloff-grid micro scale plants. A social business must be self-sustaining, andhence all profits from power generation andenvironmental market participation from both on-grid and off-grid plants will be used to buildadditional off-grid plants. e structure of the model provides a unique opportunity to identify and engage GE investors whoare interested in social investment and willing to recoup only their initial investment with no receiptof dividends. e project also has the potential to be a partnership with GE Foundation. e project will also allow us to generate certificates through the UNFCCC’s Clean DevelopmentMechanism (CDM), which will be discussed in the following section. e sale of these certificateswill have a significant impact on the scope of this project and will help us break into theinternational environmental market place. 6
  7. 7. Clean Development MechanismEnvironmental market power e Clean Development Mechanism emerged from the Kyoto Protocol in 2007 as the new optionto facilitate investment in climate change mitigating projects. It is intended to meet two objectives:(1) to assist non-Annex I countries in achieving sustainable development and (2) to assist Annex Icountries in achieving compliance with their emission reduction goals and targets through CertifiedEmission Reductions credits (CERs). ese credits can be generated through participating in a number of qualified emission reductionprojects in developing countries. ese projects, typically including renewable energy, energyefficiency, and fuel switching, open new avenues for rural electrification. Under the classical structure of CDM,projects’ registration and verification isconducted on a project-by-project basis. e high transaction costs, lengthyprocessing time, and registration risks areall concerns that have been expressedregarding CDM. In addition, the averageproject size and associated energy marketfor less developed countries (LDCs),which further increases the relativetransaction costs associated with eachindividual project. ese factors further increase the cost to apply for a CDM project under the classical structure andas such, the CDM Executive Board launched a “Programme of Activities” methodology – alsoknown as Programmatic CDM – to expand the applicability and reduce the transaction costs. is is achieved by allowing a Managing Entity to define broad parameters for a group of similarCDM project activities that are included under one umbrella – the Program of Activities – and thusrequiring only one registration as a CDM project. 7
  8. 8. is type of CDM would provide the financial incentives necessary to make our individual projectscost effective, as well as provide the flexibility necessary to add individual rural electrification plantsyear after year. Just as with traditional CDM, the projects need to prove that the generated carbon emissionreductions are additional and would not have occurred under a business as usual scenario. ecertificates are only realized through the projects existence, so GE will continuously accrue CERsover the life of the social business. To determine additionality, we used the benchmark approach to establish our baseline emissions. As required by the CDM, each project must use an approved methodology to determine existingpre-project emissions and monitor ongoing emissions once the project is up and running. For the on-grid consumers we used, as a baseline scenario, a 300 MW coal power plant recentlyendorsed by the Davao City Council. In determining the off-grid baseline, we used the rural electrification methodology. ismethodology outlines several requirements, such as 75% of consumers have to be households andeach project has to be less than 15 MW total, and is based on the number of facilities electrified, thegiven emission factor and the total number of solar plants installed. e primary market uncertainty lies in the Philippines’ designation as an LDC: due to the currentPhilippines GDP growth rate it’s possible that in the next few years the country will no longer belisted as an LDC. As long as the Programmatic CDM is approved by the CDM Executive Board while the Philippines is still considered an LDC, any projects under the PoA that are constructed after any potential country designation change will still be eligible to generate CERs. erefore, in order for this project to qualify under CDM as it has been proposed, the Program of Activities would need to be registered by the Managing Entity, aka GE, before the end of the year. 8
  9. 9. On-Grid, Off-Grid Financial ModelHow to make a financially sustainable social business. A cash-flow analysis has been conducted to evaluate the feasibility of the social business modelproposed and, thus estimate the potential impact of the project on the electrification rate of the ruraloff-grid barangays. e financial model includes two different systems: the two on-grid 5 MW solar power plants; andmultiple 100 kW off-grid solar systems each supplying one barangay. All financial assumptions for both on-grid and off-grid projects, for as long as the solar plants’operational life (20 years), can be found in the tables on page 10. e on-grid system e cost per MW installed is assumed to be roughly equal to $3.5 million (including hard costs,soft costs and yearly O&M). e main revenue stream is generated from the on-grid electricity sales at the price of $0.52/kWh(1, 2), which includes the feed in tariff ($0.34/kWh), a policy mechanism that is employedunder the Philippines’ Renewable Energy Act to accelerate investment in renewable energytechnologies. is is achieved through the offering of long-term contracts to renewable energyproducers at a preferential price. As a CDM project, additional income will be generated through the sales of Certified Emission Reductions (CERs). e amount of avoided emissions is calculated assuming the solar system will offset emissions from a new coal plant, which has been approved for the Davao region (3). e following assumptions were used: average grams of CO2 equivalents emitted per kWh generated (900g CO2 equiv./ kWh) (4), CER floor price of ~$5 (5). 9
  10. 10. e off-grid system Using the information provided by the Philippine Solar Power Alliance – the average number of households per barangay (200) and the maximum daily electricity consumption (3 kWh/day) – we were able to determine the off-grid system capacity, its cost, and the average amount of electricity dispatched per household (2.4 kWh/day). On-grid datanumber of power plant 2Plant size (GE) 5 MW To further foster the number of off-grid systemscapacity factor 20% installed, we considered two additional revenues.kWh produced 17,520,000 kWh/Yearhours 8760 e first is generated by the sale of electricity toCER price ($) 5.14 $Coal plant average CO2 em. 900 g/kwh the rural households at a rate 50% lower than theAvoided emissions 15768 Tons CO2 eq/yearMin CER Revenue 81,093 $ current market price ($0.09/kWh). is incomeCost per plant $ (16,190,373.93) will cover the O&M expenses for each off-gridTotal cost $ (32,380,747.87)CDM Approval Cost $ (40,000.00) system.Operating Cost $ (1,019,971.65)Average national price $ 0.18 e second source of revenue will be generatedFIT tarif $ 0.34Degression Rate 6% upon the recognition of the off-grid project as aAnnual Growth in Price 4%income tax 32% programmatic CDM and upon the likelihood of selling CER credits on the European market at a price at least equal to the price floor previously identified. To quantify this extra source of revenue we determined the total amount of CO2e displaced with the UNFCCC methodology: Electrification of Off-grid data rural communities using renewable energy. (6) average energy provided per household 2.4 KWh/day/household average barangay 200 households Plant size (GE) 100 Kw Since the cost of the off-grid system is capacity factor 20% assumed to be proportional to the per MW hours 8760 kWh produced 175200 KWh/year cost of the on-grid system, the total number CER price 3.6 euro CER price ($) 5.14 $ of off-grid systems to be constructed is Cost per plant $ (323,807.48) Operating Cost $ (10,199.72) determined by the overall net income that can CDM Approval Cost $ (15,000.00) be reinvested in rural electrification. Average national price $ 0.18 Price $ 0.09 FIT tarif $ - Annual Growth in Price 4% income tax 32% Cost per household/year $ 78.84 10
  11. 11. Combined Model Other major assumptions that drove the overall financial results are: straight-line depreciation forthe on-grid and off-grid system and a 7 year tax exemption for the on-grid power plants under thePhilippine’s Renewable Energy Act/ NREB (7). e significant impact that the tax exemption has on our net income is apparent in Figure 1 wherethe trough of off-grid plants is found when the tax exemption is over in 2020. We also factored inthe full repayment of the ~$32 million in principal received from investors over the 20 year life ofthe project with no interest or dividends. e cash-flow and NPV analysis was conducted over 20 years at which point the on-grid plantswould no longer be in operation. ree different scenarios were considered to comprehensively evaluate the impact of the overallproject on the social and environmental issues previously identified. ese scenarios differ in the amount of retained earnings for on-grid reinvestment at the end of the20 years: (1) no on-grid reinvestment, (2) replacement of 1 on-grid plant or (3) replacement of bothon-grid power plants. In all scenarios we broke even and the project was economically viable. We included the first scenario to try to evaluate the maximum potential impact on the ruralelectrification rate. is case assumes that at the end of the 20-year lifespan of the on-grid plants, allof the barangays will be connected to the grid and the social business as we initially conceived won’tbe necessary anymore. At this point, the parameters and goals of the social business would either beadjusted and re-evaluated or GE could decide to shift their focus to a “for-profit” renewable energybusiness. We suggest pursuing the first scenario to foster GE’s position into the Southeast Asian energymarket as the leading socially responsible company by helping to improve the electrification rate ofthe Philippines. is will help us gain a privileged position in the marketplace to ensure a future“for-profit” position in a country that is well on its way to becoming a developed country. 11
  12. 12. 160.00 14 140.00 12 120.00 10 Total Off-Grid Plants New Off-Grid Plants 100.00 8 Off-Grid, 1 plant r. 80.00 Off-Grid, 2 plants r. Off-Grid, no reinv. 6 New Off-Grid plants 60.00 4 40.00 2 20.00 0.00 0 2010 2015 2020 2025 2030 2035 Figure 1: off-grid systems installed per year and overall trend 20000 18000 16000 14000 Tonnes of CO2 eq. avoided 12000 Off-Grid, no reinv. 10000 On-Grid Off-Grid, 1 plant r. 8000 Off-Grid, 2 plants r. 6000 4000 2000 0 2010 2015 2020 2025 2030 2035Figure 2: Tons of CO2 equiv. avoided under different scenarios for the on-grid and off-grid 40000 35000 Total Tonnes of CO2 eq. avoided 30000 On-Grid 25000 Off-Grid, no reinv. Off-Grid, 1 plant r. Off-Grid, 2 plants r. 20000 15000 10000 2010 2015 2020 2025 2030 2035 12 Figure 3: Total Tons of CO2 equiv. avoided under different scenarios.
  13. 13. Risks and Mitigations Risk Assessment In addition to the various uncertainties that may affect the accuracy of our financial model, adiversity of risks associated with investing in the CDM market and installing both off-grid and on-grid solar power plants in Mindanao exist. e CDM-specific risks address licensing and regulatory,political, as well as market and financial considerations; while project specific risks addressenvironmental, climate change, as well as operations and management considerations. CDM-Specific Risks Licensing and regulatory risks are associated with every stage of a CDM project. e greatest riskto the viability of our project is the potential to not gain approval late within the project cycle. iscan happen even after a contract for the sale of CERs has been entered, and will result in the loss oftransaction costs. e risk of project delay is also common to the registration phase, as baselinemethodologies must often be revised. Due to the lack of a concrete system for years after 2012, theallocation of CERs may be reduced at any time. In this sense, the 21-year crediting period of ourproject presents an additional challenge. Political risks encompass those concerning the control of the Philippine government. ese mayinclude: failure to obtain national approval for CDM, regulatory changes in economic and energy-related policies related the baseline of the project, or the introduction of a feed-in-tariff or CER tax. e myriad of risks associated with the CDM market is largely due to its immaturity, and resultingprice uncertainties. For example, the future market price may substantially increase relative to thecontract price at any time, but it is expected that this uncertainty will decrease as market liquidityincreases. Further financial risk presents itself in the use of local currency for sale of CERs, which isespecially high for the Philippines due to the recent depreciation of the peso. Finally, the uncertaintyof the Philippines’ status as an LDC country threatens the viability of the entire project, as it maysoon no longer be able to apply for CDM status. Project-Specific Risks e predominant environmental risk to the installation of a solar power plant is that of insufficientsunlight. While our model assumes only 20% generation for baseline calculations, the seasonaldifference in cloud cover and related solar insolation during the monsoonal (wet) and dry seasons is 13
  14. 14. substantial. Additional environmental risks includea variety of natural hazards, such as earthquakes,landslides, tropical cyclones, floods, and droughts.Climate change projections indicate an increase inextreme weather events by the end of the century,which will likely amplify the risks associated withthese natural hazards and climatic phenomenon.However, a reduction in rainfall is projected forMindanao by the end of the century, which willreduce the risk concerning insufficient sunlight. Similar risks present themselves duringthe operations and management phase.Primarily, this includes the underperformance of the solar technology that may reduce potentialgains. Solar project specialists in the Philippines have additionally conveyed to us the commonoccurrence of solar panel theft for rural electrification projects as well as the risks associatedwith returning to the project site as battery replacement is necessary every 1,000 watt-hours. Themajority of these risks would be inherent to any foreign investment projects in new markets thatinvolve a great number parties and remote location. Best risk mitigation practices will involveinvesting in and communicating with the local communities in order to incentivize cooperationand spread knowledge and technology transfer. Risk Mitigation Further risk mitigation will focus on four areas: 1) Due Diligence, 2) Contract Negotiation, 3)O&M and Safety Plans, 4) Insurance. Use of these strategies will maximize the chances for a strongreturn on investment. Due Diligence Due diligence will focus on upfront research, particularly in in terms of weather variability, localgeology, accessibility of our project location to the grid, and local culture. is will ensure theproject’s success and allow us to recoup our initial investment while avoiding unexpected futurecosts. 14
  15. 15. Contract Negotiations orough contract negotiation will allow the sharing of business risks with associated partners.Such contracts include power purchase agreements, CDM, Feed-in Tariffs, and constructioncontracts. is will focus on negotiating indemnity clauses and requiring partner parties to possesshigh levels of insurance. e cost of negotiating contracts however, must be reduced to a minimumas legal costs and fees can be substantial. Such negotiations also pose the risk of delay for projectimplementation if not completed in a timely manner. is may be mitigated by setting strictdeadlines within an action plan. O&M and Safety Plans Creating detailed operations and management(O&M) and safety plans will minimize themajority of risks presented during theconstruction and O&M phases. ese documentswill enable us to educate the local workforce onsafe construction and operation procedures, aswell as allow us to reduce the costs of insurance. Insurance Purchasing insurance is one of the most commonways for business entities to reduce risk. During the construction and operation phase of our project,the purchase of sufficient insurance such as Builders Risk/Delay in Startup, Property, ConstructionLiability, Operational Liability, and Environmental Liability, will be crucial. Depending on cost, acombination of warranty insurance, weather derivates, and political risk insurance should also bepurchased. Warranty insurance for solar panels will provide an additional layer of protection againstany equipment failure and technology underperformance. e risk of insufficient sunlight may bemitigated with weather derivatives. Lastly, political insurance will reduce the many risks associatedwith environmental markets. Specifically, it may help reduce exposure to feed-in tariffs and theCDM market. 15
  16. 16. ConclusionsLeading business innovation Other multinational companies, including Danone and BASF, have engaged in social businessesthat address identified social and environmental problems by creating a solution based on their corebusiness. Energy and energy infrastructure are at the core of GE’s success as a multinationalcorporation and they have had a presence in the Philippines since the 1890s. e goal of this projectalso aligns well with that of our corporate citizenship report and will further propel us into aleadership role in the realm of corporate sustainability. As with any project, there are risks involvedand in this analysis we have identified various methods to hedge against the full scope of risks posedby this type of project. GE’s size and expertise in energy and financial markets is sufficient toparticipate in the relatively new CDM market as well as the risk mitigation activities we haveproposed. Partaking in this social business model would put GE at the forefront of an innovative method ofcontributing to sustainable development while serving as a pilot project for our environmentalmarkets strategy. is model represents an opportunity for GE to realize first mover advantages inone of the fastest growing energy markets in Southeast Asia. After a few meetings held with on-the-ground Filipino solar advocates, it became clear that in order to ensure a successful, long-termbusiness in the Philippines it is essential to gain the trust and loyalty of the people and politicians.Delivering inexpensive energy to poor rural citizens and contributing to the goals of thegovernment’s renewable energy plan will garner these essential relationships. is strategic move willput us in a position to be the top supplier of solar in the electricity market as more barangays arebrought onto the national grid and overall energy demand increases. 16
  17. 17. Sources1. Senate Economic Planning Office – Electric power at a glance, 2005 – http:// www.senate.gov.ph/publications/AG%202005-07%20-%20Electric%20Power.pdf2. National Renewable Energy Board – Status of the RE Mechanisms, Sharing Experiences on RE Promotion – February 2012 – http://eeas.europa.eu/delegations/philippines/documents/ press_corner/renewable_energy_mechanisms_maniego_en.pdf3. Edith Regalado – Philstar news – 27 October 2011 – http://www.philstar.com/nation/ article.aspx?publicationsubcategoryid=67&articleid=7416184. Marion, Nsakala, Griffin, Bill – Controlling Power Plant CO2 emissions: a long range view – http://www.netl.doe.gov/publications/proceedings/01/carbon_seq/1b2.pdf5. http://www.eex.com/en/Market%20Data/Trading%20Data/Emission%20Rights/Certified %20Emission%20Reductions%20Futures%20%7C%20Derivatives/Contract%20Information/ futures-info/F2CR/2012.126. UNFCCC CDM Executive Board – Indicative simplified baseline and monitoring methodologies for selected small-scale CDM project activity categories, Electrification of rural communities using renewable energy – Revision 01.0 – 2 March 20127. National Renewable Energy Board – Status of the RE Mechanisms, Sharing Experiences on RE Promotion – February 2012 – http://eeas.europa.eu/delegations/philippines/documents/ press_corner/renewable_energy_mechanisms_maniego_en.pdf 17

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