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Unlocking renewable energy investments

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Unlocking renewable energy investments (05.03.2018)

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Unlocking renewable energy investments

  1. 1. NEURC Feb 2018 Unlocking renewable energy investments Ukraine
  2. 2. NEURC Feb 2018 Content 1. Global trends in RE development overview 1.1. RE Installed capacities 1.2. Investments in RE 2. LCOE (Levelised cost of electricity) 2.1. LCOE: main drivers 2.2. WACC: main drivers 2.3. Preconditions for LCOE reduction 2.4. LCOE sensitivity analysis 3. Proposals for auction implementation 3.1. Auction design elements: Demand, qualification requirements, winner selection process, sellers’ liabilities 3.2. Benefits and strength of proposed type of auction
  3. 3. Total RES installed capacity in the world amounts 2013 GW Despite the insignificant share of UA’s generation capacities comparing to global ones, Ukraine is one of the CIS champions in RES capacities installation. Ukraine has excellent investment opportunities due to:  Commitment according to National Action Plan to increase its share of electricity from RES up to 11% by 2020 (Now the share is 7,3% as of January 1, 2018);  80% depreciation of generating capacities;  22,8 GW peak electricity demand in 2017; 817 331 91 94 485 193 1,37 Asia Middle East Eurasia Other Europe South America Ukraine The share of electricity from RES in UA is 7.3% (including large hydroelectric power plants with installed capacities >10MW) 1.1 RES installed capacities InstalledcapacitiesRES,GW NEURC Feb 2018 Source: IRENA Renewable Power Generation Costs in 2017 , IRENA Global landscape Renewable Energy finance 2018
  4. 4. Total global investments in RE during 2012-2016 amounted a whopping 1092 EUR bln, in Ukraine only 2.5 EUR bln ,which is only 0,3% from the global investments. з а к р ы т о З ак р ы вт о Investment in solar power and wind power dominated spending in the sector globally (92% of total investments). A similar tendency in Ukraine as well. 1.2 Global trends in RE development 10913911796113 7268 88 97 101 -8% 253 20162014 206 2013 2015 190 +12% 13 21 218 2017 12 225 2012 25 21 +19% -14% Other Solar Wind 51 7147 47 66 50 56 39 39 +2% 37 117 126 32 +29% +6% -1% 124 123 38 13 162 3630 Investments, EURbln Capacity, GW World 462 172 247 22 18 30 -84% 34 2017 162 129 61 16 +45% 2015 +164% 236 39 0 20162012 95 52 2014 12 158 1,135 90 140 387 2013 569 835 377 211183 99 10 10 3030 20 12 70 87 -84% +305% 4,922 187 0 5 +113% 257 27 626 229 20 121 4,734 19 Investments, EURmln Capacity, MW Ukraine Wind Other Solar Solar Wind Other Other Wind Solar NEURC Feb 2018 Source: IRENA Renewable Power Generation Costs in 2017 , IRENA Global landscape Renewable Energy finance 2018, NEURC
  5. 5. LCOE – Levilised cost of electricity CAPEX O&M ICUF Life span WACC 1. 2. 3. 4.5. 2. LCOE (Levilised cost of electricity) NEURC Feb 2018
  6. 6. 63% 37% Solar* Hardware Other 75% 25% Wind* 1. 72% 9% 19% Solar** 7% 61% 3% 29% Wind** Land lease Maintenance Salary Other  CAPEX for Solar equipment equals ~709 EUR per 1 kW  CAPEX for Wind equipment (turbine) equals ~1248 EUR per 1 kW 2.  O&M for Solar equals - 4.1 EUR per 1 kW  O&M for Wind equals - 45.1 EUR per 1 kW *Data from purchase agreements, submitted to NEURC when applying for FIT ** Data from expense report s (6-NKRE-energy production), submitted by licensees quarterly. 2.1 LCOE: main drivers for Solar and Wind CAEPXO&M NEURC Feb 2018
  7. 7. 3. Favorable geographical positon of Ukraine has a positive impact for electricity generation from Solar and Wind energies, thus lowering the LCOE. The level of installed capacity utilization factor in Ukraine is comparable to global ones. 2.1 LCOE: main drivers for Solar and Wind ICUF,% 5,0% Wind 18,0% Solar -4,3% 30,0% 13,7% 35,0% Ukraine World NEURC Feb 2018
  8. 8. WACC (weighted average cost of capital) – takes into account the cost of equity and the cost of debt Cost of equity Cost of debt (after tax) 4. Stock market development Market interest rate Taxation Risk free rate Country risk WACC can be decreased by:  Lower cost of equity;  Cheaper debt financing instruments;  Stock market development; WACC,% NEURC Feb 2018 2.1 LCOE: main drivers for Solar and Wind
  9. 9. 2.2 WACC: main drivers* 20,0% Doing Business improvement -0,5% -0,5% Forecasted WACC Well-designed, Stable policies Stability in Regulator’s work -1,0% Cost of equity 15,0% 10,0% -1,5% Current WACC Grid connection Optimistic WACC -10% -1,5% -1,5% Basic WACCPPA approval Auctions implementation -1,5% -2,0% 18,0% Attractive investment climate Further decrease of WACC can be achieved by:  Introduction of auctions;  Grid connection;  Well-designed, stable policies;  Attractive investment climate, strengthen UA’s position in Doing business rating; * Core data was taken from UNDP «De-risking Renewable Energy Investment” for developing countries NEURC Feb 2018
  10. 10. LCOE can be reduced by: - Reduction in CAPEX : • Cost reduction due to technology development; • Competitive procurement; • Direct discounts from equipment producers, due to market expansion; - Reduction of WACC : • strengthen UA’s position in Doing business rating; • Approval of best practices PPA; • Well-designed, stable policies • One-stop shopping (Land, all permits, grid-connections etc.) • Introduction of auctions 2.3 Preconditions for LCOE reduction NEURC Feb 2018
  11. 11. Optimistic LCOE after introduction of auction( €c for 1 kW*h) Basic LCOE after introduction of auction( €c for 1 kW*h) Current LCOE after introduction of auction( €c for 1 kW*h) WACC 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% CAPEX(EURper1kW) 600 5,92 6,30 6,69 7,09 7,49 7,90 8,31 8,73 9,15 9,58 10,01 620 6,11 6,50 6,90 7,31 7,73 8,15 8,58 9,01 9,45 9,89 10,34 640 6,30 6,70 7,12 7,54 7,97 8,40 8,84 9,29 9,74 10,20 10,66 660 6,48 6,90 7,33 7,76 8,20 8,65 9,11 9,57 10,04 10,51 10,98 680 6,67 7,10 7,54 7,99 8,44 8,91 9,38 9,85 10,33 10,82 11,30 700 6,86 7,30 7,75 8,21 8,68 9,16 9,64 10,13 10,62 11,12 11,63 720 7,04 7,50 7,96 8,44 8,92 9,41 9,91 10,41 10,92 11,43 11,95 740 7,23 7,70 8,18 8,66 9,16 9,66 10,17 10,69 11,21 11,74 12,27 760 7,42 7,90 8,39 8,89 9,40 9,92 10,44 10,97 11,51 12,05 12,60 780 7,60 8,10 8,60 9,11 9,64 10,17 10,71 11,25 11,80 12,36 12,92 800 7,79 8,30 8,81 9,34 9,88 10,42 10,97 11,53 12,10 12,67 13,24 820 7,98 8,50 9,03 9,57 10,11 10,67 11,24 11,81 12,39 12,98 13,57 840 8,16 8,70 9,24 9,79 10,35 10,93 11,50 12,09 12,68 13,28 13,89 LCOE Solar Due to the imperfect regulatory policy and high risks associated with the investments in RES, the estimated LCOE level is 13,24 (€ c per 1 kWh). Well-designed and stable regulatory policy as well as introduction of auctions will allow large projects to commenced, with WACC decrease to Basic level, the LCOE will fall to 9,41 € c per 1 kWh. Further improvement of investment climate will allow to attract cheaper financing and cheaper equipment (Direct discounts from producers) leading LCOE decrease to 6,11 € c per 1 kWh. Current FIT for Solar is 15,03 €c for 1 kW*h  WACC – 20% (cost of equity 10%, other risks 10%)  Life span – 20 years  ICUF – 13,7 % 2.4 LCOE sensitivity analysis (CAPEX and WACC) * Припущення, які використовувалися для аналізу чутливості наведені у Додатку Optimistic Basic Current NEURC Feb 2018
  12. 12. WACC CAPEX(EURper1kW) 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% 900 4,36 4,65 4,94 5,23 5,52 5,81 6,10 6,39 6,68 6,97 7,26 950 4,52 4,83 5,13 5,44 5,75 6,05 6,36 6,67 6,97 7,28 7,58 1000 4,68 5,00 5,33 5,65 5,97 6,29 6,62 6,94 7,26 7,58 7,91 1050 4,84 5,18 5,52 5,86 6,20 6,54 6,87 7,21 7,55 7,89 8,23 1100 5,00 5,36 5,71 6,07 6,42 6,78 7,13 7,49 7,84 8,20 8,55 1150 5,17 5,54 5,91 6,28 6,65 7,02 7,39 7,76 8,13 8,50 8,87 1200 5,33 5,71 6,10 6,49 6,87 7,26 7,65 8,04 8,42 8,81 9,20 1250 5,49 5,89 6,29 6,70 7,10 7,50 7,91 8,31 8,71 9,12 9,52 1300 5,65 6,07 6,49 6,91 7,33 7,75 8,17 8,58 9,00 9,42 9,84 1350 5,81 6,25 6,68 7,12 7,55 7,99 8,42 8,86 9,29 9,73 10,17 1400 5,97 6,42 6,87 7,33 7,78 8,23 8,68 9,13 9,58 10,04 10,49 1450 6,13 6,60 7,07 7,54 8,00 8,47 8,94 9,41 9,87 10,34 10,81 1500 6,29 6,78 7,26 7,75 8,23 8,71 9,20 9,68 10,17 10,65 11,13 1550 6,46 6,96 7,46 7,96 8,46 8,96 9,46 9,96 10,46 10,96 11,46 LCOE Wind Due to the imperfect regulatory policy and high risks associated with the investments in RES, the estimated LCOE level is 9,52 (€ c per 1 kWh). Well-designed and stable regulatory policy as well as introduction of auctions will allow large projects to commenced, with WACC decrease to Basic level, the LCOE will fall to 7,02 € c per 1 kWh. Further improvement of investment climate will allow to attract cheaper financing and cheaper equipment (Direct discounts from producers) leading LCOE decrease to 4,68 € c per 1 kWh.  WACC – 20% (cost of equity 10%, other risks 10%)  Life span – 20 years  ICUF – 35 % Current FIT for Wind capacities > 2000 kW 10,18 €c per 1 kW*h Optimistic Basic Current NEURC Feb 2018 2.4 LCOE sensitivity analysis (CAPEX and WACC) Optimistic LCOE after introduction of auction( €c for 1 kW*h) Basic LCOE after introduction of auction( €c for 1 kW*h) Current LCOE after introduction of auction( €c for 1 kW*h)
  13. 13. Action design: Demand Volumes (MW, MW*h, EUR mln, EUR cents per kW*h). Various arrangements technology neutral auctions or technology specific auctions, and standalone or systematic mix will take place. Qualification requirements Minimal set of requirements for eligible bidders Sellers’ liabilities Setting clear, unequivocal responsibilities and obligations stipulated in auction documents. Commitments to contract signing, contract schedule, remuneration profile and financial risks, nature of the quantity liabilities, settlement rules and underperformance penalties, and the delay and underbuilding penalties. Winner selection process Application of the bidding and clearing rules, as well as awarding contracts to winners. Covers the bidding procedure winner selection criteria, the clearing mechanism and marginal bids and the payment to the auction winner 3.1 Auction design NEURC Feb 2018
  14. 14. Summary: It is necessary to amend the current legislation in the part of the introduction of auctions, update current FIT, oblige local governments to submit proposals for land allocation for eligible RE projects. Auction design: Demand «one place shopping» auction principle: secured land, all necessary permits, grid access, pre-determined fees/levies to local budgets etc. Proposed volume bids: Solar ≥ 5 MW; Wind ≥ 10 MW Qualification requirements Reputation requirement, financial guarantee, pre- arrangement with DFO, term of project operation, ceiling price (eg. -10% from current FIT) Winner selection process Lowest price offered per 1 kW*h for PPA duration (15-20 years) Sellers’ liabilities Penalties for underperformance/delays/ underbuildings (fixed rate per 1 MW) Term between date of financing and commissioning for renewable energy projects (years), after winner announcement: Solar ≤ 1 year; Wind ≤ 2 years. NEURC Feb 2018 3.1 Auction design elements
  15. 15. TAXES to local budgets New workplace Fewer power cuts Real price discovery There will be following taxes/levies paid to local budget:  Income tax: UAH 600k per 1 MW of Solar installed capacities;  Payroll taxes: UAH 2k per 1 MW;  Levies for social region development up to UAH 75k per 1MW Realization of project in RE for 10 MW will create new workplace in region:  Solar – 8 new jobs  Wind – 12 new jobs Fewer power cuts and better quality of electricity supply due to new generation unit s and grid A key strength of auctions is their effectiveness as mechanisms of price discovery. A good auction design brings out the real price of the product being auctioned in a structured, transparent and, most importantly, competitive process. LAND lease Land lease will bring ~UAH 80 k per 1 MW to local budget Introduction of «one stop shopping» auctions will attract high number of investors and bring transparency and competiveness. There will be no discrepancies and uncertainties with regard to land, grid connection or other permits. 3.2 Benefits and strength of proposed type of auction NEURC Feb 2018
  16. 16. FI Energy commit tee TSO Ministry Developers NEURC Panel discussion with key stakeholders Draft concept of Law– within 2 month Auctions: next steps NEURC Feb 2018 NEURC Ministry IFI Developers Energy committee

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