Recent GLS analysis, accomplished for two national electricity companies, illustrates how new transmission infrastructure can reduce energy system emissions by replacing traditional fuels, and reducing congestion when integrating renewables. In one African case, analysis showed that the economic benefit of a new transmission line, from carbon reduction alone, was 3.0% of GDP, while the total economic benefits were 4.5% of GDP.
The transmission line will eventually connect a mini-grid to the primary grid. At present the mini-grid is supplied by hydropower; but during seasons of low-flow, a diesel generator is required to service the load. The total CO2 mitigated over the lifetime of the line was calculated to be 2.7 MT. The model was built assuming a CO2-eq for traditional fuel of 1.5 kg/kWh, and a cost of carbon of USD 0.036/kg. The anticipated load of the new line, previously forecasted by AECOM, was used as a proxy for the current energy now being sourced from traditional fuels.
Public-private partnerships can offer governments the opportunity to undertake major public-works projects, in partnership with a private developer, that might be too expensive or risky to undertake alone, especially for developing nations. The contracts that govern these partnerships establish the rules by which the parties relate. These contracts sometimes contain a Right of First Action clause (RoFA), often seen in real estate or extraction industries. The holder of this clause has the right, but not the obligation, to invest in expanding the project in some way, in the future. We believe the inclusion of this clause can help align the often-conflicted incentives of public and private parties (governments want long-term value preservation through appropriate operation and maintenance, while private parties may be incentivized to cut costs in order to maximize profits). If government sponsors delineate the expansion work from the initial build-operate work of the private partner through the creation of the RoFA, they have created an additional asset – a future source of potential cash flows. Our research shows how to quantify these potential cash flows and derive a transparent value of the RoFA.
In this way, the RoFA is an asset that exists in addition to the primary revenues expected upon the completion of the initial build-out. If the public sector is issuing a Request for Proposals (RFP), there are several ways in which the RoFA can be appropriated. For example, the RoFA could be offered immediately to the private partner, augmenting the value of the project, or it could be held by the public sector until certain conditions are met – such as value preservation on behalf of the private company.
By Rich Swanson, GLS Group Consultant
Renewable energy sources could form the spine of a Green Energy Corridor in Africa, setting the stage for a leapfrog in technologies, compared to the way developed nations expanded their own grids. In 2016 Africa added 4,400 MW of renewable-power capacity. Moving forward, a significant portion of planned renewable development comes from hydropower; Africa’s potential to generate power from its rivers is vast and largely untapped. However, accessing power from hydro-generation comes with both benefits and challenges. For example, multiple risks, from climate change to offtake and cost-overrun uncertainty, threaten such projects. Our research found that there can be value to a “flexible-engineering” approach to renewable energy projects. We studied a large, planned project and found that this approach could save developers well over 10% of total project value.
Our economic analysis quantified several risk factors and estimated valuations for starting small and building in stages as additional information becomes available. Importantly, our process incorporated the value of flexibility so planners can compare such designs directly with static, or monolithic plans.
We Still Live in a World of Earnings-Based Investment
According to a recent report by the International Energy Agency, the large majority of energy investment remains financed from the balance sheets of investors. The proportion of balance sheet investing has remained relatively constant during recent years. However, project finance, as a strategy to move investments off the balance sheet and to rely on cash flows for asset valuation, has grown by 50% over the past five years. Most of this growth has come from renewable generation investment, in emerging economies. This trend reflects a growing confidence in project development in these countries, and lower risk profiles associated with maturing technologies. Increasingly, new sources of funding are becoming available as well, notably green bonds, and project bonds; these have allowed investors and developers to tap larger pools of resources to move projects forward.
(IEA, World Energy Investment 2017, https://www.iea.org/publications/wei2017/)
Sources of Finance for the USD 1.7 Trillion in 2016 Energy Investments
Richard Swanson, Ph.D.
Asset valuation and project finance expert, specializing in financial and economic analysis of civil infrastructure assets.