Renewable Energy - Dissertation Example

?Renewable Energy – Literature Survey Solar Power and Geothermal Energy Opportunities in South East Asia and the Middle East: Project Finance and Marketing Strategy How to structure the investment process? What are the traps? Chioma Ubajaka: How can Project Finance for Renewable Energy Projects be Structured to Ensure There Bankability This article looked at structuring the investment process towards financing this project for renewable energy, to ensure its success. The paper mentioned the high level of perceived risks involved, and how these can be reduced in the long term. This, he explains can be done with proper risk mitigation techniques, which may result in the success of more renewable energy power projects. The article outlines details of the various financing options available in overcoming these obstacles, and bringing these types of projects into reality. It demonstrated how capital can be obtained for project financing through a combination of debt and equity investment, debt being available through bank loans, institutional debt or through public markets. The paper mentioned the possibility of procuring equity from internal or external sources in public and private markets, and sponsorship through developers, contractors, equipment suppliers, operators, off-takers and fuel suppliers, who are active equity investors. The factors limiting project finance of renewable energy power projects (REPP’s) were examined. The author indicated that resource and technology risks were high and that financial institutions lacked the experience in evaluating risks related to REPP’s. The author also noted that with the rapid change in technology and the shortage of REPP technology engineers, they would have lacked the technical expertise in this area to assess and monitor REPP’s. Other factors mentioned were: REPP’s were smaller than traditional power plants and lenders were not really enthusiastic about small transactions; REPP’s are for the most part capital intensive and would require a lot more up front investment than competing traditional power plants with lower capital costs, thus their power prices are often more expensive. Less cash flow is generated from renewable energy sources (RES) in comparison to fossil fuel fired plants, as they can only operate when their resources are available. This therefore results in a smaller margin for project financing and consequently puts pressure on costs related to maintenance and overheads. The author also pointed out that government policies, which are often unpredictable, greatly affect the economies of REPP’s. The paper gave focus to the importance of equity, seeing it as the main protection against risks. Lenders will therefore favour equity contributions in the initial part of the project. Lenders see equity investment as a form of commitment by the developers and sponsors. The author also found that security was another significant consideration for the lender, so they would implement safeguards such as a fixed charge over the projects site; a floating charge over the assets of the projects company; requiring that all cash flow be paid into a project account where they would have control, and contingency funds in place for unforeseen problems. The experience and credit worthiness of all participants would also be considered by the lender. There financial strengths would be assessed and the ability of these parties to carry out their contractual obligations with the project company would be determined. The article highlighted a number of risks that should be considered. The risk areas include the project itself, technology, construction, fuel/resource, the market, regulatory risks, mitigation and pass through. Project risks affect the amount, timing and availability of funds for the project finance. For technology lenders want to ensure that it is tested and proven, and that it will not be obsolete anytime soon. In relation to the construction risks the paper looked at the probability of cost overruns and delays in completion; most importantly the risk that the project is never completed, and the revenue is never generated to repay the loan. The intermittent nature of RES was looked at as a main reason for its risk. Market risks involved the fact that sufficient revenue may not be earned by the project company to service its debt. Policy stability would be essential when looking at regulatory risks. In concluding the author suggests that in financing REPP’s the transaction costs associated with it can be reduced by bundling together smaller projects that are similar and meet particular financial criteria, therefore reducing financial costs. Benjamin K. Sovacool and Christopher Cooper. (2006) .Green Means ‘Go?’—A Colourful Approach to a U.S. National Renewable Portfolio Standard. The Electricity Journal Aug./Sep. 2006, Vol. 19, Issue 7. Retrieved The authors of this article states that despite a renewable portfolio standard a vast majority of larger renewable energy projects in the US continue to stall for lack of political, financial, and social commitment. What are the strengths and weaknesses of a project in regard to renewable energy projects? Bharat Book Bureau. (2011, Jan). The Solar Power Generation Technologies Market Outlook. According to the author: The growth of solar power technologies is restricted because the solar PV panel is comparatively expensive; the cost of electricity generation through solar panels increases as large arrays of solar panels are needed to provide a sufficient level of electricity; the number of insulation areas are limited as only approximately 53% of the Earth’s surface is ideal for solar power. Additionally, the operating life of CSP technologies is short compared to solar PV and this is expected to be they key factor inhibiting its growth. Ayhan Demirbras. (2006). Global Renewable Energy Resources This paper focused on global renewable energy sources (RES). The writer expressed the view that energy sources will play an important role in the world’s future. The writer broke down the energy sources into three categories, namely fossil fuels, renewable sources and nuclear sources. He noted that renewables are the primary, domestic and clean or inexhaustible energy sources and they supply 14% of the world’s energy sources. He stated that RES that use domestic resources have the potential to use energy sources with zero, or almost zero emissions of both air pollutants and greenhouse gases, this reduces the environmental impact. This is in comparison to fossil fuel energy that they would replace. RES should never run out as it occurs naturally. In the document it was pointed out that renewable energy sources is expected to increase very significantly to between 30 to 80% in 2100. In this paper the writer explained that while there is a limited number of RES, there are a large number of technologies allowing the exploitation of these resources, most of which are still at the Research and Development stage or have not yet reached commercial maturity. Geothermal energy together with wind and biomass are commercially competitive and are making relatively fast progress. Important and detailed information were provided on the various RES such as biomass, wind, hydro-power, solar and geothermal energy. In the paper it stated that geothermal is used for urban heating, power generation, hydrothermal and hot dry rock. In 2000 geothermal resources were present in 80 countries and there are quantified records of geothermal utilization in 58 countries. It is clean, cheap and renewable; direct applications of geothermal energy is wide and includes end uses such as space heating and cooling, domestic hot water supply, carbon dioxide and dry ice production process, heat pumps, industrial processes, fish farming greenhouse heating, swimming and therapeutic baths, and electricity generation. It was noted that straight forward engineering and existing technology are mostly used. The direct use of geothermal energy through its technology, reliability, economics, and environmental acceptability have been demonstrated throughout the world. Geothermal steam is used to produce electricity in 21 countries spread over all continents. Also mentioned is that low temperature geothermal energy is exploited in many countries to generate heat, and with estimated capacity of about 10,000 MW thermal. World’s top country using geothermal energy are China, Japan, USA, Iceland, Turkey, New Zealand, Georgia, Russia, France, Sweden, Hungary, Mexico, Italy, Romania, and Switzerland, from a high of 2282 MW to a low of 547 MW power installation, and production from a high of 10531 GWh/a to a low of 663 GWh/a respective for these countries. For solar power the energy comes from processes called solar heating (SH), solar home heating (SHH), solar dryer (SD), solar cooker (SC), solar water heating (SWH), solar voltaic (SPV: converting sunlight directly into electricity), and solar thermal electric power (STEP: the concentration of the sun’s power to heat water and produce steam, which is used to produce electricity), as defined in the paper. It is described as the most direct renewable energy source. It further stated that solar dryers are used for drying fruits and spices. Box type, cabinet type and tunnel type are the three most popular types of solar dryers. Box type uses direct heat for dehydration, while air heated by the collector, and dehydrates the food in the cabinet type dryers. The tunnel type dryers yield a high level of dried products, but they are very bulky and costly compared to the box type dryers. The writer also stated that photovoltaic systems, except SHH systems are used for communication, water pumping for drinking, electricity generation and irrigation. PV markets have seen rapid growth and costs have fallen dramatically, similarly wind power markets. The total installed capacities of such systems are approximately 1000Kw. Together with grid-connected wind energy, solar PV installed capacities are growing at a rate of 30 percent per year. Finally, the author emphasized that renewable energies have been the primary energy source in the history of the human race. The share of the renewable energy sources is expected to increase very significantly as people become more environmentally aware. Renewable energies contribute only about 2 percent of the world primary energy use. Mark K. Heiman & Barry D. Solomon, Power to the People: Electric Utility Restructuring and the Commitment to Renewable Energy In this article some weaknesses were highlighted in regards to renewable energy sources (RES). The author indicates that geothermal plants come with the release of foul-smelling hydrogen sulphide and other gases and toxic chemicals are emitted from the production of voltaic cells. The author further stated that renewable energy development has been slowed due to competition from the declining cost of generation from fossil fuels. Also contributing to the delayed development are the additional cost of running transmission lines out to remote renewable sites and the imposition of additional penalties and/or premiums for intermittent connections to the grid. The writer further stated that renewable energy generation including solar and geothermal must overcome obstacles such as price distortions, discriminatory transmission system access, lack of storage capacity, and the end of linked utility rate hikes guaranteed to take care of the added expense of renewable generation, under the restructuring of the electric utility market. redOrbit Staff & Wire Reports (2010, June). Asia Faces Obstacles in Obtaining Geothermal Power Geothermal projects are capital intensive, and they also require deep wells to tap steam and hot water to power turbines.  The process can become even more difficult when stumbling blocks like government red tape are added. The Philippines, which is currently the second-largest geothermal energy producer behind the United States, is home to many active volcanoes that cause high acidity and therefore corrode pipes. This problem has become the country’s biggest obstacle in developing reserves. The investment required is large and in addition to that it takes nearly 8 years for a geothermal plant to be fully operational.  Furthermore there are plant and drilling costs as well as additional expenses such as building access roads in treacherous terrain.  However, once the plants are operational, the maintenance costs remain relatively low. The writer also highlighted the fact that eligibility for carbon credits could make such investments more attractive as they offset some of the hefty start up costs. Benjamin K. Sovacool and Christopher Cooper. (2006) .Green Means ‘Go?’—A Colorful Approach to a U.S. National Renewable Portfolio Standard. The electricity Journal Aug./Sep. 2006, Vol. 19, Issue 7 The writer quoted .Kerry W. Bowers as stating during a Senate meeting in 2005 that: “a renewable portfolio standard (RPS) would require us to use more costly renewable resources, increasing costs to our customers.’ The article also quotes Claudia J. Banner, the Senior Engineer Renewable Energy Planning at American Electric Power as stating that: ‘‘utilities are usually not receptive to mandated renewable portfolio standards, She cited an increase in generation costs that could get passed back to the consumer, resulting in larger utility bills. She quoted as further stating that “Studies have shown that renewables are typically more expensive than traditional generation.’’ What are the forces that determine the renewable energy for emerging markets? Benjamin K. Sovacool and Christopher Cooper. (2006) .Green Means ‘Go?’—A Colorful Approach to a U.S. National Renewable Portfolio Standard The electricity Journal The author indicates the government of the US Mandates that suppliers’ provide a certain percentage of their electricity from renewable resources by a particular date. While no federal legislation requires the deployment of renewable energy, 22 states have passed their own RPS, launching an estimated $475 million in energy projects. The most aggressive are California, which requires that 33 percent of its electricity come from renewable energy sources by 2020; New York, which mandates 25 percent by 2013; and Nevada, which seeks 20 percent by 2015. Mena Geothermal. (2010). Why Geothermal? Mena Geothermal states that some of the factors that drive demand for renewable energy are: Rapidly increasing energy demands and decreasing worldwide energy supply Renewable energy is essential to the success of sustainable urban development US environmental protection agency (EPA) states the geothermal systems are “the most energy efficient, environmentally clean and cost effective space conditioning systems available.” Heating and cooling costs can be reduced by as much as 70% Mark Fulton (2010, Dec). The Opportunity for Investing in Climate Change According to the writers there are emerging markets Australia, The Middle East and South East Asia. Jimmy Eriksson. (2010, March 17). Geothermal Energy Emerging in Australia: Renewable power news In this article Eriksson indicated that Martin Ferguson the Federal Resources Minister said that the project now being undertaken in Australia is fundamental and in order to reach the target of 20 percent of the total energy supply from renewable energy sources by 2020, geothermal energy is of importance. Currently, only 8.2 percent of the energy in Australia is harnessed through renewable energy. How can renewable energy projects position itself in such a difficult market? Michael T Eckhart. (August 1999). Scoping Paper: Financing Solar Energy in the U.S. Solar International Management, Inc. The writer indicates that in order for projects to properly position itself policies need to be put in place to address the financial attractiveness of such projects. In order to make standard loans lenders seek to be repaid from three sources: (1) the borrows willingness and ability to pay as reflected in the borrowers cash flow and character; (2) the collateral value of the solar system; and (3) guarantees from third parties. The writer further states that this mentality of the lender can be used to form a useful structure for planning and evaluating policies aimed as improving the ability and willingness of the borrower to repay which would involve reducing the cost of the R&D component of solar systems. In improving the collateral value of solar systems, the system needs to be physically recoverable and there must be a secondary market for used equipment. Possible policy options to create collateral value include: component and system standards, warranties, insurance, creation of a secondary market for used equipment, and other mechanisms that can be used to enhance the collateral. Third party guarantees is a source of repayment in case the borrower defaults and the collateral is not worth the value of the loan amount remaining. Policies that serve to enhance the “guarantee” mechanism for solar energy include the extension of existing loan guarantee programs to now encompass solar energy explicitly. The writer also indicates that in order to improve the profitability of solar energy loans incentives need to be created for the lenders as a form of encouragement to grant loans for solar energy purposes. The real basis for doing so is because the lenders bear the most of the risks associated with solar energy systems. Policies include loan guarantees, interest rate subsidies, secondary markets for solar loans, and other programs which focus mainly on reducing risks. Are there any market niches such as solar power and geothermal energy? Bull, Stanley R. and Billman, Lynn L.(2000) 'Renewable energy: Ready to meet its promise?', The Washington Quarterly, 23: 1, 229 — 244 The writer states that the current markets for renewable energy technologies range from “specialized niche markets, where the technologies are already cost-effective, to centralized energy production” Opubo G Benebo. (2010, 11/7) Niching Green Business. Solar Power Niches The writer states that several niches exist in the Green Technology Industry. Creating a niche in an industry segment does not necessarily involve as large capital investment and only careful consideration is required. Furthermore, the Consumer Power Technology business may include five separate niches. They may include a Consumer Solar Power Company that provides installation services to the customer; a Solar Collector Manufacturing Company which manufacturers the solar optical energy lights tubes; a Photo-Electrical Converter Manufacturing Company “which adopts off-the-shelf photovoltaic sells in configuring compact application-specific design;” a Light-Tubes Manufacturing Company which manufacture Light-Tubes for the movement of light from the collector to the point where it is to be used.; the Electric Supplies Manufacturing Company which designs the power supplies system that processes the direct current from the Pho-Electrical Converter in alternating current that is suitable for the home. According to the writer the entity driving the process here as well as assuming the task of creating a niche is the Consumer Solar Power Company. The consumer would first deal with the Consumer Solar Power Company as it is the company that assumes the task of developing the power technology and the market. This company for the most part is undertaking the task of forming a prospective vendor team. The writer also states that in consistency with the general guidelines for positioning in any particular niche of the green business, the company carrying out the particular venture should preferably already be in the consumer market and therefore will more likely have an established customer base for market development through leveraging. The task of niching as suggested by the writer is to ‘Stick to Niche’. However, the writer points out that even then a comprehensive analysis of the venture should be undertaken. Indie Energy (2011). Indie Energy Named 1 of Top 3 Businesses to Watch in 2011 by American Express. Creating a Niche in Geothermal Energy Systems The writer states that Indie Energy has in four short years built a thriving business and leadership position around geothermal energy systems. “Indie creates investment-grade geothermal systems with its innovative engineering, construction, and metering technologies.” The company won the 2009 U.S. Department of Energy funding award for transformational technology. The writer also stated that while geothermal systems have been used in rural areas for decades, the technology did not exist to implement systems in larger commercial buildings and in urban areas, with proven return on investment. Indie now provides geothermal energy systems to Walgreens, Medline Industries and numerous public and non-profit organisations. Identify the feasibility of an investment strategy in both regions. redOrbit Staff and Wire Reports. (2008, June). Asia Faces Obstacles in Obtaining Geothermal Power According to the author geothermal projects are feasible in places like the Philippines and Indonesia (which is located South East Asia) as they foresee a “looming energy crisis facing their power hungry developing economies. The author indicates that both countries lie in the largest reservoir of geothermal power: an area that is rich in volcanoes and which is called the Pacific Ring of Fire. A large solar power project is currently taking place in Abu Dhabi. This area is suitable for solar power because the Middle East consists of mainly desert and so there is enough room to place the equipments necessary for solar power without harming plants. The government of Abu Dhabi is currently working with several major companies in Europe to set up solar panels in approximately 62,000 homes in the country. What is the most suitable investment strategy for such projects? Chioma E. Ubajaka: How Can Project Finance for Renewable Energy Power Projects be Structured to Ensure Their Bankability. The author suggested that a mixture of debt and equity could be used. Additionally, sponsorship through developers, contractors, equipment suppliers, operators, off-takers and fuel suppliers who are active equity investors was another possibility. Further, the writer suggests a bundling together of smaller projects. Eckhart. M. T. (August 1999). Scoping Paper: Financing Solar Energy in the U.S. Solar International Management, Inc The writer states that venture capital can be used as a form of finance. Venture capital is normally high risk and high return. Venture capitalists normally look for returns in excess of 25% and they accept that a certain number of projects will fail. They normally have a long term focus. The writer further stated that venture capitalists normally take an active role by participating in the management of the business. They aim to help with the business strategy. References Balat, M (2006) 'Solar Technological Progress and Use of Solar Energy in the World', Energy Sources, Part A: Recovery, Utilization, and Environmental Effects, 28: 10, 979 — 994 Retrieved: http://dx.doi.org/10.1080/009083190953409 Last accessed 16 Feb 2011 Benebo, O. G. (2010, 11/7) Niching Green Business. Retrieved: http://www.gbanalysts.com/Reading%20Room/The%20Entreprenuer/NichingGreenBiz/conssolarpower.html Last accessed 20 Feb 2011 Bharat Book Bureau. (2011, Jan). The Solar Power Generation Technologies Market Outlook. Retrieved: http://www.nichevolumes.com/the-solar-power-generation-technologies-market-outlook/ Last accessed 18th Feb 2011 Bull, Stanley R. and Billman, Lynn L.(2000) 'Renewable energy: Ready to meet its promise?', The Washington Quarterly, 23: 1, 229 — 244. Retrieved: http://dx.doi.org/10.1162/016366000560674 Last accessed 15 Feb 2011 Demirbas, A. (2006). 'Global Renewable Energy Resources', Energy Sources, Part A: Recovery, Utilization, and Environmental Effects, 28: 8, 779 — 792 Retrieved: http://dx.doi.org/10.1080/00908310600718742 Last accessed 16 Feb 2011 Eckhart. M. T. (August 1999). Scoping Paper: Financing Solar Energy in the U.S. Solar International Management, Inc Eriksson, J. (2010, March 17). Geothermal Energy Emerging in Australia. Renewable power news. Retrieved: http://www.renewablepowernews.com/archives/1131 Last accessed 19 Feb 2011 Fukton, M. (2010, Dec). The Opportunity of Investing in Climate Change. Global Head of Climate Change Investment Research: DB Climate Change Advisors. Retrieved: http://www.dbcca.com/research Last accessed 16 Feb 2011 Gunerhan, H., Hepbasli, A. and Giresunlu, U.(2009) 'Environmental Impacts from the Solar Energy Systems', Energy Sources, Part A: Recovery, Utilization, and Environmental Effects, 31: 2, 131 — 138 Retrieved: http://dx.doi.org/10.1080/15567030701512733 Last accessed 14 Feb 2011 Heiman, M. K & Solomon, B. D. (2004). Power to the People: Electric Utility Restructuring and the Commitment to Renewable Energy. Annals of the Association of American Geographers, Vol. 94, No. 1 (Mar., 2004), pp.94-116 Indie Energy (2011). Indie Energy Named 1 of Top 3 Businesses to Watch in 2011 by American Express. Retrieved: http://indieenergy.com/news/13/indie-energy-named-1-top-3-businesses-watch-2011-american-express redOrbit Staff & Wire Reports. (n.d.). Asia Faces Obstacles in Obtaining Geothermal Power http://www.redorbit.com/news/science/1456390/se_asia_faces_obstacles_in_obtaining_geothermal_power/ Sovacool, B. K & Cooper, C. (2006) .Green Means ‘Go?’—A Colorful Approach to a U.S. National Renewable Portfolio Standard. The electricity Journal Aug./Sep. 2006, Vol. 19, Issue 7 Retrieved :http://www.newenergychoices.org/dev/uploads/Sovacool-Cooper-RPS_Electricity_Journal.pdf Ubajaka, C. How can project finance for renewable energy power projects be structured to ensure their bankability? Research Paper. http://www.pubarticles.com/article-global-geothermal-power-and-heat-pump-market-outlook-2010-2015--1293435730.html Jimmy Eriksson. (2010, March 17). Geothermal Energy Emerging in Australia. Renewable power news http://www.renewablepowernews.com/archives/1131 Read More