Smart Grid Initiative in India and Supreme’s Experience -An article released by E&P Info Journal (August-September 2012 issue)August 30, 2012
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Prepared by Mr. Gautam Agarwal who is studying M.S. in Michigan State University under Sponsorship of SCPLAugust 4, 2012
Midterm CEE/ChE 686
Out: 2/23/12 – In 3/8/12
The question to be resolved in the midterm is what Israel should do regarding its plans to deploy solar energy. The country is planning to put together a cleantech cluster on solar (see also article from EF on cleantech clusters on CTools), and is debating what the business ecosystem, and the financing should look like.
(You are expected to use course materials, EF information, and other searcheable information relevant to the solar industry.)
The Government of Israel supports the development of solar power generation, and has taken substantial steps towards advancing the use of renewable energy. These policies include the following:
1. A guiding target for producing electricity from renewable sources at a level of 10% of the county’s energy requirements by 2020.
2. Policies to enable the construction of renewable energy based power stations, especially in the Negev and Arava areas, at a scope of no less than 250 MW every year from 2010 until 2020.
3. Identification of land lots suitable for construction of solar power plants and issuance of land tenders for 3 power stations based on solar power at a capacity of 50MW to 74MW per station.
4. A feed-in tariff of 30c./kWh for deployment of solar energy, limited to a total installation of 50MW during 7 years, whichever is reached first, with a maximum of 15 kWp installation for residential and a maximum of 50kWp for commercial.
Generally, two types of solar-scale utility plants are under consideration: solar-photovoltaic (CPV) and solar thermal (CSP) plants. Solar PV tends to be more expensive to build, has fewer environmental impacts (low water use), but could deliver energy at a cost closer to grid parity (about 6c/kWh). Solar thermal plants have been built for many years (experience), are waterintensive, and deliver energy well above grid parity unless a feed in tariff or other subsidy is available. In addition, for large installations (>50 MWp), where CSP has an advantage, land and water are concerns. And even PV panels need to be washed.
Installation cost and operational and maintenance data are provided in the table between 2007-2015 for plants ranging from 100-150 MW).
Ever since Israel instituted the feed-in tariffs, investment from various sources has become available: banks, loans, project finance, corporate (e.g. Siemens), and even venture capital/private equity.
1. Which stakeholders are Israel’s policies incentivizing with their feed-in tariffs? Be specific, i.e. not ‘industry’ or ‘NGOs’. Which industries specifically, which NGO’s, technology developers, etc…
2. Find and describe examples of each form of finance for plants in Israel (use the internet as your resource), and estimate the cost of capital for each. Do not use the generic percentage data we used in class, but actual data from these cases. For example, if the European development bank is investing, what are its lending rates? If Siemens is investing, what is Siemens’ bond rating? Etc…
3. Calculate the levelized cost of electricity (in $/MW or c/kW) for CSP. The levelized cost includes all capital, operational and maintenance expenses (see Table).
4. What are the annual profit margins (% of revenue) for CSP systems in the absence of feed-in tariffs (search this information using general search engines)? In the presence of FITs (30c/kWh; a 250MW plant produces 250,000 kWh of electricity in one hour)? (To answer this question, you will need to search internet information.)
5. Given the margins you calculated in 3., and the expectations of capital (cost of capital) you found in 1., what type of capital would you say is appropriate for CSP deployment? CPV is a lot more recent form of utility scale solar, and many developments are still ongoing at the research and pilot testing level to increase efficiencies, etc… What type of capital is relevant to this application? (check the 2011 CleanTech Report).
6. What do you expect an Israel Solar CleanTech cluster to look like, in terms of its business ecosystem and type of capital that needs to be deployed? (see EF CleanTech Cluster note)
1. The following paragraphs identify the country’s major stakeholders and how they are incentivized by the new policies.
- Ministry of National Infrastructures (MNI): is responsible for the formulation of RE policies in the country. The Ministry aims at implementing Government Decision No. 4450 (as of January 29th 2009), which sets a target of 10% of RE sources in Israel’s total energy generation 2020.
- Public Utility Authority (Electricity) (PUA): it is responsible for the determination of the tariffs and the division of quotas between actual and potential producers of RE.
- Ministry of Finance (MoF): it is in charge of launching a tender for the establishment of three RE power plants (2 thermal-solar power plants and one PV power plant) . The ministry is partnered with the Ministry of National Infrastructures, and the Interministerial Tender Committee. 
- Solar EPC Contractors: They are the companies that perform the integration of the entire PV or CSP solar plants. Typically, they participate in government issued tenders and upon issuance of projects, usually finance their projects using a combination of debt and equity. Eg. Sunday Energy
- Solar Equipment manufacturers: These are the manufacturers of the various components of solar power plants like panels, collectors, mirrors, heat collection elements, inverters etc. For example, Luz II Ltd.
- Solar Technology Startups: Although the low length of the feed in tariff period ( 7 years ) will limit adoption of any new technology, technologies that focus on improving efficiencies of existing and new solar installations have enormous potential for rapid adoption. Eg. Solaredge.
- Financial Services Industry: The feed in tariffs have enabled solar projects in Israel to be bankable and profitable. This has attracted a slew of investors in the form of commercial banks, development banks, Venture capitalists, institutional lenders etc.
- Foreign corporate: Numerous large corporate conglomerates have entered the Israeli clean technology market after the feed-in tariffs were established. Eg. Siemens, GE
- Small Homeowners and business owners: They are incentivized directly by the feed-in tariffs. They can significantly reduce their energy expenditure by utilizing the subsidies available.
- Real Estate: The land tenders issued for sites suitable for solar power stations will attract various real estate companies looking benefit from the large amounts of land required for utility scale projects.
Great detail. Sources of information?
2. There are 3 major forms of financing solar plants that we see examples of in Israel. They are corporate finance, Project finance and Venture capital.
Corporate financing, also known as internal or equity financing is characterized by the use of corporate credit and general assets of a corporation, typically a utility, as the basis for credit and collateral. Because the overall credit rating of the company is used to estimate debt and equity costs rather than project specific capital costs, the cost of financing is low due to a better credit standing.
Siemens is very active in the solar thermal space in Israel. In 2009, the German conglomerate bought the Israeli solar thermal power company for about $418 million from UK firm Ecofin. Ecofin bought a 40% stake in Solel Solar Systems Ltd in 2008. Siemen`s bond rating with Moody`s is A1 and with S&P it is A+. Siemens also purchased a 40% stake in the Arava Power Company with the aim of building solar farms of a total capacity of 40 MW in August 2009. The Arava Power Company has already been approved for a 4.9 MW solar plant at Kibbutz Ketura in the Negev.  good.
Project finance is divided into 2 forms, Project bank debt and Project Equity and a mix of both usually finances most utility scale solar projects.
Project Bank debt is usually secured from commercial banks & Institutional lenders. The level of perceived technological risk, experience of the company and the profile of the lender usually determine the interest rate.
An example of project equity is Sunday Energy Ltd.`s joint venture with Ormat Systems Ltd. The JV is worth $195 million and has 36 MW of PV systems under it`s scope. Under the agreement, Sunday will contribute rights to all its properties and roofs and Sunday and Ormat will be the joint EPC contractors to develop them into Special Purpose Entities (SPE) generating Energy. Ormat will have a 70% of each SPE and have control over them. The expected cost is $195 million and expected revenue due to a long term PPA with the Israeli Electric Corporation is approximately $30 million annually. The SPEs expect to finance their capital expenditure with 80% Non-Recourse project finance debt. Good.
VC and IPOs ok public financing are also viable options. Companies in the Israeli cleantech sector raised $283 million in VC money in 2011. Many startups have had success raising capital, eg. Brightview System Ltd. Raised $6 million in their first round of financing in 2009. The investors include Israel Cleantech Ventures, Hasso Plattner Ventures and others. Also in 2011, Energix Renewable Energy, a PV system builder and operator managed to raise $43.3 million through an IPO.  
However, Venture Capital is not suited to financing companies that generate the bulk of their revenue through large solar projects. These projects operate on slim operating margins that are not commensurate with the high returns expected by VCs. Also, one of the main requirements of VC financing is that company should be able to achieve rapid growth in a manner that the growth in revenue will far exceed the capital requirements required. This is clearly not the case with solar projects. V. good.
Also, companies could use institutional funds and banks like the World Bank and the European Investment bank. A new multi-billion fund ($5 billion pledged so far) managed by World Bank for climate change mitigation to finance “transformational” projects. Terms are very concessional; 40-year term, 10 year grace, 0.25 % service fee, zero interest rate, for renewable energy projects. Also, EIB invests in renewable projects worldwide. The EIB initially invested 50 million euros in the Ashalim thermal power station and later, it doubled its investment to 100 million euros. Interest rates are based on EIB’s borrowing cost with a small margin to cover administrative expenses and other costs.  ok – no indication of cost of capital for non-development bank capital?
3. LCOE (given) – $311.8/ MWh
In terms of $/MW it is: $7464/ MW.
4. Normal price of energy in Israel is: 12c/kWh 
LCOE for CSP – 31.1c/kWh
Therefore in absence of the feed-in tarrif, the profit margin for CSP in Israel : -159.17%
As we can see without, feed-in tarrifs, CSP plants are highly unprofitable.
With feed-in tariff of 30c/KWh, profit margins: -3.7% right, so need other concessions to make this work…
5. The ideal financing mechanism to fund large-scale CSP projects, in my opinion would be project finance that has a suitable mix of debt to equity. Yes The exact distribution would depend on the terms of the agreement and the cost of capital negotiated upon. Both project debt and equity have their own set of pros and cons.
Project bank debt has been used for the majority of the CSP projects around the world, and the non-recourse loans usually provided offer protection to the EPC contractors that are building the plants. Also, banks interfere very little in management decisions often no external rating is required. The disadvantages include higher cost of capital post-financial crisis & high level of risk perceived for the CSP technology.
Project equity is attractive because these investors usually have a far greater risk appetite. The main reason to do equity is that you don’t have to service your loans! Also, if the equity partner were experienced in the field, it would be a massive advantage. In case the investor is a large corporate body ( eg. Siemens` takeover of Solel ) it is possible that they are very technologically strong in the relevant field. Disadvantages include higher yield expectations and possibility of conflict of interest with other sponsors.
6. With comprehensive policies incentivizing installation of both CPV and CSP plants, the Israeli Solar cleantech cluster could have a bright future. Also, due to Israel`s location, it is a national imperative for them to achieve energy independence. Israel has a high solar irradiance level of 2400 kwh/m2/year, which is very conducive for generating solar power. The estimated installed capacity of solar (both PV and thermal) for in Israel in 2020 is 2,375 MW. 
A major constraint for RE development in Israel is the lack of interconnections with neighboring countries (apart from Gaza/West Bank), which will not allow exporting RE within the region and, eventually, to the EU.
A major portion of the solar sector will consist of large-scale CSP projects. Israel has set a national target of generating 500 MW by 2010 and another 1000 MW by 2015 from CSP. The region offers a large area, as the selected site for the first 100 MW has adequate land for 5000 MW of CSP plants.
With an initial parabolic trough plant of 100 MW, the Israeli Ministry of National Infrastructure, overseeing the energy sector, decided in November 2001 to introduce concentrating solar power as a strategic ingredient in the Israel electricity market from 2005. The country plans to build a new solar station in The Negev desert, which covers 55% of Israel’s land, every year for the next 20 years. It also plans to increase renewable energy contribution by 15 to 20% of the total energy generation capacity by 2020. 
Also, in an encouraging move for the PV industry, the Israeli PUA enacted tariffs for mid-sized PV plants of no less than 51 kWp. The feed-in tarrif is .28 euro/ kWh and that will reduce at 5% per annum from 2012 to 2014. 
Also, the technology startups in Israel are showing great potential and Israel is poised to become a hotbed of Solar R&D and innovation. A good example is solar inverter & power optimizer manufaturer, SolarEdge who have attracted investment from GE amongst others.
In terms of finance options, the investment in solar cleantech cluster is bound to increase as long as government support and policies are maintained. Also, the entry of larger financing instruments like project bonds might make an appearance because of their success in other place. For example, NextEra`s USD 935 million CSP project in Riverside County, California is being financed in part by USD 702 million project bonds issued by Credit Suisse Group AG.
Good review. So what would cluster look like?
References: very good.
 Israeli Ministry of National Infrastructures. (2010) Energy, Alternative Energies. Web. Accessed: 03/05/2012.http://www.mni.gov.il/mni/en-US/Energy/EnergyGeneral/default.htm
 Siemens. Web. Accessed: 03/05/12.http://www.siemens.com/investor/en/debts_ratings/ratings.htm
  Cleantech Investing in Israel. Web. Accessed: 03/05/2012.http://cleantech-israel.blogspot.com/2009/10/siemens-to-buy-solel-solar-for-418.html
 Cleantech Investing in Israel. Web. Accessed: 03/05/2012.http://cleantech-israel.blogspot.com/2009/10/ormat-and-sunday-energy-sign-195m-solar.html
 Cleantech Group. (2011) Quarterly Cleantech Investment Monitor. Vol 10/Issue 4.
 Cleantech Investing in Israel. Web. Accessed: 03/05/2012.http://cleantech-israel.blogspot.com/2009/01/brightview-raises-6-million-from-israel.html
 World Bank. Web. Accessed: 03/05/2012.http://www.estelasolar.eu/fileadmin/ESTELAdocs/documents/STEI_Forum/Presentations/Session_2.2.A_-_Betrand_Marchais_-_World_Bank_Support_Mechanisms_for_Solar_Energy_in_Med_Region.pdf
 European Investment Bank. ( October 2010 ) Study on the Financing of Renewable Energy Investment in the Southern and Eastern Mediterranean region. Web.http://www.eib.org/attachments/country/study_msp_en.pdf
 Dr. Amit Mor & Shimon Seroussi. ( March 2, 2007 ) Energy Efficiency and Renewable Energy Israel – National Study. Web.http://www.planbleu.org/publications/atelier_energie/IL_National_Study_Final.pdf
 Solarpaces. 2008. Legislation Promoting CSP Implementation. Web. http://www.solarpaces.org/Library/Legislation/legislation.htm
 Energy Boom. 2009. The Concentrated Solar Power State of Play in Middle East. Web http://www.energyboom.com/concentrated-solar-power-state-play-middle-east
 Dr. Amit Mor, Shimon Seroussi, Malcolm Ainspan. ( 16 June, 2005 ) Large Scale Utilization of Solar Energy in Israel – Economic and Social Impacts. Web.http://www.ecoenergy.co.il/Portals/0/Solar%20Energy%20in%20Israel%20-%20a%20cost-benefit%20analysis.pdf
 Solarpaces. 2008. CSP Project developments in Israel. Web. http://www.solarpaces.org/News/Projects/Israel.htm
 Solar Plaza. 2010. Israel continues to stage 2 in the 2020 plan for Energetic independence. Web. http://www.solarplaza.com/pressrelease/israel-continues-to-stage-2-in-the-2020-plan-for-e