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Financing challenges for solar

PV investments – Historical and empirical analysis

Janosch Ondraczek

University of Hamburg,

Research Unit Sustainability and Global Change

Solar & Off-Grid Renewables Africa Nairobi, 5 March 2014

Titelmasterformat durch Klicken bearbeiten (1) Introduction

(2) Small-scale PV: Kenya’s SHS market

(3) Utility-scale PV in Africa

(4) Kenya case study

(5) Conclusions

Outline:

(1) Introduction

Annual solar electricity yield per country (kWh/kWp):

Source:

Ondraczek et

al. (2013)

(1) Introduction

Installed solar PV capacity per country (Wp/capita), 2010:

Source:

Ondraczek et

al. (2013)

(1) Introduction

• The “African energy challenge”:

- lack of access to electricity (ca. 70% in SSA)

- rapid increase in electricity demand

- investment required: US$ 16-22bn p.a.

- severe constraints in capital, skills & governance

• Contribution of solar PV in Africa:

- installed capacity likely to increase significantly until 2035:

- PV limited to off-grid electrification in rural Africa due to its high cost?

Financing challenges for PV investments in Africa (1):

Year 2009 2035

Capacity 0 GW 16-34 GW

CAPEX (@ US$ 2.2m/MWp) n.a. US$ 34-74bn Source:

IEA (2011)

(1) Introduction

• The financing challenge for PV investments, e.g. in Kenya:

- 200 MWp of approved PV plants = US$ 500m+ of investment

- major financing challenge for projects and supply chains

Financing challenges for PV investments in Africa (2):

Manufacturing (modules, BoP)

Project development (design, permits, finance)

Installation (modules, BoP)

O & M (tech., comm.)

Sales & logistics (modules, BoP)

Locally sourced and financed?

- sales & logistics (domestic supply chain)

- project development (local developers / offices)

- construction & installation of plant (local firms)

- operation & maintenance (local staff)


(2) Small-scale PV: Kenya’s solar market



(5) Conclusions

Outline:


1970s:

signaling & broad- casting

GoK

1980s:

off-grid electrication & SHS

GoK, donors & households

1990s:

SHS & off-grid eletrification


2000s:

SHS & off-grid eletrification


2010s:

Pico-solar, SHS, off-grid electrification & large on-& off-grid projects

GoK, donors, households & private capital

Evolution of Kenya’s solar PV market since 1970s:


• Kenya, overall market size (installed capacity):

• Segments of Kenya’s solar PV market, 2009:

- off-grid SHS: approx. 6-8 MWp; largely OTC trade

- off-grid institutional systems, telecom, commercial & tourism:

remaining 2 MWp; different funding sources (GoK, donors, private

companies)

• Larger on- and off-grid systems all over SSA will require

fundamentally different funding sources!

Year 1990 2000 2009 2012

MWp 1.5 3.9 8-10 16

Sources: ECA (2012),

Ondraczek (2013)

Source:

Ondraczek (2013)

Sub-Saharan Africa’s PV market dominated by Kenya:


5,000 35,000

97,500

200,000

320,000

0

50.000

100.000

150.000

200.000

250.000

300.000

350.000

1990 1995 2000 2005 2010

Source:

Ondraczek

(2013)

Estimated number of SHS installed in Kenya:


The effect of income on the choice of lighting fuel:

Source:

Lay et al. (2013)


Effect of the prevalence of SHS on the adoption of SHS:

Source:

Lay et al. (2013)





(5) Conclusions

Outline:


• Hypothesis 1: “Past financing model won’t work in future”

- new market segments: pico solar and utility or commercial scale PV

- new financing models: pay-as-you-go (pico solar) and long-term funding for

large-scale PV

• Hypothesis 2: “Donor and government funds won’t suffice”

- solar investment until 2035: ca. US$ 1.5-3.0bn p.a. across SSA

• Hypothesis 3: “Availability and cost of long-term private

capital hinder market development”

- sub-Saharan Africa generally not attractive enough for private capital

- available capital very costly and short-term

renders renewables uneconomic and/or drives up required subsidy level

Future capital requirements for renewables in Africa:


0

5

10

15

20

25

30

35

JP

N

IRL

C

HE

G

BR

N

LD

E

SP

S

WE

C

AN

F

IN

ITA

P

RT

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P

OL

A

UT

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N

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C

ZE

F

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S

VN

G

RC

L

TU

D

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E

ST

H

KG

N

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B

EL

M

LT

S

GP

B

RN

IS

R

TU

N

BH

S

LB

Y

AU

S

MY

S

CH

N

HU

N

KO

R

KW

T

QA

T

CY

P

SM

R

OM

N

TH

A

ME

X

AR

E

HR

V

DE

U

BH

R

LV

A

CH

L

BG

R

KN

A

VU

T

LC

A

PA

N

FJI

DZ

A

BL

R

PH

L

AT

G

VC

T

JO

R

BIH

B

RB

T

TO

G

RD

E

TH

D

MA

L

BN

M

NE

S

YC

N

PL

S

YR

Z

AF

R

US

M

KD

IN

D

PN

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CP

V

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UR

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EG

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DJI

NA

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RO

U

SW

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N

MD

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BW

A

MU

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CO

L

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IRQ

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NM

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LV

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MR

ID

N

PR

K

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M

LS

O

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B

BT

N

GA

B

LK

A

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U

KE

N

SL

B

BG

D

GU

Y

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K

MD

A

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OG

K

AZ

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T

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EC

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BD

I C

AF

N

GA

B

EN

C

IV

SE

N

SD

N

PS

E

RW

A

UK

R

TW

N

UZ

B

AR

M

BF

A

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I D

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K

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T

KM

A

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EN

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UB

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ER

M

NG

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JA

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GIN

U

GA

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EO

T

JK

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LE

G

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L

AO

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M

WI

GM

B

PR

Y

ST

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BR

A

MD

G

CO

D

FR

O

ZW

E

So

urc

e: O

nd

racze

k e

t a

l. (

20

13

)

Weighted average cost of capital in % (2006-11 or latest):

≈


0

5

10

15

20

25

30

35

So

urc

e: O

nd

racze

k e

t a

l. (

20

13

)

Weighted average cost of capital in % (2006-11 or latest):

Countries of sub-Saharan Africa

255%


• Ondraczek et al. (2013) look at influence of solar irradiation, cost of

capital on LCOE of on-grid solar PV in 160 countries:

- three-step approach for calculation of country-specific solar PV LCOEs

Financing costs determine solar PV economics:

Input parameter Value Unit

Plant lifetime 25 years

Investment

cost/kWp

a) global average:

b) Germany:

5,010

2,847

USD

USD

Operating cost 1.5 %

Scrap value 20.0 %

Degradation

factor

0.5 %

1 Globally uniform values: 2 Country-specific solar electricity yields:

3 Country-specific discount rates (WACC):

• population-weighted average solar yield (GHI)

• assuming optimal/fixed orientation based on

Breyer & Gerlach (2013)

• GHI ranges from 1,055 to 2,382 kWh/m²/a

• assumes blend of equity (30-50 percent) and

debt (50-70 percent) typical for project financing

• based on data of World Bank and UNFCCC

• WACC ranges from 3.7 to 255 percent


LCOE of on-grid solar PV per country (US$2011/kWh):

Source: Ondraczek et al. (2013)


Influence of solar irradiation and capital cost on LCOE:

Uniform

Irradiation So

urc

e: O

nd

racze

k e

t a

l. (

20

13

)


Subsidy level required per country (US$2011/kWh):

Source: Ondraczek et al. (2013)





(5) Conclusions

Outline:


• Cost of capital is crucial determinant of solar PV economics

determines potential role of this technology in future energy mix

• Ondraczek (2014) investigates potential role of solar PV in Kenya:

- in line with least cost power planning of many countries in SSA (e.g. LCPDP)

- energy planners use social discount rate, not private cost of capital (WACC)

• Availability of capital as much a constraint as cost of capital:

“The most common barrier cited in interviews was securing project financing,

particularly at interest rates suitable for the relatively low REFITs for

technologies other than hydro.”

[Renewable Energy Ventures(K), Ltd and Meister Consultants Group Inc., Powering

Africa Through Feed-In Tariffs, February 2013, page 39.]

Future role of solar PV influenced by cost of finance:


• Base case solar LCOE estimate

($ct2011/kWh): $ct 21.0/kWh

- average values for CAPEX

and OPEX (Kenya-specific)

- assumes 8% discount rate

• Scenario analysis ($ct2011/kWh):

- discount rate: $ct 16.5-28.4

(5.0-12.5%)

- investment cost: $ct 18.9-30.0

10 15 20 25 30

Base case

Scrap value

Degradation factor

Operating cost

Plant lifetime

Location

Investment cost

Discount rate

Economics of on-grid solar PV projects in Kenya:


LRMC of power generation projects in Kenya (2010 est.):

6,5 6,9 9,1 9,3 10,2 11,1 11,3 12,7

15,1

21,0 21,7

30,2

0

5

10

15

20

25

30

35

Sources: LCPDP, 2011; Ondraczek, 2013

Peak power Base power

$ct 2

01

0/k

Wh





(5) Conclusions

Outline:

(5) Conclusions

(1) scaling up renewables poses major financing challenge for

projects and supply chains

(2) larger on- and off-grid systems require fundamentally different

financing models and sources of funding

(3) donor and government funds won’t suffice; private capital is also

needed

(4) availability and cost of long-term private capital hinder market

development and limit the future role of solar PV and other

renewables

(5) more efficient capital and goods markets in ‘Sunbelt’ countries

would improve solar PV economics

Keya financing challenges for PV investments in Africa:

Titelmasterformat durch Klicken bearbeiten

Janosch Ondraczek

University of Hamburg

Research Unit Sustainability and Global Change

Grindelberg 5, 20144 Hamburg, Germany

Phone: +49-40-42838-2053

Fax: +49-40-42838-7009

E-Mail: [email protected]

Internet: http://www.fnu.zmaw.de

mailto:[email protected]

http://www.fnu.zmaw.de/

Further reading

Full references and working papers available online at www.fnu.zmaw.de >>> Publications

Ondraczek, J., Komendantova, N.,

Patt, A., 2013: WACC the dog: The

effect of financing costs on the

levelized cost of solar PV power; FNU

Working Paper No. 201, May 2013

Ondraczek, J., 2013: The sun rises

in the east (of Africa): A comparison

of the development and status of

solar energy markets in Kenya and

Tanzania; Energy Policy, May 2013

Lay, J. Ondraczek, J., Stoever, J.,

2013: Renewables in the energy

transition: Evidence on solar home

systems and lighting fuel choice in

Kenya; Energy Economics, Nov.

2013

Ondraczek, J., 2014: Are we there

yet? Improving solar PV economics

and power planning in developing

countries: The case of Kenya;

Renewable and Sustainable

Energy Reviews, Feb. 2014

Backup: Input parameters and values for Kenya

Input parameters and values (“base case”):

Input parameter Value Unit Source(s)

Plant lifetime (T) 25 years [1-3]

Installed capacity 10,000 kWp own assumption

Investment cost (It) 2,566 US$/kWp [4]

Operating cost (Ot) 1.5 percent [2-3,5]

Scrap value (Dt) 10.0 percent own assumption

Real discount rate (r) 8.0 percent [6]

Location Mombasa n/a own assumption

Global horizontal irradiation 5.43 kWh/m²/day [7]

DC to AC derate factor 76.9 percent [7]

System output (St=0) 1,374 kWh/kWp [7]

Degradation factor (d) 0.5 percent [2]

Sources: [1] IEA/NEA, 2010; [2] Peters et al., 2011; [3] Schmidt et al., 2012; [4] Hille et al., 2011; [5] Bazilian et al., 2013;

[6] LCPDP 2011; [7] PVWatts

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