1. Jan H Jansen, Senior lecturer Management Accounting & (International) Finance Researcher Chair of TQM in Organisational Networks Minor Wind Energy Project Management Research Group TQM in Organisational Networks

2. Minor Wind Energy Project Management Project FinanceLaw Supply Chain Management Construction Mechanical Engineering Energy Commercial Engineering

3. Wind Energy Project Management The exchange course in Wind Energy Project Management at HAN University of Applied Sciences is delivered in cooperation with OutSmart wind professionals. This course deals with every aspect of harvesting wind energy using offshore wind farms. It is a unique study designed for Engineering, Economics and Management students. (www.han.nl/opleidingen/exchange-courses/wind-energy-project-management) Research Group TQM in Organistional Networks

4. http://wepmprojectfinance.wikispaces.com/ Research Group TQM in Organistional Networks

5. Agenda Research Group TQM in Organistional Networks

6. Agenda Project finance Markets for energy and renewable energy ETO’s & Engineering Sustainable Investment Decisions (DOSIT) Investment Model Research Group TQM in Organistional Networks

7. Agenda Project finance Energy market Macro Meso Micro ETO’s & Engineering QC, TCO & LCC Foundation Mechanical Engineering Energy Risk Management Sustainable Investment Decisions DOSIT Investment Model Data & Assumptions Cash Flows Decision Criteria Research Group TQM in Organistional Networks

8. Agenda Project finance Energy market Macro Meso Micro ETO’s & Engineering QC, TCO & LCC Foundation Mechanical Engineering Energy Risk Management Sustainable Investment Decisions DOSIT Investment Model Data & Assumptions Cash Flows Decision Criteria Research Group TQM in Organistional Networks

9. Characteristics Project Finance Economic life > 20 years PPP (Private Public Partnership) Large investments –Equity providers (Sponsors) –Debt providers (Banks) Off taker contract S.H.E.Q. People, Planet & Profit (PPP) Ring fencing construction –SPV ( Special Purpose Vehicle) … Research Group TQM in Organistional Networks

10. Ring Fencing Research Group TQM in Organistional Networks Project Company Finance Equity Investors LendersLenders Operator (O&M) Government Support Agreement Government Concession / License Off taker (Power Distribut er) Input Supplier Contractor (Construction)

11. Project Risk (Source: Yescombe) Research Group TQM in Organistional Networks Project Risks Commercial Risks Completion Risk Environmental risk Operating RiskRevenue Risk Input Supply Risk Force majeure risk Contract mismatch risk Sponsor support Risk Macroeconomic Risks Inflation Risk Interest Rate Risk Exchange Rate Risk Political Risks Currency Convertibility Risk Transfer Risk Expropriation Risk War & Civil Disturbance Risk Change of Law Risk Quasi-political Risks

12. International Business Risk (Source: Eiteman) Research Group TQM in Organistional Networks International Business Risk Firm Specific Risks Governance Risks Country Specific Risks Transfer Risks (Blocked funds) Cultural & Institutional Risks Global Specific Risks Terrorism & war Cyber attacks Environment

13. Agenda Project finance Energy market Macro Meso Micro ETO’s & Engineering QC, TCO & LCC Foundation Mechanical Engineering Energy Risk Management Sustainable Investment Decisions DOSIT Investment Model Data & Assumptions Cash Flows Decision Criteria Research Group TQM in Organistional Networks

14. Complexity Electricity Market Research Group TQM in Organistional Networks Sources: Traditional: Oil Gas Coal Nuclear Renewable: Wind Hydro Solar Biomass Geothermal (D irect) Storage of electricity Losses during transport

15. Energy Prices in the future Annual Energy Outlook 2010 of the U.S. Energy Information Administration: The average annual increase in real electricity prices till 2035 is calculated; the expected annual increase is 0.85% for real electricity prices per KWh 0.85% = [ {(10.2 / 8.6) (1/27) -1)*100 ] Research Group TQM in Organistional Networks

17. Agenda Project finance Energy market Macro Meso Micro ETO’s & Engineering QC, TCO & LCC Foundation Mechanical Engineering Energy Risk Management Sustainable Investment Decisions DOSIT Investment Model Data & Assumptions Cash Flows Decision Criteria Research Group TQM in Organistional Networks

18. ETO’s & Engineering Research Group TQM in Organistional Networks

19. ETO’s & Engineering Some abbreviations and concepts QC: Quality Costs TCO: Total Cost of Ownership LCC: Life Cycle Costing Research Group TQM in Organistional Networks

20. Quality Costs Prevention Costs –Engineering –Supplier evaluation –Preventive maintenance of equipment –Testing of new materials –Etc Appraisal Costs –Inspection (manufacturing process) –Product testing Internal Failure Costs –Rework –Scrap –Spoilage –Additional engineering –Etc External Failure Costs Customer support Additional repair and/or engineering Warranty Liability claims Research Group TQM in Organistional Networks

21. Engineering We distinguish three main technical aspects of wind farms: Foundation –Soil –Jacket –Currents / Stream Mechanical Engineering –Corrosion –Fatigue –Performance (long term) Electricity & Energy –Power generators –Power electronic converters –Power cables –Grids –Sensors –Controllers –Converters –Computers –Batteries –Motors –Lighting –Climate control Research Group TQM in Organistional Networks

22. Risk Management Research Group TQM in Organistional Networks Risk categories Enterprise Risk Management - Integrated Framework (COSO) : Strategic Operational Compliance Financial

23. Risk Modelling Process (EQECAT) Research Group TQM in Organistional Networks

24. Agenda Project finance Energy market Macro Meso Micro ETO’s & Engineering QC, TCO & LCC Foundation Mechanical Engineering Energy Risk Management Sustainable Investment Decisions DOSIT Investment Model Data & Assumptions Cash Flows Decision Criteria Research Group TQM in Organistional Networks

25. PPP principle Research Group TQM in Organistional Networks DOSIT (Dutch)SESIT (English) DuurzaamSustainable OndernemenEntrepreneurial SelectieSelection InnovatieveInnovative TechnologieTechnology Principle of ‘rentmeesterschap’ /Stewardship

26. DOSIT triangle Research Group TQM in Organistional Networks

27. Sustainable Supply Chain Research Group TQM in Organistional Networks Supply Chain → Raw materials & ComponentsBusiness development Logistic Processes & Production Packaging Warehousing & Distribution Product & Market Development Product Use & Reversed Logistics Aspects ↓ People Planet Profit

28. Agenda Project finance Energy market Macro Meso Micro ETO’s & Engineering QC, TCO & LCC Foundation Mechanical Engineering Energy Risk Management Sustainable Investment Decisions DOSIT Investment Model Data & Assumptions Cash Flows Decision Criteria Research Group TQM in Organistional Networks

29. SIM model Research Group TQM in Organistional Networks

30. Structure Excel model Research Group TQM in Organistional Networks

31. Assumptions & Data Investment amount (From the Cash Outflow section / CAPEX) Required Financial Structure for the total investment (100%) –Equity share or ε (For instance: 30%) –Debt share or λ (For instance:70%) Expected Energy prices Expected Inflation Expected Increase in labour rate (wages) Expected increase in maintenance costs Project Risk Beta (β p ) Risk free interest rate (R RF ) Interest rate Debts (R D ) Required Return on Equity (R E ) Exchange rates Tax rate = τ (30%) Governmental policies –Tax facilities –Subsidies Per kWh produced Investment amount Straight-line depreciation (Economic life wind farm: 20 years) Straight-line repayment schedule (Duration loan: 15 years) Of course the corporate tax rate can differ per country (we assumed no VAT in the model) Research Group TQM in Organistional Networks

32. Cash Outflows Investment (CAPEX) –License & Concessions –Foundation & Construction –Mechanical equipment Gearing box Transmission system –Energy Computer & Communication system Electricity system DC > AC High voltage Cable Scrap value (CAPEX) –Remove fee (negative / positive value) –Upgrade for new investment Maintenance (OPEX) –Volume –Price Research Group TQM in Organistional Networks

33. Cash Inflows Wind production (with a link to Volume) Revenue (Energy contract with the Off taker, normally energy distributer)) –Volume (with a link to Wind production) –Price per kWh Research Group TQM in Organistional Networks

34. Some nasty financial assumptions Required Return on Equity (Based on CAPM model): R E = R RF + β P * (R M – R RF ) Project WACC: R PWACC = R E * ε + R D * (1 – τ ) * λ Research Group TQM in Organistional Networks

35. Financial decision criteria Equity providers (sponsors) –Pay Back Period (PBP) –Break Even Time (BET) –Return On Investment (ROI) –Net Present Value (NPV) –Profitability Index or Net Present Value Investment Ratio (NPV / INV) –Internal Rate of Return (IRR) Providers of loans (banks) –Debt Service Coverage Ratio(DSCR) Research Group TQM in Organistional Networks

36. Scenarios MR: Middle of the road (12% R PWACC ) PS: Pessimistic Scenario (<12% R PWACC ) OS: Optimistic Scenario (>12% R PWACC ) Research Group TQM in Organistional Networks

37. Scenario analysis Research Group TQM in Organistional Networks

38. Agenda Project finance Energy market Macro Meso Micro ETO’s & Engineering QC, TCO & LCC Foundation Mechanical Engineering Energy Risk Management Sustainable Investment Decisions DOSIT Investment Model Data & Assumptions Cash Flows Decision Criteria Research Group TQM in Organistional Networks

39. Some financial formulas DSCR = (NCF + Interest Payments) / (Installments + Interest Payments) Research Group TQM in Organistional Networks r = R PWACC r = IRR