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Financing Sustainable Energy: Seizing the Business Opportunities for Financial Institutions

Case Study: Financing of a 53 MW Bagasse-Fired Cogeneration Project

Alan Dale C. Gonzales

Organized by: Thai Bankers’ Association (TBA) and the World BankSupported by: National Economic and Social Development Board (NESDB),

Federation of Thai Industries (FTI), and the European Commission

Novotel, Bangkok, Thailand29-30 March 2007


MATERIAL BALANCE in the SUGAR INDUSTRY

1 tonne ofsugarcane

100-120 kg Sugar

Process energy required:25-30 kWh/tonne of sugarcane0.4 tonne of steam

Waste:290 kg Bagasse ~ 100 kWh


Electricity

30

Heat

50

(i) Cogeneration System

Heat Loss20

InputEnergy

100

(ii) Separate Generation

Input forPower

Generation

86

Input forBoiler

56

InputEnergy

142

Heat Loss6

Heat Loss56

Cogeneration vs. Separate Energy Production


Owner/Developer : Dan Chang Bio-Energy Co., Ltd.Major Shareholders : Mitr Phol Sugar Co., Ltd.; Mitr Particle Board;

OthersLocation : Dan Chang, Suphanburi, ThailandTotal Capacity : 53 MWFuel : Bagasse, cane leaves, wood bark and rice huskMajor Off-takers : EGAT (SPP, 21 years, firm contract)

Mitr Phol Sugar Co., Ltd. (steam + power) Major equipment : Boilers - 2x120 tph, 68 bar, 5100C (Alstom)

Turbine - 41 MW extraction-condensing (Alstom)Existing boilers + turbine (from sugar mill)

O&M : InternalIncentives : BOI privileges, EPPO subsidy, COGEN 3 supportFinancing : Project finance

Project Structure: Dan Chang BioProject Structure: Dan Chang Bio--EnergyEnergy


53 MWe Bagasse-Fired Cogeneration Project

Owner/developer: Dan Chang Bio-Energy Co., Ltd.Project type: Bagasse-fuelled energy plant Location: Dan Chang, Suphanburi, ThailandDescription: Dan Chang Bio-Energy is a special purpose company set up to implement this cogeneration project. The plant is located adjacent to a sugar mill which will supply bagasse as fuel. The electricity generated from the project will be sold to the sugar mill and the excess power to the Electricity Generating Authority of Thailand (EGAT). The project consists of new equipment (41 MW) & old transferred from the sugar mill.Power Purchase Agreement: “Firm” contract, 21 yearsTariff: 1) energy payment, indexed to natural gas price

2) capacity charge, indexed to Dollar exchange rateIncentives: BOI privileges, EPPO subsidyCommercial operation date: May 2004

Financing Arrangement (1)Financing Arrangement (1)


53 MWe Bagasse-Fired Cogeneration Project

Total project cost: THB 2,170 million Shareholders’ equity: ~29 % = THB 620 millionLoan: ~71 % = THB 1,550 million Financing institution: Siam Commercial BankInterest rate: MLR before operation, Fixed for 1st yr, MLR-1.00%

afterwardsMaturity: 11 years (including grace period)Grace period: 2 yearsSecurity arrangements:

- Mortgage of all land, building and equipment to the bank- Assignment of PPA (DC vs. EGAT)- Assignment of Utilities Supply Agreement (DC vs. MP)- Corporate guarantee for the whole portion of the loan (to be released when listed in SET)- All risk insurance for equipment & all assets in the name of the bank.

Financing Arrangement (2)Financing Arrangement (2)


Financing StructureFinancing Structure


Biomass Energy ProjectProject Finance Model

Financing Directly to Project

Power Salesto the Grid

OtherInvestors

Biomass Fuel Supply

Fuel Payment

Loan Repayment

LoanFundingPPA Assignment

CompletionGuarantee

ConstructionGuarantee

Construction Services

Other FuelSupply Sources

ENERGY PLANT COMPANY

FINANCING INSTITUTION

EPC CONTRACTORFACILITY SITEOWNER

Fuel Supply Power Payment

Fuel Payment Power Sales

Dividends

Equity

Construction Payment

Heat/Power

Energy Payment

Equity

Dividend


Project finance

Mechanism: - Special purpose company takes out the loan to finance the project- The source of debt service (interest & principal) is primarily the cash flow from the project- Lending entity has no or limited recourse to the sponsors

Conditions:- Acceptable D/E ratio- Fuel supply security- Established viability on reliable cashflow projections- Acceptable debt service coverage ratio

Typical structure:- Strong involvement of local banks- Use of both Thai Baht and foreign currency tranche- Maturity of >10 years

Financing RouteFinancing Route


Project finance (cont.)

Security arrangements: - Assets pledged as security to the bank- Assignment of contracts to the bank (PPA, SSA, etc.)- Covenants related to shareholding structure, issuance of dividends, additional loan- Accounts pledged to the lenders- Construction guarantee- Partial guarantee

Documentation: - Information memorandum- Contracts (PPA, SSA, EPC, FSA, EIA)



Project finance (cont.)

Advantages: - Minimum risk carried by the sponsors- Loan does not appear on the balance sheet of the sponsor- Long maturity of loan possible to achieve

Disadvantages:- May take longer time to reach financial close- Involves complex legal documentation and contractual arrangements- Strict requirements for due diligence as well as legal and technical assessments- High compliance for administration & reporting requirements



FUELSUPPLIER

FINANCIALINSTITUTIONS Funding agreement

MAINCONTRACTOR

INSURANCE COMPANY

Insuranceagreement

Fuel supplyAgreement

EPC/spare partscontract

Permits & licences HOSTGOVERNMENT

Operation &maintenance contract

PLANTOPERATOR

POWERPURCHASER

Shareholder'sagreement

Power purchaseagreement

PROJECT COMPANY

SHAREHOLDERS

Partner 1 Partner 2Otherequity

investors

"Deliver or payagreement"

"Take or payagreement"

Sub-contractor

Consultants/Advisers

Security ArrangementsSecurity Arrangements

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