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Webinar: Introduction to Project Finance For Renewable Energy Projects - AI Summary, Mind Map & Transcript | Materials & Manufacturing Training at Swansea Uni | YouTubeToText
YouTube Transcript: Webinar: Introduction to Project Finance For Renewable Energy Projects
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This content introduces the fundamentals of project finance for renewable energy projects, explaining the process from initial concept to financial modeling and risk mitigation, emphasizing the creation of a special purpose vehicle (SPV) and the use of debt and equity to fund infrastructure development.
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[Music]
and we're here today to talk about
project Finance okay for renewable
energy projects but it can be for
anything really so what are we talking
about here just try and frame the
discussion before we start I come from
an engineering
background um and it's okay to sort of
know it's great to know about all the
technology that's available all the
renewable energy technology that's
available solar panels turbines of of
the kind of wind or or
Hydro but what we're trying to focus on
today is we're trying to build up the
concept of how we get those bits of or
those assets those renewable energy
assets into the outside world into the
built environment and normally that
comes down to two things doesn't it it
comes down to engineering and finance
and the the combination of those things
uh I don't think I'd be too amiss to say
that Engineers are not really much into
added in finance um I may be completely
wrong but uh but that's the general Vibe
I get but it's good to know it's good to
know as an engineer um a little bit of
both and so that's what we're going to
go through today we're going to try and
build it up in
stages so what's our concept well we are
here today because we want to build a
renewable energy generator now this
could be I'm talking here about wind
turbines solar arays Hydro but this
concept can be used of practically
anything thing what do we know what do
we come to the table with well we know
that these things are not for free they cost
cost
money um and it could be a lot of money
it could be a lot more money than than
we've got and so we'd have to find a way
of getting that money to to spend on these
these
things let's assume we let's just assume
that we come from a situation where we
don't have technical knowledge to build
such a system and run it and very few
people hold the skills to do everything
in a proc project so you know let's
assume that to begin with we want to
make money on any project that we Embark
upon and we even if we don't make a lot
of money we certainly don't want to lose
money and knowing all this we've come to
this decision and we thought we still
want to build a renewable energy
generator for whatever reason that may
be environmental reasons it may be
financial reasons but anyway it's
usually a combination of both but that's
what we've decided to do how do we go
about doing that well in really in short
we use project Finance all right that's
basically what we do and if you go
online and you look up a definition of
project finance and this one's from
Investopedia you'll say see the
something of the definition of it's a
long-term fund or funding of long-term
infrastructure of industrial projects
and public services using non recourse
or limited recourse Financial structure
and we'll we'll talk about that in a bit
debt and Equity are used to finance the
project and they're paid back from cash
flow to generate um cash flow generated
from the project
right great that's all wonderful and
well we can't just stop there can we we
have to figure out what this really
means and how to implement it into our
into our business practices and our
engineering practices so I've said there
it's a perfectly adequate explanation of
project Finance but I'm sure it leaves
the door open to further questions and
clarification and I didn't write um you
know and I wrote a a course basically on
how to do all this and this is what we
presen in today
so let's start by posing another
question how do we go about building a
renewable energy project like wind or
solar let's focus on wind and
solar so we need an idea we need a
concept so someone or a group some
people have to want to build this and
operate this asset excuse
me and not only do we have to have the
want and will to do this you know these
things are not these things are large
items we need they they take up land you
know they they're physical assets that
take up land and not only do they just
take up land they take up land for a
long period of time so it's not a
trivial thing they don't make land
anymore so we need um a willing
landowner we need not just a willing
landowner but we need a council and a
community that's going to allow people
to or the company to want to build on
this land and not just that we need a
physical connection to some kind of
off-taker which is usually the National
Grid or a private wire to do all this we
need technical expertise we need
designers we need Finance people we need
um operators you know we need a whole
bunch of people to to be able to do this
on a technical
level and then
crucially we need money don't we we need
money to pay all these experts and we
need money to actually keep this thing
running and we need money to buy the
thing and the beginning um so we need
some kind of
financing so renewable energy projects
involve building real infrastructure and
they cost money and um there's many many
ways in which these things can be done
so let that's um let's just say we live
in Wales South Wales this is a map South
Wales this is the land available to us
our canvas let's say that we want to
build a wind turbine or wind farm or
solar farm somewhere between ammanford
ponad P Delice in the middle there
somewhere and we we have a discussion we
we are the people um who want to do this
and we want to build a wind turbine
right there in the middle of that map
and I think there's some wind turbines
actually there already that's probably
why I picked this and you approach the
land owner if you can find out who they
are and he says yeah yeah sure you can
build my land it's obviously going to
cost you Grand rent every year and um
you've got to take them down after a
certain number of years well he probably
won't say that but that's built sort of
built into the concept of the whole
thing about 30 years let's make sure my
neighbors don't complain and you're
probably going to need planning
permission to do
it and so we ask ourselves can we do
this and I've put we there I've put we
in a a bold for a good reason because we
need to actually discuss who we are so
we want to build a wind turbine and the
farmer said it's okay which the farmer
you know large bits of land are normally
owned by Farmers things are getting real
we need to find out if this idea
actually works on a technical level and
not just that will it be financially
viable will the local planning Authority
allow it so who are we we are normally
what's called a special purpose vehicle
right know a special purpose vehicle is
basically a limited company which an
organization a group of people would
come together and create as the first
step to doing anything in a in a project now
now
this could already have been created you
could already have a company you know
but if you haven't this is what you do
to start usually so the special purpose
Vehicles it's a generic name for legal
entity basically or I looked up last
night the legal personality which I
found interest in ter of phrase um so
special purpose vehicles are set up they
can be limited companies they can be um
what's that uh limited liability
Partnerships public limited companies or
registered societies which we look go
have a look at on the next slide so in
the context of a renewable energy
project what do they do well they own
and distribute the shares um you know in
this company there will be a board of
directors and um you know ultimately
they'll probably be the people to make
decisions they'll have assets which they
will purchase and they'll hold within
that company loans will be taken out in
the name of that company any income and
revenue will come in and block to that
company and be
redistributed um basically all the
business will go through that company
you'll have accountants you'll have bank
accounts then what we saw earlier was
the thing called non recourse so special
purpose Vehicles reason why we do them
is because they're ring fenced all the
assets are ring fenced um and have
limited recourse which means if anything
goes wrong with the company the
directors are not personally viable you
know it's all part of the company to
sort out and they'll become liable
so any we won't go on too much about
that because it's not a huge part of the
course um we're not really talking about
that much during the actual course a
little bit on registered sociey so you
can think of a limited company probably
is something that is sort of a normal
thing some people may not you a
registered societies they may have
especially for the people in the
community energy sector these are more
aimed at promoting sustainable
development they have sort of a shared
ownership um and a really aimed at sort
of community welfare other than just
sort of profit making all right and
there's two things that there's two sort
of subsets of these you can have
cooperatives and Community benefit societies
societies
okay um so the question then remains we
know who we are now we're part of a
company or
organization and we need to ask
ourselves a few more questions don't we
so technical feasibility how do we
examine the techn technical feasibility
can we construct this project within a
proposed schedule and budget well
actually what are what is our schedule
and budget and once we complete it will
this will this asset actually operate at
this capacity or will it break down all
the time and for that matter what is our
actual plan capacity so so as we start
asking more questions and start thinking
about it a bit more we think to
ourselves well we're going to have to do
some sort of exercise here AR we we have
to do some sort of I've called it
resource scoping
exercise so for instance we're going to
have to figure out how much land we've
got what type of wind turbine or solar
array do we need how much energy is that
going to produce every year and
obviously that's going to depend on its
size and its capacity and its sizing
capacity will be subject to the
constraints of the local planning
Authority okay and size and capacity
will determine um can we actually get
this asset on the land that we want to
get it on so there's a lot of variables
here that we have to try and figure out
not only will the local Council be you
know stipulating things like access and
rated capacity and size and location you
got to do a lot more studies you may
have to find out if there's any ancient
monuments there there's any protected
habitat and all that kind of stuff that
goes with planning which we're not going
to talk about in this
course then the crucial one especially
in Wales I say especially in Wales I
don't know about the rest of the UK but
I know in Wales this is an issue can we
actually get our wind turbo in our solar
farm or wind farm can we actually get it
connected to the power grid and can we
do it at a reasonable cost the probably
answer probably that is no um or is
there somebody in near your buy an off
taker a large industrial estate where I
can actually connect my my asset to I'll
call it assets from now on okay I can
connect my asset to them and sell it
electricity directly to them and
crucially how much is all of this go
into cost that we're talking about okay
this is called
development Who develops the idea well
the initial idea has to come from the
company there's professional companies
who will do this every day it's their
job to to do these kind of things but as
small organizations you know you have to
come up with an idea we need technical
feasibility okay so we need to do
research res resource scoping to do
resource scoping you you can get you can
get Consultants to do this for you and
they'll charge you um money to do that
and obviously you have to get that money
from somewhere they'll do it with costly
software there's also things you can do
for free there's free tools that you can
use online to find out sort of yield
from solar and wind and stuff like that
and I've put that in bold there because
we will be doing that on this course we
will be using free tools online to
actually figure out what our yield is
from wind and solar in specific
locations which is really really
handy you will need plan permission
again that costs more money and it costs
it costs more than what I thought to put
it that way when you do these projects
so um usually you'll employ a third
party company to do these things like
delas we won't cover any more in this
course about planning I'll just say that
you would normally employ a consultant
and you normally have to pay a lot of
money to do
so the next thing you need is a
financial model and this costs money to
develop there are companies who will do
this and I put that in bold again
because that is what we are going to do
in this course is we're going to learn
how to do very early simple Financial
modeling so in order to have a financial
model you have to build a business model
first so now let's just assume let's
just assume that we've gone through a
development phase and we've got planning
permission and we know this Project's
going to work on a technical level um
what's our business model it's quite
simple really we wish to generate elect
electricity from our
asset we then use the revenue from
selling that electricity to maintain the
asset and we also pay tax on it
depending on the type of organization
that you're dealing with depend on the
organization that you are rather and
we're going to pay back loans and pay
back interest and finally if there's any
money left over we'll pay back that
money to community funds or private
lenders otherwise known as Equity
investors this isn't the only model
model but we need to start somewhere
don't we we need to sort of yeah we need
to start somewhere and a basic model is
a good place to start if you are a
community V benefit Society your model
may look slightly different um the
profits that you actually get may be
used then to fund Community projects
such as energy efficient programs fund local
local
facilities interest payments may be made
to members who have invested in the
project examples of these organizations
are in South Wales we in Swansea we' got
ga power in pire there's a company
called care kamarian renewable energy
and in Kamar there's a company called
any tag and these are Community benefit
societies so then
right you see an opportunity you want to
build a renewable energy asset now let's
have a look where we are we've haven't
got any cash we're not flush with cash
maybe we've got none you've certainly
never generated any cash before and this
is the case from for many organizations
especially Community organizations you
got no credit history you haven't got
really got any employees you may have
got a few may have got a few Goodwill
gestures coming in as well or you may be
a massive company and you've got loads
of employees you've never operated an
asset before these are really the worst
case scenarios I'm putting down here
there's no guarantee if you borrow any
money that you actually be able to repay
the loan so how do we pay for put an
example A5 million pound Sol project
under all of these hostile
conditions it doesn't look like a good
start does it to be
fair however project financing or
project finance and we read the
definition on the first slide or first
or second slide relies on long-term
interest infrastructure primar relies on
the financing of long-term
infrastructure which relies on um you
having cash flow in the project to
enable you to repay any loans
and it's a perfectly common way of
financing large infrastructure um
airports roads power plants most things
are built like this so if we take the
concepts we've just seen and we try and
put them on a diagram it may look
something like this I like this
diagram in the middle here we are our
special purpose vehicle this is where
decisions are made this is our
shareholders this is our business
structure this is our directors they
they are there they've made the decision
we want to build I'm going to going to
say a wind farm in this instance they
figured out how much it's going to cost
okay they've got all that
together they figured out and we're
going to do this this is Project
financing at the heart really they
figured out how much all this is going
to cost and that's called our capital
expenditure and that's called shortened to
to
capex in order to pay for a capital
expenditure capex they've had to
approach the bank and they've had to
raise some debt so they've got some
money so the positive Arrow um the way
this arrow is going denotes that there's
money coming from the bank into the
special purpose
vehicle and this money is going to be uh
sorry it's going to be borrowed from the
bank to pay for capital expenditure to
pay for our asset to pay for our Wind
Farm or solar farm special purpose
vehicle has also gone out into the
community and they've raised Equity okay
so there's money coming from Equity as
well now after we've built the
asset the asset then starts to generate
Revenue all right we get income we get a
yield we get money per kilowatt hour
megawatt hour from the um our
electricity sales via a PPA P power
purchase agreement so money starts
flowing in so initially money was
flowing out now we start to get money
flowing in from the money that flows in
we have to pay our operating expenses to
keep this asset actually a float and
running to his Peak
condition money will then be used to
repay any loans so that's principle and
interest and if there's any money left
over after doing all that and it's not a
guarantee excuse me we then pay back the
equity we then pay back uh you know
dividends basically to our Equity
shareholders okay so what's a PPA let's
focus on income from a PPA for the
moment power P agreement basically there
are energy companies um who will buy
electricity from you just like they will
sell electricity to you they have to buy
it first before they can sell it okay
and that's op that's done under what's
called a power purchase agreement and
there are certain companies who will buy
clean energy as they call it or whatever
they're calling it from um you know
renewable energy
assets simple as that
really talk about debt well we all know
what debt is if you have a mortgage or a
loan most people have these days debt
you borrow from the bank um they needs
to be clear there needs to be a clear
visibility if you're borrowing money
from the bank they need to understand
your project they need to be you all
need to be very clear on how you will
pay the money back if you don't pay the
money back then the bank May retain
ownership of the asset and there's
always risk
involved they will need to do due d due
diligence risk assessments they they
will charge you fees and they will want
Security on their money and they will do
all this and the sort of um and they
will also want Financial covenants which
will we may touch upon later if you take
a loan from the bank there will be a
loan length you will have interest you
will have to pay back interest and there
will be fees for the privilege of
borrowing money Equity slightly
different Equity is when you take
capital from an outside investor in
exchange for some kind of ownership of your
your
business and again it's based on having
a solid plan you know you you want to
make people want to invest money in this
business they want to make sure they get a
a
return um TP typically then investors
will receive dividends every year but
that's not obliged by law that's you
have to want to make sure that your
business is
successful you do have to give up some
of your ownership some of the ownership
in the company when you when you have a
you know when you go down this road
again equity and you may be an extensive
evaluation process but
anyway in order to actually raise money
from the bank there's usually a
condition where you need to get about
equities so in assessing the project
viability lenders will want to know the
technical feasibility the financial
feasibility the credit worthiness of the
project to be able to service this debt
um and so on and so forth
so the the question really is how do we
do this financial
feasibility or more importantly okay
let's go back a little bit so the
technical feasibility of the project is
there to ascertain the project can be
constructed within a proposed schedule
and budget it's you know then we have to
figure out how do we operate the plan
capacity um and so on and so forth okay
um the question is how do we do
this well we have to understand that
that lenders in their feasibility uh
proposals in their feasibility stage are
basically trying to mitigate risks your
project is always a risk and a good way
to mitigate risks in a project is to
first of all understand them and then
secondly to allocate them to the best
people place to handle them so we need
to attract money in from the bank and
investors and we do so in the form of
loans and um and uh
Equity they need some kind of guarantee
that you are serious and capable of
doing this project okay
and so they will drisk this these things
and add certainty to the project and
make sure there's cash flow through the
lifespan of the project by allocating
contracts to people who know what
they're doing and let me explain that
okay back to this
diagram who is actually going to build
your wind farm who is going to build
your solar farm well you employ an EPC
contractor okay an um um an engineer
puman Contra contractor and they should
be reliable and have a good track record
of being able to deliver on projects you
may have an owner's engineer actually
then acting on your behalf taking you
know as as an intermediary between you
and the EPC contractor and you want a
good relationship with all of these
people who you're working with so APC
contractors will take could take care of
the whole project for you in terms of
construction you may decide that you
want other works done by local companies
for instance your EPC contract could be
based in Bristol or London or whatever
and you're down in uh in Swansea or pire
or somewhere in Wales and you maybe you
want your um your ground Works to be
done by a local contractor okay so You'
have to negotiate these things with with
um with the the parties involved in that box
box
there um the revenue part of your
contract is basically your power
purchase agreement so you need to have a
good solid power purchase agreement with
a reputable company in order for the
bank to take you seat seriously okay you
then need an OP um um an operated and
maintenance contract as well and that
could be through that could actually be
through your EPC contractor as well but
you need an operational maintenance
contract so again the bank and the
equity investors know that it's all in
hand you're not doing this by yourself
trying to guess your way through things
you've actually gone out and you've got
a solid contract with someone who knows
what they're doing and that's not the
only types of
contracts in order for the bank and
Equity invest does to take you seriously
you have to tell them you have to make
sure you've got your plan permission um
you know you've done all your surveys
you've done all that stuff you need a
land lease with your land owner you need
to make sure you've got your right away
sorted the heads of term contractor when
it comes to actually selling the
electricity you need to make sure you've
got a contract with your grid connection
you need a grid connection offer or a
private wire which is a direct um link
between you and an
off-taker somebody who buying your
electricity okay we've talked about um
EPC contractors and we've talked about owners
owners
Engineers um uh what else do we
financing so this go into that box
typically 20 to 30% equities we call
them sponsors as well or Community
ownership um and obviously the bank
would want to know about that
relationship you've got with those
funders and so I think that sort of
labors the point there that you you know
you have to have contractors you put contract
contract
you put contract in place to mitigate
risk basically um that's what you do now
earlier I didn't actually say it but
what was written on the side of the
screen was timing is important because a
project takes a long time okay it can
take 25 30 years maybe
longer and in those in that time period
there will be certain chunks of time
which will be sort of delineated um to
do with you know the pertinent thing at
that time so really what we've been
talking about so far is devel is
Development and Construction now
development can take it can take one
year it can take five years depending on the
the
project but during the Development and
Construction phase you are basically
outlaying money okay you're in the minus
you're in the you know you put your your
red you're actually spending money only
when that construction phase is over can
you actually start making money right
can you actually start operating so when
the operation start and you sell it
electricity that's when you actually
make the money St that begs a question of
of
okay oh it begs a lot of questions but
let's have a look at this so this is our
project timeline so up the top it's got
our time along the top here and these
are our project steps and this and the
this is a simplified version we're not
limited to these project steps and this
is our finance underneath so who pays
for what at each stage so usually in the
beginning during our development phase
which is I've said here is a very
highrisk time which we'll we'll we'll
see that's usually paid for by Equity
funding and let's assume it's paid for
by Equity funding for now and what will
that entail well youve basically got to
make sure um that you've got to convince
the people that want to invest in your
project that it's worthwhile and you
have to have all of these things in
place you have to do resource
assessments technical level you have to
do early financial planning which is
what we are looking at you need plan and
consent you need to secure a grid grid
connection offer you need to arrange
your PPA you need to identify your um
your contractors and have a good
relationship with your
contractors and you need to do due
diligence you need to do detailed
Financial modeling and legal stuff as
well a lot of legal stuff involved until
you get the financial
close now when you get the financial
close that's when the bank decides okay
you've done all your due diligence
you've got all your contracts in place
so now we are able and willing to lend
you the money that you want to actually
start constructing this thing all right
so this is when construction starts and
it could be months to years depending on
the project um that's when you start to
draw money down from the
bank and
um yeah and that's that and then you use
that loan obviously to to actually you
know construct your project and then
afterwards after that you'll go through
the operation phase which could be 25 30
years and you can see the risk starts
getting less and less as we go along so
this was the highrisk portion doing the
construction you know it's medium risk
things can go wrong but then they
normally can be sorted because you've
done your due diligence beforehand and
then you start operating your asset and
this is when you start paying your
dividends out and then you start paying
your taxes you start paying your
operations you you and then you start
paying your interest and principal
payments to the bank now if you are a
Community benefit Society because your
the idea is that you know you are you
were doing things for the benefit of
society you may be able to actually draw
down grants that will help you to sort
of arrange these things so that's one
thing that's benefit of being part of a
community benefit Society is you may be
eligible for Grants from things like
Community energy wills and stuff like
that to be able to do these um
feasibility studies right so the
question is then really is what makes
this project worth anyone's time and
effort to actually do this why on Earth
would people why on Earth would a
community benefit Society or um sponsors
Equity funders or the bank even want to
anytime and crucially how do we know
what is it what are what are we really
trying to say here what are we trying to
say is how do we know that this project
actually works
okay and that is going to be the subject
of this course we're going to find out
we've assumed here on the screen that
this Project's just going to work but
how do we know all right how how do we
know so first of all we've identified
the key players which are the special
purpose vehicle the the company um
Equity investors and debt financers and
and contractors does the project work
technically everybody's interested in
this and let's assume it does does it
work financially and this is why this is
where we start doing our financial
modeling and doing our financial
modeling we're going to start to answer
a few questions we are going to figure
out the What's called the abitar which
is the earnings before interest taxes
depreciation and amortization and we
become very familiar with that in the
course we will be able to find out the
projects interal internal rate of return
which is the project IR we'll be able to
determine the net present value
of the project and you're going to need
that you're going to need all these
numbers to convince yourself the bank
and your sponsors that this project
actually works what the bank wants to
know is can you repay the loan and in
order to do that they're going to want
to know what's called the cads which is
your cash flow available for Debt
Service they're going want to know your
debt service cover ratio as well and
when it comes to
equity basically if there's any money
left over in the project um that um that
then gets paid out as Equity or to the
community benefit fund and that's what's
known as Equity IR so these things here
are the basic things that you are really
going to need to figure out in order to
attract your investors and that's
basically what project Finance
is so in the beginning okay you can do
this the special purpose vehicle can
figure out their project IR they can
figure out their pre-tax cash cash flow
they can figure out their aitar The Net
Present Value so we do that first to
figure out how the project works then
the bank wants to know its cads and it's
a Debt Service cover ratio and then
irr all
right um there's other things as well
like there's other things that we will
do within the course of the project
we'll have a look at T we'll briefly T
touch on taxes we'll brief look at
depreciation and things like that within
the within the course itself we're not
going to do that today I'm just giving
you a flavor of what's in the course um
and so on but the the point I'm trying
to sort of um labor here really now is
how do we find out these metrics these
are numbers on a spreadsheet basically
that's all they are they're numbers on a
spreadsheet and that we we're going to
build a spreadsheet and the spreadsheet
is going to look a little something like
this well it will look pretty much
exactly like this
now I'll go back a few slides and I'll
have a look at it in sort of a cartoon
form so your Spreadsheet will contain
certain things it will contain a
timeline which is usually in years it
could be months or or quarters or all on
the spreadsheet and let's have a look at
this in a little bit more detail well in
the beginning in year zero in Period one
or year zero and I do get confused with
those during the course as as you'll see
I'll call it year zero I'll call it
period one you know it's all I'm all
over the place with calling it that this
is our capex this is when we actually
start this is where we spend our
Millions right we spend our money so in
year zero we spend our money we don't
have any Revenue in year zero but we do
have Revenue in year one to I've call
this 19 all right it doesn't matter what
it is we don't have any operating
expenses in year zero but we do have
operating expenses in year 1 to 19 and
the idea of of the the the the company
is you try and make estimates of these
things right so the company would go out
and they'd talk to the EPC contractor
and the EPC contractor would say right
it's going to cost me5 million pound to
build this solar farm brilliant that's
our capex
right then we go down to the next stage
which is trying to figure out our abitar
which is our Revenue minus our Opex by
the way I just want to say don't think
that you're going to get I'm not trying
to explain to you how to do this year
I'm trying to explain to you what's in
the course okay don't go away thinking
oh I need to know what the abitar is
okay it's Revenue minus Opex so you you
can find that out online um we're not
here today to to do that we just I'm
here today to explain to you what's in
the course and what you will find
out we will from that we'll be able to
figure out our project ir and our
pre-tax and pre Finance um pre tax and
pre-finance um IR we'll then look at tax
and depreciation we look at depreciation
allowances we're not going to dwell on
that cuz I don't like to get into the
subject of tax too much on this um on
this uh on this course but it is
important that we recognize it we can
look at our project IR then we look at
our debt interest and principle then we
look at our
soorry after after we look at the the
the things above that then we start to
bring in our our financing which is our
debt at this stage we can figure out our
cads and our debt service cover ratio
and then if there's any money left after
that we look at Equity ir and that's
basically What's called the cash flow
water for we take our Revenue we take
our expenses we adjust from networking
Capital we get our abitar we then pay uh
we then pay tax um then we after that we
um pay back the bank and after that we
pay back Equity all
right and this is the kind of
spreadsheet that you'll be looking and
you and during the
course during the course we are going to
be building this spreadsheet app bit by
bit I'm not just going to give you a
spreadsheet and explain it I'm not going
to say oh this this is this is the the
timeline and this is uh the periods and
all that we're going to be building this
up step by step by step right we'll have
a look at every aspect of this this
spreadsheet in little modules and trust
me by the end of it you will understand
how to generate this
spreadsheet and it'll be no problem
you'll be able to do it okay you will
need some spreadsheet experience I will
say that you will need to understand how
to use Excel I'd say I'd say at a basic
level okay before we embark on the
course so just be prepared for that so
all this is just this is just like a
sheet of numbers which for most people
is so daunting and for me it's daunting
as well to see all these things but
because I wrote it I understand it and
and you will as well there's no point
looking there's no point looking at
these spreadsheets and trying to
understand them you you have to sort of
interact with them and build them or
maybe you don't maybe you're just happy
once you've actually understood what
these terms mean you can go oh okay well
the project IR is 4.9% our net present
value is in the positive so that's good
um we've got minimum debt service cover
ratio 1.06 is that good we talked to the
bank about that um and our Equity IR is
2.38 I'm looking at this project now
going this is not a very good project
the bank wouldn't accept this because
they're usually looking at a minimum
debt service cover ratio of about 1.2
all right and what you learn what you
learn is is how to actually tweak those
things okay so do I need to bring down
my cost do I need to find a new PPA to
bring up my revenue and all these
things and I'll give you an example of
how cash flow works because we've got a
bit of
time um let's just say we going to build
a wind a solar farm is going to cost us
a million every year we're going to have
a revenue of 77,000 pound and it's going
to cost us
16,300 per anom I don't know why I chose
these numbers
to run this thing what Have We Done Yet
well we've just made a statement of cash
flow cash flows into the company from
revenue and cash flows out to the
company as a result of to keeping
business going in year zero or first
period we've built it and we've cut cost
us a million pound therefore cash flows
out as a
negative once we start to operate and
generate an income we generate an income
of £77,000 a year from cash sales from
PPA and we spend 16,300 from doing so we
did this for 10 years in this particular
case is it good does it work is it a
good idea and that's where you start and
that's where you start to use these
spreadsheets to actually figure out um
if that's a good idea or not that's a
very basic illustration there of a cash
flow statement okay and we'll be looking
at more of those we'll also be looking
at some free software which is open
Solar easy PV uh pvgis which I'm not
sure whether it's free anymore I looked
at it the other day it's a European
Union funded project which um enables
you to work out your yield from solar
and we'll have a look at Renewables
ninja I'm about to to put out a series
of videos um looking at each one of
these and they'll be freely available on
online on YouTube or or on our website
or something like
that um and so you'll be able to see
individual sort of um small modules out
there maybe maybe have a look at those
and see if it's they're useful for you
and come and through the course of
course you could pay a consultant to do
all of this for you okay but by the end
of this
course this is what these are the things
that you should know um first of all
you'll be able to build a spreadsheet
yourself you'll be able to understand
what abitar means some of you may know
what abitar means already you be able to
understand things like aitar and the
these sort of um weird Financial
terms you'll be able to sort of get a
feel for the construction expenses of
real life projects the contractual
obligations as well surrounding those
you'll get a feel for what the operating
expenses are you'll be able to calculate
using free
software your yield okay your your
megawatt hours per per year for your for
your um your
asset you'll be able to understand
discounted cash flow analysis which is
the value of money over time which is
basically the whole point of
doing these timelines is because you'll
be able to work out over time how much
your money is
worth and that then really ties into
what is net present value and we'll talk
about what net present value means we'll
talk about what the project IR really
means we'll have a look at things like
depreciation and
capitalization we'll have a look at
different debt schedules we debt debt
isn't just debt you don't just pay back
the bank there's different ways of
paying back the bank um fixed principal
payments annuity
payments we'll talk about equity in more
detail we'll talk about cash flow
available for The Debt Service which is
basically how much money do you have
left after you've done things pay tax
basically to um to service your your
bank uh loan we'll talk about equity IR
we'll love a look at Excel techniques
and shortcuts um we'll look at
spreadsheet formatting and we'll have a
look at much much more basically at the
end of this course you should be able to
talk the talk a little
bit okay you should be able to go into a
meeting and when someone says what's
your avitar what's the project IR on
this at least you'll have you know
fairly decent
grasp a fairly decent grasp on the terms
that are used when you go into meetings
and and one asks you these questions or
the bank wants to know these question
the answers to these questions you won't
be as daunted like I was you know when I
first first started going into meetings
and they were asking me these questions
and I couldn't answer them well I could
answer them but I didn't know what the
what what I was what I was talking about
about
um crucially as well especially in Wales
and obviously our projects run in Wales
and especially for the community energy
sector but it's you it doesn't matter so
much we'll also be comparing the model
which you make which I've shown you
against a wellestablished financial
model which is freely available from the
Welsh government this is the Welsh
government Energy Service model um and
I'm and most people you talk to in the
sector they may know a little bit about
this model or they may be completely put
off by it because it's big it's useful it's
it's
it's unless you know the basics of what
I'm showing you in this course using
this model can be very very difficult it
can um but we will go through it we will
actually go through the Welsh government
Energy Service model we'll take the
model we create and we'll compare that
against the inputs for the Welsh
government Energy Service model um and
we'll see that actually it's very useful
and it's not so daunting I think that's
a very useful part of this course and
I've spoken of people in other in other
places as well who have got similar
models and have the same kind of problem
so if nothing else if you're using the
Welsh government Energy Service model
how we do this course um it' be a lot
better so the assessment then this is a
course and um it does include an
assessment but what I really I don't
like Assessments in general unless
they're useful and so I've tried to make
this assessment
useful um and I've said there's going to
be an
example and the example is I'm going to
give you a 5 megawatt solar farm as a as
a project there's the location on the
screen there but it doesn't really
matter what are the inputs to the model
well we know that it's going to be uh 5,000
5,000
watt um we know it's going to be south
facing we know we're going to have plant
availability of 95% and we'll go through
each one of those things in the course
all right I'm going to ask you to
calculate the yield using so pvj or or
Renewables ninja it doesn't matter you
you can you can use other methods I'm
going to tell you that it's going to
cost5 million I'm going to tell you that
it's going to cost you1 ,000 to get your
um grid connection to get your asset on
the grid I'm going to tell you that it's
going to cost you1 15,000 a year to
actually operate this thing and you're
going to have a PPA agreement of 11 P
per kilowatt hour with a company okay
it's going to take you one year to
construct this project and it's going to
operate for 25 years now then this is
reality you tell me if this project is
that's what this course is you will
figure out that's a good illustration of
right here's the question this is a
perfectly fine question to pose to
anybody who wants to build a renewable
energy asset is it going to work
okay um questions you're going to need
to ask yourself how's it going to be
funded well usually about 70 30% the
debt debt to equity ratio we're going to
go to maybe the Development Bank of
Wales or some other um bank and they're
going to give us an interest rate of 6%
you're going to use a discount rate of
6% you don't know what that means yet or
maybe you do know what it means but you
will find out that in the course and
you're not going to pay any tax on
this you will decide what depreciation
schedule you use you will decide what
debt schedule you use you'll figure out
what depreciation schedule and debt
schedule is within the
course after that you're going to tell
me well you're going to a part of the
examination actually is you to tell me
does it make a difference what schedule
are you and the answer is going to be
yes I then want you to tell me what the
project irr is and the Net Present Value
I want you to tell me what my minimum
debt service cover ratio is and maybe
the average and what My Equity IR is
okay from this you're going to be able
to apply certain rules which you will
learn during the course of the project
you'll be able to tell me that um if my
internal rate to return is more than my
hurdle rate then we can proceed if my
debt service cover ratio is beyond 1.2
then we can proceed and if not then we
can't do we need to figure out why now
all of that stuff May at this point be
complet and at a jargon but the point is
I'm trying to labor again is those are
the kind of things you're going to that
you're going to come to and those are
the kind of things that this course is
going to teach
you now it's very important that I
personally as part of this project okay
tell you that obviously this is an
introductory course it has limitations
we cannot explore the whole world of
project Finance in in this course I
haven't got the skill to teach that or
the time or the ability okay U maybe one
day I
might things we do not cover in this
course we do not look at tax in general
okay we don't look at tax loss account
we don't look at it we don't look at
interest during construction but you
could is that's not that's not something
that's beyond the the you know you if
you actually um can add it on to this
course um when it comes to wind and
solar yield we're only going to scratch
the surface because we're going to look
at free software we're not going to look
at things like P90 and p50 figures I'd
like to in the future we're not going to
have a look at inflation payback periods
levelized cost of energy dividends
payments we're not going to look at decommissioning
decommissioning
costs we not going to talk about Deb
service Reserve accounts and maintenance
accounts fees development costs and many
many many more things we're not going to
look at however once you've understood
how to use the model it's not it's not a
giant leap for you to actually figure
these things out yourself and start to
integrate them into the um into the
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