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USAEE Conference, Pittsburgh (Oct 25-28, 2015)

Public-Private Partnership (PPP) Financing Model for Micro-grids

Khashayar Mahaniutgers The State University of

NJ

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Objectives

• Develop a financing model for investment in community-level micro-grids based on public and private parties collaboration

• Demonstrate how public and private parties can benefit from this investment

• Introduce Public-Private Partnership (PPP) models to energy sector community

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Public Private Partnership (PPP)• Business relationship between a private sector entity and

a government agency for the purpose of carrying out a project which will serve the public

• Public entity transfers responsibility and risk of designing, building, operating and maintaining (DBOM) of the project to the private sector while maintaining the project ownership.

PPP for micro grids – Revenue ownership• Private sector owns the micro-grid’s revenue till the

investment horizon• Revenue ownership will be transferred to the public entity

after the investment horizon till a finite after- horizon period (15 years)

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Funding resources• Public sector provides a specified amount of fund for

the private entity in the initial year of contract in the form of “Senior debt”– Issuing sufficient number of zero coupon municipal bonds

with face value and maturity at the investment horizon. – Municipal bonds are tax exempted bonds issued by an

entity under the state level, with the purpose of financing large scale infrastructural projects.

• Public sector provides the opportunity to borrow defined amount of funds in form of “Junior debts” with fixed rate of return in each year. – “Junior debt” is either unsecured (i.e. do not require

collateral behind the debts) or has a lower priority than of other debts claim on the same asset.

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Community Level Micro-grid• Micro-grid portfolio includes:

Gas fired generators (GF)Electricity storage (ST)Wind turbine (WT) Photovoltaic cells (PV)Combined heat and power (CHP)Boiler

• We are considering this portfolio to supply as much as possible of electricity and heat demands of the community

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Model development

• To accurately estimate the project revenue, operation optimization model developed in our previous work is used.

• Financial model assumptions:– No possibility of investment in

alternative projects– Interest rate term structure for

municipal bonds is estimated and used– The project revenue is split between two

parties based on the contract

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Illustrative example

• 100-year flood zone region in Hoboken, NJ.– High vulnerability to extreme weather

condition and power gird outage– Two super critical sectors (i.e. Health

service and Information technology) are located in this region

Operating Micro-grid

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Data extraction

Land use classification in 100-year flood zone, Hoboken

SectorNumber of

unitsTotal roof

area (acre)Health service 10 11.38

IT 21 9.37Retail 72 98.77

Leisure 8 28.69Residential 1500 339.71

• Half of the total roof area can be used to install PV panels

• WT installation is not practical in this region

• Micro-grid assets : GF, PV, ST, CHP

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Bond pricing and interest rate term structure

• Binomial lattice method is used– weakly converges to Geometric

Brownian Motion – and are multipliers associated to up

and down movements at each step with risk neutral probabilities of and respectively.

– Floating interest rate

Short term interest rate lattice

Bond lattice (with maturity at year 3 and face value of $5,000 )

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Two parties cash flow at the investment horizon

EntityExpected Cash flow position (M$) at the

investment horizonPublic 28.78Private 1.69

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Conclusion• Results clearly show how a Public-Private

Partnership (PPP) model can be utilized to finance and implement a micro-grid project while both private and public entities’ profits are significant.

• The developed model guarantees a revenue stream for the public entity over the course of a finite horizon, while provides an opportunity for the private sector to apply its expertise and generate revenue for its own

• Development of such a (PPP) model can be a forward step towards closer collaboration of public and private entities for more widespread micro-grid implementation

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