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CapEx, OpEx, FeasibilityHouston Workshop
Nov. 29, 2007
Uwe Roeper, President, ORTECH
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ORTECH Power
Wind Consulting: Technical & Financial Advisors
Affiliated with DEWI
German Wind Energy Institute
Wind Resource Assessment
Development Plans
Operations Support Feasibility & Sector Analysis
Due Diligence / Independent Engineers.
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Outline
Estimating CapEx Turbines
Construction
Other
Estimating OpEx O&M Fixed & Variable Parts
Analyzing Feasibility Revenue / Costs IRR
Cost of Funds
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CapEx(Example 100 MW, $200 million)
Development Costs Land, Wind, Grid, Permits
Financing Costs
Cost of Funds, Construction Interest
Construction Costs
Turbines, Commissioning, BOP
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Development Costs(Illustration)
Land $100k Wind $200k
Grid $100k
Permits $200k
Sub-total $600k (0.3% of Capital)
Pre-Constr. $1,400k (0.7% of Capital)
Total $2,000k (1.0% of Capital)
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Financing Costs(Illustration)
Due Diligence $500k Equity Fee $2,500k
Debt Fee $2,000k
Constr. Int. $12,000k
Total $16,500k (8.3% of Capital)
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Construction Costs(Illustration)
Turbines $150mill. BOP $40mill.
Financing $17mill.
Development $2mill.
Developer Fee $5mill.
Total (2010) $214mill.
($2.1mill./MW)
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CapEx Summary
CapEx (100MW, $214mill.)
Turbines70%
Dev.Fee
2%
BOP
19%
Financing
8%
Dev.Cost1%
Turbines majority cost, rapid increases BOP site dependent, modest increases
Financing going up due to project timing.
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Balance of Plant Portion
BOP Cost Make-up
Ship
Crane
Found.
Trnsf
Substation
CollectorRoads
GridInstall
Foundations are the often the largest BOP cost. BOPcosts can very widely depending on connection costsand the site location.
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Turbine Costs
Very large increase 2004 to 2007 Latest figure for 2009 delivery, could be special circumstance
Several factors, currency, input costs, global market.
Turbine Price Increase
$1.0
$1.5
$2.0
$2.5
0% 3% 7% 17% 31% 52%
Sample Quotations 2004 to 2007 (1.5MW Units)
$Mill.
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Changes in Euro exchange
US$ - Euro Exchange
1.00
1.10
1.20
1.30
1.40
1.50
FX Jan 04 to Nov 07
US$
Euro exchange is significant because many turbinecomponents come from Europe. Recent weakening ofthe US $ could put addition pressure on turbinepricing. However, not main recent for price incrs.
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US Steel Price Index
Steel prices and other commodities have increased substantially.This contributes to the price pressure, but does not account for allthe increases. Bulk is due to supply demand of turbines on theglobal market.
US Steel Price Index
100
120
140
160
180
200
Jan 04 - Oct 07
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Historical & Projected Wind Energy Costs
0
5
10
15
20
25
30
1980 1985 1990 1995 2000 2005 2010
Year
ce
ntsUS/kWh
Not attainable
Adapted from: CanWEA 2004
Price Reduction
Due to
Technology Innovation
Recent
Trend
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Key Issue
What impact will the significant increases inturbine prices have on prices of wind power,
and how could this affect the continued
expansion of the wind industry in the US in thecoming years?
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OpEx
Turbine design life 20 years, op. experience
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Cost of Warranty, ServiceMaintenance Contracts
Example of price variability in WMS contracts.
Hi quotes related to remote sites.
Large WTGs typically have slightly higher $/WTG-yr. We will use $39,000/WTG-yr as typical for 1.5 MW turbine
(limited ext. wty. + srvc.)
$/WTG - O&M + Warranty (Yr. 3-5)
$20
$40
$60
$80
1 2 3 4 5 6 7 8 9
Thousands
Selected Price Quotations by OEMs
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Wty. portion of WMSO&M Contract, $39,000/WTG-yr
Service, $26,000
Warranty, $13,000
Warranty cost seldom broken out.
Contractual exclusion vary. 1/3 Assumed as wty. portion of contracts.
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WMS as part of total O&M
WMS typically amounts to approx. 60% Largely market based, not indicative of actual.
Avail. only for early years (few repairs).
Warranty O&M - $(000)/WTG-yr
O&M, $26
Warranty, $13Reserve, $0
Ins, $7
Land, $5
M-Tax, $9
BOP, $5
Adm, $5
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Post wty. Costs
Post O&M - $(000)/WTG-yr
Service, $25
Maintenance, $4
Repair Reserve, $16
Ins, $7
Land, $5
M-Tax, $9BOP, $5
Adm, $5
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Wty. Vs. Post Comparison
Warranty vs Post O&M
$0
$10
$20
$30
C$(000)/WTG-yr
Warranty $26 $13 $0 $7 $24
Post $25 $4 $16 $7 $24
Service Wty/Mtc Reserve Ins. other
Repair
Maintenance is the expensed portion (recurringannully), Reserve is the capital portion.
Mtc. + Reserve = $20,000/WTG-yr.
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Service
Routine day to day operation 24/7 Remote monitoring
Scheduled maintenance
On-site services
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Unscheduled Maintenance
Unscheduled minor maintenance highlyvariable by site / model.
Budget figure meant to refer to minorrecurring small part replacement.
Excludes major component repairs.
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Unscheduled Maintenance
Unscheduled extension of on-site service. Relies on parts inventory or readily available
parts that can be replaced by on-site service
team. Involves recurring outages of short duration
due to minor parts.
Is tracked as operating expense, not as capitalreplacement expense.
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FAILURE FREQUENCY & DOWNTIMECourtesy: B. Hahn, ISET: Wind Energy Report Germany 2006 (draft)
Drive Train
Structurals
Generator
Gearbox
Rotor Hub
Mech. Brakes
Rotor Blades
Yaw/Pitch Sys.
Hydraulics
Sensors
Electronics
Electrical
Down time per failure [days]Annual failure frequency [-]
1 0,75 0,5 0,25 0 2 4 6
Maintenance
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Repair Reserve
Planned or unplanned major repairs.
Highly variable by site / model / age. Best to track as Capital Account Repair Reserve.
Expected to occur only a few times during 20 year life.
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FAILURE FREQUENCY & DOWNTIMECourtesy: B. Hahn, ISET: Wind Energy Report Germany 2006 (draft)
Drive Train
Structurals
Generator
Gearbox
Rotor Hub
Mech. Brakes
Rotor Blades
Yaw/Pitch Sys.
Hydraulics
Sensors
Electronics
Electrical
Down time per failure [days]Annual failure frequency [-]
1 0,75 0,5 0,25 0 2 4 6
Major Repair
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Variable Annual Repair Costs
Annual Repair & Maintenance Expenditure (illustration)
$0
$10
$20
$30
$40
$50
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Thousands
Operating Year
C$/WTG-yr
Major repair costs will vary from year to year, occur inintervals and increase in cost with age.
Wty.
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Total life cycle costCumulative Repair Expenditure (w/o CPI)
$0
$100
$200
$300
$400
$500
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Thousands
Operating Year
C$/WTG-yr
The operating goal is minimize the cumulative total throughpreventative maintenance, early detection, reduction of outagetimes etc.
Small expenditure now may save big later.
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Capital Account
Purpose of the capital account is to ensure that the cost has been budgeted and thefunds are available, regardless of the year in which the repair occurs.
In early years, repairs are less than $16,000/WTG-yr, excess is saved. In later yearsthe reverse happens.
Capital Repair Reserve Account (w/o CPI)
$0
$20
$40
$60
$80
$100
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Thousands
Operating Year
C$/WTG-yr
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Accounting for InflationImpact of 2.5% Annaul Inflation
$0
$50
$100
$150
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Thousands
Operating Year ($/WTG)
Service Repair Ins. other
Wty.
Budgets can be inflation project forward by assuming inflationrate.
Parts and labour costs may move differently than inflation.
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Key Issue
What is the financial risk related to theuncertainty of long term repair costs ofwind turbines?
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Feasibility
Typical project feasibility CapEx, OpEx, Revenue
Wind project feasibility
CapEx, OpEx, Revenue, Tax
Revenue market complex
Tax driven structure complex Revenue / tax structure unique to U.S.
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Composite Revenue(PPA, REC, Merchant, Hedges)
Composite Revenue Example
$0
$5
$10$15
$20
$25
$30
$35
$40
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26
Operating Year
millions/year
Merchant Revenue REC Revenue PPA Revenue
Part Year
PPA Ends
Various market structures by State / Region.
Revenue subject to complex policies / rules.
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Net Revenue (EBITDA)
Net Revenue / EBITDA
0
5
10
15
20
25
30
35
40
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26
Operating Year
Million/Year
Net Revenue Expenses
EBITDA = earnings before interest, tax, depreciation,
amortization (and before PTC) (but after OpEx)
Basis for cash flow feasibility (IRR = internal rate of return)
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Earnings Perspective
1525Adj. EBITDA
04Gross up
08PTC1513EBITDA
-10-7OpEx
2520Revenue
Yr 15Yr 2
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Adjusted EBITDA
PTC and PTC Gross-up create large earnings shift tofirst of project life.
$0
$5
$10
$15
$20
$25
$30
$35
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26
Operating Year
Million/Year
EBITDA PTC Gross up
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Tax Perspective
9-31Income a. tax
8PTC
-521Taxes14-59Taxable
-1-72Tax DA
1513EBITDA
Yr 15Yr 2
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After Tax (incl. PTC & tax benefit)
Wind projects generate large tax benefits in earlyyears. PTC add-back creates large after tax income inyear 7 to 11.
Income after Tax
-$40
-$30
-$20
-$10
$0
$10
$20
$30
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26
Operating Year
Million/Year
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Cash Flow Perspective
1042Cash F. a. tax
-521Taxes8PTC
(first yr. only)CapEx
1513EBITDA
Yr 15Yr 2
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Cash Flow after tax (unlevered)CFaftTax
$5.0
$10.0
$15.0
$20.0
$25.0
$30.0
$35.0
$40.0
$45.0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26
Operating Year
Large after tax CF in early years reduces long termrisk.
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Additional Feasibility Drivers
Cost of debt / long term int. rates Cost of equity
Wind resource compared to competing
projects in the region
Access to grid connections
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Conclusions
CapEx Highly predictable On rise, concern to project economics
OpEx
Difficult to estimate long term costs Repair uncertainty managed by capital reserve
Feasibility Revenue and tax issues more complex than other
types of projects. In U.S. project feasibility is highly dependent on tax,
energy and environment policy.
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