Novel financing of CSP as publicly owned infrastructure
Two CSP projects have just been financed as ‘public goods’ whereby the state guarantees their investors will get paid off within 25 years, but in return it gets to own the projects from then on. It’s an old idea that gains new relevance in the age of climate mitigation.
The idea of handing over a project to the state once it has recouped its initial CAPEX might seem unappealing to most renewable energy developers. After all, once the investors are paid, next come the golden years of free energy.
Yet BrightSource Energy and Abengoa have just completed such a financing arrangement for a pair of Concentrated Solar Power (CSP) projects in Ashalim, Israel. CSP makes electricity with steam-driven turbines using solar energy for the heat.
Abengoa will build a $1.2 billion 110 MW trough project with storage. The initial financing is from the Overseas Private Investment Corporation (OPIC) of $250 million.
BrightSource Energy will build a 121 MW tower project without storage and its $820 million cost will be funded by a consortium comprising a special purpose company formed by Alstom (25.05%), BrightSource (25.05%), and NOY Infrastructure & Energy Investment Fund (49.9%), which invests in renewables in Israel.
Under what’s called a Build, Operate, Transfer (BOT) funding arrangement, both project’s investors will be paid back within 25 years and the State of Israel will take over ownership, operating and maintaining the projects for the long term.
In BOT funding, the developer finances and builds the project, and then owns and operates it for a period of time during which they collect revenues to repay the investors, and then the project is handed over to the government.
Historically used for hydropower
Typically nowadays BOT is used only for public infrastructure like roads. But in the early 20th century, many countries built renewable energy generation like hydropower using this arrangement.
BOT funding appeals to the basic human desire to get something for nothing. “The private sector builds the project, no public money's ever involved, and at the end of the day we get a free road or railway given to us by the private sector for nothing,” as one expert puts it.
“There's a lot of examples in the past where infrastructure has been built that either is owned by the public outright or reverts to the public,” says Pascal Storck, global manager of energy services at the Finnish meteorological firm Vaisala Oy. This company recently bought Seattle-based 3TIER, an energy forecasting and assessment provider for wind developers as well as solar PV and CSP developers, including BrightSource Energy at Ashalim.
“If it is enduring infrastructure, then BOT funding will have long-term societal benefit, because you are using private dollars to fund the project and the long-term fuel cost for renewables is zero.”
Storck personally benefits from such long ago public goods renewable funding. The Bonneville Power Administration’s hydropower now offers one of the lowest base rates in the US. His own electricity is supplied by a publicly owned utility which owns its own hydropower generation and purchases power from BPA.
“Where I live in the city of Seattle in the Pacific Northwest of the United States is a shining example,” he says. “Our electricity rate starts at five cents per kilowatt hour.” Unfortunately, just when it is needed most - to solve that most critical of public goods; a liveable climate for future civilisations - BOT funding for renewable energy has fallen into disuse.
For this reason, Israel’s innovative use of this funding mechanism to incentivize a new round of renewable energy is an exciting idea that could solve renewable finance problems globally.
The Israeli-based legal advisory firm that negotiated the Ashalim funding arrangement says using BOT finance to develop renewables was not their own idea. Uri Noy, at Erdinast, Ben Nathan & Co., says the firm does negotiate BOT funding, but for a variety of infrastructure projects such as roads and bridges.
“It was the initiative of the State of Israel to apply this method to renewable projects, after being successfully applied for many years in other energy and infrastructure projects,” Noy tells CSP Today.
A win for the renewable developer
Would a firm still make money if a state takes over their project after 25 years?
“Any project has to be profitable on a pro forma basis,” says BrightSource vicepresident of Government Affairs Joe Desmond, “based on the terms entered into in order to finance a project. Everything is evaluated from the perspective of the financing company.”
A big advantage of BOT arrangements for the developer is ease of permitting, because the government has a stake in a project’s viability. For BrightSource Energy, hammered by the almost antagonistic permitting of clean energy in the US, resulting in three of four projects abandoned after years of filings, that must be a relief.
Even with easier permitting, however, BOT funding works for everybody only if the charges raised in the first 20 or 25 years are sufficient to offset the full cost of the construction.
For that reason, one danger is if revenues are set too low for paying off the initial investors. For example, toll-booth charges that are insufficient to repay investors before takeover.
But Israel has allowed a relatively high tariff of .76 shekels or 21 US cents per kWh during the 25 year concession, significantly higher than the going retail electricity rate in Israel - ensuring that investors will get fully repaid by the time the state takes it over. In return, Israeli ratepayers then get carbon free generation for the following 30-60 years.
A win for the state
“The State does not pay anything for the takeover upon the expiration of the 25 years. This is the deal,” says Noy. “Furthermore, the concessionaire is obliged to perform major maintenance prior to the takeover, and the plant is going through a thorough inspection. But the government definitely sees the CSP as a 25-year-plus technology, and rightfully does so.”
Noy says that Israel has based its confidence in the longevity of CSP on the performance of the old SEGS plant developed by BrightSource Energy’s ‘god-parent’ company Luz, in Bakersfield, California.
“It is an interesting approach,” Desmond agrees. “Not unlike, if you think about it; when the government funded major infrastructure projects in the 1930s during the Great Depression such as the Hoover Dam.”
Typically, hydropower and geothermal power was funded this way in past decades. Because of the way it makes electricity, CSP has the potential for the same sort of long life expectancy.
Like hydroelectric and geothermal plants, CSP uses a conventional power block and steam-driven turbines. Electricity made with steam turbines is suited to BOT funding because of its longevity.
Instead of grinding up mountains the way coal plants do for fuel, of course, in the ‘power block’ renewables that run steam-driven turbines - the fuel is just sunlight, or gravity-fed water, or the earth’s heated interior.
Power block renewables
But because they can last a long time and generate returns for decades with a little O&M, it is these sorts of projects that may be uniquely suited among renewables to BOT financing. Some hydroelectric and geothermal projects are still shipping power a century later.
The 354 MW SEGS project, built in the 1980s, the first solar thermal in the world, has been supplying electricity in California for over 25 years now from its 9 units.
Last year SEGS began their second round of 25-year utility contracts with California utilities - at the end of which they will be 50 years old. With their capital expenditures now paid off, they are able to cover ongoing O&M needs with these new PPAs at 5.57 cents a kWh.
But they are hardly slowing down. They generated 646,521 MWh in 2011, according to EIA data.
“My understanding is that the performance of the SEGS plants has significantly improved over time," says Mark Mehos, who heads up NREL’s CSP research program, and is very familiar with the SEGS performance.
"This is due primarily to replacement of first generation receivers with newer receivers that are much more efficient. O&M practices at the plants have also improved over time based on the now long history of operating these plants, resulting in increased output in addition to reduced O&M costs."
Just as hydropower and geothermal projects get revamped but continue to generate power over the decades, it is likely that CSP plants will continue to do the same. Because its initial costs are higher than wind and PV, CSP needs some form of government support to develop to scale.
Build, Operate Transfer business models offer a workable way for developers to stay in business to enable the continued improvement of the technology; for investors to be sure of getting paid back; for ratepayers to get cheaper power once capital costs are paid, and for states to ensure that climate goals are met by a wide range of renewable sources.