Project Green District Energy Feasibility Study - Partners in Project ...

TRCA Pearson Eco-Business Zone District Energy Feasibility Study 10 April 2012
Equity investment is probably a necessary component regardless of the ownership option
because neither grants nor debt, nor a combination of the two can usually be expected to
provide 100% of the required capital. In other words, any grantor or lender usually wants to see
a proponent have some of their own money at risk. If there wasn’t, the determination and
commitment of the proponent to ensure a successful outcome would be questionable.
Therefore, it is expected that the owner(s) will have to commit some equity as a condition for
receiving any grants or loans 11
. Further work on financing, i.e. with potential grantors and
lenders, will be required to determine the amount of equity required. This study has assumed
40% equity on approximately $30 million, approximately $12 million.
There are several multi-DES owners that may be interested in owning another DES, but the
issue is whether they would want to be involved in development and start-up. These include
Enwave, Dalkia, NRG, Fort Chicago and Corix. The local utilities, Enersource and Enbridge
may also have an interest.
Given the usual municipal requirement for competitive procurement, the interest of any outside
potential owner or partner in this specific project might have to be confirmed through a binding
RFP process, once the feasibility study has developed a reasonably clear definition of scope
and potential revenues.
If any private equity financing were made available at an early stage, it is expected that it would
be expensive. The project start-up hurdle rate for a private company is likely in the range of 15
– 20%, or more. Even allowing for some expected leverage with lower cost debt financing, the
percentage share required by private equity early on is likely to be high relative to the amount of
money that is contributed (as compared with a case where the DES is generating significant
revenues).
At a later stage, when more customers have signed contracts, the project scope becomes better
defined. Then, after firm quotations have been received from suppliers and contractors, the
cost estimates can be refined and the expectation of leverage with debt financing is higher. At
that stage, the risk would be lower so an equity investor would be willing to accept a lower
return.
Finally, when the DES is built and up and running so that market risks and completion risks
have been largely eliminated and long-term financing is in place, the cost of private equity could
be similar to a utility rate of return, i.e. in the range of 8-12%.
Since only modest rates of return are generally achievable in DE (in order to provide competitive
service charges to customers), it is difficult to develop a viable DES project yielding acceptable
rates of return for private equity subject to significant risk, even with committed customers. This
difficulty is reflected in the recent history of DES development in Canada, which has tended to
be driven by government at the start-up phases with private investment coming in later.
In one case, interviews of about a dozen possible investors to gauge the appetite of the industry
for a DES start-up in a brown field situation confirmed there was limited interest prior to
customer commitments. Nevertheless, several expressions of interest were submitted but since
the process did not continue through the binding proposal stage, it is difficult to say what the
real availability of capital would be in this situation.
11
Application can made at an early stage, on the understanding that grant funds would flow on a strictly
cost sharing basis.
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