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Subject: Financial Feasibility for the projected wind farm in Mannar Introduction Electricity generation in Sri Lanka is primarily base on prime sources such as petroleum, biomass and hydroelectricity. Wind power comes in to the picture as a green, or rather and environmental friendly means of generating electricity. With countrys electricity demand is increasing gradually and the hydroelectricity is inconsistent with the inconsistency of rain the main method of power generation is based on petroleum. This is highly expensive as well as poor in environmental friendly. Therefore, a glimpse of the picture may reveal a huge opportunity lies with wind power generation but a thorough financial analysis is conducted to certain the facts. Load factor, which is the total output probable out of the optimum output, is Sri Lanka is around 20%. This may seen as a low figure but in terms of wind power generating industry this value is reasonable. In addition, the wind turbines generating 1.25 Mw is available on Suzlon in India, and Sinovel in China as well as from European manufactures such as Veritas. Political environment for the project is also favourable as government is promoting wind power generation. As a result of that the project has managed to achieve a 200 acre land on long term lease from government as well as getting tax exemption for 20 years which is naturally the lifetime of such a plant. Although, the methods such as carbon crediting and calculating investments with an environmental aspect is not very popular in Sri Lanka a measurement considering those factors would give more favourable picture of the investment.

Opportunity is there

Source:Energyservices.lk As can be seen from the above graph wind power generation is having a negligible contribution to the national grid. So the opportunity is there to substitute expensive and environment polluting sources of power.

Financial Analysis

Net Present Value According to the Figure4 in the appendix cash flow is a positive value giving a green light with respect to the financial feasibility. NPV of the investment comes to a value of Rs3, 000,535,581 which gives a Return on Capital Employed (ROCE) Rate of Return= (3,000,535,581-2,175,000,000)/2,175,000,000 =38% Rate of return from the whole project in its time span of 20 years is approximately 38%. This is more than Mr. Mahipalas expectation of 24% return. If the values of the long term borrowing and fair value of the long term lease is also considered as equity

Payback period

Payback=RS.2175m-148127272(Y1)-172285950(Y2)-191173643(Y3)-205940386(Y4)217485293(Y5)-226511312(Y5).-233568017(Y6)-239085078(Y6)-243398416.5(Y7)-288475417(Y8) - 239085078.2(Y9)-243398416.5(Y10) =8949211.77- 295461691.8(Y11) = minus value

Therefore it is safe to assume that payback would at least take 10 years which is the halfway mark for the whole project. This can be viewed as a drawback as the investor is bound to wait at least a decade to get his investment back. Nevertheless, it is also worthwhile to note that project with this nature with a very high capital investment struggle to give their returns back quickly. However, there are plenty of pro payback benefits for the patient investors as can be seen from below.


From the data in Figure one

600000000 500000000 400000000 300000000 Profit 200000000 100000000 0 Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10

Yearly profit is increasing at rapid pace as the financial lease and long term borrowings are decreasing with time. This would give satisfying returns for the investor for enduring the projects lower returns in the first few years. A graph can also be drawn with profit margin
0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8 Y9 Y10 Profit Margin

As profit and profit margin both suggests, investor would have to be patient with earlier years of operation as the real profits in term vice as well as the profitability only increases at the latter stage of the project. Cash Flow analysis

It can be seen from the figure 4 that the plant will have substantial amounts of cash balances throughout the full time period of the project. However, the costs such as

wages are mere assumptions and number of workers and engineers can be varied, as the plant gets older. However, after considering all the variables it is obvious that the plant would have substantial cash at the disposal of the investor.

Financial Stability of the Project

Financial stability of the project is vital for the calculations of lenders. Banks and other finance provider are cautious about the ability of the project to pay back the relevant finance charges. Below an analysis is done on gearing and interest cover to measure the financial stability of the project for first 10 years.

As can be seen from the above table interest cover never gets below 1 in the whole ten years and it reaches very comfortable safety zones from 5 th year onwards to finally reach almost 20. In here, we have looked into the actual cash ability to pay the interest and leases and interest cover relating to net cash flow follows a similar patter to that of profit and is on the favorable side. With, these favorable values it is expected that the banks will not pressure on the investor to pay a high interest rate as the project has high levels of financial stability and cash generating ability. Gearing Gearing is calculated as = Debt/Equity Initially the gearing of the project would be Gearing= [240,000,000+87,000,000]/ 1,305,000,000 =25% As the investor puts in 60% for the capital investment, the value for gearing is relatively low. A low geared entity or a project is usually preferred by lenders, as it does not associate a high level of risk.

Note: Rs240, 000,000 is taken as the fair value of the 200 acre land in Mannar. Basis for taking that value and the information source in mentioned in the appendix.

Competing with other sources of power

With CEB operating all other wind farm projects a likely completion for the share in national grid can be expected from substitute power generating sources. The common method of comparison is done through the Capital Cost per kilo watt hour For a small wind power plant such as this a value of 1000 dollars per kilowatt hour is considered as the capital cost.

Source: A study by University of Moratuwa


This is a study done with a similar wind power plant having 10Mw capacity. This gives an in depth description into the cost saving aspects of a wind power plant. Highlight here would be that the 10Mw capacity is enough to satisfy the electricity demand of 35,000 houses and also cutting down the carbon emissions by 20,000MTs per year. Solar Power Plant

According to the energyservices.lk cost of a solar power plant would be 8000 dollars per kilo watt hour. This is exactly 8 times the capital cost of the wind power plant. Therefore, wind power is highly cost efficient than the solar power which is also famous for being environmental friendly. Refer http://www.energyservices.lk/pdf/reports/Deliverable_6.pdf Bio Mass power plant From the same source; a biomass power plant would require a capital of 910 dollars per kilo watt hour($910/KwH). This is lower than the wind power plant and can be considered as a threat as bio mass is available on almost everywhere and this is also reputed as an environmental friendly method of power generation. Hydro Power Plant A small village hydro project would cost around 2000 dollars per kilo watt hour in capital expenditure. This is feasible on resource vice than the wind farm but this has some levels of environmental problems such as shrinking waterways and waterfalls which often fall into criticism on reducing the serene beauty. Petroleum Power Plant This has a very low capital expenditure but there are substantial problems regarding environment as well as a general dislike from the nearby communities to the power plant. As the source of power is not a renewable this does not fall under sustainable energy generation. Although, the capital cost is lower than other methods, the operational costs of such a plant is expected to be more higher as the petroleum prices are on the up in a rapid pace to climb more higher.

Additional Factors to be Considered


As it was mentioned in the beginning the political environment is highly favorable to a project such as wind power plant. Political situation is expected to remain at this state to the length of the project as the petroleum prices climb ever so rapidly and rain becomes more and more unpredictable making hydroelectricity inconsistent. Economical angle is thoroughly discussed above and it is highly favorable. Unlike to the other sources of power wind energy generation has a reputation of being environmental friendly hence making the people receptive of wind generated electricity. This is healthy for the project as well as to the investor as people appreciate the effort to make sustainable energy conserving the environment. With having experience with technology in similar projects in Hambanthota and Nuwaraeliya , Sri Lankan engineers are expected to feel comfortable with the technology. In addition, the firms associated with selling the equipment also provide financial assistant.

Financing the Project

The cost of the plant comprises of all the logistics, installation and machinery costs. These can be varied with the supplier of choice. A Chinese or an Indian supplier will find it relatively easy to install the plant in Sri Lanka opposed to a US or a European supplier. Currently, the market for wind turbines (which is the main cost) is a sellers market. With very few companies operating and having a large number of buyers sellers dominate the terms of trade. Therefore, the risk warranties, crew training and maintained can be a costly business. A worthy point to mention is that the current lending rate of banks in Sri Lanka is around 14%-15% mark. This is a very high figure. In addition, with rupee depreciating against the dollar US equipment is expected to be costly. To escape the troubles with exchange rates it is advisable to finance the project though a bank located in the suppliers country. Lot of Indian and Chinese banks can be willingly to agree into such a deal as the financial stability and strength, as discussed above, is very high. Conclusion: In every angle the project is viable for implementation. This would give returns exceeding the expectations of the investor for two decades. Wind power plant would also be beneficial in generating reputational capital for the investor as a environment friendly investor which would make his other ventures also attractive to people. A fine example would be Richard Branson who has improved his Virgin brand through his investments into sustainable energy sector. However, there are several risk factors for the investors as well. Highly unpredictable situation in Sri Lankan energy

sector would result in unfavorable situations. A high rain could cause the all ready existing large hydro power plants more attractive. In addition, the currency fluctuations (depending on the source of finance) can make life hard in meeting obligations. Another negative aspect would be that investor would have to wait one decade or more to get his investment back. However, weighing these risks with the extremely high benefits of running the plant for 20 years would signal a go sign to the investor as the benefits easily outweigh the risks.