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9.3.3 PPA rates required to make the projects financially viable are feasible to implement The PPA rates required to make the geothermal projects financially viable are feasible to implement, which improves the bankability of the geothermal projects. Our estimations show that the geothermal project allows the equity investors to earn a 15 percent real rate of return (base case) for PPA rates between US$0.09/kWh and US$0.19/kWh.123 These PPA rates are the tariff at which the geothermal projects would need to sell each kWh of electricity to be able to cover their costs, service their debts, and provide equity investors with a 15 percent real return. As shown in Table 9.7, these PPA rates are feasible to implement because they are significantly lower than the costs of service from fuel oil generation currently in place. Table 9.7 PPA rate base case (15% return on equity) Expected tariff with introduction of geothermal for base case Maximum PPA rate (rate to still achieve a reduction in tariffs of 5–15%, reduction varies by country) IRR to Equity Investors and PPA Rates for Geothermal Projects 0.30 0.19 0.17 US$/kWh SVG DOM GRE SKN SKN SL Phase 1 Phase 2 Current Tariff 2014 0.16 0.29 0.18 0.35 Phase 1: 0.09 Phase 2: 0.12 Phase 1: 0.24 Phase 1: 0.16 Phase 2: N/A 0.37 (Phase 1) 0.19 0.34 0.21 0.37 0.14 0.23 0.18 0.32 0.15 0.23 0.19 0.32 0.32 Sources: Cost of Service is based on annual reports from utilities (DOMLEC, 2014 Annual Report; GRENLEC, 2014 Annual Report; LUCELEC, 2013 Annual Report; VINLEC, 2013 Financial Statistics provided by the General Manager of VINLEC in December 2014) and CARILEC, 2014 Average Tariffs in EC Countries (2015). PPA rate and expected tariff with geothermal generation based on financial model that supports this report. Notes: The IRR is Internal Rate of Return of the cash flows to equity investors. We assume a 15 percent real discount rate for equity cash flows. Dominica (DOM), Grenada (GRE), Saint Kitts and Nevis (SKN), Saint Lucia (SL), Saint Vincent and the Grenadines (SVG). In fact, the expected tariffs with geothermal generation are below the current cost of service with fuel oil generation (see next section for the detailed estimation of expected tariffs). This result shows that the base PPA rates, which would allow the projects to cover all their costs and the equity investor to earn a 15 percent real rate of return, are feasible and therefore implementable. Furthermore, there is some room (which varies by country) for slightly higher rates of return and PPA rates that would still result in reduced tariffs to end customers. The fact that the required PPA rates are feasible makes the geothermal projects more attractive for investors, therefore improving project bankability and the likelihood that their benefits will be realized. 70PDF Image | Unlocking Geothermal Power Eastern Caribbean Powerhouse
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