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Project Update: Solar 350 Ltd: Baja California

Bill Goldie (Solar 350’s Head of Project Development) and Axel Schmid (Head of Project Origination) have now returned from California Baja to London and Santiago respectively.

Solar 350 PPM Mexico

Their brief was to return with contracted “Greenfield Development Projects” in The Californian Baja of Mexico.

Certain factors make this area very attractive for Solar. These are as follows:

  1. High Levels of Solar Irradiation – 2465 KWh / M2 – circa 3 times Bournemouth / 5 times Glasgow.
  2. Low intermittency – sunshine is relatively constant, so very little cloud, which means solar electricity can contribute effectively to the region’s baseload requirements.
  3. High Electricity Prices – due to lack of generational capacity in the area, increasing demand and isolation from the rest of Mexico’s grid. Please remember Baja is the spit of land running down the West Coast with the Gulf of California mostly separating it from the rest of Mexico.
  4. Increases in aggregate demand for electricity of 5-6% per annum due to increased tourism (check out Los Cabos, the new Celeb Hotspot), increased urbanisation from holiday homes and increased industrialisation from domestic industry as well as from US firms building mirror manufacturing sites across the border to manufacture at lower costs (also solving Donald Trump’s migration issues).
  5. Financial Attractiveness – Fully constructed Project IRR’s of between 12%-17% unlevered at Ready to Build Sales Prices (our sales price). In addition, as interest rates are relatively low in Mexico (3%), debt for project construction can be gained at circa 5-6% meaning levered IRR’s should mid to high 20’s. If we can secure PPA’s (Power Purchase Agreements) denominated in United States Dollars, then in fact, cost of capital is even cheaper as the project can borrow at US interest rates.

There are other advantages as well:

  1. No hurricane risk – the locations are not in that band.
  2. Development to “Ready to Build” is relatively cheap and there are no minimum capital / balance sheet requirements for development or negotiating and executing PPA.
  3. Mexico has very little hydro, so no issues with a very wet El Nino, ramping up Hydro generation and lowering electricity prices.
  4. Mexico has committed to a very ambitious emission reduction INDC (Intended National Determined Contribution – basically their commitment to reduce their emissions) as per the Paris Agreement, thus desperately requires projects.
  5. The Baja works off a Single 200 KV line stretching down the length of the spit, isolated from the rest of Mexico by the Gulf of California leading to exceptionally high electricity prices at the points furthest away from generation. In fact, in Los Cabos (the new Celeb Hotspot, which you can see advertised on London Taxis), they reportedly pay $360 USD per MWh, although these off takers would not be suitable for more than 20% of the Power Purchase Agreement unless they were part of a credit-worthy hotel group. Basically, we need BBB+ and above for the majority off-taker for the final buyer to secure the debt.

There is also incidentally, a minimum guaranteed floor price for the emission reductions created by these projects, which will fold into the New Paris Agreement in due course, but as this is only $3, and an effective global emission reduction price should be £50 / €60 / $70, we have not included these incomes in our calculations. We will however accredit the project with the United Nations which will give us 21 years of emission reductions, which should have some considerable value in the future.

In fact, this next chapter of the whole environmental revolution was started by The Paris Agreement in December 2015. This agreement to limit CO2 increases to 420 Parts per Million (350 is highest level for stable climate), limit warming to with 2 degrees of preindustrial times and by necessity in achieving this, is designed to increase decarbonisation spending from $250 Billion last year to $1-2 Trillion Per Year, each year every year to 2050. This is what the International Energy Association says we need to combat the worst effects of Global Warming.

So where does Solar 350 sit in all this? Well, where do you think a company based on the solving the climate change problem, reducing CO2 to 350 parts per million and solving the climate change problem would sit. At the tip of the sword of course.

Solar 350 in Mexico

But the key issue is of course what we can sell the fully developed, permitted (but not constructed) project for?

For well-developed “Ready to Build” projects there is never any shortage of potential suitors; Pension Funds, for instance, that once relied on a healthy income from government bonds such as the French OAT or Italian BTP, paying, say 7% are desperate for yield, and environmental projects with a Power Purchase Agreement (PPA) from a Creditworthy Nation or Corporate can provide the yield they need to go some way to catch up with the annuities their paying or other commitments.

But really there is no shortage of buyers for of buyers for high quality “Ready to Build” projects. In fact, there is a very significant shortage of high quality “Ready to Build” projects and this is going to become even more apparent as decarbonisation investment jumps from circa 250B USD to 1-2 Trillion USD per year, which is what the world needs to spend, as recommended by the International Energy Agency (http://www.iea.org/) and other appropriate bodies.

Fortunately, finding and developing new sites was exactly what Bill and Axel were doing in Mexico.

The result:

2 * 60 MW Projects contracted

1 new company SPV formed

3 land rental options in process

3 development agreements signed,

3 more 60 MW Projects to follow.

And the finance to develop and the eventual sale to the end buyer to begin construction?

Well as we go to print with this article, we are moving to “Letter of Intent” with one UK Financial Group that is looking to finance “Greenfield to Ready to Build” development costs in return for 50% of the upside and, in addition, we are signing a “Letter of Intent” with one Chinese State Owned Electricity Generator, which is expanding abroad as part of China’s Belt Road Strategy as defined in their last 5-year plan. The Chinese LOI will be based on the Chinese Company buying the project from us when it is “Ready to Build”.

Solar 350 in Mexico

Develop projects through Solar 350 Ltd, accredit through Carbon 350 Ltd, finance through 350 PPM Ltd.

That’s how it works.

P.S Update on Developments in India to follow after Bill Goldie’s April Trip.

P.P.S Photo’s feature Bill and Axel negotiating land rental agreements for the projects and meeting with electrical engineering teams in Californian Baja (B.C)

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