project financing case study

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• Project Finance

Project Finance: Free Online Course

Learn the basics of a project finance transaction, key debt, and cash flow metrics, as well as return calculations and common scenarios used to support negotiations using a real case study. Includes FREE Excel template.

Get Certified in Project Finance Modeling

Table of Contents

What is Project Finance?

Before we begin – download the free excel template, video 1: introduction, video 2: project finance primer, video 3: course overview, video 4: timeline and process, video 5: timeline and process, part 2, video 6: construction and operations calculations, video 7: negotiations & optimizations, conclusion & next steps.

Welcome to Wall Street Prep’s free online course on Project Finance! 

Project finance refers to the funding of large, long term infrastructure projects such as toll roads, airports, renewable energy using a non-recourse financing structure, which means that debt lent to fund the project is paid back using the cash flows generated by the cash flows generated by the project.

Course objectives: We created this course to provide students and finance professionals pursuing a career in project finance with an understanding the role and interests of the typical participants project finance transaction, key debt and cash flow metrics such as CFADS , DSCR & LLCR, as well as equity return calculations. We hope you enjoy –  let’s begin!

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This is the first part of a 7 part series, where you will learn about the basics of project finance analysis. Using Heathrow’s expansion of a third runway , we will walk through the basics of a project finance transaction, key debt, and cash flow metrics, as well as return calculations and common scenarios used to support negotiations.

In part 2, you’ll learn the basics of a typical project finance transaction, as well as key project finance jargon and terminology, such as SPV, PPP, CFADS, DSCR , EPV, EPC, DSRA, P90/P50.

In part 3, we introduce our project finance case study: Heathrow Airport’s expansion of a third runway.

The Ultimate Project Finance Modeling Package

Everything you need to build and interpret project finance models for a transaction. Learn project finance modeling, debt sizing mechanics, running upside/downside cases and more.

In part 4, you’ll learn about the typical project finance timeline and process. You’ll learn about the different characteristics of the project development, construction and operation phases of an infrastructure project.

In this lesson, you’ll continue on with the Heathrow Airport case study and learn about the capex , operations, debt and tax mechanics and calculations involved in a project finance transaction.

In part 6, you’ll learn about the cash flow waterfall and set the stage to determine cash flow available for debt service (CFADS), the Debt Service Coverage Ratio (DSCR) , the Loan Life Coverage Ratio (LLCR), determine the all-important Project IRR .

In this final lesson, we will introduce the various interests of the stakeholders involved in a project finance transaction. You will learn about the typical contours of a project finance negotiation and the typical scenarios that a project finance model must accommodate to support these negotiations.

We hope you enjoyed the course and please provide feedback in the comment section below. To learn more about how to build a comprehensive bankable project finance model, consider enrolling in our complete Project Finance Modeling Certification Program.

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• Project Finance Model Structure

Well done. Project Finance is really demystified.

A joy to listen.

Glad to hear, and thanks for that feedback!

It´s interesting for me the Scenarios Manager. In the model End i see it but in the other one i don´t know how to make the table and the index. Could you explain me?

If there is a completed version in the model that comes with this course, try to duplicate it. Also check out our FSM course online for its lesson on scenarios.

kindly e mail to me the schedule of On line courses and fees and eligiblity criterion .

We will adjust our work shcedule to match the time lags/leads owing to our geographical locations

Please check out this link: https://www.wallstreetprep.com/support/ , and email [email protected] , and they will get back to you with that information!

Sir , I would consider referring my employees from finance department to go for concise On Line Course . we are taking up BOOT projects of mid sized tickets for food waste digesters and Effluent Treatment and recycling to private industries in India

Hi, Shreepad,

Great, we would love to help your employees!

Dear sir , this free on line course on BOOT Finance is excellant , it enlightened me on all aspects of Long term Project financing . It is crisp, to the point , simplified to understand the complex process of making the financial decision .I work as CEO in Indian …  Read more »

Glad to hear the course was helpful!

I think this free Project Finance intro course was brilliant! I wish we could also get the slides

Thank you, Ukamaka! Unfortunately, we do not provide the slides for this course, but please do check out our complete project finance online course! https://www.wallstreetprep.com/self-study-programs/the-ultimate-project-finance-modeling-package/

We're sending the requested files to your email now. If you don't receive the email, be sure to check your spam folder before requesting the files again.

Learn Online: Everything you need to build and interpret project finance models for a transaction.

The Wall Street Prep Quicklesson Series

Modern Project Finance: A Casebook

ISBN: 978-0-471-43425-2

October 2003

Benjamin C. Esty

Written as a guide to a dynamic, and increasingly important field, Modern Project Finance: A Casebook provides a detailed description and analysis of project-financed transactions. Other books describe what project finance is and how it works--Benjamin Esty, of the Harvard Business School, brings his expertise to a collection of cases that analyze the challenges of structuring, valuing, and financing project companies.

As a researcher, professor Esty has published numerous articles in both academic and practitioner-oriented journals such as the Journal of Financial Economics, Journal of Applied Corporate Finance, and the Journal of Financial and Quantitative Analysis . In addition, he has written more than 70 case studies, technical notes, and teaching notes on project finance, emerging market investments, and valuation mechanics. He currently serves on the editorial board of the Journal of Structured and Project Finance and regularly advises investment banks, development institutions, government agencies, and project sponsors on a broad range of investment, financing, and valuation issues.

• Provides a new and interesting setting in which to teach advanced principles of corporate finance.
• The cases provide comprehensive coverage of project finance in terms of actual use (i.e., geographic regions, industrial sectors, stages of project execution, etc.) so the reader can see the full range of practice. Cases are set in power, telecom, oil and gas, and mining, and in a range of countries such as Kuwait, Vietnam, Venezuela and Chad.
• Because most cases were written in conjunction with the people actually involved with the deals, the cases include contractual details, commentary, and financial projections that are not typically disclosed through public documents.
• The case studies are "managerial" in nature. They provide descriptive details, but they challenge readers to make important managerial decisions. Readers must identify critical issues (key questions), analyze the available data, and create a plan of action or respose. This process helps students become more adept at management in a way that replicates practice.
• The cases have been "battle-tested" in the classroom. The author has taught every case multiple times, and revised them to ensure they achieve their pedagogical objectives. The teaching notes have been tested and revised-they work in practice.

• Project Finance

Structuring, Valuation and Risk Management for Major Projects

• © 2022
• B Rajesh Kumar 0

Dubai International Academic City, Institute of Management Technology, Dubai, United Arab Emirates

You can also search for this author in PubMed   Google Scholar

• Includes insightful case studies on finance in major projects
• Discusses both theoretical perspectives and practical aspects of project finance
• Presents a framework for evaluating structure, value and risk

Part of the book series: Management for Professionals (MANAGPROF)

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About this book

Large projects are defining moments for companies and countries. When large projects succeed, they can dramatically improve the social and economic conditions in a region. This book focuses on major aspects of the world’s largest infrastructural, industrial and public service projects through the lens of structuring, valuing, managing risk and financing projects. The book analyses and discuss large projects in government, private and public and private partnership. The author sheds light into the attributes of project finance which have unique structural elements. The book focuses on case studies related to 50 mega projects which includes infrastructural projects, energy related projects, industrial projects, roads, ports and bridges among others. This book covers both the theoretical aspects of financing of mega projects and the practical applications by including case studies of the world’s largest projects in terms of value.

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• Structured Finance
• Financial Engineering
• Corporate Finance
• Project Management

Table of contents (54 chapters)

Front matter, trends in infrastructure industry.

B Rajesh Kumar

Infrastructure Financing Instruments

Risks inherent in project finance and its mitigation, structuring and implementation of the project, case 1: the chuo shinkansen project, japan, case 2: developing the world’s largest passenger aircraft-airbus a3xx, case 3: south north water transfer project china, case 4: dubailand project, case 5: international space station, case 6: al maktoum international airport, case 7: california high speed rail project, case 8: london cross rail project, case 9: beijing daxing international airport, case: 10 jubail ii industrial city, case 11: hong kong zhuhai macao bridge (hzmb), case 12: gotthard base tunnel (gbt), case 13: channel tunnel uk, case 14: doha metro, case 15: panama canal expansion, authors and affiliations, about the author.

B. Rajesh Kumar  is a professor of finance at IMT Dubai (UAE). He received his Ph.D. from the Indian Institute of Technology Kharagpur (IIT Kharagpur, India). His research interests are in areas of applied corporate finance, valuation, M&A   and sustainability.  He has authored over 65 empirical research papers in refereed journals and seven scholarly books published by publishers such as Springer, Academic Press-Elsevier, Palgrave Macmillan and McGraw-Hill.

Bibliographic Information

Book Title : Project Finance

Book Subtitle : Structuring, Valuation and Risk Management for Major Projects

Authors : B Rajesh Kumar

Series Title : Management for Professionals

DOI : https://doi.org/10.1007/978-3-030-96725-3

Publisher : Springer Cham

eBook Packages : Economics and Finance , Economics and Finance (R0)

Copyright Information : The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2022

Hardcover ISBN : 978-3-030-96724-6 Published: 04 May 2022

Softcover ISBN : 978-3-030-96727-7 Published: 05 May 2023

eBook ISBN : 978-3-030-96725-3 Published: 03 May 2022

Series ISSN : 2192-8096

Series E-ISSN : 2192-810X

Edition Number : 1

Number of Pages : XV, 332

Topics : Business Finance , Risk Management , Project Management , Industries

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Easing complex transactions: project finance case studies, project finance is complex, which is a why a corporate trust partner with comprehensive capabilities is a critical piece of the puzzle..

Improving the country’s aging infrastructure is a top priority, and the $1 trillion Congress recently committed to infrastructure spending will likely kickstart a host of new building projects. At the same time, the American Society of Civil Engineers estimates that the United States needs to spend $4.5 trillion by 2025 to “fix” the country’s infrastructure.

What that means for stakeholders across the infrastructure industry is a growing pipeline of projects, along with the need for project finance expertise to help move projects forward. Bringing those projects to a successful close requires proven expertise, experience and strong communication processes, as well as an ability to work seamlessly with a number of parties and an ability to understand and navigate project finance risks.

As a leading global corporate trust provider , U.S. Bank has experience working on many complex transactions.

“We’ve seen many different approaches to these financings, and we have the ability to come to the table, apply our expertise from prior transactions in the documentation process, and help our clients reach the best outcome on how they’re going to put these complex financing packages together,” says Bob Kocher, managing director, U.S. Bank Global Corporate Trust.

That expertise was recently highlighted in two major project finance projects, where U.S. Bank served as a trustee in bond issuances in the capital stack of the Red River Diversion Project at the Minnesota/North Dakota border and the Central 70 Project in Colorado.

Red River Diversion project

In an infrastructure industry that is no stranger to large, complex projects, the Red River Diversion Project is a notable standout. The $3 billion project is more than a decade in the making, with numerous stakeholders and a mix of funding sources. It’s also a landmark public-private partnership (P3) project in the water infrastructure industry.  

The Red River Diversion project represents the first use of the U.S. Army Corps of Engineers’ P3 Pilot Program to reach financial close. The aim of the program is to improve collaboration between the public and private sectors, as well as develop a more efficient alternative financing model for future Corps infrastructure projects.  

The Red River Diversion project intends to provide permanent, reliable flood protection to the Fargo-Moorhead metropolitan area. The Red River serves as the state border for much of Minnesota and North Dakota and cuts through the center of Moorhead, Minnesota, and Fargo, North Dakota. Spring flooding in the Fargo-Moorhead metro has been a chronic problem for decades.  

The solution is the development of a 30-mile diversion channel. The Army Corps of Engineers is overseeing design and construction, with completion scheduled in 2027.  

The Red River Diversion project involved a number of intricate financing sources that were woven together, including developer equity, federal and state funding and $1.1 billion from local tax levies. The Metro Flood Diversion Authority worked with the U.S. Environmental Protection Agency to obtain one of the largest Water Infrastructure Finance Innovation Act (WIFIA) loans in the program’s history, at $569 million. In addition, project financing included $273 million in tax-exempt senior bonds issued through the Wisconsin-based Public Finance Authority.  

According to the Corps , the Red River Diversion P3 was an “innovative approach leading to significant gains in efficiency, productivity and resiliency” that saved the federal government $277 million and shortened the construction time by 10 years.  

As part of a competitive bid process, U.S. Bank was selected in April 2021 to serve as the bond trustee on the bonds issued by the Wisconsin Public Finance Authority, as well as filling additional roles as the account bank, collateral agent and dissemination agent.  

Once U.S. Bank was selected as trustee, it needed to get up to speed quickly with all documents, provide comments regarding duties and liability and communicate to all parties its views on how the transaction should work as it related to the daily activities of the trustee.  

“This trustee deal had a tremendous amount of document turnarounds as a result of the complexity of the transaction. It required attention to detail to ensure changes were consistent throughout all the documents,” says Angela Davis, relationship manager, Global Corporate Trust at U.S. Bank.  

Keeping communication and workflow on track is a testament to the U.S. Bank team’s diligence in tracking documents, as well as its proactive approach to the collection and distribution of project information and covenants.  

“Through our hands-on partnership and ability to work efficiently with other business lines inside of U.S. Bank, our client received everything they needed to keep this project moving forward,” says Davis.  

Collectively, the U.S. Bank team will serve as the operational and administrative end of the financing, following the documents, administering the movement of funds and making sure the money is moved from account to account properly. U.S. Bank will be responsible for the billing and collecting funds to pay holders of the bonds and senior notes through 2056.  

“P3 projects are the wave of the future, and U.S. Bank is at the forefront of that shift in how infrastructure projects are financed,” says Kocher.

“We can come to the table, apply our expertise from prior transactions in the documentation process, and help our clients reach the best outcome.” Bob Kocher, managing director, U.S. Bank

Central 70 project

Interstate 70, between I-25 and Chambers Road in Denver, is a key corridor that services nearly 1,200 businesses and provides an important regional connection to Denver International Airport. The  Central 70 Project  will reconstruct a 10-mile stretch of I-70, add one new Express Lane in each direction, remove the aging viaduct and create a four-acre park over a portion of the lowered interstate between Brighton and Colorado Boulevards.  

The Central 70 Project involves the refinancing of a 2017 Transportation Infrastructure Finance and Innovation Act (TIFIA) loan, along with the financing of additional costs. As part of the refinancing, the U.S. Department of Transportation’s (DOT) Build America Bureau provided a new TIFIA direct loan with a reduced interest rate, allowing for additional loan principal increase to facilitate project completion.  

Besides TlFIA, the project is backed by the proceeds of tax-exempt private activity bond and taxable bond issuances, as well as contributions from the state DOT, the Colorado Bridge and Tunnel Enterprise, the High Performance Transportation Enterprise, and local and state entities .  The Series A bond issuance totaled $51,670,000 and the Series B bond issuance totaled $464,955,000.  

U.S. Bank served as bond trustee and acted in ancillary roles as the collateral agent and intercreditor agent, paying agent, registrar, transfer agent and dissemination agent. In addition, because bondholder approval was needed to issue the new debt in 2021, U.S. Bank stepped in and served as the tabulation agent for the existing investors.  

Key to a successful project finance deal is finding a partner with the expertise, resources and systems to streamline the process, such as tracking necessary compliance requirements and providing online reporting for the client. In addition, these complex deals often require a higher level of client relationship management.  

“There is a lot more client interaction than a typical municipal financing, because there is always something going on, whether it is requisitions being paid or the sponsor needing to post financials or updates that need to be disseminated to the market,” says Gretchen Middents, relationship manager, Global Corporate Trust at U.S. Bank. “So, it is a much more hands-on relationship as compared with other assignments that don’t have the same scope of documents and requirements.”  

In addition, working with a third-party trustee and agent to perform all project finance roles can produce numerous efficiencies, such as streamlining operations, coordinating workstreams from various parties and providing assistance for investors at every stage of the project lifecycle. Finding a partner with extensive experience servicing all debt vehicles can help guide decision-making with strategic insights and proactive solutions.  

“These projects are more of a team effort because of the complexity,” adds Middents, “and being able to rely on others within our organization is key to our success.”

U.S. Bank administers a variety of infrastructure asset types and has the dedicated expertise to assist investors at every stage of the project finance lifecycle. See our extensive suite of services for debt financing  here  or contact Lars Anderson at  [email protected]  or Alejandro Hoyos at  [email protected] .

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Disclosures.

Loan approval is subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Interest rates and program terms are subject to change without notice. Mortgage, home equity and credit products are offered by U.S. Bank National Association. Deposit products are offered by U.S. Bank National Association. Member FDIC.

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Project Finance Portal

• Format: Print
• | Language: English

About The Author

Benjamin C. Esty

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Edward Bodmer – Project and Corporate Finance

Resolving BS in Project Finance

Project Finance Case Study – Dabhol Power Plant

This webpage puts together information of the Dabhol electric power plant case. The case is old, but it has a lot of project finance lessons. One lesson is the dangerous way students are taught at Harvard before they go to Wall Street.  Other issues relate to the danger of a high IRR and a high plant cost. The case includes philosophical issues related to legal structuring versus economic analysis; benchmarking of costs; the use of different types of financial models evaluation of the ability of off-takers to honour contracts.

Dabhol is also an interesting case for me because it was first launched as a breakthrough in electricity investment for India and arguably was an important cause of the downfall of Enron. The central issue in the case is whether risk analysis and valuation should have involved contract evaluation and insurance on PPA contracts or whether the ultimate affordability of the produced electricity to ultimate consumers should have been the focus of the analysis.

PDF File with Case Study of the Dabhol Plant Financed by Enron, GE, and Bectel in India in the Late 1990's

Dabhol Case Introduction

For the Dabhol case I have made an assignment rather than just putting some of my opinions on the website. The outcome of the Dahbol case study is well known in project finance (it is difficult not to call the project a dramatic failure). I am not interested in you just telling me what happened. I am interested in how you would have assessed the risks, the contract structure and other issues at the time the loan was made (a long time ago in the 1990’s). Even though the failure of the case is well known, I would like to know how you would have evaluated both positive and negative aspects of the project financing and how you would have considered nuances involving contract structure (in particular, the PPA pricing); benchmarking of costs, rate of return analysis, and off-taker assessment.

The case is about project finance risk analysis and contract structuring.  If you would like to review background in these subjects I have included power point slides that provide discussion of project finance and contracts. You can download these slides by pressing the buttons below.  In particular, you need to understand that project finance does not have history and as such benchmarking may be a good idea. You should also understand why a capacity or availability payment is present in some project finance transactions. You can review project finance issues by clicking on the button below to download power point slides.

Power Point Slides that Accompany the Video Lecture Series on The Theory of Project Finance

Enron Corporation was the main sponsor (owner or equity investor) and developer of the project. The plant was completed in 2001 and became a disaster at about the same time Enron collapsed. Maybe the Dabhol plant problems in India had something to do with the Enron fall.  You can see the Enron stock price data below in case you are young and don’t know story.

In most places in the world (especially in India), the kind of arrangement where the revenue contract (in this case the PPA contract) is negotiated without a bidding process are no longer acceptable. This does not make the Dabhol case obsolete, as the economics of the contracts and political risk associated with the contracts still must be assessed even if a bidding process is used.

Background Resources for Completing Questions Raised in the Case

You can find many of the resources on the website except for the Harvard Business School (HBS) write-up. (I am not allowed to put the HBS case itself on the website because of copyright issues. Somebody from HBS has sent me threatening e-mails about this). I have however, put some of the information from the case in screenshots below.

The basis for the case is the HBS Dabhol Case 1. The last exhibit in this case has numbers on the PPA agreement including the capacity charge.  (In fact, the PPA was changed after the case write-up, but the re-negotiated numbers are not available). For purposes of this assignment you should use numbers and structure from the data in the HBS Case 1 that is the last page of the case.

Other than the HBS case, resources that should help you completing the case and are available download in different sections include:

• Case from India with Financial Analysis of the off-taker (the buyer of power)
• Read PDF excel utility so you can download data from the PDF to an Excel File
• Database File on exchange rates with the India/US exchange rate
• Files for benchmarking that include EIA data and Lazard
• Other case write-ups that describe various aspects of the case

You can use the buttons I have added below to download and read the background materials. (I wrote a few comments about the Dabhol case a few years ago.  You are welcome to read these comments in my case studies preliminary manuscript. But please do not assume these comments are very good. I have not included my comments in the resources available for downloading below.)

Step by Step Instructions for the Dabhol Assignment

The assignment involves writing-up seven parts of the Dabhol project finance case.  There are seven parts of the assignment.  I would like you to write-up one or a couple of paragraphs on each section, something like a credit memo.  Do not worry about the length of this page — I have tried to put a lot of details in the sections so you can concentrate on the central learning issues.

Part 1: Write-up the Summary

Write a succinct summary of the case from a credit analysis perspective (e.g. what were unacceptable risks in the loan agreement and why was the project good or bad from the perspective of risk). Include a couple of sentences in your summary about the implications of the case in the context of general project finance theory.  You should probably write this up after you are finished with other parts of the assignment.

Part 2: Make a Diagram of the Contract Structure and Comment

The Dabhol project was named deal of the year for its contract structure before it imploded. In this section, I would like you to make a diagram of the structure of the contracts in the project financing — the entities and the contracts. Also, in a couple of paragraphs, discuss the general economic concepts of using a purchased power agreement with a capacity charge in an availability-based project. I am looking for a diagram that you can use to discuss risks of contracts not being honoured. I hope you can make it come alive with flows of where the money is coming from and where it is going.

I would also like you to comment on the diagram that is included in Exhibit 1 of the HBS study (shown in the screenshot below).  I hope you make a much better diagram that allows the reader immediately understand risks and mitigations associated with the different contracts.

Part 3: Write a Paragraph on Benchmarking of the Cost per Unit

Any project finance investment includes capital expenditures, operating costs, volumes produced and prices.  A lot of risk analysis depends whether the amounts for these capital expenditure, operating cost and revenue drivers are reasonable.  As project finance does not include financial history, you often need to do some detective work to evaluate unit costs for capital expenditures, operating costs and other items (e.g. capital expenditures per kW).  The cost and the capacity are at the top of the HBS case as shown in the screenshot below.

In this section, I would like you to do some cost benchmarking and compute unit costs of Dabhol. This is a bit difficult because of the age or the case, but you could start with an old HBS case that includes capital costs for different types of units. I have clipped a couple of sources in the screenshots below. Once you finished your benchmarking, comment on the reasonableness of the cost structure explain why you think the Dahbol costs are different from other plants. If you are really fancy, you could try also to benchmark the O&M cost.

I have included a photo of the plant that you can maybe use in benchmarking.  Tell me if you think there is something special about this plant that makes it different from other plants around the world.

Part 4: Compute the Project IRR from the PPA numbers in the HBS Case 1

In this part of the assignment I would like you to compute the project IRR (return on investment measure in project finance) from information given in the HBS case study on the PPA.  I would like you to think about the implications of different return measures.  Maybe as lenders you should not care much about the return. Maybe you think a high return is good. For example, S&P includes various criteria in developing credit ratios. One of the S&P criteria is the return on investment – a higher return on investment is associated with better credit quality.

I would like you to: (1) compute the project IRR from the PPA statistics at the bottom page of the HBS Case 1; (2) discuss the difference between project IRR, equity IRR and debt IRR; (3) comment on the level of the project IRR in the context of credit analysis; and, (4) comment on whether the IRR reflects the true returns to investors.

In computing the project IRR, you can use the step-by-step process below.  I do not want you to struggle too much with this.  I just want you to get a very general idea of what can go into the project IRR calculation and, most importantly, how to interpret the calculation.

Step 1 : Open the Read PDF Excel file (you can download it by pressing the button below)

Read PDF to Excel File that Allows you to Format Data After Copying from PDF File (Press Shift, Cntl, A)

Step 2: Copy the PPA data at the bottom of the HBS case study to a blank excel sheet (the first screenshot). The second screenshot below shows the messy raw data after you copy and paste it into excel.

Step 3 : Press SHIFT, CNTL, A sequence to get the menu to appear (it is essential that the Read PDF to Excel File is open and you see the SHIFT, CNTL A on the bottom status bar of excel). Then go to the Conversions and Adjustments Button and adjust the REPEAT ROW option.  These steps are illustrated in the screenshots below.  If you are having trouble, you can send me an e-mail to [email protected] . The menus that should appear are shown in the screen shots below.

When you have finished this process, there should be a second sheet in your file that is cleaned up.  The cleaned up sheet should look something like the screenshot below. Then you should add a couple of columns and you can make an analysis of the project IRR.

Step 4 : Insert a column for the construction period (assume a 1-year period) and enter the construction cost of $2.8 billion and the capacity of 2,000 MW for both units as quoted in the case.  I have illustrated a little excerpt from this below.

Step 5: Use the absurd assumption that the plant will run 8760 hours per year that is noted in the case (maybe the plant will get a sick day — have an outage of 24 hours in leap years). With this assumption, compute the volumes sold as the capacity multiplied by the hours to arrive at MWH. Assume also that the PPA applies to the entire 2,000 MW of the plant. Do all of your analysis in USD (not USD 000’s or USD millions).  In the case, the contract prices are in USD cents per kWh.  Convert these to USD per MWH through multiplying by 10. These few calculations are shown in the screenshot above.

Step 6: Assume that the contract structure is such that the fuel revenues in the PPA contract match fuel costs and the operating revenues in the PPA contract match the actual operating expenses. This means that the return is earned through multiplying the capacity charge in USD/MWH by the MWH.

Step 7: Compute the Project IRR on a pre-tax basis using the capital expenditures in the first year as the cash output and the combination of the capacity charge and the management fee multiplied by the volumes as the cash flow input.  Use the IRR function in excel. Now do the important part.

Part 5: Off-taker Analysis

If a project revenue depends on a PPA contract, then risk analysis of the project finance should include: (1) the incentive of the off-taker (the buyer of power) is to break the contract; and, (2) the financial ability of the off-taker to honour the contract are essential elements of project finance risk analysis. The Dabhol case was a classic case where evaluation of the off-taker was a crucial element of credit analysis.

To evaluate risks of the central PPA contract not being honoured, I would like you to compute the effects of the PPA on the prices charged by the off-taker in this section. My hope is for you to think past the fundamental legal structure of contracts and the SPV and examine the economics of the project.

You could get very sophisticated about calculating the effects of the PPA contractor on the off-taker the calculation, but for purposes of this assignment, assume that the revenues and therefore prices charged by the off-taker must be increased by the capacity charges and the operating costs.  This means you can make a pro-forma revenue calculation of the offtaker — MSEB — with and without the Dabhol plant. Once you have computed the pro-forma revenue increase, calculate the percent revenue increase that MSEB – the off-taker – must charge to its customers. Finally, as part of your write-up, comment on whether you think the percent increase in revenues will affect the non-technical losses, which is stolen electricity.

For the pro-forma calculation of the revenue increase and percent rate increase, you can use the India perspective case study that is available for download below. In this file you will find a couple of tables that show the revenue of MSEB before attempting to recover charges for the Dabhol plant. Tables that will be useful for this analysis are shown in the screenshot below the button. You can use the read pdf to excel conversion process for this just as you did for the PPA analysis file to do the analysis. Assume that the term Mus in the case study is the same as MWH.

PDF File with Dabhol Case Write-up from Indian Perspective Including Discussion of Finances of MSEB

To make your analysis of how much the capacity charge for Dabhol increases rates to MSEB customers, you should first convert the Rupiah to USD in the above table. This can be done by using the interest rate database file that is available for download. Once you have converted the numbers to USD, you can then use the 1998-1999 values to make a pro-forma rate calculation (Revenues in USD divided by MWH).  After that, make the same calculation, but add the capacity charges from the Dabhol plant to the revenues and compute the revenue per kWh after the plant is added.  Finally, compute the percent change in prices.

In making the calculation, you will need to convert the data in Rupiah to USD.  You can do this by using the file below or you can estimate the exchange rate using the graphs below. The graph can be downloaded by pressing the button below.

Interest Rate Database that Extracts Data from the FRED Database with Quick Updates and Flexible Graphs

Part 6: Risk Analysis

Given the contract structure, benchmarking, rate of return calculation and off-taker assessment, write a short credit analysis report. In the credit analysis report, use key credit issues where you write a question (e.g. this is the first large NGCC plant in India, what is the risk of capital cost over-runs).  Then you can answer how the risk is mitigated.  Alternatively, or in addition, you can make risk matrix where you organise risks (construction, operation, financial) and put the name of the risk in different rows. The columns can include the name of the risk, a description of the risk, mitigation of the risk, and the potential cash flow effect of unmitigated risk.

Part 7: Conclusion and Opinions

Find the article with the chronology of the project and write a sentence or two on the final resolution of the power plant. Comment on the comical jiberish (apparently taken seriously by students) that Harvard students are given before they go to Wall Street — in particular the statement that Enron was “Spreading the Privatization Gospel” made by Rebecca Mark, a Harvard Alumni who was behind the transaction. The first screenshot below is the amazing crap that Harvard students are given with the case.  The second screenshot is a picture of Rebecca Mark with and Indian official.

Given your analysis, write a couple of sentences about what happened to the project and the introductory quote in the HBS case about India “desperately needing” the kind of thinking taught at HBS .  Comment on what you think are the major errors that were made in the case.

Other Resources

I have included a few other articles and case studies that you can read. These articles may be amusing to read and provide some further background for the case.  I even understand that there is a Bollywood film about the Dabhol project modelled after the Godfather.

Comprehensive Article on the Dabhol Project from the Asia Times

Article on Political Pressure from the U.S. on India Related to the Dabhol Project

Article with Time Line for Dabhol Cronology with Description of Meeting between India PM and Dick Cheny

Article from the Infrastructure Journal Describing the Final Settlement Between Dabhol and the Indian Government

Article with Discussion of the Current Operations and Status of the Dabhol Power Plant After Sale by Enron

My Comments on Possible Answers:

My opinions about the case are probably biased and wrong.  But here they are. In terms of credit, this case demonstrates that no matter how many government guarantees, letters of comfort or other legal assurances you have, if the counterparty cannot afford to honour the contract, the project will have big problems.  Further if you have promises from OPIC and other insurances, they are not like a letter of credit where you can just go and collect the money as soon as a default occurs.  This is aggravated if there are published reports that can be used against you in arbitration.

Most importantly, the project reveals a fundamental question about project finance.  This question is whether having really good contracts is most important or whether it is more important to evaluate the economics of the project. I hope you think that both are important. The government of India was heavily criticized for not honouring contracts.  This was a valid complaint as private investment in the country dried up to an extent.  Enron and its banks were criticized for not evaluating the economics of the project and relying too much on the contract structure of the project.

I think the diagram in the case sucked.  First, there was a bizarre line from the SPV to the Bank to the Off-taker.  I would hope a better diagram would start with the PPA and have arrows pointing which way the money is flowing.  Second, each line should represent a contract.  Third, essential elements of the contracts should be highlighted.  For the PPA, contract I would put right in the diagram the required price increase to consumers.  I am in no way saying the diagram below is any better, but I hope it can be used to thing about risks.

The reason I included this question is to highlight a fundamental fact about project finance.  That is that there is no history — no historical trends from financial reports — in project finance.  No trends in EBITDA or ROIC to evaluate. No historic volatility in cash flows; no way to compare Debt/EBITDA ratios across different companies operating in the business. Project finance involves large capital investments  that must be maintained and produce not very exciting products such as roads, electricity, oil, prison buildings, hospitals, LNG plants etc.  The differentiation between projects generally comes down to cost structure and efficiency.

The second point about benchmarking is that it is very difficult to do on an objective apples-to-apples basis with real data. Maybe there are customs duties; maybe added transmission facilities must be built; maybe labour costs are different.  In the case of Dabhol, the cost of $2.8 billion relative to capacity of 2,000 MW or a cost per kW of USD 1,400 per kW is very high.  This is demonstrated in the table below.

While you may say the comparison with plants around the world is not appropriate; you could also say that comparison with other plants in India is not appropriate because other plants in India were charging high EPC profits and using the political risk premium excuse. The two tables below demonstrate premiums of the Enron plant compared with other plants.

In addition to benchmarking plant costs, the O&M costs should be benchmarked which in general is even more difficult.  The Dabhol fixed O&M costs appear surprisingly high.  This is demonstrated by comparing the cost per kW-year in the HBS case with current costs that are published by Lazard.  Costs in the case study were

In response to my question for this section, I was hoping for comments that the IRR was very high. I was also interested in statements that IRR does not measure the real profit because profit is made from O&M and EPC contracts. You could get even fancier and discuss upside IRR options from continuation of the PPA; use of the LNG terminal for additional business ventures; and, increasing the IRR from re-financing.

There is an issue in project finance that economic rents that are in the IRR amount to transfer of wealth from consumers of electricity in India to investors in the U.S.  A high IRR may be suggested to compensate for political risk; but it also increases political risk.

In project finance there is a basic rule. the project IRR must be higher than the cost of debt which is the debt IRR.

Now, some people have mentioned that the IRR as a statistic has flaws.  This is true.  There is the famous problem of multiple IRR’s when cash flows are positive, then negative, then positive.  There is the re-investment rate.  There is the theoretical problem of project ranking discussed by McKinsey that almost never happens. But the IRR still provides a good measure of growth in future cash flows.  The real problem with IRR is that: (1) it does not account for changing risk of the project; (2) it undervalues far-out cash flows when the IRR is high; and (3) it does not account for probabilities in staged investments.  You can find further discussion of this on another page of this site:

My hope in getting a response to this question is that you think about ways to evaluate risks of project counter parties in an objective manner.  The idea of the structuring diagram is to show that projects depend on revenues.  If there are no revenues, there is of course no money to pay O&M; no money to pay debt service; no money to pay taxes; and no money for equity.  When you perform risk analysis, the question is how to do it on an objective basis.  I think a good answer to this question would be to try and evaluate what will happen to the off-taker as a result of signing the PPA contract.  This is not an easy task as the MSEB, the off-taker may be able to sell more energy because of surpressed demand. But if the demand is not surpressed, then the following four things could happen that would increase rates:

• MSEB must pay the capacity payment of almost USD 600 Million
• MSEB must pay the fixed O&M payment of about USD 98 Million
• MSEB must pay the additional cost of Gas Fuel compared to Coal Fuel if the plant is forced to dispatch.  This could cost another approximately USD 300 Million

The next task is to see how much consumers are currently paying to MSEB.  This is a bit tricky because you want to find the time period before Dabhol had any effects on revenues and you need to find the number that is not distorted by subsidies. Finally, as the numbers are in Rupee and not in USD, you need an exchange rate adjustment.

Part 6: Risk Write-up

For this section I expected a write-up that ultimately (with hindsight), recognised that the off-taker risk was not really mitigated.  It was not even mitigated with the state guarantee.  For this you could walk through a scenario where MSEB cannot pay the PPA agreement and then political issues regarding whether three big American companies would not be paid.

In writing up the risk it can be good to state the risk as a question and then answer the question with potential mitigation. If the risk cannot be mitigated and it is a large risk, the loan may not be acceptable.

It may have been good to create a credit issue and then answer the question.  For example a question may have been phrased as follows:  MSEB will have difficulty paying the PPA contract.  In this scenario will the state government honour its guarantee.  The answer could then be your discussion about the recession etc.

Another question could relate to the World Bank report — The World Bank issued a report stating that the Dabhol plant is uneconomic. Does the World Bank report provide a means by which the government guarantees may not be honoured if MSEB defaults on the PPA contract.

I made a few comments about the issue of whether the plant was really economically viable and whether the whole thing made economic sense.  If the plant does not make sense should the bank lend money.

Review Concepts

In this final section I have included a couple of ideas that I think are important in project finance analysis.  I have listed a couple of bullet points and some ways that you may think about the issues.  I have also included references to my set of power point slides that describe project finance theory.

• The difference between the structure and analysis of availability projects and output projects — see slides 8-13.
• DSCR definition and use in project finance — see slides 67-74.
• Use of DSCR, LLCR and PLCR in different projects — see slides 75-84.
• IRR in project finance and why IRR is different from ROIC — see slides 89-94.

You can find some of these review concepts in the power point slides that are available for downloading in the button below.

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Free AI Presentation Maker for Generating Projects in Minutes

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Net Zero by 2050

A Roadmap for the Global Energy Sector

This report is part of Net Zero Emissions

About this report

The number of countries announcing pledges to achieve net zero emissions over the coming decades continues to grow. But the pledges by governments to date – even if fully achieved – fall well short of what is required to bring global energy-related carbon dioxide emissions to net zero by 2050 and give the world an even chance of limiting the global temperature rise to 1.5 °C. This special report is the world’s first comprehensive study of how to transition to a net zero energy system by 2050 while ensuring stable and affordable energy supplies, providing universal energy access, and enabling robust economic growth. It sets out a cost-effective and economically productive pathway, resulting in a clean, dynamic and resilient energy economy dominated by renewables like solar and wind instead of fossil fuels. The report also examines key uncertainties, such as the roles of bioenergy, carbon capture and behavioural changes in reaching net zero.

Summary for policy makers

Reaching net zero emissions globally by 2050 is a critical and formidable goal.

The energy sector is the source of around three-quarters of greenhouse gas emissions today and holds the key to averting the worst effects of climate change, perhaps the greatest challenge humankind has faced. Reducing global carbon dioxide (CO 2 ) emissions to net zero by 2050 is consistent with efforts to limit the long-term increase in average global temperatures to 1.5˚C. This calls for nothing less than a complete transformation of how we produce, transport and consume energy. The growing political consensus on reaching net zero is cause for considerable optimism about the progress the world can make, but the changes required to reach net zero emissions globally by 2050 are poorly understood. A huge amount of work is needed to turn today’s impressive ambitions into reality, especially given the range of different situations among countries and their differing capacities to make the necessary changes. This special IEA report sets out a pathway for achieving this goal, resulting in a clean and resilient energy system that would bring major benefits for human prosperity and well-being.

The global pathway to net zero emissions by 2050 detailed in this report requires all governments to significantly strengthen and then successfully implement their energy and climate policies. Commitments made to date fall far short of what is required by that pathway. The number of countries that have pledged to achieve net zero emissions has grown rapidly over the last year and now covers around 70% of global emissions of CO 2 . This is a huge step forward. However, most pledges are not yet underpinned by near-term policies and measures. Moreover, even if successfully fulfilled, the pledges to date would still leave around 22 billion tonnes of CO 2 emissions worldwide in 2050. The continuation of that trend would be consistent with a temperature rise in 2100 of around 2.1 °C. Global emissions fell in 2020 because of the Covid-19 crisis but are already rebounding strongly as economies recover. Further delay in acting to reverse that trend will put net zero by 2050 out of reach.

In this Summary for Policy Makers, we outline the essential conditions for the global energy sector to reach net zero CO 2 emissions by 2050. The pathway described in depth in this report achieves this objective with no offsets from outside the energy sector, and with low reliance on negative emissions technologies. It is designed to maximise technical feasibility, cost-effectiveness and social acceptance while ensuring continued economic growth and secure energy supplies. We highlight the priority actions that are needed today to ensure the opportunity of net zero by 2050 – narrow but still achievable – is not lost. The report provides a global view, but countries do not start in the same place or finish at the same time: advanced economies have to reach net zero before emerging markets and developing economies, and assist others in getting there. We also recognise that the route mapped out here is a path, not necessarily the path, and so we examine some key uncertainties, notably concerning the roles played by bioenergy, carbon capture and behavioural changes. Getting to net zero will involve countless decisions by people across the world, but our primary aim is to inform the decisions made by policy makers, who have the greatest scope to move the world closer to its climate goals.

Net zero by 2050 hinges on an unprecedented clean technology push to 2030

The path to net zero emissions is narrow: staying on it requires immediate and massive deployment of all available clean and efficient energy technologies. In the net zero emissions pathway presented in this report, the world economy in 2030 is some 40% larger than today but uses 7% less energy. A major worldwide push to increase energy efficiency is an essential part of these efforts, resulting in the annual rate of energy intensity improvements averaging 4% to 2030 – about three-times the average rate achieved over the last two decades. Emissions reductions from the energy sector are not limited to CO 2 : in our pathway, methane emissions from fossil fuel supply fall by 75% over the next ten years as a result of a global, concerted effort to deploy all available abatement measures and technologies.

Ever-cheaper renewable energy technologies give electricity the edge in the race to zero. Our pathway calls for scaling up solar and wind rapidly this decade, reaching annual additions of 630 gigawatts (GW) of solar photovoltaics (PV) and 390 GW of wind by 2030, four-times the record levels set in 2020. For solar PV, this is equivalent to installing the world’s current largest solar park roughly every day. Hydropower and nuclear, the two largest sources of low-carbon electricity today, provide an essential foundation for transitions. As the electricity sector becomes cleaner, electrification emerges as a crucial economy-wide tool for reducing emissions. Electric vehicles (EVs) go from around 5% of global car sales to more than 60% by 2030.  

Priority action: Make the 2020s the decade of massive clean energy expansion

All the technologies needed to achieve the necessary deep cuts in global emissions by 2030 already exist, and the policies that can drive their deployment are already proven.

As the world continues to grapple with the impacts of the Covid-19 pandemic, it is essential that the resulting wave of investment and spending to support economic recovery is aligned with the net zero pathway. Policies should be strengthened to speed the deployment of clean and efficient energy technologies. Mandates and standards are vital to drive consumer spending and industry investment into the most efficient technologies. Targets and competitive auctions can enable wind and solar to accelerate the electricity sector transition. Fossil fuel subsidy phase-outs, carbon pricing and other market reforms can ensure appropriate price signals. Policies should limit or provide disincentives for the use of certain fuels and technologies, such as unabated coal-fired power stations, gas boilers and conventional internal combustion engine vehicles. Governments must lead the planning and incentivising of the massive infrastructure investment, including in smart transmission and distribution grids.

Electric car sales in the net zero pathway, 2020-2030

Capacity additions of solar pv and wind in the net zero pathway, 2020-2030, energy intensity of gdp in the net zero pathway, 2020-2030, net zero by 2050 requires huge leaps in clean energy innovation.

Reaching net zero by 2050 requires further rapid deployment of available technologies as well as widespread use of technologies that are not on the market yet. Major innovation efforts must occur over this decade in order to bring these new technologies to market in time. Most of the global reductions in CO 2 emissions through 2030 in our pathway come from technologies readily available today. But in 2050, almost half the reductions come from technologies that are currently at the demonstration or prototype phase. In heavy industry and long-distance transport, the share of emissions reductions from technologies that are still under development today is even higher.

The biggest innovation opportunities concern advanced batteries, hydrogen electrolysers, and direct air capture and storage. Together, these three technology areas make vital contributions the reductions in CO 2 emissions between 2030 and 2050 in our pathway. Innovation over the next ten years – not only through research and development (R&D) and demonstration but also through deployment – needs to be accompanied by the large-scale construction of the infrastructure the technologies will need. This includes new pipelines to transport captured CO 2 emissions and systems to move hydrogen around and between ports and industrial zones.

Priority action: Prepare for the next phase of the transition by boosting innovation

Clean energy innovation must accelerate rapidly, with governments putting R&D, demonstration and deployment at the core of energy and climate policy.

Government R&D spending needs to be increased and reprioritised. Critical areas such as electrification, hydrogen, bioenergy and carbon capture, utilisation and storage (CCUS) today receive only around one-third of the level of public R&D funding of the more established low-carbon electricity generation and energy efficiency technologies. Support is also needed to accelerate the roll-out of demonstration projects, to leverage private investment in R&D, and to boost overall deployment levels to help reduce costs. Around USD 90 billion of public money needs to be mobilised globally as soon as possible to complete a portfolio of demonstration projects before 2030. Currently, only roughly USD 25 billion is budgeted for that period. Developing and deploying these technologies would create major new industries, as well as commercial and employment opportunities.

Annual CO2 emissions savings in the net zero pathway, 2030 and 2050, relative to 2020

The transition to net zero is for and about people.

A transition of the scale and speed described by the net zero pathway cannot be achieved without sustained support and participation from citizens. The changes will affect multiple aspects of people’s lives – from transport, heating and cooking to urban planning and jobs. We estimate that around 55% of the cumulative emissions reductions in the pathway are linked to consumer choices such as purchasing an EV, retrofitting a house with energy-efficient technologies or installing a heat pump. Behavioural changes, particularly in advanced economies – such as replacing car trips with walking, cycling or public transport, or foregoing a long-haul flight – also provide around 4% of the cumulative emissions reductions.

Providing electricity to around 785 million people that have no access and clean cooking solutions to 2.6 billion people that lack those options is an integral part of our pathway. Emissions reductions have to go hand-in-hand with efforts to ensure energy access for all by 2030. This costs around USD 40 billion a year, equal to around 1% of average annual energy sector investment, while also bringing major co-benefits from reduced indoor air pollution.

Some of the changes brought by the clean energy transformation may be challenging to implement, so decisions must be transparent, just and cost-effective. Governments need to ensure that clean energy transitions are people-centred and inclusive. Household energy expenditure as a share of disposable income – including purchases of efficient appliances and fuel bills – rises modestly in emerging market and developing economies in our net zero pathway as more people gain access to energy and demand for modern energy services increases rapidly. Ensuring the affordability of energy for households demands close attention: policy tools that can direct support to the poorest include tax credits, loans and targeted subsidies.

Priority action: Clean energy jobs will grow strongly but must be spread widely

Energy transitions have to take account of the social and economic impacts on individuals and communities, and treat people as active participants.

The transition to net zero brings substantial new opportunities for employment, with 14 million jobs created by 2030 in our pathway thanks to new activities and investment in clean energy. Spending on more efficient appliances, electric and fuel cell vehicles, and building retrofits and energy-efficient construction would require a further 16 million workers. But these opportunities are often in different locations, skill sets and sectors than the jobs that will be lost as fossil fuels decline. In our pathway, around 5 million jobs are lost. Most of those jobs are located close to fossil fuel resources, and many are well paid, meaning structural changes can cause shocks for communities with impacts that persist over time. This requires careful policy attention to address the employment losses. It will be vital to minimise hardships associated with these disruptions, such as by retraining workers, locating new clean energy facilities in heavily affected areas wherever possible, and providing regional aid.

Global employment in energy supply in the Net Zero Scenario, 2019-2030

An energy sector dominated by renewables.

In the net zero pathway, global energy demand in 2050 is around 8% smaller than today, but it serves an economy more than twice as big and a population with 2 billion more people. More efficient use of energy, resource efficiency and behavioural changes combine to offset increases in demand for energy services as the world economy grows and access to energy is extended to all.

Instead of fossil fuels, the energy sector is based largely on renewable energy. Two-thirds of total energy supply in 2050 is from wind, solar, bioenergy, geothermal and hydro energy. Solar becomes the largest source, accounting for one-fifth of energy supplies. Solar PV capacity increases 20-fold between now and 2050, and wind power 11-fold.

Net zero means a huge decline in the use of fossil fuels. They fall from almost four-fifths of total energy supply today to slightly over one-fifth by 2050. Fossil fuels that remain in 2050 are used in goods where the carbon is embodied in the product such as plastics, in facilities fitted with CCUS, and in sectors where low-emissions technology options are scarce.

Electricity accounts for almost 50% of total energy consumption in 2050. It plays a key role across all sectors – from transport and buildings to industry – and is essential to produce low-emissions fuels such as hydrogen. To achieve this, total electricity generation increases over two-and-a-half-times between today and 2050. At the same time, no additional new final investment decisions should be taken for new unabated coal plants, the least efficient coal plants are phased out by 2030, and the remaining coal plants still in use by 2040 are retrofitted. By 2050, almost 90% of electricity generation comes from renewable sources, with wind and solar PV together accounting for nearly 70%. Most of the remainder comes from nuclear.    

Emissions from industry, transport and buildings take longer to reduce. Cutting industry emissions by 95% by 2050 involves major efforts to build new infrastructure. After rapid innovation progress through R&D, demonstration and initial deployment between now and 2030 to bring new clean technologies to market, the world then has to put them into action. Every month from 2030 onwards, ten heavy industrial plants are equipped with CCUS, three new hydrogen-based industrial plants are built, and 2 GW of electrolyser capacity are added at industrial sites. Policies that end sales of new internal combustion engine cars by 2035 and boost electrification underpin the massive reduction in transport emissions. In 2050, cars on the road worldwide run on electricity or fuel cells. Low-emissions fuels are essential where energy needs cannot easily or economically be met by electricity. For example, aviation relies largely on biofuels and synthetic fuels, and ammonia is vital for shipping. In buildings, bans on new fossil fuel boilers need to start being introduced globally in 2025, driving up sales of electric heat pumps. Most old buildings and all new ones comply with zero-carbon-ready building energy codes. 1

Priority action: Set near-term milestones to get on track for long-term targets

Governments need to provide credible step-by-step plans to reach their net zero goals, building confidence among investors, industry, citizens and other countries.

Governments must put in place long-term policy frameworks to allow all branches of government and stakeholders to plan for change and facilitate an orderly transition. Long-term national low-emissions strategies, called for by the Paris Agreement, can set out a vision for national transitions, as this report has done on a global level. These long-term objectives need to be linked to measurable short-term targets and policies. Our pathway details more than 400 sectoral and technology milestones to guide the global journey to net zero by 2050.  

There is no need for investment in new fossil fuel supply in our net zero pathway

Beyond projects already committed as of 2021, there are no new oil and gas fields approved for development in our pathway, and no new coal mines or mine extensions are required. The unwavering policy focus on climate change in the net zero pathway results in a sharp decline in fossil fuel demand, meaning that the focus for oil and gas producers switches entirely to output – and emissions reductions – from the operation of existing assets. Unabated coal demand declines by 98% to just less than 1% of total energy use in 2050. Gas demand declines by 55% to 1 750 billion cubic metres and oil declines by 75% to 24 million barrels per day (mb/d), from around 90 mb/d in 2020.

Clean electricity generation, network infrastructure and end-use sectors are key areas for increased investment. Enabling infrastructure and technologies are vital for transforming the energy system. Annual investment in transmission and distribution grids expands from USD 260 billion today to USD 820 billion in 2030. The number of public charging points for EVs rises from around 1 million today to 40 million in 2030, requiring annual investment of almost USD 90 billion in 2030. Annual battery production for EVs leaps from 160 gigawatt-hours (GWh) today to 6 600 GWh in 2030 – the equivalent of adding almost 20 gigafactories 2  each year for the next ten years. And the required roll-out of hydrogen and CCUS after 2030 means laying the groundwork now: annual investment in CO 2 pipelines and hydrogen-enabling infrastructure increases from USD 1 billion today to around USD 40 billion in 2030.

Priority action: Drive a historic surge in clean energy investment

Policies need to be designed to send market signals that unlock new business models and mobilise private spending, especially in emerging economies.

Accelerated delivery of international public finance will be critical to energy transitions, especially in developing economies, but ultimately the private sector will need to finance most of the extra investment required. Mobilising the capital for large-scale infrastructure calls for closer co operation between developers, investors, public financial institutions and governments. Reducing risks for investors will be essential to ensure successful and affordable clean energy transitions. Many emerging market and developing economies, which rely mainly on public funding for new energy projects and industrial facilities, will need to reform their policy and regulatory frameworks to attract more private finance. International flows of long-term capital to these economies will be needed to support the development of both existing and emerging clean energy technologies.

Clean energy investment in the net zero pathway, 2016-2050

An unparalleled clean energy investment boom lifts global economic growth.

Total annual energy investment surges to USD 5 trillion by 2030, adding an extra 0.4 percentage point a year to annual global GDP growth, based on our joint analysis with the International Monetary Fund. This unparalleled increase – with investment in clean energy and energy infrastructure more than tripling already by 2030 – brings significant economic benefits as the world emerges from the Covid-19 crisis. The jump in private and government spending creates millions of jobs in clean energy, including energy efficiency, as well as in the engineering, manufacturing and construction industries. All of this puts global GDP 4% higher in 2030 than it would be based on current trends.

Governments have a key role in enabling investment-led growth and ensuring that the benefits are shared by all. There are large differences in macroeconomic impacts between regions. But government investment and public policies are essential to attract large amounts of private capital and to help offset the declines in fossil fuel income that many countries will experience. The major innovation efforts needed to bring new clean energy technologies to market could boost productivity and create entirely new industries, providing opportunities to locate them in areas that see job losses in incumbent industries. Improvements in air quality provide major health benefits, with 2 million fewer premature deaths globally from air pollution in 2030 than today in our net zero pathway. Achieving universal energy access by 2030 would provide a major boost to well-being and productivity in developing economies.

New energy security concerns emerge, and old ones remain

The contraction of oil and natural gas production will have far-reaching implications for all the countries and companies that produce these fuels. No new oil and natural gas fields are needed in our pathway, and oil and natural gas supplies become increasingly concentrated in a small number of low-cost producers. For oil, the OPEC share of a much-reduced global oil supply increases from around 37% in recent years to 52% in 2050, a level higher than at any point in the history of oil markets. Yet annual per capita income from oil and natural gas in producer economies falls by about 75%, from USD 1 800 in recent years to USD 450 by the 2030s, which could have knock-on societal effects. Structural reforms and new sources of revenue are needed, even though these are unlikely to compensate fully for the drop in oil and gas income. While traditional supply activities decline, the expertise of the oil and natural gas industry fits well with technologies such as hydrogen, CCUS and offshore wind that are needed to tackle emissions in sectors where reductions are likely to be most challenging.

The energy transition requires substantial quantities of critical minerals, and their supply emerges as a significant growth area. The total market size of critical minerals like copper, cobalt, manganese and various rare earth metals grows almost sevenfold between 2020 and 2030 in the net zero pathway. Revenues from those minerals are larger than revenues from coal well before 2030. This creates substantial new opportunities for mining companies. It also creates new energy security concerns, including price volatility and additional costs for transitions, if supply cannot keep up with burgeoning demand.

The rapid electrification of all sectors makes electricity even more central to energy security around the world than it is today. Electricity system flexibility – needed to balance wind and solar with evolving demand patterns – quadruples by 2050 even as retirements of fossil fuel capacity reduce conventional sources of flexibility. The transition calls for major increases in all sources of flexibility: batteries, demand response and low-carbon flexible power plants, supported by smarter and more digital electricity networks. The resilience of electricity systems to cyberattacks and other emerging threats needs to be enhanced.

Priority action: Address emerging energy security risks now

Ensuring uninterrupted and reliable supplies of energy and critical energy-related commodities at affordable prices will only rise in importance on the way to net zero.

The focus of energy security will evolve as reliance on renewable electricity grows and the role of oil and gas diminishes. Potential vulnerabilities from the increasing importance of electricity include the variability of supply and cybersecurity risks. Governments need to create markets for investment in batteries, digital solutions and electricity grids that reward flexibility and enable adequate and reliable supplies of electricity. The growing dependence on critical minerals required for key clean energy technologies calls for new international mechanisms to ensure both the timely availability of supplies and sustainable production. At the same time, traditional energy security concerns will not disappear, as oil production will become more concentrated.

Critical minerals demand in the net zero pathway, 2020-2050

Oil supply in the net zero pathway, 2020-2050, international co-operation is pivotal for achieving net zero emissions by 2050.

Making net zero emissions a reality hinges on a singular, unwavering focus from all governments – working together with one another, and with businesses, investors and citizens. All stakeholders need to play their part. The wide-ranging measures adopted by governments at all levels in the net zero pathway help to frame, influence and incentivise the purchase by consumers and investment by businesses. This includes how energy companies invest in new ways of producing and supplying energy services, how businesses invest in equipment, and how consumers cool and heat their homes, power their devices and travel.

Underpinning all these changes are policy decisions made by governments. Devising cost-effective national and regional net zero roadmaps demands co-operation among all parts of government that breaks down silos and integrates energy into every country’s policy making on finance, labour, taxation, transport and industry. Energy or environment ministries alone cannot carry out the policy actions needed to reach net zero by 2050.

Changes in energy consumption result in a significant decline in fossil fuel tax revenues. In many countries today, taxes on diesel, gasoline and other fossil fuel consumption are an important source of public revenues, providing as much as 10% in some cases. In the net zero pathway, tax revenue from oil and gas retail sales falls by about 40% between 2020 and 2030. Managing this decline will require long-term fiscal planning and budget reforms.

The net zero pathway relies on unprecedented international co-operation among governments, especially on innovation and investment. The IEA stands ready to support governments in preparing national and regional net zero roadmaps, to provide guidance and assistance in implementing them, and to promote international co-operation to accelerate the energy transition worldwide. 

Priority action: Take international co-operation to new heights

This is not simply a matter of all governments seeking to bring their national emissions to net zero – it means tackling global challenges through co-ordinated actions.

Governments must work together in an effective and mutually beneficial manner to implement coherent measures that cross borders. This includes carefully managing domestic job creation and local commercial advantages with the collective global need for clean energy technology deployment. Accelerating innovation, developing international standards and co-ordinating to scale up clean technologies needs to be done in a way that links national markets. Co-operation must recognise differences in the stages of development of different countries and the varying situations of different parts of society. For many rich countries, achieving net zero emissions will be more difficult and costly without international co-operation. For many developing countries, the pathway to net zero without international assistance is not clear. Technical and financial support is needed to ensure deployment of key technologies and infrastructure. Without greater international co-operation, global CO 2 emissions will not fall to net zero by 2050. 

Global energy-related CO2 emissions in the net zero pathway and Low International Cooperation Case, 2010-2090

A zero-carbon-ready building is highly energy efficient and either uses renewable energy directly or uses an energy supply that will be fully decarbonised by 2050, such as electricity or district heat.

Battery gigafactory capacity assumption = 35 gigawatt-hours per year.

Reference 1

Reference 2, related net zero reports.

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IEA (2021), Net Zero by 2050 , IEA, Paris https://www.iea.org/reports/net-zero-by-2050, Licence: CC BY 4.0

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