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Workshop on Innovative Options for Financing the Development and Transfer of Technologies Montreal, 27-29 September 2004. “Financing Renewable Energy in Emerging Markets – Opportunities & Approaches”. Frank Joshua Montreal, 28 September 2004. Contents. - PowerPoint PPT Presentation
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“Financing Renewable Energy in Emerging Markets – Opportunities & Approaches”
Frank Joshua
Montreal, 28 September 2004
Workshop on Innovative Options for Financing the Development and Transfer of Technologies
Montreal, 27-29 September 2004
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Contents
Investor Expectations in Emerging Markets
Returns on Investment & Impact of Carbon Finance
Assessing Risks & Rewards in Emerging Markets
Opportunities for Private Equity Funds & Debt Providers
Role of Climate Investment Partnership (“C.I.P.”)
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1Investor Expectations in
Emerging Markets
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Emerging markets offer major opportunities for Renewable Energy projects
In the best markets (for example: China, India, Brazil, Chile, Mexico, Korea, Thailand, Philippines) common characteristics of good potential include:
Huge and growing energy demand (e.g. China recently announced that it plans to invest USD120 billion to double generation capacity by 2010)
Centralized power sector (need for re-organization)
Good wind speeds and/or small scale hydro resources
Healthy “start up” growth rates and returns
Increasing environmental awareness
Relevant national and/or local policies in place
Ability to utilize CDM benefits
Emerging markets have significant long term potential compared to North America and Europe
However, until recently, lack of reliable local developers, regulatory risk, and wind data risk have tended to depress investments.
Rationale for Investing in Renewable Energy Projects in Emerging Markets
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Investor Expectations & Opportunity for Strong Emerging Market Returns
Equity investment IRR:
India 15 – 25%
China 10 – 15%
Korea 10 – 15%
Brazil 15 – 20%
Chile 10 – 15%
+ 2.5 – 5% from carbon credits
Expected IRR of individual wind farms: +/- 15% + carbon + country risk premium
Expected IRR of Landfill gas: >15%, + carbon + country risk premium
Exit Strategy: Possible Sale of Equity to local utility or through IPO
If equity is sold after 3 – 5 years of operating history a significant capital gain can be made
IPOs of bundled RE projects have been successful in mature markets (Europe) but have yet to be tried in emerging markets
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2Returns on Investment & Impact of Carbon Finance
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Impact of Carbon Finance
Carbon Finance Deal Structure
Host Country
LendersSponsor/ Project
CF
ERPA
Financing Agreement
Letter of Approval
ERs
ER payment
Debt service
SPV
Permits, etc.
Source: World Bank
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Impact of Renewables
Fuel Displaced Generic Emissions Factor (tCO2e/MWh)
Carbon Revenue US$/MWh at
US$4/tCO2e
Gas 0.50 $2.00
Coal 0.85 $3.40
Diesel 0.75-1.00 $3.00-4.00
Source: World Bank
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Impact of Carbon Finance
At $4/ ton CO2e
Technology IRR @$4/tCO2e
Hydro, Wind, Geothermal 0.5-2.5%
Crop/Forest Residues 3-7%
Municipal Solid Waste 5-15%+
Source: World Bank
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Profitability of a Subset of CIP Projects
TechnologyExpected
project IRR
Expected carbon
premium 1Expected total
IRR incl. carbonBiomass electricity
15% 4% 19%
Biomass heat
15% 5% 20%
Energy Efficiency
16% 1% 16%
Hydro 15% 3% 18%
Landfill Gas 16% 11% 27%
Wind 14% 1% 15%
15% 4.3% 19%
Source: Climate Investment Partnership (CIP)
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Impact of Carbon Finance
Increased cash flow boosts IRRs
~0.5% to 2.5% for renewables/EE
5-15% for CH4
High quality cash flow reduces risk
OECD - sourced
$- or €- denominated
Investment-grade payer
Eliminate currency convertibility or transfer risk
Financial engineering helps access capital markets
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3Assessing Risks & Rewards in
Emerging Markets
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Understanding Carbon Risk (1)
The GHG business involves many poorly understood but widely perceived risks: Regulatory risk
Performance risk
Delivery risk
Counterparty Credit risk
Price risk
Etc.
Proposition: Investors’ inability to accurately assess “Carbon Risks & Rewards” will drive resources towards “Carbon Trading” instead of “Project Finance”
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Understanding Carbon Risk (2)
The Evidence:
Volume of carbon reductions traded since 2001 has doubled year-on-year to over 100 mtCO2e per year
Yet most carbon projects (CDM) have not achieved financial close. Why?
Perceived Risks will:
Discourage investment in RE & GHG Projects by major financial institutions, and
Drive resources towards “Carbon Trading” instead of “Project Finance”… Carbon is not their core business
Hedge trading via Forward Contracts with “payment-on-delivery” terms
Governments & Multilateral Financial Institutions as Investors (e.g. Dutch, UK, PCF, etc)
Missing: Investment Banks; Fund Managers; Debt Providers
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Enabling Carbon-linked Project Finance
But as the GHG market matures “Carbon Procurement” will face supply constraints
And rising carbon prices
Companies and governments could face serious financial exposure
RE & CDM project developers need early upfront financing
In the form of Equity, Debt, & Mezzanine Finance, & Risk Mitigation
Carbon as Collateral: i.e. utilizing the market value of emission reductions to enable projects to proceed
Carbon as financial security (€, $, £)
Carbon as risk mitigation asset
Renewable Energy Certificates (RECs & ROCs)
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4Opportunities for Private
Equity Funds & Debt Providers
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Attracting Private Equity & Debt Providers
The Problem:
Strong market interest exists in emerging markets (private equity and debt) but bundling opportunities are lacking
Investors often lack resources to find, screen, and evaluate projects
And few RE & GHG projects are well structured from a technical, financial and risk point of view; hence access to project debt and equity is poor
Risk perceptions: Investors often see RE & GHG projects as combining: (i) a risky sectors with (ii) high risk markets & (iii) a risky commodity…
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Opportunities for Private Equity Funds
Solution: Renewable Energy Equity Funds
Create commercially attractive diversified investment opportunity by bundling replicable high quality projects
Stick to proven replicable cost competitive technologies, mainly on-grid, and mostly Wind Power, Hydro Power, and Landfill Gas Projects
Work with strong developers to reduce risk of investment delays
Raise equity mainly in the private sector & look to increase returns through soft debt
Lock in advantageous pricing and future cash flow for carbon
ROI of Funds expected to exceed that of individual project investments (i.e. 15 – 20%, plus carbon)
Benefit from opportunity for early exit through bundling and sale of investments after construction and safe operating period.
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Where’s the Money?
Some Examples: European Investment Bank (EIB) renewable energy investments in 2003: €500m
EIB Climate Change Facility: €500m
EIB/EDFI Cotonou Investment Facility: €2.2 billion
World Bank Carbon Finance Business: $450m
Citigroup (Renewables, private equity): US$500m
Government of Netherlands: €500m
Japan Carbon Fund
Development Bank of Japan: US$100m
Japan Bank for International Cooperation: US$100m
Government of Austria: €360m (€36 million per year for 10 years)
Government of Canada: C$50m (C$10 million per year for 5 years)
Other possible sources of funds:
Fortis Bank… World’s largest investor in wind power
Rabobank…
ABN AMRO…
Others…
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5Role of Climate Investment
Partnership (“C.I.P.”)
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A GHG Project Finance Facility (for project-by-project investing)
Project 2
Project Finance Facility (PFF)
PFF Manager (Swiss Re)
Project 1 Project nProject 3
Equity Investors
Grant Providers
Delivery Insurance Providers
Credit Guarantee Providers
Loan Providers
Fin
an
ciad
Re
turn
s C
arb
on C
red
its
$
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The Challenge of Structuring a Deal
Case Example: 100MW Indian Wind Farm (€100 m.)
Sources of Funds (1)
• Developers’ Equity
• Private Equity
• Export Credits
• Senior Debt (Lead Bank)
• Subordinated Debt
• Mezzanine Finance
Other Sources of Funds (2)
• Grants
• Development Finance
• Financial Guarantees
• Vendor Finance
• Suppliers Credit
• Carbon Finance
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CIP’s “Project Finance Capacity Development Initiative for Latin America”
Objectives:
Improve access to project finance by raising technical and financial standards of small and medium size project developers;
Develop analytical tools to better assess carbon risks;
Develop risk mitigation tools to improve the use of carbon as financial collateral in project finance, and enhance the bankability of emission reduction purchase agreements; and
Support direct negotiations between CDM project developers and investors.
Participants: Argentina, Bolivia, Chile, Colombia, Ecuador, Mexico, Peru, Uruguay
Sponsors: Climate Investment Partnership (CIP) [possibly with CF Assist & WBCSD]
Duration: 2 Years, 6 Months
Cost: €2.0 million (Donor enquiry welcome)
Plan to Launch at COP10 in Buenos Aires.
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Contact Details:
Frank Joshua, Chief Executive Officer, CIP
Karen McClellan, Director, Investment, CIP
7-9 Chemin des Balexert,
1219 Châteleine, Geneva, Switzerland.
Tel. (Frank): +41 78 772 4183; (Karen): +44 77 9250 1109
Tel/Fax. +41 22 776 5078
Email: [email protected]