Joint Implementation

1
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
2
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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1
Investor Expectations in Emerging Markets
4
Rationale for Investing in Renewable Energy
Projects in Emerging Markets

• 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.

5
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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2
Returns on Investment Impact of Carbon Finance
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Impact of Carbon Finance

• Carbon Finance Deal Structure

Host Country
Letter of Approval
CF
Permits, etc.
ERPA
ERs
ER payment
SPV
Sponsor/ Project
Financing Agreement
Lenders
Debt service

Source World Bank
8
Impact of Renewables
Source World Bank
9
Impact of Carbon Finance

• At 4/ ton CO2e

Source World Bank
10
Profitability of a Subset of CIP Projects
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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3
Assessing 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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4
Opportunities 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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Wheres 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) US500m
• Government of Netherlands 500m
• Japan Carbon Fund
• Development Bank of Japan US100m
• Japan Bank for International Cooperation US100m
• Government of Austria 360m (36 million per
  year for 10 years)
• Government of Canada C50m (C10 million per
  year for 5 years)
• Other possible sources of funds
• Fortis Bank Worlds largest investor in wind
  power
• Rabobank
• ABN AMRO
• Others

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5
Role of Climate Investment Partnership (C.I.P.)
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A GHG Project Finance Facility (for
project-by-project investing)
Project Finance Facility (PFF)
Equity Investors
Grant Providers
Delivery Insurance Providers
Credit Guarantee Providers
Loan Providers
Financiad Returns Carbon Credits
PFF Manager (Swiss Re)

Project 2
Project 1
Project n
Project 3
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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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CIPs 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. [phone] Email
frank.joshua_at_climateinvestors.com karen.mcclellan
_at_climateinvestors.com