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Financing Renewable Energy solutions through

Partnerships & Borrowing

Renewable Energy City Summit

South African Cities Network

14 May 2008

Spier Conference Centre

Stellenbosch, Western Cape

Colin King Project Finance, Absa Corporate & Business Bank


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2Absa Corporate & Business Bank

Content

Project Risk and Return

CDM Risk and Return

Case studies


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Content


CDM Risk and Return

Case studies


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Project Risk and Return:

Assessing Risk

How do commercial banks assess and respond to project risk and

return when appraising renewable energy projects?

What are the risks and rewards from a financiers perspective?


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Assessing Risk

What Risks?

Generic project risks:

Demand

Technology

Construction

Operations & Maintenance

Supply (fuel, water, spares)

Political risk

Environmental

Force Majeure

Funding mismatch

Collections


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Risk Structuring

How to improve the risk profile of renewable energy transactions?

Overr iding pr inciple: Risks t o li e wi t h par t y best able to manage t hem!

Combine Grant funding with DFI financing and Commercial bank debt

Grant funding assumes first loss position

DFIs can assume the riskier elements of quasi equity and/or subordinated debt

Commercial lenders can provide the senior debt and/or subordinated debt

Allows grant and/or DFI funds to have largest impact using multiplier effect


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Risk Structuring

Combine Grant funding with DFI financing and Commercial bank debt


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Project finance defined

Financing of a specific project, secured primarily on the

projects cash flow, the project assets generating the cash flow,

and contractual arrangements relating specifically to that

project including third party support.

The financial structuring of a project is largely determined by

the following key factors: Profile of cash flow

Risk profile of the project

Credit quality of project off-taker

Experience of project sponsors/developers

Country specific issues

Sector specific issues


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Sources of project finance

Financial instruments that can be incorporated into a project finance/ PPP financial structure:

Equity

Senior Debt

Subordinated Debt

Multilateral/Bilateral Agency backed funding Export Credit Agency (ECA) backed funding

Capital Markets

Carbon revenue streams

Empowerment Partners

Key requirement for most projects/ PPP concessions

Difficulties often experienced with financing of empowerment partnersequity participation in project

Innovation required


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Debt perspective of project finance

From a bank debt perspective, the following financial analysisand ratios are utilised in determining the debt-carrying capacityof a project:

Project Risk & Lending Margins

Debt : Equity Ratio

Annual Debt Service Cover Ratios (DSCR)

Loan Life Cover Ratio (LLCR)

Project Life Cover Ratio (PLCR)

Legal Covenants (Default / Termination)

Assignment of Contracts / Step in Rights

Carbon revenue risks and rewards

Project returns (Project IRRs)

Equity returns (Equity IRRs)


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Impact of CDM on project finance

The impact of the CDM on a project financing structure is that it can

introduce a new project revenue stream as well as new risks

Carbon revenue streams & contracts (ERPAs) can be used for the

following purposes in a project financing:

Improve Equity IRRs (investors perspective)

Enhance Debt: Equity ratios (investors perspective)

Improve Debt Service Coverage Ratios (lenders perspective)

Improve the Security/Collateral Package (lenders perspective)

However, the following financial aspects still need to be managed:

Commodity price risk linked to the project CERs generated

Currency risk linked to the CER revenue stream (Euro, USD)

Credit & counterparty risk linked to the CER purchaser

Financial covenant & financial ratio impact of CERs


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Content


CDM Risk and Return

Case studies


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CDM Risk and Return:

The basic concept

Alignment of Project & CDM development cycle

The Project development cycle

The CDM development cycle

Carbon commercialisation cycle

ConceptFeasibilityanalysis

Financialclosure

Construction Operation

ProjectIdeaNote

ProjectDesignDocument

Projectvalidation

Projectregistration

Developcommercialisationstrategy

Selectbuyer

Negotiateterms andconditions

TransactCarbonvalue

Monitorcontractcompliance

Projectverificationand CERissuance


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The basic concept

Traditional

offtaker

Carbon

Credit

offtaker

Carbon

Credits

Cost of

capital

Operating

cost

Services providers

Debt providers

The project

(SPV)

Equity providersReturn

on equity

Material/

Services

Capital

Traditionalrevenue

streamProducts

Carbon

revenue

stream

The CDM revenue stream potentially increasesthe projects financial performance and thereforecan attract finance or more attractive projectfinancing terms

Opportunity

cost


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Project risk

The primary driver behind if ,and on what terms and

conditions, a project attracts financing is risk

The are many different types of risk:

Political Risks (e.g. war, nationalization, civil unrest, terrorism,

legal system & taxes)

Commercial Risks (e.g. completion risk, market risk, supply risk,

counterparty risk)

Technical Risks (e.g. construction risk, performance risk,

depletion and geological risk)

Financial Risks (e.g. interest rates, exchange rates, inflation,

refinancing)


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CDM risk

In addition to the underlying project risks, there are three

CDM specific risk categories:

CDM cycle risk (e.g. issues or delays at validation,

registration, verification, etc.)

CDM performance risk (e.g. volume of CERs generated,

annually and within the Kyoto period) CER price risk (e.g. CERs are traded commodities and

therefore the price fluctuates over time)


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Content


CDM Risk and Return

Case studies


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Case studies:

An overview

Windfarms: Renewable

energy

~ 5 Euro/MWh Costs: CDM

cycle

Landfills: CH4

destruction,renewableenergy

~ 100Euro/tCH4, ~ 5Euro/MWh

Costs:installation,

CDM cycle

Small scale hydro: Renewable

energy

~ 5 Euro/MWh

Costs: CDM cycle

N2O abatement: N2O

Destruction

~ 1550Euro/tN2O

Costs:installation,CDM cycle

Source: EcoSecurities


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Case studies:

An overview

Anaerobicdigestion:

CH4destruction,renewableenergy



Biomass: Reduction of

fossil fuel

~ 7 Euro/tCO2 Costs:

installationretrofit, CDMcycle

Coal minemethane:

CH4destruction,renewableenergy



Biofuels: Reduction of

fossil fuel

~ 5 Euro/tCO2 Costs:

CDMcycle

Source: EcoSecurities


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Conclusion: Points to remember

Most projects involving cleaner & renewable energy technologies will create

this additional carbon value - essentially free cash flow

It is imperative that project developers compile the CDM project

documentation before the project becomes operational otherwise it is not

eligible for participation in these mechanisms

Skilled carbon/financial advisers and arrangers/lenders can manage virtuallythe entire process for clients either as part of conventional

commercial/financial relationships or strictly on a carbon project

development basis

Currently, the electricity crisis in SA is creating a favourable regulatory and

economic climate for the development of well structured, commercially viable

renewable energy & CDM projects in South Africa

Public-private partnerships (in various forms) need to be explored further


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Contact details

Colin King

Consultant: Project Finance

Absa Corporate and Business Bank

7th Floor, Diamond Building

11 Diagonal Street

Johannesburg, 2001, South Africa

Phone : +27 11 556 7781

Fax : +27 11 556 6901

Mobile : +27 83 307 6563

Email : [email protected]

Web : http://www.absa.co.za

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