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UNDP Study: Public instruments to promote

renewable energy investments in [Tunisia]

Materials for Investor Interviews ([Solar PV])[Month] [Year] (Version [x.x])

Guidance:These slides were prepared for a UNDP study in Tunisia.

If being applied in other studies, much of the these slides are generic. However certain slides would need to be adapted as

appropriate.Version 1.3 (Sep 2014)

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UNDP contact details

Sanju Deenapanraysanju@ecolivinginaction.com

La Gaulette, Mauritius +230 5924 3395

• Energy Specialist (Consultant to UNDP)

• Formerly Climate Change Coordinator, UNDP Mauritius; Fellow at the Australian National University (ANU)

• PhD in Semiconductor Physics, MBA in Technology Management, MSc Physics, BEng (ANU, Pretoria, LaTrobe)

Oliver Waissbeinoliver.waissbein@undp.org

New York, USA+1 212 906 3637

• Finance Advisor (Energy and Environment Group at UNDP)

• Formerly Associate at Goldman Sachs in M&A and corporate finance

• MA in international affairs, BA/MA in molecular biology (Columbia, Oxford)

UNDP at a glance:• UNDP is the UN’s development agency; active in 135 country offices; annual $5bn

budget• Assists developing countries to create enabled investment environments for low-

carbon growth• Active $500m portfolio ($4bn additional co-financing) of support to developing

countries in renewable energy• More information at www.undp.org/DREI

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Outline of the [Tunisia] study

Objective of the study: • What is the best selection of public instruments to promote large-scale

renewable energy investment in Tunisia? Objective of these investor interviews:

• How does the private sector view investment risks surrounding renewable energy?

• How does the private sector view the impact of public instruments on reducing these risks?

Methodology for the study:• Focuses on wind power and/or solar PV• Uses “Levelized-Cost-Of-Electricity” (LCOE) modeling to study how current

renewable energy LCOEs can be made competitive with fossil-based energy Methodology for the investor interviews:

• Introduces a risk framework and asks interviewee to score risks between 1 to 5• All responses will be treated with full confidentiality; all data will be blended

within the entire study and no names or traceable facts will be published

Objective

Methodology

Despite strong potential for renewable energy in Tunisia, the reality is that private sector face significant barriers to investment and investment is yet to flow.

Tunisia is now introducing legislation for independent power producers (IPPs) and seeking to put in place an enabled investment environment. UNDP is supporting Tunisia.

Public instruments - such as well-designed legislation, loan guarantees, new grid codes - can assist the private sector through reducing investment risk

The Issue

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Study’s approach to risk and renewable energy

1. Analyse renewable energy (RE) using LCOE modeling

Mac

ro

leve

lTech

nolo

gy/S

ecto

r le

vel

1. Power Market Risk2. Permits Risk3. Social Acceptance Risk 4. Resource & Technology Risk5. Grid/Transmission Risk6. Counterparty Risk7. Financial Sector Risk8. Political Risk9. Currency/Macroeconomic Risk

2. Define 9 risk categories from an investment

perspective

3. These 9 risk categories form part of the cost of equity/debt for

renewable energy

Objective: ReduceRE LCOE

Best in ClassRE Investment

(Developed Country)Cost of Equity/Debt

Risk #1

Risk #2

Risk #3

%%

Pre de-riskingRE investment (Developing Country)Cost of Equity/Debt

4. Public instruments can reduce these risks and thereby decrease

cost of equity/debt

%

Pre De-Risking (Developing Country)

Cost of Equity/Debt

%

De-risking instrument

#2

Post de-risking(developing country)Cost of Equity/Debt

De-risking instrument

#1

Current LCOE of Renewable

Energy

Target LCOE

Cap Ex/Depreciation

Op ExCost of Debt Cost of Equity

US$US$

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The solar PV opportunity in [Tunisia]

• Current auto-production law• Up to 30% sold to grid (70%

auto-consumption)• New legislation for Independent

Power Producers (IPPs) currently in Parliament

• Limited private sector investment to date

Energy generation by resource Tunisia Solar Plan’s 2030 objectives

Solar resources Current status • Tunisia has some

of the best solar resources in North Africa

Source: Chiffres Clés, Juin 2013 (ANME)

• Targets• Solar PV at 10% of generation

mix• 1,930 MW installed capacity

• Meet fast-growing energy demand • Reduce domestic fossil-fuel subsidies

Source: http://solargis.info/doc/88

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Survey: 9 Risk Categories

Mac

ro le

velTe

chno

logy

/Sec

tor l

evel

1. Power Market Risk2. Permits Risk3. Social Acceptance Risk 4. Resource & Technology Risk5. Grid/Transmission Risk6. Counterparty Risk7. Financial Sector Risk8. Political Risk9. Currency/Macroeconomic Risk

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Survey: Risk/Derisking ConceptsThe study uses a conceptual framework in order to quantify risks and the impacts of public

de-riskinginstruments. Investor risk is broken down into three conceptual components (barriers;

negative events;financial impact). De-risking instruments fall into two categories (barrier removal; risk

transfer)

Policyderiskinginstruments act to reduce barriers

Financial deriskinginstrumentsact to transfer risk (impact) to another actor

Negative events:Uncertainty and delays due to poorly administered licensing

Financial impact:Transaction costs; delayed revenues; under- or no investment

Barrier removal Streamlined licensing process: Harmonized requirements, reduced licensing steps; priority areas/zoning

Conceptual framework for risks

Practical example: permits risk

Drivers of Risk

Components of Risk

Existence of barriers in investment environment

Result in increased probability of negative events affecting wind farm

Negative events result in financial impact for investors

Barriers:Lack of clear responsibility of different agencies for RET energy approvals

Drivers of Risk

Components of Risk

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Survey: Questions and Assumptions

Q1 : How would you rate the probability that the events underlying the particular risk occur?

Q2: How would you rate the financial impact of the events underlying the particular risk, should the events occur?

Q3: How would you rate the effectiveness of the identified de-risking instrument in mitigating the particular risk?

1 2 3 4 5

Low Impact High Impact

1 2 3 4 5

Unlikely

Very Likely

1 2 3 4 5

Low Effectiveness

HighEffectiveness

1. Please answer all questions based on the current status of the risks in the country’s investment environment today

2. Assume you have the opportunity to invest in a 10-100 MW on-shore wind park

3. Assume a high quality c-Si PV panel manufacturer with proven track record (eliminating certain technology risks)

4. Assume an O&M insurance contract (eliminating certain technology risks)

5. Assume that transmission lines with free capacities are located relatively close to the project site (within 10 km)

6. Assume a build-own-operate business model and a construction sub-contract with high penalties for contract breach (eliminating certain technology risks)

7. Assume a project finance structuring

3 Key Questions for Each Risk General Assumptions

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1: Power Market RiskRisk Definition: Risk arising from limitations and uncertainties in the power market, and/or suboptimal regulations to address these limitations and promote renewable energy markets

Barriers • Market outlook: Lack of or

uncertainties regarding governmental renewable energy strategy and targets

• Market access/price: Suboptimal energy market liberalization; uncertainties regarding competitive and price outlook; limitations in PPA and/or PPA process

• Market distortions: high fossil fuel subsidies

Negative events • Inability to secure a visible and viable

outlook for cash flow generation Examples: • Uncertainty on long term policy outlook• Difficult to negotiate PPAs• Uncompetitive with subsidised fossil fuels

Financial impacts

Q1

Derisking Instrument #1: Public sector activities to create an enabled investment environment • Establish transparent, long-term national wind energy strategy and targets: National-level resource

inventory/mapping; establish national energy office; review technology options; renewable energy targets• Establish well-designed and harmonized energy market liberalization and FIT (or similar

instrument): Unbundling of the energy market (generation, transmission, distribution); establish well-designed and transparent procedures for FIT, PPA tendering (or similar); well-designed, transparent policy on key clauses for standard PPA

• Reform of fossil fuel subsidies: Assessment of fuel subsidies, phase-out/down of subsidies, awareness campaigns, design of transfer programs to affected groups

Q2

Q3

Key Stakeholder Group: Public sector (legislators, policymakers)

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2: Permits RiskRisk Definition: Risk arising from the public sector’s inability to efficiently and transparently administer renewable energy-related licensing and permits

Barriers

• Labor-intensive, complex processes and long time-frames for obtaining licenses and permits (generation, EIAs, land title) for renewable energy projects

• High levels of corruption. No clear recourse mechanisms

Negative events • Project delays and operational

uncertainties due to administration of permits

Examples: • Inability to advance permitting of project• Uncertainty and delays due to poorly

administered licensing process• Limited/inability to have recourse in case

of breach of contract or arbitrary decisions

Financial impacts

Q1

Derisking Instrument #1: Public sector activities to create an enabled investment environment

• Establish a one-stop-shop for renewable energy permits; streamline processes for permits: Establish institutional champion with clear accountability and appropriate expertise for renewable energy; harmonisation of requirements; reduction of process steps; training of staff in renewable energy

• Contract enforcement and recourse machanisms: Enforce transparent practices, wind energy related corruption control and fraud avoidance mechanisms; establish effective recourse mechanisms

Q2

Q3

Key Stakeholder Group: Public sector (administrators)

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Key Stakeholder Group: End-users, general public

3: Social Acceptance RiskRisk Definition: Risks arising from lack of awareness and resistance to wind energy in the general public

Barriers

• Lack of awareness of renewable energy in the general public: including, for example, consumers, end-users, local residents and labor unions

Negative events

• Social and political resistance activities due to special interest groups

Example: • Protests or vandalism at project site• Delays in development, construction or

operations of renewable energy plant

Financial impacts

Q1

De-Risking Instrument #1: Public sector activities to create an enabled investment environment

• Awareness raising of key stakeholders: Working with the media, awareness campaigns and stakeholder dialogue with end users, policymakers, and local residents

• Community involvement at project sites: Community consultations including piloting models such as in-kind services (energy access, local employment; etc.) or equity stakes in renewable energy projects

Q2

Q3

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4: Resource & Technology Risk Risk Definition: Risks arising from use of the renewable energy resource and technology (resource assessment; construction and operational use; hardware purchase and manufacturing)

Barriers • For resource assessment and supply: inaccuracies in

early-stage assessment of renewable energy resource

• For planning, construction, operations and maintenance: sub-optimal plant design; lack of local firms and skills. limitations in civil infrastructure (roads etc.)

• For the purchase and, if applicable, local manufacture of hardware: purchaser's lack of information on quality, reliability and cost of hardware; lack of local industrial presence and experience with hardware

Negative events • Operational disruptions or

underperformance due to technology disruptions or malfunctions

Examples: • Breakdown of hardware• Delays through prolonged

repairs

Financial

impacts

Derisking Instrument #1: Public sector activities to create an enabled investment environment • For resource assessment and supply: Project development facility: capacity building for resource assessment• For planning, construction, operations and maintenance: Project development facility: feasibility studies;

networking; training and qualifications• For the purchase and, if applicable, local manufacture of hardware: Research and development; technology

standards; exchange of market information (e.g., via trade fairs)

Q1 Q2

Q3

Key Stakeholder Group: Project developers, supply chain

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Derisking Instrument #1: Public sector activities to create an enabled investment environment • Strengthen transmission company's operational performance, grid management and

formulation of grid code: Develop a grid code for new renewable energy technologies; sharing of international best practice in grid management

• Policy support for national grid infrastructure development: Develop a long-term national transmission/grid road-map to include intermittent renewable energy

5: Grid/Transmission RiskRisk Definition: Risks arising from limitations in grid management and transmission infrastructure in the particular country

Barriers • Grid code and management: limited experience or

suboptimal operational track-record of grid operator with intermittent sources (e.g., grid management and stability). Lack of standards for the integration of intermittent, renewable energy sources into the grid

• Transmission infrastructure: inadequate or antiquated grid infrastructure, including lack of transmission lines from the renewable energy source to load centres; uncertainties for construction of new transmission infrastructure

Negative events • Problems in connecting the

renewable energy plant to the grid and transmitting electricity

Examples:• Delays in grid connection• Higher cost due to excessive grid

code requirements• Inability to feed-in electricity due

to poor grid management

Financial

impacts

Q1 Q2

Q3

Key Stakeholder Group: Utility (transmission company/grid operator)

Derisking Instrument #2: Take-or-Pay Clause in PPA• Addresses grid/transmission risks ((black-out/brown-out) and grid management (curtailment))

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6: Counterparty RiskRisk Definition: Risks arising from the utility's poor credit quality and an IPP's reliance on payments

Barriers • Limitations in the utility's (electricity

purchaser) credit quality, corporate governance, management and operational track-record or outlook; unfavourable policies regarding utility's cost-recovery arrangements

Negative events • Inability to receive payments for wind

energy generated and sold to the gridExamples:• Non-payment of tariffs • Utility's credit profile deteriorates

resulting in reduced or non-payment of tariffs

Financial impacts

Q1 Q2

Derisking Instrument #2: Guarantee of tariff /PPA• Depends on specific circumstances and division of risks in PPA. Can include, as necesssary: partial risk

guarantees on PPA; counterparty guarantees as part of political risk insurance (PRI)

Q3Derisking Instrument #1: Strengthen utility's management/operational performance• Establish international best practice in utility/distribution company's management, operations

and corporate governance; implement sustainable cost recovery policies

Key Stakeholder Group: Utility (electricity purchaser)

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7: Financial Sector Risk Risk Definition: Risks arising from the lack of information and track record on financial aspects of wind energy, and general scarcity of investor capital (debt and equity), in the particular country

Barriers • Capital scarcity: Limited availability of local or

international capital (equity/and or debt) for green infrastructure due to, for example: under-developed local financial sector; policy bias against investors in green energy

• Limited experience with renewable energy: Lack of information, assessment skills and track-record for renewable energy projects amongst investor community; lack of network effects (investors, investment opportunities) found in established markets; lack of familiarity with project finance structures

Negative events • Failure or delay in launch of wind

project due to unfavorable or insufficient debt and/or equity financing

Examples:

• High costs in soliciting investors and debt providers

• Longer and more extensive process for closing on financing

Financial

impacts

Q1 Q2

Derisking Instrument #1: Debt and equity products• Depends on specific financial circumstances. Can include as necessary: public loans; public loan guarantees;

public equity

Derisking Instrument #1: Public sector activities to create an enabled investment environment • Financial sector policy reforms: Assess trade-offs between financial stability regulation and

renewable energy objectives (e.g. liquidity treatment); promote financial sector policy favorable to long-term infrastructure, including project finance

• Strengthen investors‘ familiarity with and capacity regarding renewable energy projects: Industry-finance dialogues and conferences; workshops/training on project assessment and financial structuring

Q3

Key Stakeholder Group: Investors (equity and debt)

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8: Political Risk Risk Definition: Risks arising from country-specific governance, social and legal characteristics

Barriers • Uncertainty or impediments due to war,

terrorism, and/or civil disturbance• Uncertainty due to high political

instability; poor governance; poor rule of law and institutions

• Uncertainty or impediments due to government policy (currency restrictions, corporate taxes)

Negative events • Interferences to the operations and

finances of the renewable energy plant due to socio-political instability

Examples:• Damage or delays to renewable energy

plant due to violence • Expropriation of assets • Inability to repatriate cash flows

Financial impacts

Q1 Q2

Q3

Derisking Instrument #1: Political Risk Insurance for equity and debt holders (PRI)

• Provision of political risk insurance to equity holders covering (i) expropriation, (ii) political violence, (iii) currency restrictions and (iv) breach of contract

Key Stakeholder Group: National Level

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9: Currency/Macroeconomic Risk Risk Definition: Risks arising from the broader macroeconomic environment and market dynamics

Barriers • Uncertainty due to volatile local

currency; unfavourable currency exchange rate movements

• Uncertainty around inflation, interest rate outlook due to an unstable macroeconomic environment

Negative events • Exposure of project operations and cash

flows to macroeconomic and market related changes

Examples:• Inability to sell electricity to the grid• Mismatching of currency for revenues

and expenses • Unexpected rise in financing costs due to

higher interest rates

Financial impacts

Q1 Q2

De-Risking Instrument: Partial-indexing of the PPA tariff

• Addresses currency risk (the foreign exchange rate exposure that IPPs may face due to hard-currency lending with a local-currency denominated PPA)

Key Stakeholder Group: National Level

Q3

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Thank you for your support.