Financial Schemes for Renewable Energy Projects

co-organised by the Delegation of the European Union to and the Department of Alternative Energy Development and Efficiency, Ministry of Energy

Experiences with Renewable Investment Schemes in EU – as Seen From an Investor Point of View Natalia Svejgaard, IFU Bangkok, 27 November 2012 Outline

• Who is IFU • Financing incentives • Business models for renewable investments • Information’s needed for assessing business cases • Public support and legal framework IFU – Investment Fund for Developing Countries

• IFU is a self-governing fund established by law in 1967 • Purpose: To promote economic activity in developing countries • Advises and invests with Danish companies in developing countries and emerging markets • Operates on commercial terms • Environmentally and socially sustainable investments • Fund manager for – IFU (developing countries) – IØ (CEE) – AIF (MENA) – KIF (DAC – climate fund) IFU in Thailand

Active projects HortiQ Tropical ornamental plants Group of Danish Investors GPV Asia (Thailand) Co. Service of metal parts GPV International Flux International Prod. of electronic components Flux Dan Thai Machinery Special-purpose machinery Varo Zoma Thailand Electronics subcontractor Etk Ems Skanderborg Normeca International Mobile clinics Normeca Rockwool Thailand Production of stone wool Rockwool International Royal -Thailand Porcelain painting Royal Scandinavia Holm Machinery Asia Mechanical engineering Peter Holm Holding Styromatic Thailand PCB production Styromatic Georg Jensen Thailand Jewellery Royal Scandinavia Exited projects DIS (Thailand) Advanced conference electronic Informationsteknik Scandinavia Carlsberg Brewery Brewery Carlsberg Int. Premier Dairy Food Dairy Group of Danish Investors Beer Thai Brewery Carlsberg Int. Khuan Khanun Biogas Plant Biogas plant Solum Pongpara Rubber products Codan Gummi Caretex Production of container liners Caretex Scanthai Furniture M. Krüger P. C. Rubber Rubber profiles Codan Gummi Flux B. Grimm Electrical machinery/equipment Flux P. C. Hose Rubber hoses Codan Gummi Quick-Cool Co. Fabricated metal products Brødrene Gram Invest Tricon Thai Automation Prod. of electronic components Tricon Holding Nation Egmont Edutainment Publishing house Egmont Energy Maintenance Serv. Production of control systems Orbital Tropic Dane Ceramics and furniture Tropic Dane Trading Penadansk Textiles Dansk Transfertryk DZ Plastic cards DZ Holding In total 29 projects in Thailand (total investments amounting to DKK 227m) Financing incentives

EU support schemes by country. Source: Recent developments of feed-in systems in the EU – A research paper for the International Feed-In Cooperation January 2012 A report commissioned by the Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU)

Financing incentives

• Feed-in schemes are the most common support scheme in Europe • EU member states use feed-in systems, quota obligations with tradable green certificates, investment grants and tax incentives to support renewable electricity generation. • 20 out of 27 member states use feed-in systems as main support instrument; 4 more member states as supporting instrument for certain RES-E technologies. • Two feed-in system options are available: – the feed-in tariff, which guarantees a fixed price per kWh electricity, or – the feed-in premium, a feed-in support payment in addition to the revenues from selling electricity in the spot market. • Some Member states with quota systems have introduced feed-in tariffs in combination with their quotas (f.x. Italy and the UK - a feed-in tariff for small scale installations; Belgium - for PV; Finland moved from its investment grant support to a feed-in premium in 2011). • FITs increased steadily from 9 states in 2000 to 18 in 2005 and 24 in 2012. • , Denmark, Estonia, Finland, , Italy, the , Slovakia, Slovenia and use feed-in premiums in combination with other support instruments or as the main support tool for renewable electricity. The UK plans the introduction of a similar scheme. FIT countries

– have 93% of onshore wind capacity and nearly 100% of all PV installed by the end of 2010 initiated by FITs; – generally a leading role in developing renewables in EU: • 78% of new renewable electricity generation added between 1999 and 2009 • their electricity consumption only comprises 62% of total EU-27 electricity consumption. – 60% of electricity generated from solid biomass was produced in countries with FIT

– potential disadvantages of fixed FITs: • does not react to demand fluctuations or • electricity spot market prices FIP countries

Three types of FIP: 1. fixed premium - the premium does not depend on the average electricity price in the power market (increased revenue risk when compared to FIT as the renewable generators bear all price risks from the electricity market; over- and undercompensation may occur). 2. FIP with cap and floor prices (reduced revenue risks as only a certain income range is allowed) 3. sliding premium or contract for difference (CfD) - premium is a function of the average electricity price (revenue risk neutral).

• Used in addition to FIT (the Czech Republic, Germany, Slovenia and Spain) - generators can chose fixed FIT or a premium. • As the only option (Denmark, the Netherlands, Estonia, Finland, Slovakia and from 2014 the UK; Italy - only for PV).

Quota countries

• Programmes are time limited (except for ) – and UK do not guarantee prices – leaving for the market to regulate it – Belgium sets minimum price – Poland sets average market price of the previous year • Few countries offer both FIT and certificates – Producers make advantage of years with higher electricity prices, using the guaranteed FITs as a price floor. – Italy: RE-generated electricity mainly promoted through quota system, but small plants and expensive technologies (PV) can make use of FIT

Business models

• Exit horizons developer/investors: pre-/post-completion • Long term assets allowing refinancing upon completion or mid-term • Bond-like returns, improved by increased risk profile • Leveraged structures add complexity - depend on specific tax and incentive systems (PAYGO, leveraged lease, etc.) • Offshore/onshore collateral agents – foreign exchange shield Business models considerations

Consideration / Motivation Context • The transaction costs of project finance will outweigh the benefits of complex Project Size structure • Number, strategic considerations re share capital division • Exit alignment Project partners • Interest alignment • Investment motive alignment • Simple cash out at financial close Development cost refund • Free carry • Earn-out (interest allignment)

• Increasing debt levels will help increase the equity holder's rate of return Low Project IRR • RECs/CSRs/VERs • Concessional financing

• New equity at closing Exit perspective • Completion exit • Mid-term (5-7 years exit) • Corruption Other considerations • Service and maintenance • Community /CSR, ownership perception/ Assessing business cases (1) • Country framework conditions • State monopoly? Federal or regional permit process or both • FIT/other incentives for RE tariff construction vs generation costs • Price to consumer • PPA / power offtakers • RE projects under way, possibility of repowering, competition in the specific market segment • The Developer • Who is the developer? Reputation, experience with RE projects, exits history, contractor references • Bankability • Advancement of PPA? Pending regulatory approvals? • Advancement of procurement contacts? NB solar • Project financing package mobilisation and sources, dry/wet close conditions, onshore/offshore agents or escrow arrangements Assessing business cases (2) • Feasibility of the Site • Location distance to the grid, CSR, zoning • Resource conditions duration of wind measurements, extrapolation from nearby data sources • Safety or security problems ice, volcanic ash, structural integrity and structural capabilities of the roof, dam size • Biodiversity • Associated facilities • Local legal requirements zoning, community approvals, disclosure process, specific conditions for getting the tariff, specifications for grid connection • Project Factors • Size contexts: financing/contingent equity, grid effect, supporting infrastructure, influx of workers • Technology suppliers of equipment, EPC wrap, OMS/pf guarantees • Timing flexibility of the schedule milestones, coordination with associated facilities/control over associated facilities construction • Payment performance bonds, LD guarantees, credit enhancement (L/C, escrow, sovereign guarantee), track record in payments to IPP • Risk Assignment risk allocation between developer and EPC contractor, take- or-pay PPA, PF duration – claim procedure (NB solar), power forecasting, currency risk mitigation, risk on non-connection Integration of Public Support Methods Public support and legal framework

Transparent and predictable policy changes No retroactive changes Reliable Investor policy Consultations with stakeholders confidence framework Long term guarantee support

Support schemes tailored to actual RE capacity and electricity market readiness Risk Priority grid access and dispatch Growth at conscious Quota: long-term horizon and considerable reduced sanctions policies support costs Government facilitation of finance (guarantees, participation, credit lines)

Levelized Cost of Energy as determinant of Technology necessary support level Demand- specific support Planned and transparent adjustment based driven support policies on market and technology development levels