Mobilising Private Capital to reduce Climate Change
Instruments and Policies to mobilise International Green Energy Investment
Berlin June 29 - 30, 2010
Financing Renewables and Energy Efficiency Projects in Developing
Countries
Andreas Ufer
Global Head Power, Renewables, Water
KfW IPEX-Bank GmbH
Content
● Role of KfW IPEX Bank within KfW Bankengruppe
● Investing in Renewables: What is Key for Private Investors and Financiers
● Financing Renewables: “The Easy and the Challenging Ones”
● Private Investors in Renewables and Ways of Financing
● Mitigating Risks in Developing Countries. Using ECA and PRI/EPRG Cover,
● Key Take Aways
KfW Bankengruppe
Climate Change and Energy Efficiency are in the Focus of the Group
Promotion of developing and transition countries International
project and export finance Promotion of housing,
environmental and climate protection,
education, infrastructure and social development Promotion of SMEs,
founders of new businesses,
start-ups
Financing of municipal and social infrastructure
projects
Domestic promotional business
Investing in Renewables: What is Key for Private Investors and Financiers
A Predictable, reliable Regulatory Framework Key for Investors , Financiers and the Industry National/Local Approval Process
Predictable or more unpredictable;
Transparent and fast or intransparent ,bureaucratic
Location
e.g. Wind Speed, Sunshine Hours, Grid Connection
Technology
Mature or more immature,O&M Cost MW/h Operation and Maintenance Experience
Creditworthiness/Stability of a Country Mitigating the Currency Mismatch:
Income stream in local currency, Financing
in hard currency
Investing in Renewables: What is Key for Investors and Financiers The Regulatory Framework Observations 1
Feed in System
¾ Generally good reliable instrument to foster green investments ( e.g. Germany); Attract more manufacturers and fosters competition, which helps reducing the cost per Kw/h
¾ Stable cash flow attracts banks, but also
institutionals and private investors ;reduces risk premium significantly both for Sponsor and banks
¾ Adjustments of feed in systems necessary on a regular basis to avoid extensive subsidies, but consider different planning periods/ lead times to develop projects -(Photovoltaic's versus CSP, Wind Offshore) to avoid roller coaster effects;
¾ The “Spanish” Lesson learnt: Reliability is key.
The discussion of changing the agreed tariffs for existing projects is poison for private green
investments ( not only in Spain)
Investing in Renewables: What is Key for Investors and Financiers. The Regulatory Framework Observations 2
Tax Incentive Structures
¾ In the past investments often more tax and less power generation driven
¾ May have “rollercoaster effects” in case of change of tax law , which again avoids long term planning for Investors, Industry,
Financiers
¾ You need always Sponsors who can pay taxes
Renewable Certificate Related Incentive Schemes
¾ from a regulators point of view best system to reduce subsidies,
¾ However often complex, cash flow ( seems
to be) less stable, results often in higher
higher risk premium both for Sponsors an
Financiers.
Investing in Renewables: What is Key for Investors and Financiers. The Regulatory Framework Observations 3
Tendering
¾ A attractive solution for large scale projects where sufficient competition is guaranteed
¾ Good instrument to attract local
manufacturing provided there are sufficient projects
A general Observation
¾ Same systems with different tariffs or
different systems in countries may result in significantly different Capex Prices for
Renewables
Financing Renewables Today: The Easy and the Challenging Ones 1
Wind Onshore/ Photovoltaic's Industry more mature
High Competition helps reducing costs cost kw/h
Biomass/ Biogas
The challenge: How to secure long term fuel supply The energy and food debate can be an reputation issue for Sponsors and Banks
Generally more complex in financing, very tailor
made, no constant project pipeline
Financing Renewables Today: The Easy and the Challenging Ones 2
Concentrated Solar Power CSP
Revitalization of CSP in the last 2-3 years in particular thanks to Spain
Competition still low with high costs kw/h
Still tailor made financing , not standard PF financing;
Huge investments may come
Financing Renewables Today: The Easy and the Challenging Ones 3
Wind Offshore :
The Real Challenge !
Generally young technology ( 5MW+ class), only 3 / 3.6 MW class in the market for some years. Logistics is one of the Key Challenges Project financing funds is one of the bottleneck in particular for the construction phase
Geothermal
Drilling and the risk of finding sufficient hot water needs often Venture Capital or Equity
Project Financing challenging, only feasible after
successful drilling
Sponsors in Renewables and Ways of Financing
Utilities as Sponsors
¾ not always the “early birds” in Renewables
¾ mainly balance sheet financing.
Small and Medium Developers / Institutionals/
Sometimes manufacturers
¾ Can be driving force in Renewable Investments
¾ “Copy and pace” approach in countries which start promoting Renewables
¾ Mainly Project Finance required
¾ ROE Expectations for “sponsors reaonable if cash flow is predictable (private and
Institutionals)
A good Example for a private investment A wind 100 MW wind park in Africa
Wind cheaper than Diesel/Petroleum generation
Projects creates Carbon certificates, shared
between sponsor and government
SPV
Loan
O &M co ntra
ct Va rio us C on tra ct s
Interest and Repayment
Wind Turbine Manufacturer
Bank
Operator Offtaker
EPC Contractor Civil Works
Sponsors
Equity Dividends
Offtake Agmt Lice nse s
Wind, Technical, Insurance, Legal
Advisors
Regul ./Local Authorities
Example of a Project Finance Structure
ECA Cover/ PRI Cover
ECA Cover
Mitigating Risks in Developing Countries.
Using ECA and PRI/EPRG Cover
• ECA Cover (Comprehensive economic and political cover. )
- Key for financing long term investments in Developing countries
- Cover in local currency only on a case by case basis
- ECA Premium: The higher the country risk , the higher the premium. Generally the right approach, but helpful for stimulating green investments?
• PRI / EPRG Cover Political cover, -Sometimes enhanced with breach of contract clause
- Available in certain countries to stimulate foreign investments
Useful instrument, when public entity is the
ultimate risk
Example : An ECA covered Transaction mitigating Currency Risk
The Challenge
●
Local currency financing in TWD in order to mitigate exchange rate risks
The Solution
●
Project finance on a local currency basis via two local funding banks
●
