Transcript Financing Renewables Projects

13 May 2003
Financing Renewable Energy
Projects
Jonathan Johns, Partner
Ernst & Young Renewable Energy Group
Broadwalk House, Southernhay West
Exeter EX1 1LF
Tel
+44 (0) 1392 284300
Fax
+44 (0) 1392 284302
e-mail
[email protected]
Current Policy in Europe
45
RE requirement to 2010 (TWh)
40
– Green electricity contribution to total
electric generation to increase from 14%
(2000) to 22% by 2012
35
30
– E.g., if all wind, circa 70,000MW required
by 2010
TWh
25
– Germany, UK and Italy have the highest
TWh requirement to 2010
20
15
– Indicative targets on nation states, with
freedom to implement their own support
mechanism
10
5
– Harmonisation acknowledged, subject to a
7-year transitory period (will it happen?)
er
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U
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Ita
Fr ly
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Sp e
Sw ain
D ed
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G ds
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Fi ce
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a
A nd
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B tri
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– EU Directive 2001/77/EC makes Europe
the most attractive market for RE globally
Source: EU Directive 2001/77/EC
Support Mechanisms Vary Considerably
Regime
Tariffs
Country
Fixed price: Feed-in rates
Denmark, France, Germany, Greece, Portugal, Spain
Fixed price: Competitive tendering
France (old system may be used for offshore wind), Ireland,
UK (old system)
Premium mechanisms
Finland, Spain (optional), Sweden, Netherlands
Green Certificates mechanisms
Existing in Italy, Netherlands, UK and imminent in Norway,
Sweden and Denmark
Net metering
Denmark, Netherlands
Emissions trading
Netherlands, UK
Tax incentives
Denmark, France, Germany, Greece, Ireland (withdrawn),
Italy, Netherlands, Norway, Spain, Sweden, UK
Grants
Finland, Greece, Italy, Norway, Poland, Sweden, UK
Soft loans
Germany, Greece, Netherlands, Poland, Portugal, Spain
Source: Ernst & Young, European Survey, 2002
Onshore Wind Tariffs
Onshore Wind
Power Factor
compared to
Germany
15-Year PPA Projections for Onshore Wind
Ernst & Young - December 2002
10
9
Minimum Price (€c/kWh)
8
GR
7
[Denmark]
100%
France
116%
Germany
100%
Greece
100%
Ireland
116%
DE [NL]
6
PT
IR
5
F
Italy
SP
92%
[DK]
[Netherlands]
116%
Portugal
100%
2
Spain
100%
1
[Sweden]
116%
0
UK
116%
4
UK
[SW]
3
IT
0
1
2
3
Indicates price movement associated with PPA structure
Source: Ernst & Young
4
5
6
Maximum Price (€c/kWh)
[ ] indicates under review
7
8
9
10
Indicates price pressure from electricity market deregulation
E&Y’s RE Country Attractiveness Indices
Country
Regulatory
All
Infrastructure
Renewables
Index
Index
Germany
61
73
Spain
64
73
UK
64
72
Italy
63
64
Greece
60
59
France
41
59
Portugal
47
57
Sweden
57
55
Ireland
51
53
Denmark
54
53
Netherlands
40
52
Norway
55
46
Belgium
48
43
Austria
44
38
© Copyright Source: Ernst & Young
6 January 2003, subject to update
Ernst & Young’s RE Country Attractiveness Indices provide ratings for
national renewable infrastructures and their suitability for individual
technologies. The indices are:– Forward looking, providing scores out of 100
– Updated on a quarterly basis
Regulatory Infrastructure Index
An assessment of the General Regulatory Infrastructure for Renewable
Energy. On a weighted basis, the index considers:– Electricity market regulatory risk
– Planning and grid connection issues
– Tax climate
– Grant / soft loan availability
This index excludes tariffs as they are often resource specific
All Renewables Index
A combination of the Regulatory Infrastructure Index and each Renewable
Energy Resource Index (see next slide). The specific weightings are:
– Regulatory Infrastructure Index – 38%
– Wind Index – 47%
– Solar Index – 5%
– Biomass and Other Index – 10%
Provides an overall score for all Renewable Energy technologies.
Attractiveness will vary with specific sponsor / financier requirements and
tailor made studies can be provided.
E&Y’s Country Attractiveness Index
Country
Wind
Solar
Biomass and Other
Attractiveness
Attractiveness
R E Attractiveness
Index
Index
Index
Germany
76
70
62
Spain
75
71
63
A resource specific
assessment for each country of
the following weighted factors:
UK
79
42
51
– Power offtake attractiveness
Italy
67
73
50
– Market growth potential
Greece
64
55
39
France
60
60
50
Portugal
59
52
51
Sweden
56
39
61
Ireland
58
32
40
Denmark
57
40
43
Netherlands
55
50
43
Norway
46
34
54
Other RE technologies include
Belgium
46
36
37
Austria
36
42
47
small hydro, landfill gas, wave
tidal and geothermal.
Attractiveness
© Copyright Source: Ernst & Young
6 January 2003, subject to update
Resource Attractiveness
Indices
– Current installed base
– Resource quality
which when combined with the
Regulatory Infrastructure Index
(38% weighting) shows the
attractiveness of a country for a
particular technology
Key Questions for Equity Stakeholders
• Does the project reinforce /
extend core strengths, skills and
markets?
• Is it deliverable in an acceptable
timescale?
• Does it enhance the carbon
portfolio?
Most importantly:
• Is there low PPA risk?
• Does it develop a new
technology that can be proven
and will it transform the cost
base for the industry?
• Does the cash flow allow high
debt leverage?
• Does it provide purchasing
power for existing technologies?
• Can it be refinanced for profit?
• Does the cash flow deliver the
required project hurdle rate?
Typical Objectives of Equity Holders
Investor Type
Objectives
Technology provider
Exploitation of technology, probable float (ownership of projects only for track record
purposes).
Small scale private,
individual or community
vehicle
Involvement in green based vehicle over long term, often investing in specific local
projects. Often tax financed.
Entrepreneurial developer
and possibly part owner
Maximise fees through repeated project origination, development and on sale: may
retain stake in projects.
Renewable energy
specialist developer
Become a large scale player using third party equity and debt (often using tax based
structures). Probable multi-territory operation. Possible float.
Utilities and other large
corporate seeking
diversification
Ownership or control of large portfolio of green electricity usually on a market entry
basis. In a market based environment, may only want green certificates.
Financial investor
Predictable annuity type long term earnings streams.
Tax based finances
Requires physical ownership and legal ownership of assets in return for low cost of
equity (typically 10-12%).
Private equity
Prefer a “Buy and Build” and refinance approach with short-term exit.
Principal capital
Provision of integrated debt and equity packages using securitisation as a possible
process of exit.
Equity Risk Return Requirements
Investor Type
Attitude to risk
Return requirement
Technology provider
Averse to resource and permitting risk, but
overspend to prove technology tolerated
Low to medium (on project alone)
Small scale private,
individual or community
vehicle
Averse to technology and O&M risk
Above savings alternative,
provided tax breaks available
Entrepreneurial developer
and possibly part owner
Focused on taking and managing planning
permitting and project assembly risk
Medium to high (once utility hurdle
rate achieved)
Renewable energy specialist
developer
Very focused on risk identification and mitigation,
to allow non recourse finance and careful
definition of returns
Medium to high
Utilities and other large
corporate seeking
diversification
Will take some early stage risk
Medium (depending on synergies
with own operators)
Financial investor
Risk averse, post construction
Medium
Tax based finances
Risk averse post-construction
Medium
Private equity
Will take technology risk and/or buy and build
High
Principal capital
Tend to avoid development and construction risks
High
Source of Finance: Debt
• Debt financing for wind projects is proven,
with an increasing number of players
competing for market share:
• Traditional lenders to RE
• Umbrella facilities are commonly used to
obtain portfolio financing
• Tax based debt
• Construction finance is available.
• Traditional lenders to power market
• New entrants to RE
• Project risks are well understood
• Credit enhancement products exists:
• Wind derivatives
• Extended turbine warranties
• Insurance products
Other technologies can require strong
partners and covenants
How Banks View Technologies
• Onshore wind is viewed as an
established commercial energy
source
1.00
0.50
• Offshore wind is still ranked ahead
of conventional Biomass
Tidal
1.50
Wave
2.00
Biomass
2.50
Offhore Wind
• Independent resource assessments
are key
Onshore Wind
3.00
0.00
Source: Ernst & Young - Bank Survey, 2002
Interviews were conducted with major international banks with the
objective of establishing the banking sectors’ attitude to various types
of renewable energy technologies relative to offshore wind,
jurisdictional preferences for offshore wind projects, manufacturer
preferences, attitude to various risks (permitting, construction,
technology, merchant). Responses were standardised on the scale of
1 (least) to 3 (most).
• Banks consider the strength of
suppliers’ warranties and the actual
performance of technologies over a
period of time, together with scale
up and system integration risks
• All cashflows are sensitised to
ensure that key cover ratios are
maintained
Indicative PF Debt Terms for Onshore Wind
– Tendering procedures produce
very different results
– Gearing: 75% to 85% (and higher) of which mezz of 10% to 20%
– Quasi merchant plant financings
have been achieved
– Tenor: 10 to 13 years
– Strong PPAs achieve much
better results
– Commitment fee: 0.4% to 1.0%
– Tax based financing should
always be considered
– Margin: 1.3% to 2.0%
– Arrangement fee: 1 to 2%
– Admin fee: Varies
– DSCR: 1.25 to 1.40
– LLCR: 1.25 to 1.50
– DSRA: 6 months
The cash flows of the particular project and the structuring techniques employed
have a fundamental effect on the terms and the value achieved by stakeholders
Technology Risk & Rewards
• Onshore wind and small hydro are
clear winners
35
INCREASING RETURNS
• The greater the risk, the greater the
requirement for capital grants, other
support mechanisms and the
presence of a strong equity partner
with either explicit or implicit support
30
25
Large Hydro
Landfill Gas
20
Onshore Wind
Small hydro
CCGT
15
EfW
Offshore Wind
Biomass (Pyrolysis)
Biomass (Gasification)
Small Hydro
10
Small Wind
5
Gilts
0
0.00
Solar
0.10
0.20
0.30
0.40
0.50
INCREASING RISK
0.60
0.70
0.80
0.90
1.00
The position in Ireland
• Merchant financing of wind projects is possible if:– Integrated business with established customer base
– Carefully constructed portfolio
– Well structured financing
• Key advantages for Ireland – priority of despatch and lack of general capacity in power
market
• The Airtricity model:
– Quote from Fintan Whelan, Airtricity’s Corporate Finance Manager
“ Working with Ernst & Young’s Renewable Energy Team, we were able to
demonstrate to debt providers that a more market based approach to renewable
energy development was possible, and that project finance could be used in these
circumstances. The great benefit for Airtricity has been to remove the risk of stopstart governmental support, and without losing the ability to project finance our wind
farms.” (Source: Wind Directions January 2003)
• AER’s bring their own opportunities (and issues)
Ernst & Young came No1 for Project Finance in EMEA in 2001
13 May 2003
Financing Windfarm Projects
Peter McArdle, Manager
Ernst & Young - Project Finance/PPP
Ernst & Young House, Harcourt Centre
Harcourt Street, Dublin 2
Tel
+353 (0) 1 4750555
Fax
+353 (0) 1 4750590
e-mail
[email protected]
AER V and AER VI Summary
AER V CAP
Price
AER VI CAP Price
Small Scale
5.297 eurocents
per kwh
5.742 eurocents
per kwh
Large Scale
4.812 eurocents
per kwh
5.216 eurocents
per kwh
CPI Applicable
25% of Cap Price 100% of Cap Price
No. of Successful
Applicants
40
No. of Projects Built 4
To Date
?
?
Financing Issues Facing Developers
Build Cost
Equity
Build Methodology
Warranty Arrangements
Operation Arrangements
Financing Issues Facing Developers contd.
Bank Financing Terms
Due Diligence
Technical
Financial
Legal
Financing Issues Facing Developers contd.
Compliance to Planning Conditions
Insurances
Timeline