Investment strategies for the success of renewable energy markets Christopher Knowles Brussels, 18 th November 2009
Table of Content 1. 2. Requirements for success 3. 2 EIB and the policy context Financial instruments / Carbon funds / Carbon Capture & Storage
THE EUROPEAN INVESTMENT BANK • The European Union’s financing institution. . . • Created by the Treaty of Rome in 1958, to provide long-term finance for projects implementing the EU’s policies. • Subscribed capital: € 164. 8 bn • EIB shareholders: 27 Member States of the European Union. • EIB’s annual disbursements (2008): € 48. 6 bn. (+12%) 3 EIB and the policy context
European Investment Bank (EIB) EIB Borrowing activity EUR bn Volume of issuance compares with that of other EU Governments … Supranational Issuance EUR bn … and is larger than that of other supranationals * Estimated financial results/forecasts Apr 05 -06/Apr 06 -07 ** Estimated financial results/forecasts are June 06 -07/June 07 -08 4 Source: Barclays Capital research & EIB as of February 2008
ENERGY AND ENVIRONMENT: EU POLICY CONTEXT Environmental sustainability • Energy accounts for 80% of greenhouse gas emissions in the EU (European Environment Agency) • EU Commitment: 20% reduction of GHG emissions by 2020 compared to 1990 • EU target: Renewable Energy to account for 20% of EU energy mix by 2020 (up from less than 7% in 2005) Security of supply • Diversification of energy sources - Securing geographical diversification Lisbon Agenda • Employment and competitiveness in the low carbon economy 5 EIB and the policy context
ENVIRONMENTAL SUSTAINABILITY Environmental Financing in the EU in 2008 was € 15. 7 billion 6 EIB and the policy context
SUSTAINABLE, COMPETITIVE AND SECURE ENERGY - COP • Priority areas: - Renewable energy - Energy efficiency - Research, development and innovation - Diversification and security of internal supply (including TEN-E) - External energy security and economic development • In 2008 direct energy loans of EUR 10. 2 bn of which: - € 8. 6 billion within the EU - € 1. 6 billion outside the EU - € 2. 2 billion to renewable energy projects - € 2. 9 billion to TEN-E projects 7 EIB and the policy context
EIB’S ENERGY FINANCING IN 2008 Renewable Energy Financing in 2008 amounted to € 2. 2 bn 8 EIB and the policy context
EIB’S RENEWABLE ENERGY FINANCING IN 2008 Wind Energy projects accounted for 34% of EIB’s Renewable Energy Financing in 2008 9 Renewable energy
Table of Content 1. 2. Requirements for success 3. 10 EIB and the policy context Financial instruments / Carbon funds / Carbon Capture & Storage
SUCCESS REQUIRES • Regulatory framework – encouraging new entrants to market – ensuring quick consenting process • Incentives – Tariff or Quota - adequate to – offset higher costs of new low carbon technologies – compensate for carbon market failure • Simplicity, Certainty, Stability – Whether tariff or quota based regime • Functional financial and credit markets 11
Table of Content 1. 2. Requirements for success 3. 12 EIB and the policy context Financial instruments / Carbon funds / Carbon Capture & Storage
RENEWABLES FINANCE IN CONTEXT • To date, EIB financed 5% of installed capacity of wind to energy sector in Europe - Focus on medium / large on shore and off shore demonstration projects - Bank developing new initiatives for the on shore wind sector • Leading edge investments in concentrating thermal power in Spain 13 Renewable energy
FINANCING INSTRUMENTS • EIB’s traditional loan products • New financial instruments for sustainable energy 14 Financial instruments / Carbon funds / Carbon Capture & Storage
EIB’S LOAN PRODUCTS General Terms: • Senior and subordinated loans • Corporate Loans and Project Finance • Loan term up to economic life of the assets • Loan amount generally up to 50% of eligible project costs; can be up to 75 % 15 Financial instruments / Carbon funds / Carbon Capture & Storage
EIB’S LOAN PRODUCTS (2) Large-Scale Projects (typically > 50 m € investment cost): • Direct Investment Loans • Corporate Loans and Project Finance • Project could consist of single or multiple sites • Comprehensive loan appraisal justified by project size • Where EIB takes full project risk, loan may fall under SFF => EIB loan amount capped at 200 m € (maximum amount could be lower depending on riskiness of project) 16 Financial instruments / Carbon funds / Carbon Capture & Storage
EIB’S LOAN PRODUCTS (3) Small-to-Medium Scale Projects (typically < 50 m € investment cost): • Programme or Framework loan to corporate or intermediary • Traditionally, intermediaries were financial entities – global loans • EIB now willing to provide loan facilities to developers for bundling small-scale projects EIB Strategy: • Increase exposure to small-to-medium scale wind energy projects through: - Intermediated loans on a risk-sharing basis; and - Facilities for developers 17 Financial instruments / Carbon funds / Carbon Capture & Storage
TECHNICAL ASSISTANCE FOR SUSTAINABLE ENERGY – RISK FACILITIES • EIB capital under Structured Finance Facility (SFF) for non investment grade projects - € 3. 75 bn facility for higher risk priority projects - Quasi-equity / risk-taking instruments - Additional EC capital of € 1. 5 billion under mandate to EIB • Risk Sharing Finance Facility - Established with European Commission with capital of € 2 billion - Supports investment in R&D including Energy - Loans to corporates (including SMEs) and structured transactions with JTIs under Framework Programme 7 - Other forms of public private lending supporting research infrastructures (for example ITER or ESFRI projects, R&D in nuclear safety) 18 Financial instruments / Carbon funds / Carbon Capture & Storage
FINANCIAL INSTRUMENTS FOR SUSTAINABLE ENERGY – CLIMATE CHANGE • Climate Change Technical Assistance Facility (CCTAF) - A € 5 million TA facility to cover carbon crediting activities of projects expected to be financed by the EIB - Conditional funding –reimbursable on successful registration of carbon credits meeting requirements of Kyoto Protocol 19 Financial instruments / Carbon funds / Carbon Capture & Storage
FINANCIAL INSTRUMENTS FOR SUSTAINABLE ENERGY – EQUITY FUNDS Equity Funds for renewable energy / clean energy projects - Investment into energy projects via funds managed by professional funds managers - First transactions cornerstone investor in Spain, Czech Republic, Portugal and Netherlands - Further transactions with broader geographical base in negotiation with the private sector - Marguerite or 20: 20 Fund 20 Financial instruments / Carbon funds / Carbon Capture & Storage
EIB FUNDS – RENEWABLES & CARBON Name Size DIF RE € 150 m Onshore Wind North EU Green Alliance € 120 m Wind, Solar, Biofuel ES, PT Enercap € 100 m Onshore Wind CE & SEE ESIF € 80 m Renewables ES, PT Dasos € 85 m Forestry CE & L. Am / SE Asia DIF II € 500 m Renewables & Municipalities North EU Dexia South EU € 120 m Renewables/Infra ES, PT, F, IT Fondo Italia € 120 m Renewables/Infra Italy 2020 Marguerite € 1. 5 bn Infra/Renewables/Energy EU-27 MCCF (IFIs+Private) € 190 m Carbon Credits NMS & CIS CFE (IFIs) € 50 m Carbon Credits Global EIB/KFW (IFIs+Private) € 100 m Carbon Credits Global Post 2012 (IFIs+Private) € 125 m Carbon Credits Global EIB/KFW II (IFIs+Private) € 100 m Carbon Credits Global EIB/CDC Fds Carbone Maroc € 26 m 21 Sector Focus Carbon Credits Geography Morocco
2020 Marguerite Fund: Summary • Target equity base of 1. 5 b€; associated Debt Co-financing Initiative of 5 b€ • Focus on Greenfield projects within EU-27 in areas of TEN-T; TEN-E and Renewables • Major public Core Sponsors: EIB; CDC (France); CDP (Italy); ICO (Spain); Kf. W (Germany) and PKO (Poland)) are investors; • Based on long-term private sector, as well as public-sector institutional, investors • Access to significant deal flow potential in priority sectors throughout EU • Core Sponsors maintain close dialogue with regulatory & public authorities in their home countries and with EU • Focus on solid IRR targets; Fund to give preference to projects with satisfactory Economic Rates of Return (ERR) 22
FINANCIAL INSTRUMENTS FOR SUSTAINABLE ENERGY – NEW PRODUCTS & MARKETS • Development of new instruments - Energy Efficiency Finance Facility - SE 4 F (South East Europe Energy Efficiency Fund) - Wind energy facilities to be developed for small scale on shore sector - Roll out to the photovoltaic and solar power sector in due course • Participation in European Technology Platforms devoted to energy - EIB has strategic intent to be the ‘house bank’ of ETPs - Zero emission power generation is a particular target - Bank has expressed willingness to participate in demonstration projects in the field of Carbon Capture and Storage (CCS) • EIB’s Green Bond 23 Financial instruments / Carbon funds / Carbon Capture & Storage
INTERNATIONAL CARBON FUNDS • • 24 Multilateral Carbon Credit Fund (MCCF) Carbon Fund for Europe (CFE) EIB/Kf. W Carbon Purchase Programme Post 2012 Carbon Fund Financial instruments / Carbon funds / Carbon Capture & Storage
CARBON CAPTURE & STORAGE CONTEXT: • European Commission (DG TREN / DG ENV. ) • Zero Emission Platform • Fossil Fuel Forum • Clean Energy Framework • Member States Initiatives (e. g. UK) • Financing Possibilities 25 Financial instruments / Carbon funds / Carbon Capture & Storage
FOUR NEW COURSES OF ACTION • An EU Sustainable Energy Financing Package • EE, RE, TA, Smaller Actors, Municipalities, SMEs • Maximise leverage effect of EU financing • Financial Support of EU SET (Strategic Energy Technology Plan) • Objective to accelerate deployment of low carbon demos • 1 st gap analysis; 2 nd implement financing measures e. g. CCS • Working Group on coordinated support energy and infrastructure • Will complement above: propose new integrated approaches • Financial Support for Clean Vehicle R&D • Special Facility and RSFF to ensure sustained R&D despite slowdown • Hybrid, electric, hydrogen 26 Financial instruments / Carbon funds / Carbon Capture & Storage
CONTACT STRUCTURED FINANCE AND ADVISORY / AGI-EU Chris Knowles, knowles@eib. org James Ranaivoson, ranaivos@eib. org Kristin Lang, k. lang@eib. org Martin Poulsen, poulsen@eib. org Melchior Karigl, karigl@eib. org Peter Coveliers, covelier@eib. org 27
MULTILATERAL CARBON CREDIT FUND • • Opened to: - shareholders of EBRD or EIB, - and also private companies and other public entities (compliance/voluntary buyers) - Fully subscribed to the value of EUR 150 million • Aims to buy credits under JI, CDM, and ETS - from EBRD- and/or EIB- funded projects - Value added role of private sector carbon managers • Can also facilitate Green Investment Schemes All sellers will be: - Located in a country in transition - Financed by either EBRD or EIB • Buyers bear delivery risk and Kyoto risk • 28 Co-sponsored and managed by EBRD and EIB Phasing: - Investment period 2006 -2009 - Delivery period 2008 -2013 (2014) Financial instruments / Carbon funds
OBJECTIVES OF THE MCCF • • Increase investment flows in low-carbon and clean technologies • Support the development of emission trading • Encourage private sector involvement • 29 Procure quality carbon credits from EBRD/EIB financed projects in the 29 countries in transition Promote dissemination of best practices Financial instruments / Carbon funds
CARBON FUND FOR EUROPE • Trust fund established by the World Bank in partnership with EIB • Fund will purchase greenhouse gas emission reductions through Kyoto CDM and JI mechanisms • Eligible projects from either bank’s portfolio or standalone projects • First tranche of € 50 million subscribed with 4 sovereign and 1 private participant 30 Financial instruments / Carbon funds
EIB/KFW CARBON PURCHASE PROGRAMME • Risk sharing arrangement between EIB and Kf. W • Focus on enabling EU based SMEs to access the carbon market for voluntary or statutory compliance purposes • Significantly extends the carbon market to players normally excluded due to limited purchasing requirement and lower credit standing 31 Financial instruments / Carbon funds
POST 2012 CARBON FUND • Addresses current gap in Kyoto carbon market relating to post 2012 uncertainty • Fund will acquire post 2012 credits only, thus extending revenue stream of environmentally beneficial projects • Banks take risk of non development of market after 2012 • EIB leading development with NIB, Kf. W, CDC & ICO • € 125 million committed 32 Financial instruments / Carbon funds
STRUCTURES FOR DIRECT LOANS • Corporate Finance - Financing the activities of corporates or institutions which carry project risk - Credit analysis focuses on the ability of the promoter to meet debt service obligations • Project Finance - Financing of a standalone project entity which takes project risk - Credit analysis focuses on ability of the project to generate the cash need to cover debt service 33
CARBON CREDIT TRANSACTION STEPS FROM ORIGINATION TO DELIVERY 34
RSFF – PART OF A NEW EIB VISION Capital • A € 3. 75 billion commitment of capital by EIB • A € 1. 5 billion commitment of EU budgetary resources by the Commission which commits a significant critical mass of capital Partners and Products • A joint EIB and EU programme for TENs and RDI • New EIB programmes for Energy and Climate Change • A new Carbon based programme with both public (EBRD/Kf. W/WB and national public institutions) and private sectors • Introduction of new financial products (RSFF; LGTT; Interest Contingent Loan, etc. ) targeted on needs of priority sectors • A risk sharing programme with corporates and financial institutions 35
EIB/EU RISK SHARING FINANCE FACILITY (RSFF) RSFF FP 7 „An innovative joint EIB and EU facility to improve access to debt financing with a higher than average risk profile for RDI projects. The beneficiaries can be private and public promoters, SPVs and PPPs” 36
RISK SHARING FINANCE FACILITY RSFF – Key Terms RSFF provisioning & capital allocation € 1 bn OWN RESOURCES Eligibility € 1 bn Beneficiaries § Large Corporates, Mid-caps, SMEs, turnaround situations, infrastructure SPVs, Universities and PPPs § Commission: R&D § EIB: R&D + I Size of Loans EIB Products § Corporate loans, project finance § Risk sharing bank facilities, funds that meet the RSFF credit profile § Reduced to min. € 7. 5 m for direct loans/guarantees € 10 bn in Financing Capacity 37 FP 7
RISK SHARING FINANCE FACILITY Eligibility 1. EC Window - RTD & D 2. EIB Window - RDI Fundamental research Definition stage / feasibility studies Industrial research Pre-competitive development activity Pilot and demonstration projects Innovation • Geographic Scope: EU 27 and Associated countries (Iceland, Liechtenstein, Norway, Switzerland, Israel, Turkey and Croatia) 38
RISK SHARING FINANCE FACILITY What can be financed ELIGIBLE COSTS Year 2 € 10 m € 30 m Total € 60 m € 45 m 39 • Facilities: project capital expenditures for tangible assets; € 20 m Year 3 Time Year 1 Eligible project cost include: • Activities : project capital expenditures for intangible assets, research staff cost, incremental working capital needs and other related operating expenses. R&D budgets typically cumulated over 3 years (investment programme) MAX. EIB LOAN Up to 75% of the total project cost.
RISK SHARING FINANCE FACILITY Financial Risk RSFF Target Companies respectively risk profile 40
JESSICA (Joint European Support for Sustainable Investment in City Areas) Offering Member States (MS) and Managing Authorities (MAs) the possibility to lever grants from Operational Programmes (OP) into revolving, sustainable financial capacity for urban renewal and development projects. 41
• Member States (MS) and Managing Authorities (MA) have the possibility to allocate and contribute resources from OPs, to: - Urban Development Funds (UDF) - Holding Funds (HF); Urban Development Funds investing in - PPPs or projects included in Integrated Urban Development Plans (IUDP) - Holding Funds investing in several UDFs 42
JESSICA Disbursement: § Up front § Irreversible EU Level European Commission ERDF – DG Regio Programming Authority National /or regional Level € Managing Authority National/regiona l /Local Level Holding Fund ( « HF » ) € Urban Development Funds Regional /Local Level € 43 € € Projects € € € HF Manage r € Sustainable Urban Development (In tranches if required) Holding Fund: § Greater delegation to Local Authorities § Owned by National Authority § Management/administratio n are outsourced to HF Role of the HF Manager: Mgr. § Structure investments, select Urban Development Funds § Administer, monitor & report on investments § Attract other investors § Closely collaborate with national/regional authorities THE MANAGER IS SELECTED BY MEMBER STATE / REGION
Why JESSICA? • Use innovative financing and loan schemes for sustainable urban development, not aggravating public finance and debt. • Involve technical, financial, managerial capacity and expertise of IFIs, banks, private sector, for sustainable urban investment. • Increasing investment needs for sustainable cities and towns. Available public funds are scarce- need private and banking sector contribution. • Existing administrative and technical capacity within Urban authorities often does not correspond to investment needs. 44
CLIMATE AWARENESS BOND • Dedicated use of funds in sectors key to climate protection • Funds raised earmarked for renewable energy and energy efficiency lending • Investor option to reduce capacity for CO 2 emissions • Largest ever syndicated index-linked bond 45
SOLAR POTENTIAL : Insolation potential in the Mediterranean 46
Thermal solar Power * * Contractually guaranteed load factor taking into account molten salt storage and auxiliary firing on natural gas. 47
Solucar – Central Solar Receiver 48
CASE STUDY: LARGE PROJECT FINANCE Ø 240 MW onshore windfarm project in 5 sites Ø Off-take agreement with TSO Ø Total project cost = € 390 m Ø 20 year project Ø Debt: Equity = 90: 10 Ø EIB loan: € 170 m project finance loan secured on project’s assets and revenues Ø Pari passu with other senior lenders Ø Loan Term: 18 years 49
CASE STUDY: LARGE PROJECT FINANCE Ø Framework loan to finance renewable energy projects, mainly wind energy, in large WE country Ø Loan intermediated by specialised subsidiary of major bank Ø Total Facility Amount: € 300 m Ø EIB loan amount: € 100 m Ø Loan Term: 15 years Ø Projects financed by EIB must meet preset criteria => streamlined appraisal process 50
CASE STUDY: LARGE PROJECT FINANCE Ø Corporate loan to a major Western European electricity producer to finance 3 -year investment programme in wind energy Ø Total Programme Cost = € 1. 1 bn Ø EIB loan amount: € 450 m Ø 2 Tranches: Ø Tranche A: € 350 m 10 year tenor, corporate risk Ø Tranche B: € 100 m 15 year tenor, bank guaranteed 51
CASE STUDY: LARGE PROJECT FINANCE Ø Framework loan to finance on-shore wind on a Pan-EU basis Ø Co-financing arrangement with a leading PF Bank active in RE Ø Total Facility Amount: € 200 m; provided equally § Individual loan tenors of 15 years § EIB assuming full project risk, with pricing benefits for individual projects being financed § Co-financier acts as Facility Agent Ø Projects financed by EIB must meet preset criteria § Co-financier responsible for identifying eligible projects § Streamlined project appraisal process 52
CCS FORM OF SUPPORT MECHANISMS • EIB has no single or preferred solution: • Feed in tariff • Guaranteed hours • Portfolio standard • ETS based 53
CCS EIB DEBT FINANCING (1) • Normal EIB project finance loan with standard EIB terms and conditions: • Senior secured loans • Cover ratios, covenant package, intercreditor etc. consistent with commercial banks • Comparative advantage: • Pricing • Maturity 54
CCS EIB DEBT FINANCING (2) • Non-standard project finance loan relying solely on carbon revenue stream: • Tailored security, intercreditor and covenant package • 100% dedication of carbon revenue stream • Comparative advantage: • As per normal loan re pricing and maturity • Lower perceived risk on the carbon revenue stream resulting in higher debt: equity ratios 55
CCS EIB CARBON OFFTAKE AGREEMENT • Normal project finance package (with or without EIB lending) • EIB enters into a Carbon Offtake Agreement „COA“ equivalent to a PPA • Comparative advantage: • Simplified loan / security structure • AAA rated COA counterpart • Longer term for COA and higher price • Capacity to raise more project finance 56
FINANCIAL INSTRUMENTS FOR SUSTAINABLE ENERGY – EQUITY FUNDS Target Size Sector Focus Green Alliance € 50 million Onshore wind, Spain solar PV, biodiesel Enercap € 100 million Principally onshore wind Central and South Eastern Europe M. Michael White mwhite@enercap. com Tel: +420 227 316 222 DIF Renewable Energy € 120 million Principally onshore wind The Netherlands and Northern Europe M. Jean-Pierre Sweerts jp. sweerts@dif. eu Tel: +31 20 655 47 06 Espirito Santo Infrastructure Fund € 80 million Onshore wind, Portugal, Spain solar, biomass and EU 57 Geography Contact M. Oriol Serra oserra@greenalliance. es Tel: +34 932 722 980 M. João Oliveira joliveira@escapital. pt Tel: +351 21 330 2279
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