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The Need for Robust Legal & Regulatory Frameworks to Promote Renewables Riccardo Puliti Managing The Need for Robust Legal & Regulatory Frameworks to Promote Renewables Riccardo Puliti Managing Director, Energy & Natural Resources VI KAZENERGY Eurasian Forum Astana, 5 October 2011

Agenda 1. What is EBRD? 2. Experience in Renewables 3. Regulatory Frameworks and Regulatory Agenda 1. What is EBRD? 2. Experience in Renewables 3. Regulatory Frameworks and Regulatory Risk 4. Sustainable Policy Instruments 5. Transparent & Predictable Legal Framework 6. Case Studies 2

Foundation of Operations l Apply sound banking principles to all projects – EBRD does Foundation of Operations l Apply sound banking principles to all projects – EBRD does not subsidise l Advance the transition to a full market economy – Priority to promote private sector involvement and market expansion l Support, but not replace, private investment: additionality – Act as a catalyst for higher and riskier involvement of financiers l Achieve environmentally sound and sustainable development 3

Where EBRD Operates 4 Where EBRD Operates 4

Experience in Renewables l EBRD was an early mover in Renewable Energy (RE) in Experience in Renewables l EBRD was an early mover in Renewable Energy (RE) in its countries of operations – hundreds of projects screened, dozens analysed, many rejected, but several successful transactions l Extensive knowledge of the market and main players l Early and steep learning curve l Knowledge of RE regulation – As an equity investor in and lender to RE projects, EBRD understands the importance of legal & regulatory arrangements in this sector 5

Experience in Renewables l EBRD signed – In 2010 € 220 m for 6 Experience in Renewables l EBRD signed – In 2010 € 220 m for 6 RE deals with project value of € 820 m Renewable Energy financing by geography (2009 -2010) – In 2009 € 186 m for 6 RE deals with project value of € 540 m – 2011 YTD € 311 m of financing for 6 RE deals with potentially project value of € 700 m l l EBRD has been most active in projects in Poland, Hungary, Bulgaria and Turkey Source: EBRD, Unaudited data as at 31 December 2010 Strong pipeline of projects in Romania, Georgia, Poland, Bulgaria and Turkey 6

Regulatory Certainty is Key! l l l Renewable Energy technologies have been moving down Regulatory Certainty is Key! l l l Renewable Energy technologies have been moving down a steep cost curve Economic support is an interim solution for RE, not expected forever l l Yet most projects today still require financial support mechanisms l – Renewables projects are capital intensive and have long asset lives (often 20+ years) – Therefore, the assets in question require long-term regulatory certainty to attract financing 7 The Renewable Energy sector is unique as it is policy-driven Investors therefore face regulatory risk for debt repayment and equity return This does not mean regulatory frameworks should never be amended: – But should not be changed retroactively to existing projects – Investors will require stability in the level of support available from the time of investment

Regulatory Risk – the EU Experience l l The European Union has ambitious 20/20/20 Regulatory Risk – the EU Experience l l The European Union has ambitious 20/20/20 targets, that require large capacity increases in Renewable Energy (20% reduction in GHG, 20% of energy in EU from RE, and 20% reduction in primary energy us through energy efficiency) The countries most likely to meet those targets (e. g. Germany) are those that have created a stable, predictable investment climate – Numerous examples of retroactive tariff cuts in Europe (see Czech and Spanish solar PV) have undermined the credibility of policy support to the sector in the eyes of investors – Certain infrastructure funds stopped investing in Renewables – Bank financing for projects dried up while existing policies were revised l Regulatory certainty is just as important as the chosen instrument itself! 8

Sustainable Policy Instruments l l Kazakhstan is moving towards implementation of feed-in-tariff There is Sustainable Policy Instruments l l Kazakhstan is moving towards implementation of feed-in-tariff There is a trade-off in setting the level of economic support for Renewables projects – If level of support is too low (e. g. feed-in-tariff, Green Certificate price) investment will not take place – If level of support is too high, the country will attract opportunistic investors seeking high returns, facilitating unsustainable bubble in the sector – Getting the level of support right is important (EBRD is assisting through Technical Cooperation) 9

Transparent & Predictable Framework l We can distinguish between (at least) two phases in Transparent & Predictable Framework l We can distinguish between (at least) two phases in renewable project life: (i) Construction / operation phase, and (ii) Development phase – In the Development phase transparency and predictability in the permitting process is crucial – Several permits are required in most jurisdictions as Renewable Energy development is more complicated than e. g. real estate : it involves high structures, grid connection often in environmentally sensitive areas – For foreign investors it is important to understand what permits and approvals will be required by what authority at what time l e. g. aviation authorities (due to height of structures), Ministry of Defence (wind farm impact on radar), environmental authorities – Complex legal frameworks are one reason why development phase is usually undertaken by local developers, rather than foreign companies 10

Example of Natural Resources l Kazakhstan was successful in establishing a sustainable regulatory framework Example of Natural Resources l Kazakhstan was successful in establishing a sustainable regulatory framework in the Natural Resources sector – Limited restrictions on ownership of subsoil assets and a predictable tax regime have attracted significant foreign investment – Transparency was enhanced by the implementation of EITI principles by oil & gas operators and more recently in mining – Priorities was put on the development of local content l EBRD is supporting efforts to improve further regulation through – Technical Cooperation funds to improve Health, Safety and Environmental standards in mining and reduce accidents in mines – Cooperation with the Government to develop emergency response capacity in the Caspian Sea and enhance co-ordination with neighbouring countries 11

Conclusion Strategic Priorities for Kazakhstan l l l Kazakhstan is making good progress in Conclusion Strategic Priorities for Kazakhstan l l l Kazakhstan is making good progress in developing a comprehensive Renewable Energy strategy and has significant potential across diverse Renewable Energies Through Technical Cooperation EBRD has supported development of Renewable Energy legislation in Kazakhstan: review of primary legislation will pave the way for feed-in-tariff to be implemented by yearend 2011 Going forward, key themes will include: – Searching for an adequate and yet sustainable level of economic support – Promoting policy / regulatory certainty – Ensuring transparency & predictability in the legal framework to facilitate the development phase 12

Case Studies Case Studies

Margonin wind farm - Poland l l In 2010 EBRD financed the 120 MW Margonin wind farm - Poland l l In 2010 EBRD financed the 120 MW Margonin wind farm, the largest operational wind farm in Poland Facility Details Borrower Relax Wind Park I sp. zo. o. Sponsor EDPR First wind farm in CEE to be financed on a limited recourse basis without a long-term, fixed-price arrangement for electricity sales. Lenders - EBRD: € 45 m - EIB: € 45 m - Commercial Banks: € 45 m Total debt size of PLN 535 m (€ 135 m equivalent) financed by EBRD, EIB and commercial banks, including Bank Millennium S. A. , BESI and Unicredit’s Pekao Structure - Project finance - Without long-term fixed-price sales contract for electricity Margonin is controlled by EDP Renovaveis, the world’s 3 rd largest onshore wind farm operator 14

Rotor Wind Farm - Turkey l l l The EBRD signed its first Turkish Rotor Wind Farm - Turkey l l l The EBRD signed its first Turkish deal in May 2009 after launching operations there in October 2008 The Bank is lending € 45 m for the financing of Rotor Wind Farm, which will be one of the largest wind farms in Turkey (135 MW) The total investment cost is estimated to be > € 200 m, including € 70 -75 m of Sponsor equity Facility Details Borrower Rotor Elektrik Uretim AS Sponsor Zorlu Enerji Lenders - EBRD: € 45 m - IFC: € 55 m - EIB: € 30 m Awarded European Onshore Wind Deal of the Year 2009 by Project Finance Magazine Tenor - IFC, EBRD: 12 years + 1 year grace - EIB: 10 years +1 year grace Progressed from EBRD initial approval to signing in four months Structure - Project finance - EIB loan guarantees from HSBC Bank plc and Deniz. Bank A. S. 15

Saturn Biomass - Poland l l The Bank financed the first large scale biomass Saturn Biomass - Poland l l The Bank financed the first large scale biomass fired power plant owned by a local investor in Poland The CHP facility provides heat and energy to Mondi Swiecie, the largest Polish paper producer, and operates under a long-term off-take agreement The transaction was structured as project finance exceeding € 100 m and was successfully closed despite the financial turmoil Three month lead time: - Initial approval May 2009 - Signing August 2009 Facility Details Borrower Saturn Management Sponsor Polish Energy Partner Lenders - EBRD: € 30 m - Commercial Banks: € 56 m Tenor Structure 16 - EBRD: 8. 5 years - Commercial Tranche 6. 5 years - Project finance - Very strong off-take contract with Mondi Swiecie

Thank you Riccardo Puliti Managing Director Energy & Natural Resources Email: pulitir@ebrd. com 17 Thank you Riccardo Puliti Managing Director Energy & Natural Resources Email: [email protected] com 17