The Need for Robust Legal Regulatory Frameworks

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 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 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

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 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 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 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 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 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 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 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

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 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 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