Financing the renewable energy supply chain. Steve Lewis Ernst & Young Orenda Corporate Finance Inc 4 May 2011

Transcription

1 Financing the renewable energy supply chain Steve Lewis Ernst & Young Orenda Corporate Finance Inc 4 May 2011

2 Agenda Section 1 Section 2 Section 3 Section 4 Section 5 Appendix 1 Introduction to the team The Green Energy Act Financing supply chain build-out Government support Contact details and credentials Detailed domestic content requirements Page 2

3 Section 1 Introduction to the team

4 Ernst & Young s renewable energy team has been building for 15 years evolving to individual technology sector teams, solar being a key focus Dedicated renewable energy team based in Toronto servicing Canada and the North American market, backed by a global centre Dedicated team Global reach & knowledge base Global Centre of Knowledge based in the UK, with a dedicated team of 65 renewable energy specialists Ernst & Young renewable energy team Experience based on all renewable energy technologies, across all major markets globally, with a dedicated solar team Industry wide experience, solar specific focus Advised across the industry and beyond Worked with stakeholders across the renewable energy industry and beyond Page 4

5 Section 2 The Green Energy Act

6 The Green Energy Act transcended from energy to industrial policy through domestic content requirements for projects Broadly: The Green Energy Act intended to create 50,000 green collar jobs in a period of 3 years Keen to stimulate domestic and foreign investment in infrastructure and skills Aim to diversify Ontario s manufacturing employment Mechanism to achieve this is domestic content Domestic content: Solar 50% of designated activities currently sourced within Ontario 60% from 1 January 2011 Example opportunities in solar Silicon refining Ingot casting and wafer cutting Cell production Module manufacture Inverter production Page 6

7 Section 3 Financing supply chain build-out

8 As hoped for by the Ontario government, the global solar supply chains want a piece of the Ontario market opportunities exist for domestic businesses Routes to the Ontario market: Examples of risks/issues to new supply chain entrants: Acquire existing (unused) facilities Green field development Partner a local manufactu rer from a relevant sector and transfer skills Manufacturing expertise Access to distribution channels Product track record Product warranty Partner a local manufacturer in the wind or solar sector Page 8

9 Financing within the solar supply chain strongly resembles other supply chain ventures Structures that have been deployed Stand-alone routes Equity Private Public Mezzanine debt Subordinated debt Senior debt Asset based Cash flow Participation routes Joint-venture Alliance Strategic partnership Vendor finance Page 9

10 Capital Structure Capital structure refers to the way a corporation finances its assets through some combination of debt and equity It represents major sources of external funds derived from financing It is typically measured by the debt-to-capitalization (D/C) ratio which indicates the proportion of debt and equity in the firm Page 10

11 A Key Decision The capital structure decision is one of the most important decisions a company can make The decision of how much debt and equity to raise is made on the basis of achieving the highest rate of return for the lowest cost There must be a balance between debt and equity Too much debt can increase the risk of the firm not being able to pay its creditors Page 11

12 Cost of Capital The cost of capital refers to the minimum rate of return that a firm must earn to cover the cost of doing business = VALUE Management s goal is to achieve the highest level of profitability from the assets while keeping the costs of financing as low as possible It is also refers to the rate of return that a firm must pay investors to entice them to lend debt to the firm or invest in the firm s equity Page 12

13 Cost of Capital (cont d) The cost of capital varies based on the type of capital Pre-Tax Cost of Capital Senior Debt Traditional Asset Based Loans Second Lien Loans Subordinated Debt Equity 5% -7% Coupon only 5% -8% Coupon only 10% -15% Coupon only 18% -22% Coupon and warrants 25%+ Page 13

14 Factors Influencing Capital Structure Internal Factors: Size and nature of the business Regulatory environment Certainty of income Asset structure Age of the firm Level of control/ownership retention Future plans and growth prospects Cash flow generation capability Period and purpose of financing Page 14

15 Factors Influencing Capital Structure (cont d) External Factors: Capital market conditions Economic environment Nature of potential investors / lenders Statutory requirements Taxation policy Internal policies of financial institutions (i.e. hold limits) Cost of financing Seasonal variations Nature of competition Page 15

16 Section 4 Government support

17 Support exists from the Ontario government through non-sector specific programs The Next Generation of Jobs Fund Launched in March 2008 A five-year program Supporting job creation/retention in strategic areas renewable energy is one Jobs & Investment Program (J&IP) Within The Next Generation of Jobs Fund, J&IP supports business expansion or retention and attract foreign investment J&IP provides up to 15% of the total eligible costs of a Project J&IP priority investment targets are: Green auto research, parts production and assembly Clean fuels research, development and commercialization Environmental technologies, clean industries and bio-economy Anchor investments to support cluster development (including services sector) Case study for the solar sector: 6N Silicon, Vaughan Solar grade silicon production J&IP invested c.$8 million to support a $50 million expansion Created 84 new jobs and retained 16 existing jobs Page 17

18 Support exists from the Ontario government through non-sector specific programs The Advanced Manufacturing Investment Strategy Focus on keeping the highest valueadded manufacturing jobs Targeted at innovative activities in advanced manufacturing: New or advanced materials and products Advanced manufacturing processes Waste reduction or energy conservation Terms: Loan of up to 30% of eligible project costs (max $10 million) Provided at the province s cost of borrowing plus 1% Repayable loans are interest free for up to 5 years provided the firm meets milestones and performance targets: Cumulative job target (total facility employment over 5 years) Project investment commitment The loan must be secured and the principal repaid, but the terms are negotiable including term length (up to 10 years) Page 18

19 The previous programs have an element of research and development support, other programs focus specifically on the Green space Sustainable Development Technology Canada Aiming to foster technological solutions that address: Clean air, water or land Climate Change SD Tech Fund Intended to bridge the technology development and demonstration gap Sustainable Development Technology Canada (SDTC) operates: SD Tech Fund NextGen Biofuels Fund The SDTC funding for wind or solar supply chain development could be secured for development of new production techniques that enhance product efficiency or reduce cost Page 19

20 Section 5 Contact details and credentials

21 For further information and to discuss opportunities please contact: Steve Lewis Senior Vice President Mark Porter Senior Associate Direct: Ernst & Young OrendaInc. Cell: Bay Street, PO Box Toronto, Ontario, M5k 1J7 Direct: Ernst & Young OrendaInc. Cell: Bay Street, PO Box Toronto, Ontario, M5k 1J7 Page 21

22 EY is known for advising in the renewable energy space Canadian Solar Industries Association Solar Vision 2025 The Canadian Solar Industries Association ( CanSIA ) asked Ernst & Young to assist with their long-term vision document for the Canadian solar PV and solar thermal sectors. CanSIA engaged Ernst & Young based upon our understanding of the Canadian and provincial solar markets. Key benefits to the CanSIA Ernst & Young supported the development of the Solar Vision 2025 document, providing details of the resource opportunity in Canada, the benefits of solar PV and solar thermal, the business case for both technologies in Canada and what is required to realize CanSIA s vision. The document was designed to be a platform for stimulating ongoing discussions within the solar industries. Solar Vision 2025 included a specific case study review on the Ontario electricity and solar markets. This document can be accessed at Ontario solar PV developer (confidential) An Ontario solar PV developer sought to evaluate different project structures for investment, human capital resource allocation, forecast returns and overall project financial performance. Key benefits to the developer Ernst & Young developed a financial model specifically for our client to address their unique project sturcture needs and align with their business model. The development team provided training on the model, empowering our client to use this tool to win new business. The model development was enhanced with tax advice surrounding the most appropriate structures for each stream of business. Page 22

23 A very limited selection of our financing credentials Page 23

24 A very limited selection of our financing credentials (cont d) * Transaction services provided by a predecessor firm Page 24

25 Appendix 1 Domestic content requirements

26 Domestic content requirements: Solar PV >10kW (FIT program) # Designated activity % 1 Silicon that has been used as input to solar photovoltaic cells manufactured in an Ontario refinery 11% Silicon ingots and wafer, where silicon ingots have been cast in Ontario, and wafers have been cut from the casting by a saw in 2 Ontario 13% 3 The crystalline silicon solar photovoltaic cells, where their active photovoltaic layer(s) have been formed in Ontario 11% 4 Solar photovoltaic modules (i.e. panels), where the electrical connections between the solar cells have been made in Ontario, and the solar photovoltaic module materials have been encapsulated in Ontario 15% 5 Inverter, assembly, final wiring and testing has been done in Ontario 8% 6 Mounting systems, entire machining and assembly in Ontario 11% 7 Wiring and electrical hardware sourced from Ontario supplier 9% 8 Construction costs and onsite labour minimum 95% by Ontario residents 18% 9 Construction services including legal, technical and accounting minimum 95% Ontarians 4% Total 100% Level of requirement % Operational before 31 December % Operational after 31 December % Page 26

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