Financing Renewables EPG Summit, Prague 3 December 2012
The new paradigm This was then This is now Decarbonisation Value for money Ambitious goals Long-term policy GDP growth Market Policy Limited to no goals Radical policy shifts Negative / flat GDP Cheap capital Large volume available Finance Expensive capital Illiquidity The market needs long term policy visibility and stability to attract new forms of capital Page 2
Upward trend in global clean tech investments despite economic headwinds Global clean tech investments ($bn) 300 250 247 263 200 187 189 153 150 113 100 54 75 50 0 2004 2005 2006 2007 2008 2009 2010 2011 Other ($63bn) Wind ($72bn) Solar ($128bn) $263bn (2011) India 4% Other 23% China 17% USA 18% EU 38% 80 70 60 50 40 30 20 10 0 12 16 13 18 19 21 22 Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 33 26 28 33 46 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 34 Q1 08 47 41 41 Q2 08 Q3 08 Q4 08 25 Q1 09 45 45 42 48 49 56 Q2 09 Q3 09 Q4 09 Q1 10 Q2 10 Q3 10 64 Q4 10 52 Q1 11 73 71 Q2 11 Q3 11 58 Q4 11 48 Q1 12 60 Q2 12 Source: Bloomberg New Energy Finance - Note: Excludes corporate and government R&D, and small distributed capacity. Not adjusted for reinvested equity Page 3
Stable investments in early stage clean tech Co s despite exit challenges Global clean tech investments ($bn) 300 VC tech Infra 7 7 250 9 200 5 5 150 3 240 256 100 179 184 148 50 110 0 2006 2007 2008 2009 2010 2011 Average size of cleantech deal ($m) 20 16.6 15 15.2 14.3 10.2 12.5 9.8 10 10.2 5 0 2006 2007 2008 2009 2010 2011 1H'12 Amount raised in clean tech deals ($bn) 9 8 7 6 5 4 3 2 1 0 2.8 5.0 8.5 5.4 7.3 7.1 3.4 2006 2007 2008 2009 2010 2011 1H'12 Water Industry-focused Environment Energy/Electricity Generation Energy Storage Energy Efficiency Alternative Fuels Source: Bloomberg New Energy Finance - Note: Excludes corporate and government R&D, and small distributed capacity. Not adjusted for reinvested equity Page 4
USD/ MWh Towards economic maturity Levelised cost of energy 2012 ($/MWh) 900 800 700 600 500 400 300 200 100 0 Source: Bloomberg New Energy Finance - Note: Carbon forecasts from the Bloomberg New Energy Finance European Carbon Model with an average price to 2020 of $33/mtCO2. Coal and natural gas prices from the US Department of Energy EIA Annual Energy Outlook 2011 and internal forecasts. Page 5
USD/ MWh Towards economic maturity Levelised cost of energy 2012 ($/MWh) 900 800 700 600 500 400 300 R&D Early deployment Subsidised commercialisation Maturity $400/MWh 200 100 $200/MWh 0 Source: Bloomberg New Energy Finance - Note: Carbon forecasts from the Bloomberg New Energy Finance European Carbon Model with an average price to 2020 of $33/mtCO2. Coal and natural gas prices from the US Department of Energy EIA Annual Energy Outlook 2011 and internal forecasts. Page 6
Asset financing challenged by regulatory change and liquidity challenge Asset financing Private equity/venture capital Corporate debt IPO M&A 6 7 12 8 13 6 7 3 4 3 12 2 15 3 9 2 3 4 22 7 2 29 9 2 4 42 61 69 92 77 3 1 35 2005 2006 2007 2008 2009 2010 2011 2012 YTD Source: Bloomberg New Energy Finance - Note: Includes estimates for undisclosed deals; 2012 YTD figures through 30 August 2012 Page 7
F I N A N C I A L T R A D E Asset financing - Investor landscape Positioning within the project lifecycle Financial drivers Category Development Procurement Construction Early operation Long term operation Equity ticket Levered returns Asset financing Utility Any 10%+ Historically BS, but now PF Oil and gas Any 10-15% Traditionally BS but now PF IPP Any 15%+ PF Japanese Trading Houses 50m 10%+ PF Developers ( ) 50m+ 15%+ PF WTG ( ) ( ) 50m+ 15-20% PF Infrastructure contractors ( ) 100m+ 15-20% PF Private equity ( ) 50-200m 20-25%+ PF Sovereign Wealth Funds ( ) 250m+ 10-15%+ BS or PF Pension funds ( ) ( ) 50-200m c.10% PF Institutional investors ( ) 200m+ c.10% PF / IPO Debt provider ( ) 50m- 100m - - Page 8
F I N A N C I A L T R A D E Asset financing - Long-term hold Positioning within the project lifecycle Financial drivers Category Development Procurement Construction Early operation Long term operation Equity ticket Levered returns Asset financing Utility Any 10%+ Historically BS, but now PF Oil and gas Any 10-15% Traditionally BS but now PF IPP Any 15%+ PF Japanese Trading Houses 50m 10%+ PF Developers ( ) 50m+ 15%+ PF WTG ( ) ( ) 50m+ 15-20% PF Infrastructure contractors ( ) 100m+ 15-20% PF Private equity ( ) 50-200m 20-25%+ PF Sovereign Wealth Funds ( ) 250m+ 10-15%+ BS or PF Pension funds ( ) ( ) 50-200m c.10% PF Institutional investors ( ) 200m+ c.10% PF / IPO Debt provider ( ) 50m- 100m - - Page 9
F I N A N C I A L T R A D E Asset financing - De-risking development Positioning within the project lifecycle Financial drivers Category Development Procurement Construction Early operation Long term operation Equity ticket Levered returns Asset financing Utility Any 10%+ Historically BS, but now PF Oil and gas Any 10-15% Traditionally BS but now PF IPP Any 15%+ PF Japanese Trading Houses 50m 10%+ PF Developers ( ) 50m+ 15%+ PF WTG ( ) ( ) 50m+ 15-20% PF Infrastructure contractors ( ) 100m+ 15-20% PF Private equity ( ) 50-200m 20-25%+ PF Sovereign Wealth Funds ( ) 250m+ 10-15%+ BS or PF Pension funds ( ) ( ) 50-200m c.10% PF Institutional investors ( ) 200m+ c.10% PF / IPO Debt provider ( ) 50m- 100m - - Page 10
F I N A N C I A L T R A D E Asset financing - Seeking stable yield Positioning within the project lifecycle Financial drivers Category Development Procurement Construction Early operation Long term operation Equity ticket Levered returns Asset financing Utility Any 10%+ Historically BS, but now PF Oil and gas Any 10-15% Traditionally BS but now PF IPP Any 15%+ PF Japanese Trading Houses 50m 10%+ PF Developers ( ) 50m+ 15%+ PF WTG ( ) ( ) 50m+ 15-20% PF Infrastructure contractors ( ) 100m+ 15-20% PF Private equity ( ) 50-200m 20-25%+ PF Sovereign Wealth Funds ( ) 250m+ 10-15%+ BS or PF Pension funds ( ) ( ) 50-200m c.10% PF Institutional investors ( ) 200m+ c.10% PF / IPO Debt provider ( ) 50m- 100m - - Page 11
Trade - under credit pressure Credit ratings trajectory Top 11 integrated utilities plus DONG Energy The issue The issue Competing needs for capital Long-term PPA capitalised as debt (S&P) AA A+ A AA- AA- A Project finance loans consolidated as corporate debt Higher opportunity cost of capital A+ A- A- Next step Create liquidity to re-build balance sheet A BBB+ BBB Generate a profit by attracting low WACC into their portfolio (whilst avoiding LT liabilities) 2001 2009 2011 Fresh capital available from some European utilities and Asian IPPs Source: Standard & Poors Page 12
Financial - can Infra & PE funds validate the investment prognosis to their shareholders? Exit model for financial investors The issue The issue Trade Energy yield down 15-10% (wind) Banking covenants stretched (recapitalisation) Thin, highly volatile cash flows LT O&M? Operating portfolio Next step Secure exit at promised multiple to raise the next fund IPO Institutional Infra & PE who have taken development risks will be able to secure premium; others may not... Page 13
Debt - high margins, low liquidity 9 12 year Sterling swap rate 1 8 7 6 5 4 3 2 1 0 Jan-09 Jan-10 Jan-11 The issue The issue Basel III: cost is up, availability down Utility leverage impact from PPA accounting and loan consolidation Lack of capital market refinancing opportunities 12 year LIBOR swap rate Margin 8% 7% 6% 5% 4% 3% 2% 1% 10 year Euro swap rate 1 Next step Enable liquidity Increase availability of LT money Control margins 0% Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Lenders' margin 10 year sw ap rate ( ) Source: Bloomberg & Ernst & Young proprietary information Page 14
Solution 1 - Strategic procurement to secure financing through multi-lateral and ECAs Project financing for offshore wind (reliance on multi-laterals & ECAs Eq. Cont. KfW EIB Credit G Com. Bank Northwind Lincs Meerwind Global Tech I C-Power I, II & III Borkum West II Belwind C-Power I Princes Amalia 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Page 15
Solution 2 - Structure to attract institutional investors as debt and equity providers Large volumes but structuring issues Volumes ($bn) How can we turn a wind / solar investment into a rated financial instrument? Construction risk Technology risk O&M risk Resource risk (wind) Regulatory/political risk Asset management capabilities New structures, new business models Page 16
Solution 3 - Flex policy framework Provide long-term visibility (2030 Targets?) Manage cost reduction pathway Enable liquidity (Multi-laterals, ECAs) Implement capacity payments Ensure value for money through government-led procurement Page 17
Conclusions Strategic procurement / structuring critical to detract capital from alternatives Within reach of economic maturity, subsidiary regimes seek delivery certainty and value for money Traditional business models are being challenged Utilities => leverage expertise and flex financing strategy Funds => prove investment model Equipment & Service suppliers => cost vs. profit Institutional investors => knowledge curve Page 18
Ernst & Young has developed a unique Country Attractiveness Indices (CAI) The CAI publication In production since 2003 Produced quarterly Distributed to over 5,000 industry specialists and investors, as well being publically available online What is the CAI s purpose? Quantifies the attractiveness of a renewable energy market for investment Distinguishes by technology and country Increased from 25 to 30 countries in 2010 Increased from 30 to 40 countries in 2011 What is the investment horizon? Analysis considers a 5 year horizon www.ey.com/cai Page 19
Thank you