renewable energy support schemes and institutional...

Clean Energy Partners

Renewable Energy Support Schemes and Institutional Investments


Table of Contents

1. The BNP Paribas Investment Partners Clean Energy Fund

2. The Context of Renewable Energy Support Schemes

3. Institutional Investments in Renewable Energy Generation Assets

4. Support Schemes Overview

5. Assessment of Renewable Energy Support in the UK

2 | 09/06/2011 |


1. THE BNP PARIBAS CLEAN ENERGY FUND

3 | 09/06/2011 |


Different Ways to Invest in Clean Energy

4

● Listed equities─ Clean Tech ─ Clean resources─ Utilities─ Listed Private

equity● Mutual funds

Typically are:● Mature companies● Correlated to equity

markets● Have high P/Es

● Venture capital─ Concept stage companies / new and unproven technology─ Characterised by high volatility and varying success rates

● Growth / Expansion capital─ Companies with revenue streams in need of capital to expand

capacity, enter new markets, etc─ Development companies with ambition to grow pipeline

● Buyouts─ Large/mostly mature companies with high debt capacity in need of

strategic change and restructuring─ Few pure play opportunities in Clean energy

● Infrastructure─ Invest in generation assets that create electricity using proven

technologies─ Predictable and stable cash flows Solid risk/return profile

The Clean Energy Fund will primarily invest directly into clean power generation assets

Public Equities Private Equity

| 06/05/2011 |


Targeted Generation Technologies

5

● Annual growth rate 14%● Individual projects typically between 20-

50 MW● European core of experience● Main growth markets W. Europe

Wind Power

Small scale Hydro

● Individual projects <30MW● Proven technology● Niche growth opportunities● New construction in CEE● Revamp in CEE● Unique engineering for each project

Biomass

● Individual projects up to 50MW● Combination of technologies● Fuel supply creates added risk● Value from steady supply of power● Opportunities from growth in Europe (UK)

● Annual growth rate 25%● Solar PV ● Individual projects up to 20MW (PV)● Market opportunities in Southern Europe

and France

Solar

| 06/05/2011 |


Clean Energy Infrastructure InvestmentsFocus on Construction and Operating Assets

6

Acquisition Strategy

High Risk

Low RiskSpeculative / High Return

Conservative Return

Investment Focus

* For illustrative purposes only

● Feasibility Studies● Land Acquisition● Engineering &

Environmental Impact

● Full Permitting & PPA

Development Stage(6 – 48 Months)

● Plant Operation

Operations Stage(Ongoing)● Engage EPC Contractor

● Construction● Connection to Grid

Construction Stage(6 – 18 Months)

Selective basis

| 06/05/2011 |


2. THE CONTEXT OF RE SUPPORT SCHEMES

7 | 09/06/2011 |


Power Markets – Pressing Issues● Prospective shortage of energy supply

● Rising energy costs

● Overall long-term supply security an issue

● Has implications affecting entire economies

● Resource sustainability normally overlooked

● Environmental costs only introduced by way of regulation

8 | 09/06/2011 |


Renewable Energy Policy in the Big Picture● Rationale in early days: Support of “green” technologies to reduce CO2 emissions

● Shift in public discourse– Focus on support of complementary technologies– Decreased dependency on fossil fuels– Biomass potentially a regulator’s favourite

● “Green” energy to take on a proper role in energy policy

● Cost convergence of conventional and “green” energy technology expected to reduce level of future RE support requirement

9 | 09/06/2011 |


Renewable Energy Strategy in the UK● Onshore and offshore wind

● Biomass

● Landfill gas

● Hydropower

● Solar photovoltaics probably to play a minor role

10 | 09/06/2011 |


3. INSTITUTIONAL INVESTMENTS

11 | 09/06/2011 |


Institutional Investments in RE Generation Assets● General objectives

– Stable returns– Cash yield– Achieve scale to deploy large chunks of money– Sensible risk profile

● General investment characteristics– High capital intensity– Long project lifetime– Need for project finance

12 | 09/06/2011 |


Key Areas of Risk (Upfront)● Project Development

– Planning consent and possible challenges– Grid connection– Tariff approval procedure

● Construction– Overall risk allocation– Counterparties

13 | 09/06/2011 |


Key Areas of Risk (Ongoing)● Revenues

– Tariff / price volatility (regulation, market forces)– Generation volatility (technical, availability of fuel or resource)

● Expenses– Fuel costs (if any)– Operation and maintenance and lifecycle costs– Taxation (legislation)

14 | 09/06/2011 |


Assessment of Cash Flow Profile● Cash inflows

– Yield assessment to estimate annual production over project lifetime– Projected tariff and power price estimates

● Cash outflows– Budget for O&M services, fuel (if any), management, insurance and lifecycle costs– Taxation– Debt service

● Returns– Stable, reasonably predictable yield profile– Drives debt sizing and repayment and feeds into asset pricing

15 | 09/06/2011 |


Typical Cash Flow Profile

16 | 09/06/2011 |

Operation & Maintenance Repairs Technical & Commercial Management

Insurance Site Lease Expenses Other Expenses

Taxes Paid Total Senior Debt Service Subordinated Debt Service

Dividends / Equity Repayment Cash Increase Transfer to DSRA

Movement in Working Capital Other Cash Movements Total Turnover

Turnover (incl. Cash Movements)


4. SUPPORT SCHEMES OVERVIEW

17 | 09/06/2011 |


Feed-In Tariffs● Guaranteed for a period sufficient to recover investment

● Can be changed, reflecting changes in investment cost structures

● Changes to apply to new investments only

● Different support level across technologies, reflecting differences in cost structures

● Tariffs may vary according to resource availability on sites (stepped feed-in tariff)

18 | 09/06/2011 |


Renewable Obligation Certificate Systems● Offtake by means of power purchase agreements (PPAs)

● PPAs with duration of 10-15 years available

● PPA’s wrap the whole set of products, incl. certificates, into one bundle

● Long-term (at least 20 years) certificate targets

● Duration of support scheme

● Gradually increasing quota to maintain security of demand

● Differentiation of certificate allocation across technologies

19 | 09/06/2011 |


Investment Subsidies● Provide upfront investment support

● Level of support as a percentage of investment

● Differentiating support level across technologies

20 | 09/06/2011 |


5. ASSESSMENT OF RE SUPPORT IN THE UK

21 | 09/06/2011 |


Criteria from an Investor’s Perspective● Continuity: Long-term stability of the scheme from an investment point of view

● Profitability: Scheme’s support level appropriate to generate expected returns

● Scale: Key to attract institutional investments

● Political and Implementation Risks– Implementation: Well designed or prone to reversal or alteration?– Counterparty risk: Who is to pay the bill?– Difference to market price: Incentive to “break” the contract?– Public acceptance

22 | 09/06/2011 |


Other Considerations● Attract sufficient capital to promote sector development

● Encourage research and development to reduce manufacturing costs

● Create a market to increase competition among manufacturers

● Rising energy costs help reduce overall support need

23 | 09/06/2011 |


Biomass(w/o CHP)

Solar Photovoltaics

Onshore WindBiomass (CHP)

Historical Impact of Ongoing Support Schemes

24 | 09/06/2011 |

Cumulative Installed Capacity

Profitability

Bubble size indicates average size of individual investmentRanges indicate return corridors

For Illustration Purposes Only

● Solar PV: Small investments and tariff risk pose problems

● Biomass: Sizeable investments but challenging project economics

● Wind: Decent investment size and well understood technology


Suitability of Upfront Support Schemes● Reduce overall financing requirements

● Do not address long-term volatility in operating cash flows

● Merely help reduce upfront costs

● More suitable to late-stage maturing technologies

25 | 09/06/2011 |


Conclusions● For proven technologies, ongoing support schemes preferable

● Ceteris paribus, feed-in tariffs preferable over certificates– One remuneration variable per MWh– Lower forecast volatility in revenue estimates– Helps in raising debt and narrows down valuation corridors

● Investment subsidies– Have not helped to proliferate RE in the UK as intended– Did not prove successful as technology differentiator when ROCs were introduced– Unsuitable to mitigate risks associated with long-term asset life

26 | 09/06/2011 |


Thank you for your attention.

27 | 09/06/2011 |

renewable energy support schemes and institutional...

Documents