13 May 2003

Financing Renewable Energy ProjectsFinancing Renewable Energy Projects

Jonathan Johns, PartnerErnst & Young Renewable Energy GroupJonathan Johns, PartnerErnst & Young Renewable Energy Group

Broadwalk House, Southernhay WestExeter EX1 1LF Tel +44 (0) 1392 284300Fax +44 (0) 1392 284302e-mail jjohns@uk.ey.com

0

5

10

15

20

25

30

35

40

45

Germ

any

UKIta

ly

France

Spain

Sweden

Denm

ark

Nether

lands

Greec

e

Finla

nd

Austria

Belgiu

m

Irela

nd

Luxem

bourg

Portugal

TW

h

RE requirement to 2010 (TWh)

Source: EU Directive 2001/77/EC

Current Policy in EuropeCurrent Policy in Europe

–EU Directive 2001/77/EC makes Europe the most attractive market for RE globally

–Green electricity contribution to total electric generation to increase from 14% (2000) to 22% by 2012

–E.g., if all wind, circa 70,000MW required by 2010

–Germany, UK and Italy have the highest TWh requirement to 2010

–Indicative targets on nation states, with freedom to implement their own support mechanism

–Harmonisation acknowledged, subject to a 7-year transitory period (will it happen?)

–EU Directive 2001/77/EC makes Europe the most attractive market for RE globally

–Green electricity contribution to total electric generation to increase from 14% (2000) to 22% by 2012

–E.g., if all wind, circa 70,000MW required by 2010

–Germany, UK and Italy have the highest TWh requirement to 2010

–Indicative targets on nation states, with freedom to implement their own support mechanism

–Harmonisation acknowledged, subject to a 7-year transitory period (will it happen?)

Support Mechanisms Vary ConsiderablySupport Mechanisms Vary Considerably

Source: Ernst & Young, European Survey, 2002

Regime Country

TariffsFixed price: Feed-in rates Denmark, France, Germany, Greece, Portugal, Spain

Fixed price: Competitive tendering France (old system may be used for offshore wind), Ireland,

UK (old system)

Premium mechanisms Finland, Spain (optional), Sweden, Netherlands

Green Certificates mechanisms Existing in Italy, Netherlands, UK and imminent in Norway,

Sweden and Denmark

Net meteringDenmark, Netherlands

Emissions tradingNetherlands, UK

Tax incentivesDenmark, France, Germany, Greece, Ireland (withdrawn),

Italy, Netherlands, Norway, Spain, Sweden, UK

GrantsFinland, Greece, Italy, Norway, Poland, Sweden, UK

Soft loansGermany, Greece, Netherlands, Poland, Portugal, Spain

Onshore Wind TariffsOnshore Wind Tariffs

100%100%

116%116%

100%100%

116%116%

92%92%

116%116%

100%100%

100%100%

116%116%

116%116%

Onshore Wind

Power Factor

compared to

Germany

Onshore Wind

Power Factor

compared to

Germany15-Year PPA Projections for Onshore WindErnst & Young - December 2002

0

1

2

3

4

5

6

7

8

9

10

0 1 2 3 4 5 6 7 8 9 10Maximum Price (€c/kWh)[ ] indicates under review

Min

imum

Pri

ce (

€c/k

Wh)

[Denmark]

France

Germany

Greece

Ireland

Italy

[Netherlands]

Portugal

Spain

[Sweden]

UK

UK

F

[NL]DE

IT

IR

SP

GR

[DK]

[SW]

PT

Indicates price pressure from electricity market deregulationIndicates price movement associated with PPA structure

100%100%

Source: Ernst & Young

Known Tariffs

E&Y’s RE Country Attractiveness IndicesE&Y’s RE Country Attractiveness IndicesErnst & Young’s RE Country Attractiveness Indices provide ratings for national renewable infrastructures and their suitability for individual technologies. The indices are:-

– Forward looking, providing scores out of 100

– Updated on a quarterly basis

Regulatory Infrastructure Index

An assessment of the General Regulatory Infrastructure for Renewable Energy. On a weighted basis, the index considers:-

– Electricity market regulatory risk

– Planning and grid connection issues

– Tax climate

– Grant / soft loan availability

This index excludes tariffs as they are often resource specific

All Renewables Index

A combination of the Regulatory Infrastructure Index and each Renewable Energy Resource Index (see next slide). The specific weightings are:

– Regulatory Infrastructure Index – 38%

– Wind Index – 47%

– Solar Index – 5%

– Biomass and Other Index – 10%

Provides an overall score for all Renewable Energy technologies. Attractiveness will vary with specific sponsor / financier requirements and tailor made studies can be provided.

Ernst & Young’s RE Country Attractiveness Indices provide ratings for national renewable infrastructures and their suitability for individual technologies. The indices are:-

– Forward looking, providing scores out of 100

– Updated on a quarterly basis

Regulatory Infrastructure Index

An assessment of the General Regulatory Infrastructure for Renewable Energy. On a weighted basis, the index considers:-

– Electricity market regulatory risk

– Planning and grid connection issues

– Tax climate

– Grant / soft loan availability

This index excludes tariffs as they are often resource specific

All Renewables Index

A combination of the Regulatory Infrastructure Index and each Renewable Energy Resource Index (see next slide). The specific weightings are:

– Regulatory Infrastructure Index – 38%

– Wind Index – 47%

– Solar Index – 5%

– Biomass and Other Index – 10%

Provides an overall score for all Renewable Energy technologies. Attractiveness will vary with specific sponsor / financier requirements and tailor made studies can be provided.

© Copyright Source: Ernst & Young

6 January 2003, subject to update

Country Regulatory

Infrastructure

Index

All

Renewables

Index

Germany 61 73

Spain 64 73

UK 64 72

Italy 63 64

Greece 60 59

France 41 59

Portugal 47 57

Sweden 57 55

Ireland 51 53

Denmark 54 53

Netherlands 40 52

Norway 55 46

Belgium 48 43

Austria 44 38

E&Y’s Country Attractiveness IndexE&Y’s Country Attractiveness IndexResource Attractiveness Indices

A resource specific assessment for

each country of the following

weighted factors:

– Power offtake attractiveness

– Market growth potential

– Current installed base

– Resource quality

which when combined with the

Regulatory Infrastructure Index (38%

weighting) shows the attractiveness of

a country for a particular technology

Other RE technologies include small

hydro, landfill gas, wave tidal and

geothermal.

Resource Attractiveness Indices

A resource specific assessment for

each country of the following

weighted factors:

– Power offtake attractiveness

– Market growth potential

– Current installed base

– Resource quality

which when combined with the

Regulatory Infrastructure Index (38%

weighting) shows the attractiveness of

a country for a particular technology

Other RE technologies include small

hydro, landfill gas, wave tidal and

geothermal.

© Copyright Source: Ernst & Young

6 January 2003, subject to update

Country

Attractiveness

Wind

Attractiveness

Index

Solar

Attractiveness

Index

Biomass and Other

R E Attractiveness

Index

Germany 76 70 62

Spain 75 71 63

UK 79 42 51

Italy 67 73 50

Greece 64 55 39

France 60 60 50

Portugal 59 52 51

Sweden 56 39 61

Ireland 58 32 40

Denmark 57 40 43

Netherlands 55 50 43

Norway 46 34 54

Belgium 46 36 37

Austria 36 42 47

Key Questions for Equity StakeholdersKey Questions for Equity Stakeholders

• Does the project reinforce / extend core strengths, skills and markets?

• Is it deliverable in an acceptable timescale?

• Does it develop a new technology that can be proven and will it transform the cost base for the industry?

• Does it provide purchasing power for existing technologies?

• Does the project reinforce / extend core strengths, skills and markets?

• Is it deliverable in an acceptable timescale?

• Does it develop a new technology that can be proven and will it transform the cost base for the industry?

• Does it provide purchasing power for existing technologies?

• Does it enhance the carbon portfolio?

• Does it enhance the carbon portfolio?

Most importantly:

• Is there low PPA risk?

• Does the cash flow allow high debt leverage?

• Does the cash flow deliver the required project hurdle rate?

• Can it be refinanced for profit?

Most importantly:

• Is there low PPA risk?

• Does the cash flow allow high debt leverage?

• Does the cash flow deliver the required project hurdle rate?

• Can it be refinanced for profit?

Typical Objectives of Equity HoldersTypical Objectives of Equity Holders

Technology provider Exploitation of technology, probable float (ownership of projects only for track record purposes).

Small scale private, individual or community vehicle

Involvement in green based vehicle over long term, often investing in specific local projects. Often tax financed.

Entrepreneurial developer and possibly part owner

Maximise fees through repeated project origination, development and on sale: may retain stake in projects.

Renewable energy specialist developer

Become a large scale player using third party equity and debt (often using tax based structures). Probable multi-territory operation. Possible float.

Utilities and other large corporate seeking diversification

Ownership or control of large portfolio of green electricity usually on a market entry basis. In a market based environment, may only want green certificates.

Financial investor Predictable annuity type long term earnings streams.

Tax based finances Requires physical ownership and legal ownership of assets in return for low cost of equity (typically 10-12%).

Private equity Prefer a “Buy and Build” and refinance approach with short-term exit.

Principal capital Provision of integrated debt and equity packages using securitisation as a possible process of exit.

Investor Type Objectives

Equity Risk Return RequirementsEquity Risk Return Requirements

Investor Type Attitude to risk Return requirement

Technology provider Averse to resource and permitting risk, but overspend to prove technology tolerated

Low to medium (on project alone)

Small scale private, individual or community vehicle

Averse to technology and O&M riskAbove savings alternative, provided tax breaks available

Entrepreneurial developer and possibly part owner

Focused on taking and managing planning permitting and project assembly risk

Medium to high (once utility hurdle rate achieved)

Renewable energy specialist developer

Very focused on risk identification and mitigation, to allow non recourse finance and careful definition of returns

Medium to high

Utilities and other large corporate seeking diversification

Will take some early stage risk Medium (depending on synergies with own operators)

Financial investor Risk averse, post construction Medium

Tax based finances Risk averse post-construction Medium

Private equity Will take technology risk and/or buy and build High

Principal capital Tend to avoid development and construction risks High

Source of Finance: DebtSource of Finance: Debt

• Debt financing for wind projects is proven, with an increasing number of players competing for market share:

• Traditional lenders to RE

• Traditional lenders to power market

• New entrants to RE

• Project risks are well understood

• Credit enhancement products exists:

• Wind derivatives

• Extended turbine warranties

• Insurance products

• Debt financing for wind projects is proven, with an increasing number of players competing for market share:

• Traditional lenders to RE

• Traditional lenders to power market

• New entrants to RE

• Project risks are well understood

• Credit enhancement products exists:

• Wind derivatives

• Extended turbine warranties

• Insurance products

• Umbrella facilities are commonly used to obtain portfolio financing

• Tax based debt

• Construction finance is available.

• Umbrella facilities are commonly used to obtain portfolio financing

• Tax based debt

• Construction finance is available.

Other technologies can require strong partners and covenants

How Banks View Technologies How Banks View Technologies O

nsho

re W

ind

Off

hore

Win

d

Bio

mas

s

Wav

e

Tida

l0.00

0.50

1.00

1.50

2.00

2.50

3.00 • Independent resource assessments are key

• Onshore wind is viewed as an established commercial energy source

• Offshore wind is still ranked ahead of conventional Biomass

• Banks consider the strength of suppliers’ warranties and the actual performance of technologies over a period of time, together with scale up and system integration risks

• All cashflows are sensitised to ensure that key cover ratios are maintained

• Independent resource assessments are key

• Onshore wind is viewed as an established commercial energy source

• Offshore wind is still ranked ahead of conventional Biomass

• Banks consider the strength of suppliers’ warranties and the actual performance of technologies over a period of time, together with scale up and system integration risks

• All cashflows are sensitised to ensure that key cover ratios are maintained

Source: Ernst & Young - Bank Survey, 2002

Interviews were conducted with major international banks with the objective of establishing the banking sectors’ attitude to various types of renewable energy technologies relative to offshore wind, jurisdictional preferences for offshore wind projects, manufacturer preferences, attitude to various risks (permitting, construction, technology, merchant). Responses were standardised on the scale of 1 (least) to 3 (most).

Indicative PF Debt Terms for Onshore WindIndicative PF Debt Terms for Onshore Wind

– Gearing: 75% to 85% (and higher) - of which mezz of 10% to 20%

– Tenor: 10 to 13 years

– Arrangement fee: 1 to 2%

– Commitment fee: 0.4% to 1.0%

– Admin fee: Varies

– Margin: 1.3% to 2.0%

– DSCR: 1.25 to 1.40

– LLCR: 1.25 to 1.50

– DSRA: 6 months

– Gearing: 75% to 85% (and higher) - of which mezz of 10% to 20%

– Tenor: 10 to 13 years

– Arrangement fee: 1 to 2%

– Commitment fee: 0.4% to 1.0%

– Admin fee: Varies

– Margin: 1.3% to 2.0%

– DSCR: 1.25 to 1.40

– LLCR: 1.25 to 1.50

– DSRA: 6 months

– Tendering procedures produce very different results

– Quasi merchant plant financings have been achieved

– Strong PPAs achieve much better results

– Tax based financing should always be considered

– Tendering procedures produce very different results

– Quasi merchant plant financings have been achieved

– Strong PPAs achieve much better results

– Tax based financing should always be considered

The cash flows of the particular project and the structuring techniques employed have a fundamental effect on the terms and the value achieved by stakeholders

Technology Risk & RewardsTechnology Risk & Rewards

• The greater the risk, the greater the requirement for capital grants, other support mechanisms and the presence of a strong equity partner with either explicit or implicit support

• Onshore wind and small hydro are clear winners

• The greater the risk, the greater the requirement for capital grants, other support mechanisms and the presence of a strong equity partner with either explicit or implicit support

• Onshore wind and small hydro are clear winners

Solar

Small hydro

Small Wind Small Hydro

CCGT EfW

Onshore Wind Landfill Gas Large Hydro

Biomass (Gasification) Offshore Wind

Gilts 0

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Biomass (Pyrolysis)

The position in IrelandThe position in Ireland• Merchant financing of wind projects is possible if:-

– Integrated business with established customer base

– Carefully constructed portfolio

– Well structured financing

• Key advantages for Ireland – priority of despatch and lack of general capacity in power market

• The Airtricity model:

– Quote from Fintan Whelan, Airtricity’s Corporate Finance Manager

“ Working with Ernst & Young’s Renewable Energy Team, we were able to

demonstrate to debt providers that a more market based approach to renewable

energy development was possible, and that project finance could be used in these

circumstances. The great benefit for Airtricity has been to remove the risk of stop-

start governmental support, and without losing the ability to project finance our wind

farms.” (Source: Wind Directions January 2003)

• AER’s bring their own opportunities (and issues)

• Merchant financing of wind projects is possible if:-

– Integrated business with established customer base

– Carefully constructed portfolio

– Well structured financing

• Key advantages for Ireland – priority of despatch and lack of general capacity in power market

• The Airtricity model:

– Quote from Fintan Whelan, Airtricity’s Corporate Finance Manager

“ Working with Ernst & Young’s Renewable Energy Team, we were able to

demonstrate to debt providers that a more market based approach to renewable

energy development was possible, and that project finance could be used in these

circumstances. The great benefit for Airtricity has been to remove the risk of stop-

start governmental support, and without losing the ability to project finance our wind

farms.” (Source: Wind Directions January 2003)

• AER’s bring their own opportunities (and issues)

Ernst & Young came No1 for Project Finance in EMEA in 2001

13 May 2003

Financing Windfarm ProjectsFinancing Windfarm Projects

Peter McArdle, ManagerErnst & Young - Project Finance/PPPPeter McArdle, ManagerErnst & Young - Project Finance/PPP

Ernst & Young House, Harcourt CentreHarcourt Street, Dublin 2 Tel +353 (0) 1 4750555Fax +353 (0) 1 4750590e-mail peter.mcardle@ie.ey.com

AER V and AER VI SummaryAER V and AER VI Summary

AER V CAP

Price

AER VI CAP Price

Small Scale 5.297 eurocents

per kwh

5.742 eurocents

per kwh

Large Scale 4.812 eurocents

per kwh

5.216 eurocents

per kwh

CPI Applicable 25% of Cap

Price

100% of Cap Price

No. of Successful

Applicants

40 ?

No. of Projects Built

To Date

4 ?

Financing Issues Facing DevelopersFinancing Issues Facing Developers

Build Cost

Equity

Build Methodology

Warranty Arrangements

Operation Arrangements

Build Cost

Equity

Build Methodology

Warranty Arrangements

Operation Arrangements

Financing Issues Facing Developers contd.Financing Issues Facing Developers contd.

Bank Financing Terms

Due Diligence- Technical- Financial- Legal

Bank Financing Terms

Due Diligence- Technical- Financial- Legal

Financing Issues Facing Developers contd.Financing Issues Facing Developers contd.

Compliance to Planning Conditions

Insurances

Timeline

Compliance to Planning Conditions

Insurances

Timeline