“Financing Renewable Energy in Emerging Markets – Opportunities & Approaches”

1. Workshop on Innovative Options for Financing the Development and Transfer of Technologies Montreal, 27-29 September 2004 “Financing Renewable Energy in Emerging Markets – Opportunities & Approaches” Frank Joshua Montreal, 28 September 2004

2. Contents • Investor Expectations in Emerging Markets • Returns on Investment & Impact of Carbon Finance • Assessing Risks & Rewards in Emerging Markets • Opportunities for Private Equity Funds & Debt Providers • Role of Climate Investment Partnership (“C.I.P.”)

3. 1 Investor Expectations in Emerging Markets

4. Rationale for Investing in Renewable Energy Projects in Emerging Markets • Emerging markets offer major opportunities for Renewable Energy projects • In the best markets (for example: China, India, Brazil, Chile, Mexico, Korea, Thailand, Philippines) common characteristics of good potential include: • Huge and growing energy demand (e.g. China recently announced that it plans to invest USD120 billion to double generation capacity by 2010) • Centralized power sector (need for re-organization) • Good wind speeds and/or small scale hydro resources • Healthy “start up” growth rates and returns • Increasing environmental awareness • Relevant national and/or local policies in place • Ability to utilize CDM benefits • Emerging markets have significant long term potential compared to North America and Europe • However, until recently, lack of reliable local developers, regulatory risk, and wind data risk have tended to depress investments.

5. Investor Expectations & Opportunity for Strong Emerging Market Returns • Equity investment IRR: • India 15 – 25% • China 10 – 15% • Korea 10 – 15% • Brazil 15 – 20% • Chile 10 – 15% • + 2.5 – 5% from carbon credits • Expected IRR of individual wind farms: +/- 15% + carbon + country risk premium • Expected IRR of Landfill gas: >15%, + carbon + country risk premium • Exit Strategy: Possible Sale of Equity to local utility or through IPO • If equity is sold after 3 – 5 years of operating history a significant capital gain can be made • IPOs of bundled RE projects have been successful in mature markets (Europe) but have yet to be tried in emerging markets

6. 2 Returns on Investment & Impact of Carbon Finance

7. Impact of Carbon Finance Carbon Finance Deal Structure Host Country Letter of Approval CF Permits, etc. ERPA ERs ER payment SPV Sponsor/ Project Financing Agreement Lenders Debt service Source: World Bank

8. Impact of Renewables Source: World Bank

9. Impact of Carbon Finance At $4/ ton CO2e Source: World Bank

10. Profitability of a Subset of CIP Projects Source: Climate Investment Partnership (CIP)

11. Impact of Carbon Finance • Increased cash flow boosts IRRs • ~0.5% to 2.5% for renewables/EE • 5-15% for CH4 • High quality cash flow reduces risk • OECD - sourced • $- or €- denominated • Investment-grade payer • Eliminate currency convertibility or transfer risk • Financial engineering helps access capital markets

12. 3 Assessing Risks & Rewards in Emerging Markets

13. Understanding Carbon Risk (1) • The GHG business involves many poorly understood but widely perceived risks: • Regulatory risk • Performance risk • Delivery risk • Counterparty Credit risk • Price risk • Etc. • Proposition: Investors’ inability to accurately assess “Carbon Risks & Rewards” will drive resources towards “Carbon Trading” instead of “Project Finance”

14. Understanding Carbon Risk (2) The Evidence: • Volume of carbon reductions traded since 2001 has doubled year-on-year to over 100 mtCO2e per year • Yet most carbon projects (CDM) have not achieved financial close. Why? Perceived Risks will: • Discourage investment in RE & GHG Projects by major financial institutions, and • Drive resources towards “Carbon Trading” instead of “Project Finance”… • Carbon is not their core business • Hedge trading via Forward Contracts with “payment-on-delivery” terms • Governments & Multilateral Financial Institutions as Investors (e.g. Dutch, UK, PCF, etc) • Missing: Investment Banks; Fund Managers; Debt Providers

15. Enabling Carbon-linked Project Finance • But as the GHG market matures “Carbon Procurement” will face supply constraints • And rising carbon prices • Companies and governments could face serious financial exposure • RE & CDM project developers need early upfront financing • In the form of Equity, Debt, & Mezzanine Finance, & Risk Mitigation • Carbon as Collateral: i.e. utilizing the market value of emission reductions to enable projects to proceed • Carbon as financial security (€, $, £) • Carbon as risk mitigation asset • Renewable Energy Certificates (RECs & ROCs)

16. 4 Opportunities for Private Equity Funds & Debt Providers

17. Attracting Private Equity & Debt Providers The Problem: • Strong market interest exists in emerging markets (private equity and debt) but bundling opportunities are lacking • Investors often lack resources to find, screen, and evaluate projects • And few RE & GHG projects are well structured from a technical, financial and risk point of view; hence access to project debt and equity is poor • Risk perceptions: Investors often see RE & GHG projects as combining: (i) a risky sectors with (ii) high risk markets & (iii) a risky commodity…

18. Opportunities for Private Equity Funds Solution: Renewable Energy Equity Funds • Create commercially attractive diversified investment opportunity by bundling replicable high quality projects • Stick to proven replicable cost competitive technologies, mainly on-grid, and mostly Wind Power, Hydro Power, and Landfill Gas Projects • Work with strong developers to reduce risk of investment delays • Raise equity mainly in the private sector & look to increase returns through soft debt • Lock in advantageous pricing and future cash flow for carbon • ROI of Funds expected to exceed that of individual project investments (i.e. 15 – 20%, plus carbon) • Benefit from opportunity for early exit through bundling and sale of investments after construction and safe operating period.

19. Where’s the Money? Some Examples: • European Investment Bank (EIB) renewable energy investments in 2003: €500m • EIB Climate Change Facility: €500m • EIB/EDFI Cotonou Investment Facility: €2.2 billion • World Bank Carbon Finance Business: $450m • Citigroup (Renewables, private equity): US$500m • Government of Netherlands: €500m • Japan Carbon Fund • Development Bank of Japan: US$100m • Japan Bank for International Cooperation: US$100m • Government of Austria: €360m (€36 million per year for 10 years) • Government of Canada: C$50m (C$10 million per year for 5 years) • Other possible sources of funds: • Fortis Bank… World’s largest investor in wind power • Rabobank… • ABN AMRO… • Others…

20. 5 Role of Climate Investment Partnership (“C.I.P.”)

21. A GHG Project Finance Facility (for project-by-project investing) Project Finance Facility (PFF) Equity Investors Loan Providers Grant Providers Credit Guarantee Providers Delivery Insurance Providers Financiad Returns Carbon Credits PFF Manager (Swiss Re) $ Project 1 Project 2 Project 3 Project n

22. The Challenge of Structuring a Deal Case Example: 100MW Indian Wind Farm (€100 m.) • Sources of Funds (1) • Developers’ Equity • Private Equity • Export Credits • Senior Debt (Lead Bank) • Subordinated Debt • Mezzanine Finance • Other Sources of Funds (2) • Grants • Development Finance • Financial Guarantees • Vendor Finance • Suppliers Credit • Carbon Finance

23. CIP’s “Project Finance Capacity Development Initiative for Latin America” • Objectives: • Improve access to project finance by raising technical and financial standards of small and medium size project developers; • Develop analytical tools to better assess carbon risks; • Develop risk mitigation tools to improve the use of carbon as financial collateral in project finance, and enhance the bankability of emission reduction purchase agreements; and • Support direct negotiations between CDM project developers and investors. • Participants:Argentina, Bolivia, Chile, Colombia, Ecuador, Mexico, Peru, Uruguay • Sponsors:Climate Investment Partnership (CIP) [possibly with CF Assist & WBCSD] • Duration:2 Years, 6 Months • Cost:€2.0 million (Donor enquiry welcome) • Plan to Launch at COP10 in Buenos Aires.

24. Contact Details: Frank Joshua, Chief Executive Officer, CIP Karen McClellan, Director, Investment, CIP 7-9 Chemin des Balexert, 1219 Châteleine, Geneva, Switzerland. Tel. (Frank): +41 78 772 4183; (Karen): +44 77 9250 1109 Tel/Fax. +41 22 776 5078 Email: frank.joshua@climateinvestors.com karen.mcclellan@climateinvestors.com