FINANCING RENEWABLE ENERGY TRAINING - AHK to Financing Renewable Energy in ... Access to Renewable...

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  • Access to Financing Renewable Energy in Nigeria introduction of different models

    and requirements

    June 4, 2013

    Lagos

    http://www.undp.org/

  • OBJECTIVE

    To give an overview of renewable energy project

    finance and how they can be accessed bearing in

    mind renewable energy related risks

    Access to Renewable Energy Financing

    2013 2 Thursday, 09 April 2015

    http://www.undp.org/

  • Why Renewable Energy?

    Global Warming/Climate Change UNFCCC Kyoto Protocol

    Depletion of fossil fuels (petroleum, coal, etc) Energy Security;

    Escalating costs of conventional sources of energy;

    Environmental protection;

    Need to achieve key Millennium Development Goal (increased access to electricity).

    Africa has the lowest per capita consumption of energy in the world;

    Africas average energy consumption per capita: 0.66 Tons of Oil Equivalent (TOE) vs 1.8 TOE world average (est. 2008)

    http://www.undp.org/

  • RE Project Finance

    Project Financing:

    The International Project Finance Association (IPFA) define project Finance as:

    The financing of long-term infrastructure, industrial projects and public services based upon a

    non-recourse or limited recourse financial structure where project debt and equity used to finance the project are paid back from the cash flow generated

    by the project.

    Financing Renewable Energy Training

    2013 4 Thursday, 09 April 2015

    http://www.undp.org/

  • Financing Models/Sources for RE

    Adopt a Village Model (RESC-PD, MFI, AtRE/Sp)

    Public Private Partnership (PPP Models)

    Build Operate and Transfer (BOT)

    Micro Financing Model (BoP)

    Bank of Industry Window (Equipments Only)

    Commercial Banks (e.g. Ecobank)

    Carbon Credit

    http://www.undp.org/

  • Other Financing Alternatives

    Government Loan Funds e.g. Green Fund managed by the Federation of Canadian Municipalities

    Investment capital from venture capital organisations, socially responsible corporations, stock markets etc

    Community funds and bond issues

    Sale of environmental attributes such as greenhouse gas emission reduction credits, renewable energy (green) certificates or energy efficiency (white) certificates

    National and international funds set up to provide grants or interest-free loans to developers of RE and EE projects e.g. GEF, GVEP, REEEP, etc

    http://www.undp.org/

  • Underutilized potential:

    - Only 5% of the continents potential of hydropower developed

    - Only 0.6% of the continents potential of geothermal developed.

    High cost of technology;

    Uneven distribution of resources on the continent:

    - Northern Africa and South Africa account for 30% and 45% of total electricity generated in Africa, respectively;

    - Sub-Saharan Africa (outside South Africa) accounts for 25% of the total electricity generated but 80% of Africa population resides in the Sub-Sahara.

    High initial projects and related infrastructure costs;

    Trade-off between on-grid and off-grid projects;

    Renewable Energy Projects Challenges

    Access to Renewable Energy Financing

    2013 Thursday, 09 April 2015

    http://www.undp.org/

  • Low purchasing power against the cost;

    Resistance to economic tariffs (capacity to pay versus willingness-to-pay);

    Limited demand-side management;

    Political & regulatory environment;

    Socio-environmental issues;

    Trade-off between bio-fuels and food production;

    Lack of adequate infrastructure to effectively capture urban and rural waste.

    Renewable Energy Challenges

    Access to Renewable Energy Financing

    2013 Thursday, 09 April 2015

    http://www.undp.org/

  • AfDB has reserved US$ 547 billion to fund cleaner electric power in all the 53 countries in Africa by 2030.

    Challenges of mobilising finance:

    - Many economies in Africa are performing badly;

    - Lack of government support (Political Will);

    - Little interest from private sector (equity) and lenders (debt):

    - Long implementation period; - High relative investment requirement (debt &

    equity) compared to non-renewables;

    - Higher risk than non-renewables;

    - Lack of asset mobility;

    - Relatively higher tariff requirement compared to non-renewables.

    Financing Renewable Energy Projects

    Access to Renewable Energy Financing

    2013 Thursday, 09 April 2015

    http://www.undp.org/

  • Facilitation of Project Development

    Public Debt Reduction

    Reduce/Eliminate Impact on Balance Sheet (Limited Recourse/Non-Recourse)

    Optimisation of Risk Allocation (Structured Finance)

    Management of Project Costs (Fixed Time/ Fixed Price/Lump Sum Contract)

    Value for Money

    Optimisation of Return on Investment

    Attraction of Private Sector in Public Goods & Services Investment

    Objectives of Project Finance

    Access to Renewable Energy Financing

    2013 Thursday, 09 April 2015

    http://www.undp.org/

  • The Project

    Project Sponsor/Promoter/Developer

    Government (Concession/PPP)

    Special Purpose Vehicle (SPV)

    Equity Provider(s)

    Lenders

    Offtake (Buyer) Contract(s)

    Supply Contract(s)

    Engineering, Procurement, Construction( EPC) Contract(s)

    Operation & Maintenance (O & M) Contract

    Insurance

    Cash Flow

    Security Package

    Key Elements of Project Finance

    Access to Renewable Energy Financing

    2013 Thursday, 09 April 2015

    http://www.undp.org/

  • Risk Analysis (Political/Financial/Commercial)

    Financial Modelling

    Discount Rate

    Discounted Cash Flow (DCF)

    Free Cash Flow

    Internal Rate of Return (IRR)

    Analytical Tools

    Financing Renewable Energy Training

    2013 Thursday, 09 April 2015

    http://www.undp.org/

  • Project Rate of Return

    Sensitivity Analysis

    Ratio Analysis

    Debt Service Coverage Ratio (DSCR):

    - Loan Life Cover Ratio

    - Project Life Cover Ratio

    Weighted Average Cost of Capital (WAC)

    Pay Back Period

    Analytical Tools

    Access to Renewable Energy Financing

    2013 Thursday, 09 April 2015

    http://www.undp.org/

  • Equity:

    - Shareholders Contribution

    - Preference Shares

    Debt:

    - Senior Debt

    - Subordinated Debt

    Hybrids:

    - Mezzanine

    - Shareholders Loans

    Funding Mix in Project Finance

    Access to Renewable Energy Financing

    2013 Thursday, 09 April 2015

    http://www.undp.org/

  • Equity:

    - Shareholders (Individuals / Institutional Investors)

    - Preference Share Investors

    - Venture Capital Funds

    Debt:

    - Development Financing Institutions (DFIs): Bilaterals / Multilaterals

    - Commercial / Investment Banks (Domestic / International)

    - Underwriting (Hard vs Soft)

    Sources of Funds

    Financing Renewable Energy Training

    2013 Thursday, 09 April 2015

    http://www.undp.org/

  • Project Preparation

    Advisory Services (Financial, Legal, Technical)

    Permits / Licenses (Environmental, Water Usage, Operational, Way leave, etc.)

    EPC Contractor

    Working Capital

    Cash Sweep

    Contingencies

    Uses of Funds

    Financing Renewable Energy Training

    2013 Thursday, 09 April 2015

    http://www.undp.org/

  • Financial (Including Cost over runs, Underwriting, etc)

    Commercial (Including Pricing, Quantity, Marketing)

    Partner Selection

    Economic (Macro Economic Aggregates, Infrastructure, etc)

    Technical

    Legal

    Environmental

    Social

    Political

    Climatic

    Risk Management in Project Finance

    Financing Renewable Energy Training

    2013 Thursday, 09 April 2015

    http://www.undp.org/

  • Identify Pertinent Risks

    Develop a Risk Inventory

    Develop a Risk Matrix

    Undertake Due Diligence

    Develop Risk Mitigation Strategy (Covering All Pertinent Risks)

    Allocate Risks to Various Parties

    Risk Mitigation in Project Finance

    Financing Renewable Energy Training

    2013 Thursday, 09 April 2015

    http://www.undp.org/

  • Develop & Agree a Security Package

    - Key Project Agreements

    - Key Commercial Agreements

    - Payments Mechanism

    Recourse to Sponsors:

    - Limited

    - Management Fees Forfeiture

    - Dividends (Current and Past) Forfeiture

    - Cost over runs

    - More Equity Injection

    Management of Contractors

    Risk Mitigation in Project Finance

    Financing Renewable Energy Training

    2013 Thursday, 09 April 2015

    http://www.undp.org/

  • Project Contracts

    Shareholders Agreement

    Joint Development Agreement

    Concession/Implementation Agreement

    Environmental and Social Impact Certification

    Loans Agreement

    Common (Lenders) Agreement

    Force Majeure Issues

    Termination Clause(s)

    Conditions Precedent (CPs)

    Key Legal Elements

    Financing Renewable Energy Training

    2013 Thursday, 09 Apr