multiconsult.no

FROZEN IN: How to Unleash New Sources ofCapital for the Norwegian International Solar Industry?

Av William GreeneStanislas MerletFull rapport: presentert på ZERO frukostmøtet, 5 april 2017

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About Multiconsult

z Established 1908z Employees 2 400 (400 in renewable energy)z Net operating revenues 2 604 MNOK (2016)z Headquarters Oslo, Norway

OsloDrammen

Kristiansand

Stavanger

Bergen

Trondheim

Tromsø

Fredrikstad

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Position - Energy

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Solar Power

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Multiconsult in the PV Value chain

Strategic advisory

Concept / Feasibility

Basic design

Detailed Engineering

Sourcing and

logistics

Construction Supervision

Commissioning /

TTO

O & M Technical Advisory /

Facility Management

Preparation of Tender

documents

Market, Commercial, Strategic and Regulatory Advisory / Due Diligence

Project Management

High focus

Medium focus

Low focus

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Implementation Consultant, Uganda

Client: KfW/GET FiT

Date: 2015 – 2017

Capacity: 2 x 10 MWpPhoto: Access Power

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Implementation Consultant, Uganda

Client: KfW

Date: 2015 – 2017

2 x 10 MWp

Due Diligence, Turkey

Client: Pareto Securities

Date: 2015

Estimated max. capacity: 37 MWp

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Project Development, Zanzibar

Client: Zanzibar Electricity Company

Date: 2015

Capacity: 5 MW

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And more…Norway, Poland, Turkey, Paraguay, Bangladesh, Cameroon, Uganda, Zanzibar, Sierra Leone, Botswana, Ethiopia, Zambia, Antarctica…

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Key Questions to be Addressed in the Study

1. What are the major financing bottlenecks for Norwegian solar companies overseas?

2. What are the most effective measures, including public policy instruments to improve access to finance for the Norwegian solar industry?

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Research Process

RESEARCH

•Collect data on types of solar RE business prevalent in Norway

• Interview 4+ business CEOs

• Interview 2+ governmentrepresentatives

•Review industry& academicliterature

ANALYSIS

•Classify businesses and business models

•Classify and rank financing barriers

•Collate and considerproposedmeasures

• Investigate solutions in other countries

RESULTS

•Summarisebarriers

•Describe solutions

•Big picture: Job creation? Visionfor the future

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What is the problem?

¾Mitigation of climate change depends on the rapid, widespread deployment of renewable energy technologies¾Solar is the largest, fastest growing energy generation

technology¾Most industry growth is taking place in developing countries¾A major opportunity for Norwegian project developers and

technology retailers¾Smaller firms face major challenges accessing the capital they

require to grow¾Norway is one of the wealthiest countries in the world with an

ambitious climate change, business and development policy agenda…

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Focus on Norwegian Companies Deploying Panels…

TYPE 2

Retail/microTechnology supply Mini-grid Utility scaleInstallers/EPC

TYPE 1 TYPE 3

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Solar PV: The Second Fastest Growing Industry in theWorld?

¾75-200 GWp p/a over next 30 years¾A massive employer ¾USD 170-250 billion

until 2040¾More than ALL

upstream oil and gas

Source: BNEF NEO, 2016

GWp

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What does Norway have to offer?

9Large quantities of long term capital9Financial services - structuring,

legal, risk management9Infrastructure project management

skills in high-risk areas 9Engineering competence9A local industry cluster9 REC/Sol Klyngen9Research competance9High personell costs, extreme

weather & low power prices requirelean, mean business models…

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Fastest growth is in developing countries

Yet…ME & Africa have a lot of catchingup to do…

Share of grid-connected solar PV market per region 2000-2015

Source IEA PVPS, 2016

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And there is real political will…

• Mer vekt på infrastruktur

• Mer vekt på klima og miljø i næringsutviklingen

• Mer næringslivsrelevant forsknings- og utviklingssamarbeid

• Mer kapital til Norfund

• Mer tilpassede eksportfinansieringsordninger

1. Paris Agreement I. Article 9 (climate finance)II. Article 6 (flexible

mechanisms)2. Bistands politikk

I. Meld. St. 35 (2014–2015) Sammen om jobben —Næringsutvikling innenfor utviklingssamarbeidet

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Sun Power is a Capital Intensive Industry…

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Where Efficient Capital Allocation WINS

Source: IFE

High Levelised Cost of Energy means harder to compete againstincumbent technologies, thus fewer projects in developing countries

Zambia

Germany

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Prices reflect risk & competition not sunshine…

Multiconsult & University of Cape Town original analysis

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Different markets, different challenges

Sovereign/regulatory riskCurrency riskCounterparty credit risk

Low WACCCompetitive landscape

Development costs

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Different J curves, different challenges

Culm. P&L

Time

Type 1 & 2 Distributed

systems

Type 2 Utilityscale

developer(Head co.)

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Where are Norwegian Companies Struggling Most?

Type DescriptionTarget Market

1Distributed systems OECD

1 Distributed systems DCs

2 Mini-grid DCs

3 Utility Scale OECD

3 Utility Scale DCs

Grants & Angel/Series A Series B Project Equity

Corporate & Project Debt

Ready Sources of Capital Noticeable Lack ofFunding on ReasonableTerms

Severe Lack or Absence of Funding onReasonable Terms

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Grant & Angel/Series A – Industry Feedback

«Innovasjon Norge has been excellent.»«Norad grant funding is a good offer but almost as if you need to prove you don't need the money before you get it»«Very limited impact investor market in Norway»Mini-grid DC CFO

«No formal VC industry in Norway… I have hadto do it all myself»Utility OECD CEO

«Limited grant funds available outside of12 UD strategic countries»«Takes longer to prove business models in DCs…Yet VCs usually want money back in 3-4 years. » Distributed DC CEO

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Series B/Growth Equity – Industry Feedback

« Norwegian investment brokers & bankers do not understand international RE opportunity & risks »«Argentum is too conservative, only investing in PE funds in established markets.»- Utility scale OECD CEO

«The gap between series A & B is enormous» -- Distributed OECD Founder«Solar is capital heavy...hard for VCs to manage» «We sit in between VC and Infrastucture. Small system size… »- Mini-grid DC CFO

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«The gap between series A and series B is ENORMOUS»

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Project Equity & Debt – Industry Feedback«Our bank provides 100% debt financing, at a price»«Getting cost of debt down is one of our major challenges» «Our Norwegian banking partner does not invest internationally» «Leasing not a commonly accepted (or permissable) business model in Scandinavia»- CEO Distributed OECD

«We only focus on wealthy markets where ability to pay is very high»-CEO Distributed OECD

«Without Norfund they [Scatec] wouldn’t be where they are now. A strong partner but takes time to work with the bureacracy»- Utility OECD & DC

«Norwegian content requirements become harder to fulfill when profit margins are squeezed»«GIEK& eksportkreditt is a great tool but held back by Norwegian minimum content rules»- Utility OECD & DC

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Barriers to Debt – Lender Feedback

«Eksportkreditt must come in alongside commercial lenders; projects must be bankable»«Non recourse finance to non-Norwegian SPVs is a problem»«Strict lower limit on risk premiums, country dependent»- GIEK

«High Norwegian minimum capital requirements mean makes it hard to compete with big international banks»«There is a desire to take more developing country risk but we don’t have the mandate»«We cannot take non-major currency risk»«Norwegian pension funds are not set up to manage infrastructure investments»Norwegian Investment Bank

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Recommended Measures & Responsibilities

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Finanstilsynet: provide clearer,

specifc regulation. Skattetaten: tax reflief

for small investors

NORAD/UD:mofidyminimum

requirements & issueletters of intentInnovasjon Norge &

fag foreningen: guide companies towardsgrant opportunities

(e.g. EU grants)

Innovasjon Norge & Sol Klyngen: help

start-ups understand & partner with clean

tech VCs in Stockholm, London &

Boston…

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Regjeringen: «The sooner the better…»

Clusters give investors a point of focus.

Companies can shareexperiences & raise

joint funding

Regjeringen: Unleashhousehold wealth.

Look to UK (see slide on SEIS &EIS)

Fornybar AS/Innovasjon Norge: Improve

understanding amongNorwegian asset

managers & lenders on RE opportunities &

risks

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See following slides

DU/regjeringen: Continue to deepensupport & focus on

energy

DU/Miljodepartementet: New «flexible

mechanisms» from Paris Agreement could drastically

increase funding to RE projects in the

long run

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See following slides

Forskningsrådet: commission studies

on solar powerconsumer & project

risks, esp. defaultrisks

Banks: Begin co-investing togetherwith Multilateral

lenders who can takefirst risks

Banks & Large Developers: Issuetraditional & asset

backed green bonds

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UK Enterprise Investment Scheme – A model for Norway?

- Raised £1.8bn (NOK20 bn) in 2015, £14.1 bn since 1995 into small companies and projects

- Max £1m (EIS) or £100,000 (SEIS) investment allowance to individual investors

- 30%/50% of investment as income tax deduction - 100% inheritance tax relief - No capital gains tax on dividends or share sale if shares held

for 3 years

https://www.gov.uk/government/publications/the-enterprise-investment-scheme-introduction/enterprise-investment-scheme

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Oljefondet/SPU: Green Infrastructure Investments

Release of 5% = BNOK 393 in fresh infrastructureequity capital

× Initially limited to OECD countries

× Only projects with«dependable»

returns (brown-field, strong PPA counterparties)

× No favour to Norwegian companies

× Long ramp-up time

9 Would «turbo charge» the global

solar industry9 Would reduce

overall Cost ofEquity

9 A strong marketsignal to other

insitutionalinvestors

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Reforming the Export Credit Regime

«Regjeringen vil vurdere rammene for GIEKs u-landsordning …med særlig tanke på å fremme norsk næringslivs virksomhet i fattige land... For å fremme samhandelen med utviklingsland vil det også bli gjort en tilpasning i hvordan Eksportkreditt Norge skal sikre sine utlån.»Meld. St. 35 (2014–2015) Sammen om jobben —

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Export Credits 101

PROJECT COMPANY

OFFTAKER/CUSTOMER

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Compare with OPIC & SIDA

“In 2016 OPIC committed $1.4 billion to energy transactions and critical infrastructure around the world. This included $55 million for off-grid energy projects”

SIDA / ADB guarantee example

https://www.opic.gov/content/energy-and-infrastructure

https://www.adb.org/news/adb-sweden-unveil-innovative-risk-transfer-arrangement-expanded-lending

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GIEK/Eksportkreditt Constraints

Forskrift om eksportkredittordningen

(2012)

30% Norwegian «Content»

EksportKreditt together with commercial bank

OECD Regulations

Minimum guarantee premiums

Common country risk scores (1-7)

Minimum interest rates, loan tenor, repayment

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Summary Conclusions

a. Low-cost of capital is critical if companies are to succeed

ÆThe government must facilitate a more vibrant financial market-place and greater access to concessional funding

b. Off-grid companies face most difficulty accessing growth capital, utilities low-cost debt

c.Many simple measures government, industry & investors can takebut they must move now

ÆRevised ExportKredittordning & investor tax incentives key amongthem

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Toget forlater stasjonen og det er drevet av sola…

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TAKK FOR OSS OG TA KONTAKT

william.greene@multiconsult.nostanislas.merlet@multiconsult.noPresentasjonen blir gjort tilgjengelig på ZERO sin nettside