The Need for Robust Legal & Regulatory Frameworks to Promote Renewables

Riccardo Puliti Managing Director, Energy & Natural Resources

VI KAZENERGY Eurasian ForumVI KAZENERGY Eurasian Forum

Astana, 5 October 2011Astana, 5 October 2011

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Agenda

1. What is EBRD?

2. Experience in Renewables

3. Regulatory Frameworks and Regulatory Risk

4. Sustainable Policy Instruments

5. Transparent & Predictable Legal Framework

6. Case Studies

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Foundation of Operations

Apply sound banking principles to all projects

– EBRD does not subsidise

Advance the transition to a full market economy

– Priority to promote private sector involvement and market expansion

Support, but not replace, private investment: additionality

– Act as a catalyst for higher and riskier involvement of financiers

Achieve environmentally sound and sustainable development

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Where EBRD Operates

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Experience in Renewables

EBRD was an early mover in Renewable Energy (RE) in its countries of operations

– hundreds of projects screened, dozens analysed, many rejected, but several successful transactions

Extensive knowledge of the market and main players

Early and steep learning curve

Knowledge of RE regulation

– As an equity investor in and lender to RE projects, EBRD understands the importance of legal & regulatory arrangements in this sector

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Experience in Renewables

EBRD signed

– In 2010 €220m for 6 RE deals with project value of €820m

– In 2009 €186m for 6 RE deals with project value of €540m

– 2011 YTD €311m of financing for 6 RE deals with potentially project value of €700m

EBRD has been most active in projects in Poland, Hungary, Bulgaria and Turkey

Strong pipeline of projects in Romania, Georgia, Poland, Bulgaria and Turkey

Turkey12%

Baltics8%

Hungary14%

Bulgaria12%

Poland52%

Western Balkans

2%Source: EBRD, Unaudited data as at 31 December 2010

Renewable Energy financing by geography (2009-2010)

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Renewable Energy technologies have been moving down a steep cost curve

Economic support is an interim solution for RE, not expected forever

Yet most projects today still require financial support mechanisms

– Renewables projects are capital intensive and have long asset lives (often 20+ years)

– Therefore, the assets in question require long-term regulatory certainty to attract financing

The Renewable Energy sector is unique as it is policy-driven

Investors therefore face regulatory risk for debt repayment and equity return

This does not mean regulatory frameworks should never be amended:

– But should not be changed retroactively to existing projects

– Investors will require stability in the level of support available from the time of investment

Regulatory Certainty is Key!

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Regulatory Risk – the EU Experience

The European Union has ambitious 20/20/20 targets, that require large capacity increases in Renewable Energy (20% reduction in GHG, 20% of energy in EU from RE, and 20% reduction in primary energy us through energy efficiency)

The countries most likely to meet those targets (e.g. Germany) are those that have created a stable, predictable investment climate

– Numerous examples of retroactive tariff cuts in Europe (see Czech and Spanish solar PV) have undermined the credibility of policy support to the sector in the eyes of investors

– Certain infrastructure funds stopped investing in Renewables– Bank financing for projects dried up while existing policies were revised

Regulatory certainty is just as important as the chosen instrument itself!

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Sustainable Policy Instruments

Kazakhstan is moving towards implementation of feed-in-tariff

There is a trade-off in setting the level of economic support for Renewables projects

– If level of support is too low (e.g. feed-in-tariff, Green Certificate price) investment will not take place

– If level of support is too high, the country will attract opportunistic investors seeking high returns, facilitating unsustainable bubble in the sector

– Getting the level of support right is important (EBRD is assisting through Technical Cooperation)

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Transparent & Predictable Framework

We can distinguish between (at least) two phases in renewable project life: (i) Construction / operation phase, and (ii) Development phase

– In the Development phase transparency and predictability in the permitting process is crucial

– Several permits are required in most jurisdictions as Renewable Energy development is more complicated than e.g. real estate : it involves high structures, grid connection often in environmentally sensitive areas

– For foreign investors it is important to understand what permits and approvals will be required by what authority at what time

e.g. aviation authorities (due to height of structures), Ministry of Defence (wind farm impact on radar), environmental authorities

– Complex legal frameworks are one reason why development phase is usually undertaken by local developers, rather than foreign companies

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Example of Natural Resources

Kazakhstan was successful in establishing a sustainable regulatory framework in the Natural Resources sector

– Limited restrictions on ownership of subsoil assets and a predictable tax regime have attracted significant foreign investment

– Transparency was enhanced by the implementation of EITI principles by oil & gas operators and more recently in mining

– Priorities was put on the development of local content

EBRD is supporting efforts to improve further regulation through

– Technical Cooperation funds to improve Health, Safety and Environmental standards in mining and reduce accidents in mines

– Cooperation with the Government to develop emergency response capacity in the Caspian Sea and enhance co-ordination with neighbouring countries

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ConclusionStrategic Priorities for Kazakhstan

Kazakhstan is making good progress in developing a comprehensive Renewable Energy strategy and has significant potential across diverse Renewable Energies

Through Technical Cooperation EBRD has supported development of Renewable Energy legislation in Kazakhstan: review of primary legislation will pave the way for feed-in-tariff to be implemented by year-end 2011

Going forward, key themes will include:

– Searching for an adequate and yet sustainable level of economic support

– Promoting policy / regulatory certainty

– Ensuring transparency & predictability in the legal framework to facilitate the development phase

Case Studies

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Margonin wind farm - Poland

In 2010 EBRD financed the 120MW Margonin wind farm, the largest operational wind farm in Poland

Margonin is controlled by EDP Renovaveis, the world’s 3rd largest onshore wind farm operator

First wind farm in CEE to be financed on a limited recourse basis without a long-term, fixed-price arrangement for electricity sales.

Total debt size of PLN 535m (€135m equivalent) financed by EBRD, EIB and commercial banks, including Bank Millennium S.A., BESI and Unicredit’s Pekao

Facility Details

Borrower

Sponsor

Lenders

Structure

Relax Wind Park I sp. zo.o.

EDPR

- EBRD: €45m- EIB: €45m- Commercial Banks:

€45m

- Project finance- Without long-term

fixed-price sales contract for electricity

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Rotor Wind Farm - Turkey

The EBRD signed its first Turkish deal in May 2009 after launching operations there in October 2008

The Bank is lending €45m for the financing of Rotor Wind Farm, which will be one of the largest wind farms in Turkey (135MW)

The total investment cost is estimated to be > €200m, including €70-75m of Sponsor equity

Awarded European Onshore Wind Deal of the Year 2009 by Project Finance Magazine

Progressed from EBRD initial approval to signing in four months

Facility Details

Borrower

Sponsor

Lenders

Tenor

Structure

Rotor Elektrik Uretim AS

Zorlu Enerji

- EBRD: €45m- IFC: €55m- EIB: €30m

- IFC, EBRD: 12 years + 1 year grace

- EIB: 10 years +1 year grace

- Project finance- EIB loan guarantees from HSBC Bank plc and DenizBank A.S.

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Saturn Biomass - Poland

The Bank financed the first large scale biomass fired power plant owned by a local investor in Poland

The CHP facility provides heat and energy to Mondi Swiecie, the largest Polish paper producer, and operates under a long-term off-take agreement

The transaction was structured as project finance exceeding €100m and was successfully closed despite the financial turmoil

Three month lead time: - Initial approval May 2009- Signing August 2009

Facility Details

Borrower

Sponsor

Lenders

Tenor

Structure

Saturn Management

Polish Energy Partner

- EBRD: €30m- Commercial Banks:

€56m

- EBRD: 8.5 years- Commercial

Tranche 6.5 years

- Project finance- Very strong off-take

contract with Mondi Swiecie

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Thank you

Riccardo Puliti Managing DirectorEnergy & Natural Resources

Email: pulitir@ebrd.com