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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

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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;

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


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

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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


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


• Underutilized potential:

- Only 5% of the continent’s potential of hydropower developed

- Only 0.6% of the continent’s 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


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• 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




• 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




• 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




• 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




• Risk Analysis (Political/Financial/Commercial)

• Financial Modelling

• Discount Rate

• Discounted Cash Flow (DCF)

• Free Cash Flow

• Internal Rate of Return (IRR)

Analytical Tools




• 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




• Equity:

- Shareholders’ Contribution

- Preference Shares

• Debt:

- Senior Debt

- Subordinated Debt

• Hybrids:

- Mezzanine

- Shareholders’ Loans

Funding Mix in Project Finance




• 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




• 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




• 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




• 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




• 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




• 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




• Contentious Issues:

- Tariffs

- Price Adjustments

- Termination Clauses

- Compensation

- Step-In Rights

- Direct Agreement (with Government)

- Government Support

Project Bankability




• Security Package:

- Key Drivers:

- Concession Agreement

- Off-take Agreement (from Project)

- Supply arrangements (to Project)

- Government Support Agreement

- Escrow Account

- Tariff adjustment Mechanism

- Insurance Arrangements (Policy)

- Performance Bonds

- Step-In Rights

Project Bankability




Constraints for Funding of RE • The process of arranging financing is time consuming

• The technical, contractual and consent aspects of a project all affect financing

• Lack of proper dimensioning of perceived risks by funding institutions coupled with general lack of information, skills and incentives for deal-makers

• Project developers not carefully scrutinising every aspect of the project and anticipating the concerns of lenders

• A developer may believe the project will ‘sell itself’ based on merits, but in reality the developer will have to adhere to the strict terms and conditions applied to project financing


Sources of Financing

• Bank loans secured against assets or guarantees • Co-development with a financially strong joint-

venture partner • Limited recourse project financing, with bank

loans secured against future cash flows and involving a series of complex contractual arrangements (equity, senior and subordinated debt)

• Leasing • Capital markets – local and international • Development institutions


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


Government Policies in RE

• Financial Incentives – such as production or user tax credits, standing-offer contracts that provide a fixed higher tariff for renewable power or efficiency gains, and direct financial assistance in form of rebates or free installation

• Regulation – removing inefficient and conventional investments options from the market through performance requirements in building codes and equipment standards

• Market Support – certification and training, information and technical assistance to users, market transformation and other programs that remove investment barriers.


Financing Issues in RE and EE

• Sources of financing – loans, investment capital, environmental markets, international facilities and partnerships;

• Policies that leverage increased investment – financial incentives, standing offers, market transformation, training and infrastructure development; and

• Financing mechanisms – micro-finance, on-bill payment, leasing/rental, local improvement charges.


Key Legal Documentation

• Financial Documents

• Project Documents

• Support Documents

• Security Documents

• Expert Opinions


Power Purchase Agreement (PPA)

• Should involve a creditworthy buyer

• Defined term and price

• Acceptable operational and transmission risks

• Acceptable security, default and termination provisions (including lender’s rights)

• Wind PPAs usually don’t have capacity payments because of their intermittent natures

• Damages for failure to perform

• Feed-in Tariffs


Project Risk Matrix

• Construction

• Operating

• Transportation

• Environmental

• Financial

• Political

• Contractual

• etc


Principal Parties in a Project

• Shareholders

• Lenders

• Contracting parties

– Turnkey construction contractor

– Subcontractors, equipment suppliers

– Power purchaser

– Fuel/waste/feedstock supplier (if applicable)

– Network operator

• Operator


Conditions Precedent

• All project contracts and agreements being executed and in full force and effect

• A satisfactory report from an independent technical consultant (usually retained directly by the bank)

• All permits, consents etc being in place

• A report from an insurance consultant, and all insurances in place

• Execution of loan and security documentation, and registration of security
