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MAY2011
MarkCrandall
ContinentalWind
Partners
25May2011
EnergyCommunityInvestmentChallenges:FightingClimateChangeConference
Vienna,Austria
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MAY2011PAGE2
COMPANYINTRODUCTION
CWP de velop s
p rojec ts in Europ e
an d A ustral ia
Ma rk Crand al l is
CWPs found er andm ajor investor
CWP
Markets
Poland 600MW
Romania 610MW
Bulgaria 400MW
Serbia 300MW
Australia 3,000MW
PL
RO
BG
HR
AU
SR
NZ
CONTINENTALWINDPARTNERS(CWP)
CWPsabilitytoidentifypromisingmarketsandtospreadriskacrossgeographiesallowsittoentermarketsearly,
toselectthebestlocalpartnersandtosecureaccesstositeswiththebestwindresourcesandgridconnections
CWPinitiallytargetedEUaccessioncountriesPolandandRomania,whichpresentedanoptimalmixofthesefactors,andsubsequentlyenteredAustraliawithastronglocalpartner
CWPhas
more
recently
entered
promising
new
markets
such
as
Bulgaria
and
Serbia,
and
is
continually
evaluating
additionalmarketswithstrongpotential
MARKCRANDALL
MarkestablishedtheCompanyin2007andcurrentlyisCWPsChairman.MarkhasrecentlymovedtoBelgrade
BeforethatMarkhadacareerinenergytradingatMorganStanley,GlencoreandfinallyasoneofthefoundersofTrafigura
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WHYDEVELOPLARGESCALEWIND?
CWPfocusesonprojectsabove100MW,andtheaveragesizeismorethan200MW
EconomiesofScalelowerdevelopmentcostperMW
Lowercostsforenvironmentalmonitoringandotheressentialstudies
Larger
budget
allows
for
more
specialists
and
consequently
better
success
rate Larger budget allows us to follow international standards
for preparing environmental
assessments (Equator Principles) even if these are more rigorous
than local countryrequirements
Largescalewindfarmsarebigenoughtomovetheneedle
forlargebanksandlargeinvestors,sowebelieve it iseasiertoattractboth
internationaldebtand internationalequity finance
tolargeprojects,somethingwhichisinherentlydifficultinsmallerscaleprojects,whetherofwind,
solar,or
biomass
EUROPESLARGESTWINDFARM FANTANELEINROMANIA
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MUCHTALK,LITTLEBUILDING
Bulgaria
Romania
Serbia
Macedonia
Albania
Croatia
Bosnia
and
Hercegovina
Montenegro
Alpiq 50MW
AES 156MW
CEZ 300MW
EDP 90+30MW
Note:Slidereferstoinstalledcapacitygreaterthan50MW
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SOUTHEASTERNEUROPE
LARGEOPERATINGWIND
Romania
PesteraandCernavoda 90+30MW(EDP) BalanceSheetFinancing*
Fantanele 300MW(CEZ) BalanceSheetFinancing
Bulgaria
Suvorovo 60MW(EolicaBulgaria)
ProjectFinancing(EBRD,BSTDBandUniCredit)
Kazanlak 50MW(Alpiq) BalanceSheetFinancing
St.Nikolai 156MW(AES) ProjectFinancing(EBRD,IFC)
No
large
wind
in
Serbia,
Croatia,
Albania,
Macedonia,
Montenegro,
Ukraine
and
Bosnia
andHerzegovina
*EBRDandIFCfinancedpartofthecostsafterconstructionbegan
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PRACTICALCHALLENGESTODEVELOPINGLARGESCALEWINDPROJECTS
Large wind farms
are harder and
risk ier to d eve lop.
Goodgridaccessiscomplicatedoneneedstofindalocationthathasacombinationofgoodwindandtheabilitytoconnectalargescale
wind farm to the local grid, objectives which are often
inconflict
Debt will be provided by international lenders so
developmentmust
follow
(expensive)
international
standards;
the
size
of
the
projects is usually larger than the local banking markets
canhandleso internationalbanksand international bestpractice
isinevitable
Regulatory regime must be very robust and enforceable,
asinternational banks with less familiarity with local
countryconditionsaretheactorsdecidingwhethertolend noholes in
the
regulatory
regime
can
be
allowed Grid connection cost is high, because of the need to
connect at
highvoltage,offsettingsomeoftheeconomiesofscaleof
largescaleversussmallscaledevelopment
Environmental impact is inherently larger, so
environmentalpermitting requires much greater resource than for
smallerprojects
Permitting
uncertainty
exists
because
of
lack
of
experience
in
windfarmdevelopment
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DO THE BALKAN COUNTRIES REALLY WANT LARGE SCALE IMPLEMENTATION
OF RENEWABLEENERGY?ORARETHEYJUSTGOINGTHROUGHTHEMOTIONS
TOSATISFYTHEEUAGENDA?
Renewableslookexpensive,thoughtheyusuallyarenotasexpensiveastheycan
look,ifoneadoptsalongtermprospective,whichpoliticiansoftendonot:
Gridstrengthening
costs
Costoffeedintariffs/subsidyregimes
Balancingcosts
Currentlywholesalepowerpricesareartificiallylow,sorenewableslookevenmoreexpensivefromashorttermperspective
Future
wholesale
power
prices
likely
to
be
much
higher
because
of
natural
convergence
ofwholesale prices to European levels, because of higher
hydrocarbon prices, and because of
highercarbontaxation.Throughthisevolutionthepriceofwind
willremainfixed,meaningtherelativecostofwindenergycomparedtoconventionalsourceswillfall
InthericherpartsofEurope,thecostofrenewables iseasiertoacceptas
thecountriescanbetteraffordtosubsidizethem.Neitherthegridstrengtheningcostsnorthesubsidiesrepresentsuchalargeburdentothepopulation
GOVERNMENTCHALLENGESTOLARGESCALERENEWABLEPROJECTSTHEPROBLEM
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Changesintariffsortariffreviewmechanismswhichincreaseuncertainty(e.g.Bulgaria)
Limitationsonavailabilityofsupportregime
whichincreaseuncertainty(e.g.Serbia)
Grid access used as gating mechanism to slow down renewable
development (e.g. Bulgaria,Croatia,andRomania)
NonEurodenominatedsupportregimes(e.g.Croatia,Bulgaria)
All these problems essentially arise from a government desire
not to overshoot
renewablestargetsorconsumetoomuchmoneyonsupportregimes
GOVERNMENTCHALLENGESTOLARGESCALERENEWABLEPROJECTS
THECONSEQUENCES
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MANAGINGTARIFFS
Governmentsneedtomanagetariffstobalanceencouragingrenewableswithmanagingcosts
Technologyshiftscanlowercost(e.g.solar)andthereforejustifytariffreduction
Inthecaseofwind,technologyisimprovingbutbettersitesgetbuiltfirstleavingthelesswindyforlatesttechnology
The
advantages
of
changing
tariffs
to
meet
new
conditions
have
to
be
balanced
against
the
disadvantagesofmakingtheenvironmentlesspredictableandimpossiblefordeveloperstoplanforthefuture
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BULGARIACASESTUDY LAWOFUNINTENDEDCONSEQUENCES
WHYBULGARIACHANGEDITSTARIFFSTRUCTURE?
Thecountrywouldhavefinishedwithmuchmoresolarandtoolittlewind
Changingsolartechnologymadeoriginaltariffsunbearable
Ourcalculation isthatthechange
inthesolartariffhasdecreasedthesolarcapacityfromaround1000MWto200MW
Undertheprevioustariffregimesolarwasoverencouraged,biomasswasunderencouragedandwind
was
neutral
Had Bulgaria stuckwith the old tariff it would have ended up
paying, within two years, about340millionperyeartosubsidizesolar
clearlyunsustainableforacountryof7millionpeople
Andnow,withthenewtariff,
itwillsavethiscrushingsolarcost,butprobablywillnotdevelopmorewind,thecheapestrenewabletechnologyforthepublic,asithasmadeituneconomic
The saved 800MW of solar, even with the new tariff, would cost
budget circa 165 million,while
the
equivalent
amount
of
wind
generated
power
would
cost
the
budget
35
million
Currently wind is completely stopped because of general
uncertainty, the tariff
settingmechanismsetpostconstruction(impossibletofinance)andtariffbeingtoolow
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Thefeedintariffisthepreferredsystemwhenlookingforoutsidedebtfinancing
OthercountriesthathavefeedintariffinSEEareMacedonia,Ukraine,BosniaandHerzegovina
Countries
without
feedin
tariffs
use
a
certificate
based
system
to
incentivize
renewableproduction
FEEDINTARIFFS
Fee d -In ta riffs a re
the m ost suc c essful
wa y to boo st
renewab les .
WindEnergyFeedInTariffs
Country Tariff (/MWh) Tenor(Years) InflationIndexed
Bulgarianew 961 12 No
Bulgaria
old 961 15 YesCroatia 992 12 Yes
Serbia 953 12 No
1TariffisinBulgarianLev
withEUinflationwhenapplicable2TariffandInflationrelatedtoCroatianKuna3TariffinEUR4LevelizedTariffinEURfor12yearsbasedontheGCsystemexpectations5LevelizedTariffinEURfor15yearsbasedontheGCsystemexpectations
WindEnergyCertificateBasedPrice
Country EstimatedPrice(/MWh) Tenor(Years)
Poland 1234 15
Romania
realistic 1175
15Romaniaoptimistic 1315 15
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ROMANIAGREENCERTIFICATES
Rom an ia is the
c ountry wi th
wo rk ing GC quota
system . Howe ve r,
there are a lot of
adjustmentsneed ed if la rge
wind p ro jects are
to be pro jec t
f i nanced .
Romania is theonlycountry in SEEwhere the quota system (based
onGreen Certificates)
hasbeenestablished.Othercountrieswithsimilarregulatory framework in
theEU includeUKandPoland
The system requires all suppliers of electricity to show that
part of the electricity delivered isfrom renewable sources. To do
that they have to purchase Green Certificates (GC) on
aspecializedmarket
Theprice
of
the
GC
is
between
27
55/GC
plus
inflation
with
wind
currently
receiving
1GC
but
expectedtostartgettinga2nd
soon(newlegislationstillnotcompleted)
Thepromotionschemeisfor15yearswith2GCforwinduntil2017and1GCafterwards
Thereareseveralmajorissueswiththelegislation
If there is excess of GC (GCs over the quota for the year) the
Government does
notguaranteetherewillpurchasersfortheadditionalcerts
Thepromised 2nd
GChasnotyetarrivedinactualsecondarylegislation
The quota is adjusted each year based on the renewable energy
produced so no
realmarketincentivesexisttoencouragedevelopmentofrenewables
Missingtransparencyandmethodologyonhowthelegislationmaychangeinthefuture
No
long
term
PPAs
available
which
makes
project
financing
impossible Investors perceive a lot more risk in the GC system,
which makes financing projects more
difficultforthesmallerplayersonthemarket
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WHOARETHEWINNERSANDWHOARETHELOSERS?
EQUATIONWITHMANYMOVINGPARTS
Keep
inmindthatcountriesmaynotwanttobewinnersherebecausetheymaynotwantanymorethanbareminimumofrenewablesinplace
Capitalisinternational soitwillflowtothebestreturns
Absolute returns are not definitive varying perceptions of
country risk, currency risk, andcorporateor fund
investmentguidelines
(EUvsnonEU,EurovsnonEuro)canmakecountrieswithseeminglyhigherabsoluteinvestmentreturnsattractlesscapital
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PAGE14 MAY2011
ASSUMPTIONS HYPOTHETICALWINDFARMWITHOUTACOUNTRY
ProjectAssumptions Capacityfactor
Gross 32%
Power MW 250 Guaranteedavailability 96%
Annualhoursofoperation hours/year 2,296 Internalcablelosses
3%
Electricityproduced MWh 573,955 Net 30%
CPI % 2.0%
Incometax
rate % 20% CAPEX
CAPEX 1000/MW 1,580 Turbineprice(/MW) 1,100,000
OPEX /MW 43,000 BOPcost,noconnection(/MW) 200,000
Depreciationrate % 5% Connectioncost 30,000,000
FinancingonFC Bankfees 10,000,000
Leverage % 70% Others 30,000,000
Term years 10 Total(/MW) 1,580,000
LIBOR % 4.0%
Spreadover
LIBOR % 4.0% OPEX
DSRArequirement* %ofannualdebtservice 50.0% O&M(/MW)
25,000
VATrateforlocalconstructionworks % 18.0%
landlease/municipaltax(%ofrevenues) 5,000
VATwithholdingperiod years(full) 1 Insurance(/MW) 6,000
Developmentcosts 1,000 5,000 Others(/MW) 7,000
Developerpremium 1,000 5,000 Total(year1) 43,000
*levered
Note:Withblueinputstothemodel
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HYPOTHETICALPROJECTSRESULTS
Capacity
Factor TaxRate LevelizedTariff LevelizedPrice EquityIRR
Romaniarealistic 30% 16% 117 115 17.60%
Romaniaoptimistic 30% 16% 131 128 22.03%
Poland 27% 19% 123 120 17.63%Serbia 30% 10% 95 94 11.10%
Bulgaria new 30% 10% 96 94 11.37%
Bulgaria old 30% 10% 107 106 15.37%
Croatia 26% 20% 112 109 10.58%
SOWHERE
WILL
THE
SMART
MONEY
GO?
WillanybodyinvestinBulgariawiththenewtariffsinplace?
WilltheansweronBulgariachangeifBulgariajoinstheEurozone?
Willanybody invest
inSerbia,anonEUcountry,whenapparentlyconsiderablybetter
returnsareavailable inRomania,which is
anEUcountry,especiallysincetherehasneverbeendirectforeign
investment in Serbias energy sector before? Would anybody invest in
Serbia whenreturns
are
just
marginally
above
Croatia's,
when
Croatia
is
about
to
join
the
EU
and
is
perceived
asmuchmorestable?
Is Croatia, as a soontoaccede country, a sufficiently better
risk than Serbia or Bulgaria
toattractinvestmentdespiteapparentlylowerratesofreturn?
From the table, is it any surprise that seemingly every major
European utility wants to buildwind farms inPoland? Will the
Balkancountriesbeable toattract investmentwith Poland
ascompetition?
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MarkCrandall
[email protected]
+44(20)74095409(London)
+381(1)13284425(Belgrade)
