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Clean Energy Partners
Table of Contents
1. The BNP Paribas Investment Partners Clean Energy Fund
2. The Context of Renewable Energy Support Schemes
3. Institutional Investments in Renewable Energy Generation Assets
4. Support Schemes Overview
5. Assessment of Renewable Energy Support in the UK
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Clean Energy Partners
Different Ways to Invest in Clean Energy
4
● Listed equities─ Clean Tech ─ Clean resources─ Utilities─ Listed Private
equity● Mutual funds
Typically are:● Mature companies● Correlated to equity
markets● Have high P/Es
● Venture capital─ Concept stage companies / new and unproven technology─ Characterised by high volatility and varying success rates
● Growth / Expansion capital─ Companies with revenue streams in need of capital to expand
capacity, enter new markets, etc─ Development companies with ambition to grow pipeline
● Buyouts─ Large/mostly mature companies with high debt capacity in need of
strategic change and restructuring─ Few pure play opportunities in Clean energy
● Infrastructure─ Invest in generation assets that create electricity using proven
technologies─ Predictable and stable cash flows Solid risk/return profile
The Clean Energy Fund will primarily invest directly into clean power generation assets
Public Equities Private Equity
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Clean Energy Partners
Targeted Generation Technologies
5
● Annual growth rate 14%● Individual projects typically between 20-
50 MW● European core of experience● Main growth markets W. Europe
Wind Power
Small scale Hydro
● Individual projects <30MW● Proven technology● Niche growth opportunities● New construction in CEE● Revamp in CEE● Unique engineering for each project
Biomass
● Individual projects up to 50MW● Combination of technologies● Fuel supply creates added risk● Value from steady supply of power● Opportunities from growth in Europe (UK)
● Annual growth rate 25%● Solar PV ● Individual projects up to 20MW (PV)● Market opportunities in Southern Europe
and France
Solar
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Clean Energy Infrastructure InvestmentsFocus on Construction and Operating Assets
6
Acquisition Strategy
High Risk
Low RiskSpeculative / High Return
Conservative Return
Investment Focus
* For illustrative purposes only
● Feasibility Studies● Land Acquisition● Engineering &
Environmental Impact
● Full Permitting & PPA
Development Stage(6 – 48 Months)
● Plant Operation
Operations Stage(Ongoing)● Engage EPC Contractor
● Construction● Connection to Grid
Construction Stage(6 – 18 Months)
Selective basis
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Clean Energy Partners
Power Markets – Pressing Issues● Prospective shortage of energy supply
● Rising energy costs
● Overall long-term supply security an issue
● Has implications affecting entire economies
● Resource sustainability normally overlooked
● Environmental costs only introduced by way of regulation
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Clean Energy Partners
Renewable Energy Policy in the Big Picture● Rationale in early days: Support of “green” technologies to reduce CO2 emissions
● Shift in public discourse– Focus on support of complementary technologies– Decreased dependency on fossil fuels– Biomass potentially a regulator’s favourite
● “Green” energy to take on a proper role in energy policy
● Cost convergence of conventional and “green” energy technology expected to reduce level of future RE support requirement
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Renewable Energy Strategy in the UK● Onshore and offshore wind
● Biomass
● Landfill gas
● Hydropower
● Solar photovoltaics probably to play a minor role
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Institutional Investments in RE Generation Assets● General objectives
– Stable returns– Cash yield– Achieve scale to deploy large chunks of money– Sensible risk profile
● General investment characteristics– High capital intensity– Long project lifetime– Need for project finance
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Key Areas of Risk (Upfront)● Project Development
– Planning consent and possible challenges– Grid connection– Tariff approval procedure
● Construction– Overall risk allocation– Counterparties
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Key Areas of Risk (Ongoing)● Revenues
– Tariff / price volatility (regulation, market forces)– Generation volatility (technical, availability of fuel or resource)
● Expenses– Fuel costs (if any)– Operation and maintenance and lifecycle costs– Taxation (legislation)
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Assessment of Cash Flow Profile● Cash inflows
– Yield assessment to estimate annual production over project lifetime– Projected tariff and power price estimates
● Cash outflows– Budget for O&M services, fuel (if any), management, insurance and lifecycle costs– Taxation– Debt service
● Returns– Stable, reasonably predictable yield profile– Drives debt sizing and repayment and feeds into asset pricing
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Typical Cash Flow Profile
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Operation & Maintenance Repairs Technical & Commercial Management
Insurance Site Lease Expenses Other Expenses
Taxes Paid Total Senior Debt Service Subordinated Debt Service
Dividends / Equity Repayment Cash Increase Transfer to DSRA
Movement in Working Capital Other Cash Movements Total Turnover
Turnover (incl. Cash Movements)
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Feed-In Tariffs● Guaranteed for a period sufficient to recover investment
● Can be changed, reflecting changes in investment cost structures
● Changes to apply to new investments only
● Different support level across technologies, reflecting differences in cost structures
● Tariffs may vary according to resource availability on sites (stepped feed-in tariff)
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Renewable Obligation Certificate Systems● Offtake by means of power purchase agreements (PPAs)
● PPAs with duration of 10-15 years available
● PPA’s wrap the whole set of products, incl. certificates, into one bundle
● Long-term (at least 20 years) certificate targets
● Duration of support scheme
● Gradually increasing quota to maintain security of demand
● Differentiation of certificate allocation across technologies
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Investment Subsidies● Provide upfront investment support
● Level of support as a percentage of investment
● Differentiating support level across technologies
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Criteria from an Investor’s Perspective● Continuity: Long-term stability of the scheme from an investment point of view
● Profitability: Scheme’s support level appropriate to generate expected returns
● Scale: Key to attract institutional investments
● Political and Implementation Risks– Implementation: Well designed or prone to reversal or alteration?– Counterparty risk: Who is to pay the bill?– Difference to market price: Incentive to “break” the contract?– Public acceptance
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Other Considerations● Attract sufficient capital to promote sector development
● Encourage research and development to reduce manufacturing costs
● Create a market to increase competition among manufacturers
● Rising energy costs help reduce overall support need
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Biomass(w/o CHP)
Solar Photovoltaics
Onshore WindBiomass (CHP)
Historical Impact of Ongoing Support Schemes
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Cumulative Installed Capacity
Profitability
Bubble size indicates average size of individual investmentRanges indicate return corridors
For Illustration Purposes Only
● Solar PV: Small investments and tariff risk pose problems
● Biomass: Sizeable investments but challenging project economics
● Wind: Decent investment size and well understood technology
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Suitability of Upfront Support Schemes● Reduce overall financing requirements
● Do not address long-term volatility in operating cash flows
● Merely help reduce upfront costs
● More suitable to late-stage maturing technologies
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Conclusions● For proven technologies, ongoing support schemes preferable
● Ceteris paribus, feed-in tariffs preferable over certificates– One remuneration variable per MWh– Lower forecast volatility in revenue estimates– Helps in raising debt and narrows down valuation corridors
● Investment subsidies– Have not helped to proliferate RE in the UK as intended– Did not prove successful as technology differentiator when ROCs were introduced– Unsuitable to mitigate risks associated with long-term asset life
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