Planning and Development:
Locking-in the capital
Lloyds All-Island Renewable Energy Summit
Barry O’Flynn
Director | Lead Advisory – Environmental Finance
Our Environmental Finance Credentials
Our Credentials
►
Team of 70+ people in UK&I
dedicated to the EF sector.
►
Over 15 years experience in
renewable energy finance
spanning all technologies
►
►
►
Advised on over 10,000 MW of
renewable energy capacity over
the past decade
Extensive experience of recycling
and energy from waste with both
public and private sectors
Integrated firm thus able to
leverage EY’s global network of
experienced renewable energy
specialists
Our offering
►
Raise debt, equity and grant
funding and provide M&A
transaction support
►
Proven track record of successful
advisory mandates including a
number of ‘firsts’:
–
Offshore wind project
financing
–
Onshore wind merchant plant
financing
–
UK onshore wind farm
financing
–
UK Community based wind
farm
–
Private equity transaction for a
wave energy company in the
UK
Awards
►
Best advisory firm in
Europe for Renewable
Energy (Environmental
Finance magazine 2011)
►
No. 1 Financial Adviser Renewables (Infrastructure
Journal awards, 2011)
►
No. 1 Global Project
Finance Advisory,
Mandates Won (PFI awards,
2011)
►
Best Project Finance
Adviser in EMEA and CEE
(EMEA Finance, 2011)
Selected clients
2
Current and closed mandates across Europe
Offshore wind (UK)
Onshore wind (RoI)
Biomass (UK)
Onshore wind (Sweden)
CSP (Sweden)
Supported Ofgem on both the initial
design and subsequent implementation
of the Offshore Transmission Operator
(OFTO) regime
Currently advising a renewable energy
developer with the disposal of a 120+
MW portfolio of consented and
operational wind assets
Advised on project finance and equity
raising for 38MW biomass plant.
Currently advising feedstock biomass
project on project finance and debt
Currently advising a developer on the
disposal of their 144MW consented
Swedish onshore wind farm
Currently advising a CSP technology
company on a capital raise
Onshore wind (Ireland)
Solar (UK)
Currently advising renewable energy
developer on partnership options for exporting
energy to the UK
Acted as advisor for:
• Equity fundraising to install solar PV units on
c.450 rooftops
• Financing for a portfolio of roof top solar PV
assets
• Finance raise in relation to UK based solar
asset
Onshore wind (UK)
Advised on the successful disposals of:
• 7 MW consented wind farm
• 8.8MW consented wind farm
• 21MW, 26MW and 28MW onshore wind
farm.
Onshore wind (Poland)
Onshore wind (UK)
Currently advising on the disposal of a 150MW
consented Polish onshore wind farm
Currently advising developers selling onshore
wind farms (8MW, 14MW, 21MW, 30MW )
Onshore wind (Germany)
Advised on the sale of two German wind farms
(53MW)
Onshore wind (France)
Currently advising an onshore wind fund on
the project finance for c.70MW of assets
Solar PV (Ukraine)
Currently advising on the sale of the equity
stake in an operating ground mounted PV solar
project
Solar PV (France)
Assisted in the tendering process of a
photovoltaic power plant that will be
constructed on Lyon St Exupéry Airport land.
Onshore wind (Romania)
Currently advising on the disposal of a 300MW
consented Romanian onshore wind farm
Solar PV (Spain)
Solar PV (Bulgaria)
Advised on the debt and equity fundraising for
a 10MW roof top PV asset
Supported the debt financing for two solar PV
installations in Bulgaria
Solar (Europe)
Onshore wind (Italy)
Solar PV (Greece)
Hydro (Turkey)
Advised a renewable energy fund manager on
the structuring, strategy and marketing of their
€200m pan-European solar fund
Currently advising a developer on the sale of its c.3GW
onshore wind portfolio
Currently advising on the debt financing of a €135
million portfolio of 19 Solar PV parks across Greece
Advised on the financing of a $500 million energy
concession the operation and development of a number
of hydro-electric and geothermal power plants
3
The new paradigm
That was then...
...and this is now
‘Decarbonisation’
‘Value for money’
Policy
►
►
►
►
►
Ambitious goals
Long-term policy
GDP growth
Cheap capital
Large volume available
►
►
►
Limited to no goals
Radical policy shifts
Negative / flat GDP
Market
Finance
►
►
Expensive capital
Illiquidity
The market needs long term policy visibility, strong fundamentals and regulatory stability
to attract new forms of capital
Energy Demand: Consumption on the rise
Total primary energy consumption – OECD Countries
122.4
82.9
82.4
39.5
39
2005
124.3
123.7
121.8
2006
82.3
39.7
46.3
44.8
43.3
41.8
39.7
88.2
86.5
85
83
82
146.3
140.2
134.9
129.4
2007
2015
2020
2025
OECD North America
OECD Europe
2030
2035
Total primary energy consumption – Non-OECD Countries
127.1
119.6
70.9
85.8
68.3
52.4
51.5
51.0
112.6
66.0
50.4
2005
2006
2007
2015
217
187.8
159.3
94.5
54.2
2020
102.4
56.2
110.5
120.4
57.8
60.2
2025
Non-OECD Europe and Eurasia
Middle East, Africa, Central and South America
Page 5
277.3
246.9
2030
2035
2015-2035 Change:
Global:
+36%
OECD:
+14%
Non-OECD:
+54%
Energy Supply: Fossil fuel production
limitations
Fossil fuel reserves-to-production (R/P) ratios at end 2010
500
400
300
200
100
0
OECD
Non-OECD
European Union
Former Soviet Union
Source: BP statistical review of world energy 2011
Oil
Natural gas
Coal
• Coal has 112 years, gas 63 years and oil 54 years, at current production rates.
• Demand outstripping supply, despite new reserves being discovered.
• Shale gas is a localised benefit with limited transportation infrastructure
• Interest in nuclear generation is waning
• Increasing gap appearing between fossil-supply and global demand
• Alternatives to coal are increased renewable energy and energy efficiency
World
Energy Supply: Increasing Oil and Natural Gas
Prices
Normalised Oil and Natural Gas Prices (US)
Population: 7 Bn
600
Brent Oil
500
Population: 6 Bn
400
300
Population: 5.6 Bn
200
Natural Gas
100
0
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
• Population to increase to 8.5 Billion by 2035
• Impact on oil and natural gas prices driven by increasing demand, political uncertainty and production
capabilities
• 9% and 11% CAGR over the past 15 years, for gas and oil respectively (vs. 2.5% average CPI)
• Increasing demand, limited capability to increase net production and increasing pressure on the cost of
emissions is likely to force prices up over the long-term.
• No fossil-based silver bullets despite hype, politics and subsidies – nuclear, offshore oil and gas, shale
• Demand-side: Energy efficiency is coming rapidly to the fore
• Supply-side: Non-fossil-fuel generation penetration accelerating rapidly
Page 7
Global Emissions: Unsustainably on the rise
75
Global Emission Projections
70
Reference
pathway
‘BAU’
70
65
61
Gt CO2e per year
60
55
-17
52
-35
50
45
44
40
35
0
2000
Page 8
2010
2020
450ppm
pathway
(with
overshoot)
2030
New Energy Economy
• Emissions like to significantly
exceed the 450 ppm trajectory
under current practices
• 2°C target cap on target likely to
be missed
Upward trend in global clean tech investments
despite economic headwinds
Global clean tech investments ($bn)
$263bn (2011)
300
263
247
250
187
200
Other
189
Wind
153
150
($72bn)
113
100
54
Other
23%
($63bn)
75
India
4%
China
17%
Solar
($128bn)
50
EU
38%
USA
18%
0
2004 2005 2006 2007 2008 2009 2010 2011
80
70
60
50
40
30
20
10
0
73 71
64
56
47
46
33
21 22
16 13 18 19
12
26 28
33
49
45 45 42 48
41 41
52
60
58
48
34
25
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
05 05 05 05 06 06 06 06 07 07 07 07 08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11 12 12
Source: Bloomberg New Energy Finance - Note: Excludes corporate and government R&D, and small distributed capacity. Not adjusted for reinvested equity
RE forecasts suggest steady growth...
…towards economic maturity
Levelised cost of energy – 2012 ($/MWh)
900
800
USD/ MWh
700
600
500
400
300
200
100
0
Source: Bloomberg New Energy Finance - Note: Carbon forecasts from the Bloomberg New Energy Finance European Carbon Model with an average price to 2020 of $33/mtCO2. Coal and natural gas prices
from the US Department of Energy EIA Annual Energy Outlook 2011 and internal forecasts.
…towards economic maturity
Levelised cost of energy – 2012 ($/MWh)
900
800
USD/ MWh
700
600
R&D
Early
deployment
Subsidised
commercialisation
Maturity
500
400
$400/MWh
300
200
100
$200/MWh
$100/MWh
0
Source: Bloomberg New Energy Finance - Note: Carbon forecasts from the Bloomberg New Energy Finance European Carbon Model with an average price to 2020 of $33/mtCO2. Coal and natural gas prices
from the US Department of Energy EIA Annual Energy Outlook 2011 and internal forecasts.
Asset financing challenged by regulatory
change and liquidity challenge
Asset financing
Private equity/venture capital
Corporate debt
IPO
M&A
6
7
12
2
12
8
3
1
6
7
3
4
3
9
4
2
3
4
22
2005
7
2
15
3
9
2
92
61
77
69
42
35
29
2006
2007
3
1
2008
2009
Source: Bloomberg New Energy Finance - Note: Includes estimates for undisclosed deals; 2012 YTD figures through 30 August 2012
2010
2011
2012 YTD
Asset financing - Investor landscape
Positioning within the project lifecycle
Development
Procurement
Construction
Early
operation
Long term
operation
Utility





Any
10%+
Historically BS,
but now PF
Oil and gas





Any
10-15%
Traditionally BS
but now PF
IPP





Any
15%+
PF
Japanese
Trading Houses





£50m
10%+
PF
Developers


()
£50m+
15%+
PF
WTG
()


£50m+
15-20%
PF
Infrastructure
contractors
()


£100m+
15-20%
PF
Private equity
()


£50-200m
20-25%+
PF
()



£250m+
10-15%+
BS or PF
()
()

£50-200m
c.10%
PF
()

£200m+
c.10%
PF / IPO


£50m-£100m
-
-
TRADE
Category
FINANCIAL
Financial drivers
Sovereign
Wealth Funds
Pension funds
Institutional
investors
Debt provider
()
()
Levered
Equity ticket returns Asset financing
Asset financing - Long-term hold
Positioning within the project lifecycle
Development
Procurement
Construction
Early
operation
Long term
operation
Utility





Any
10%+
Historically BS,
but now PF
Oil and gas





Any
10-15%
Traditionally BS
but now PF
IPP





Any
15%+
PF
Japanese
Trading Houses





£50m
10%+
PF
Developers


()
£50m+
15%+
PF
WTG
()


£50m+
15-20%
PF
Infrastructure
contractors
()


£100m+
15-20%
PF
Private equity
()


£50-200m
20-25%+
PF
()



£250m+
10-15%+
BS or PF
()
()

£50-200m
c.10%
PF
()

£200m+
c.10%
PF / IPO


£50m-£100m
-
-
TRADE
Category
FINANCIAL
Financial drivers
Sovereign
Wealth Funds
Pension funds
Institutional
investors
Debt provider
()
()
Levered
Equity ticket returns Asset financing
Asset financing - De-risking development
Positioning within the project lifecycle
Development
Procurement
Construction
Early
operation
Long term
operation
Utility





Any
10%+
Historically BS,
but now PF
Oil and gas





Any
10-15%
Traditionally BS
but now PF
IPP





Any
15%+
PF
Japanese
Trading Houses





£50m
10%+
PF
Developers


()
£50m+
15%+
PF
WTG
()


£50m+
15-20%
PF
Infrastructure
contractors
()


£100m+
15-20%
PF
Private equity
()


£50-200m
20-25%+
PF
()



£250m+
10-15%+
BS or PF
()
()

£50-200m
c.10%
PF
()

£200m+
c.10%
PF / IPO


£50m-£100m
-
-
TRADE
Category
FINANCIAL
Financial drivers
Sovereign
Wealth Funds
Pension funds
Institutional
investors
Debt provider
()
()
Levered
Equity ticket returns Asset financing
Asset financing - Seeking stable yield
Positioning within the project lifecycle
Development
Procurement
Construction
Early
operation
Long term
operation
Utility





Any
10%+
Historically BS,
but now PF
Oil and gas





Any
10-15%
Traditionally BS
but now PF
IPP





Any
15%+
PF
Japanese
Trading Houses





£50m
10%+
PF
Developers


()
£50m+
15%+
PF
WTG
()


£50m+
15-20%
PF
Infrastructure
contractors
()


£100m+
15-20%
PF
Private equity
()


£50-200m
20-25%+
PF
()



£250m+
10-15%+
BS or PF
()
()

£50-200m
c.10%
PF
()

£200m+
c.10%
PF / IPO


£50m-£100m
-
-
TRADE
Category
FINANCIAL
Financial drivers
Sovereign
Wealth Funds
Pension funds
Institutional
investors
Debt provider
()
()
Levered
Equity ticket returns Asset financing
Trade - under credit pressure
Credit ratings trajectory
The issue
Top 11 integrated utilities plus DONG Energy
AA
AA-
A+
AA-
A
A
A-
A
2001
►
Competing needs for capital
►
Long-term PPA capitalised as debt (S&P)
►
Project finance loans consolidated as corporate
debt
►
Higher opportunity cost of capital
Next step
A-
A+
BBB+
2009
BBB
The issue
►
Create liquidity to re-build balance sheet
►
Generate a profit by attracting low WACC into
their portfolio (whilst avoiding LT liabilities)
2011
Fresh capital available from some
European utilities and Asian IPPs
Source: Standard & Poors
Financial - can Infra & PE funds validate the
investment prognosis to their shareholders?
Exit model for financial investors
The issue
Trade
►
Energy yield down 15-10% (wind)
►
Banking covenants stretched (recapitalisation)
►
Thin, highly volatile cash flows
►
Long-term O&M?
Next step
Operating
portfolio
►
IPO
The issue
Secure exit at promised multiple to raise the
next fund
Institutional
Infra & PE who have taken
development risks will be able to
secure premium; others may not...
Debt - high margins, low liquidity
9
The issue
12 year Sterling swap rate1
The issue
8
7
►
6
►
5
4
3
►
2
1
0
Jan-09
Jan-10
Basel III: cost is up, availability down
Utility leverage impact from PPA accounting
and loan consolidation
Lack of capital market refinancing
opportunities
Jan-11
12 year LIBOR swap rate
Margin
Next step
8%
7%
10 year Euro swap rate1
►
6%
5%
►
4%
►
3%
2%
1%
0%
Dec-07
Mar-08
Jun-08
Lenders' margin
Sep-08
Dec-08
10 year sw ap rate (€)
Source: Bloomberg & Ernst & Young proprietary information
Mar-09
Enable liquidity
Increase availability of LT money
Control margins
Solution 1 - Strategic procurement to secure
financing through multi-lateral and ECAs
Project financing for offshore wind (reliance on multi-laterals & ECAs
Eq.
Cont.
KfW
EIB
Credit G
Com. Bank
Northwind
Lincs
Meerwind
Global Tech I
C-Power I, II & III
Borkum West II
Belwind
C-Power I
Princes Amalia
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Solution 2 - Structure to attract institutional
investors as debt and equity providers
Large volumes but structuring issues
Volumes ($bn)
How can we turn a wind / solar
investment into a rated financial
instrument?
Construction risk
Technology risk
O&M risk
Resource risk (wind)
Regulatory/political risk
Asset management capabilities
New structures, new business models
Solution 3 - Flex policy framework
 Provide long-term visibility (2030 Targets?)
 Manage cost reduction pathway
 Enable liquidity (Multi-laterals, ECAs)
 Implement capacity payments
 Ensure value for money through government-led procurement
Final thoughts
• Planning your funding strategy is a critical part of the project development process.
• The sources of long-term debt and equity are changing as the financial markets change
and the regulatory environment changes.
• Equity investors are being more selective, more risk-averse and less susceptible to
financial engineering.
• Debt providers have increasing margins, shorter tenors and less risk tolerance.
• Capital innovation will be centre stage in the years ahead as the need for capital from the
sector increases and capital markets re-assess their classification of the RE asset base.
• The regulatory and policy environment needs to continue to respond and adapt to the
needs of capital providers, in order to drive down the cost of capital and increase capital
availability and thus reduce the cost to the consumer.
Page 24
New Energy Economy