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Private Sector Perspectives on Risk

UNFCCC Workshop on Innovative Options for Financing the Development and Transfer of Technologies 27-29 September 2004. Private Sector Perspectives on Risk. Charles Donovan Commercial Manager, Transactions CAT Alliance Ltd. T: +44 20 7421 6359 E: cwd@cat-alliance.com.

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Private Sector Perspectives on Risk

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  1. UNFCCC Workshop on Innovative Options for Financing the Development and Transfer of Technologies27-29 September 2004 Private Sector Perspectives on Risk Charles Donovan Commercial Manager, Transactions CAT Alliance Ltd. T: +44 20 7421 6359 E: cwd@cat-alliance.com

  2. Enviros Consulting: Founding Member of CAT Alliance Ltd. • Europe’s largest resource base for environmental due diligence • Owned by three environmental / energy consulting firms: Enviros (UK), Tauw (Netherlands), and COWI (Denmark) • Total staff of 5000+ and combined turnover of $400+ million • Transaction support to investors and developers in the global clean technology sector

  3. CAT Alliance Geographical Coverage

  4. Let’s Start with the Basics Common Equity HIGH Preferred Equity Risk Tolerance and Required Financial Return Mezzanine Debt Subordinated Debt LOW Senior Debt

  5. Let’s Start with the Basics Common Equity HIGH Preferred Equity Cost of Financing Mezzanine Debt Subordinated Debt LOW Senior Debt

  6. Private Sector Demands on Project Evaluation • Exchange Rate Risks • Political Risks • Environmental Compliance Risks • Technology Risk • Operational Risks • Construction / Commissioning Risks • Counterparty Credit Risk • Commodity Price Risks

  7. Overview of Credit Risk Management • Screening of counterparties • Development of trading limits and transaction limit processes • Monitoring and reporting of financial exposure against limits • Testing exposure to financial losses on individual transactions • Development of credit support packages (e.g. netting) that support efficient allocation of credit risk for multiple transactions What is my expected risk-adjusted return on capital?

  8. Credit Enhancement in the Renewable Energy Sector • Financial risk can be influenced by a large number of factors – credit risk is one area where governments and multilateral institutions can make a tremendous difference. • Energy financing is still recovering from unprecedented default events in 2001 and 2002. Industry is very focused on credit risk issues. • Few well capitalised developers and suppliers (e.g. GE Energy) • The use of output-based subsidies to support renewable energy projects (e.g. Renewable Energy Certificates, CDM carbon credits) may lead investors to have complex and unwanted credit risk exposure. • Financing renewable energy is at least as pressing a problem as how to make new projects economically viable. • Public-private partnerships urgently need to address the credit gap.

  9. Commodity Price Risk: What is the Value of Carbon Credits? Source: Enviros Consulting EU ETS Price Forecast

  10. Historical Emissions Data Technological Uptake Forecasts Production Forecasts Baseline Emissions Phase I Allocations Phase II Allocations Sector Cost Abatement Curves Fuel Price Forecasts JI/CDM Cost Abatement Curves Can We Expect Bank Credit Committees to Understand This? Allowance Allocation Demand for Allowances CO2 Emission Projections Weather Allowance Prices Sector Surplus or Shortfall Banking and Borrowing Economic Growth Traded Volumes Supply of Allowances Future development

  11. Looking Back: UK ETS Price Activity What sets the price when supply and demand are artificial? 2002 vintage 2003 vintage Today’s price ~ £2.00/tonne Source: TFS, ICAP

  12. Case Study: Durban, South Africa • eThekwini Municipality (Durban) in South Africa is developing a 10 MW landfill gas-to-electricity project on three landfill sites. • Recently signed an Emissions for the sale of $15 million in CDM carbon credits to the World Bank Prototype Carbon Fund. • An innovative project in many respects: One of very few independent power producers in South Africa, multi-site landfill gas collection system, and the project involves the largest waste transfer facility in Southern Africa. • No legally binding power purchase agreement (PPA) • Funded from the Municipal Balance Sheet – City of Durban was able to access low cost funds due to low inflation and very strong credit profile.

  13. How do we create more successes like this? Is there a role for lease financing to reduce capital expenditure? Can these projects gain debt financing from private financial institutions? How can you access large-scale private sector debt investments?

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