UNDP Study: Public instruments to promote renewable energy investments in [Tunisia]

1. Guidance: These slides were prepared for a UNDP study in Tunisia. If being applied in other studies, much of the these slides are generic. However certain slides would need to be adapted as appropriate.Version 1.3 (Sep 2014) UNDP Study: Public instruments to promote renewable energy investments in [Tunisia] Materials for Investor Interviews ([Solar PV]) [Month] [Year] (Version [x.x])

2. UNDP contact details • UNDP at a glance: • UNDP is the UN’s development agency; active in 135 country offices; annual $5bn budget • Assists developing countries to create enabled investment environments for low-carbon growth • Active $500m portfolio ($4bn additional co-financing) of support to developing countries in renewable energy • More information at www.undp.org/DREI Oliver Waissbein oliver.waissbein@undp.orgNew York, USA+1 212 906 3637 • Finance Advisor (Energy and Environment Group at UNDP) • Formerly Associate at Goldman Sachs in M&A and corporate finance • MA in international affairs, BA/MA in molecular biology (Columbia, Oxford) Sanju Deenapanray sanju@ecolivinginaction.comLa Gaulette, Mauritius +230 5924 3395 • Energy Specialist (Consultant to UNDP) • Formerly Climate Change Coordinator, UNDP Mauritius; Fellow at the Australian National University (ANU) • PhD in Semiconductor Physics, MBA in Technology Management, MSc Physics, BEng (ANU, Pretoria, LaTrobe)

3. Outline of the [Tunisia] study • Despite strong potential for renewable energy in Tunisia, the reality is that private sector face significant barriers to investment and investment is yet to flow. • Tunisia is now introducing legislation for independent power producers (IPPs) and seeking to put in place an enabled investment environment. UNDP is supporting Tunisia. • Public instruments - such as well-designed legislation, loan guarantees, new grid codes - can assist the private sector through reducing investment risk The Issue • Objective of the study: • What is the best selection of public instruments to promote large-scale renewable energy investment in Tunisia? • Objective of these investor interviews: • How does the private sector view investment risks surrounding renewable energy? • How does the private sector view the impact of public instruments on reducing these risks? Objective • Methodology for the study: • Focuses on wind power and/or solar PV • Uses “Levelized-Cost-Of-Electricity” (LCOE) modeling to study how current renewable energy LCOEs can be made competitive with fossil-based energy • Methodology for the investor interviews: • Introduces a risk framework and asks interviewee to score risks between 1 to 5 • All responses will be treated with full confidentiality; all data will be blended within the entire study and no names or traceable facts will be published Methodology

4. Study’s approach to risk and renewable energy 1. Analyse renewable energy (RE) using LCOE modeling 2. Define 9 risk categories from an investment perspective Objective: Reduce RE LCOE • Power Market Risk • Permits Risk • Social Acceptance Risk • Resource & Technology Risk • Grid/Transmission Risk • Counterparty Risk • Financial Sector Risk • Political Risk • Currency/Macroeconomic Risk Technology/Sector level US$ Cost of Equity US$ Cost of Debt Op Ex Cap Ex/ Depreciation Macro level Current LCOE of Renewable Energy Target LCOE 3. These 9 risk categories form part of the cost of equity/debt for renewable energy 4. Public instruments can reduce these risks and thereby decrease cost of equity/debt % % % % Post de-risking (developing country) Cost of Equity/Debt De-risking instrument #1 De-risking instrument #2 Best in Class RE Investment(Developed Country) Cost of Equity/Debt Risk #1 Risk #2 Risk #3 Pre De-Risking (Developing Country) Cost of Equity/Debt Pre de-risking RE investment (Developing Country) Cost of Equity/Debt

5. The solar PV opportunity in [Tunisia] Tunisia Solar Plan’s 2030 objectives Energy generation by resource • Targets • Solar PV at 10% of generation mix • 1,930 MW installedcapacity • Meetfast-growingenergydemand • Reducedomesticfossil-fuel subsidies Source: ChiffresClés, Juin 2013 (ANME) Current status Solar resources • Tunisia has someof the best solarresources in NorthAfrica • Currentauto-productionlaw • Up to 30% sold to grid (70% auto-consumption) • New legislation for Independent Power Producers (IPPs) currently in Parliament • Limited privatesectorinvestment to date Source: http://solargis.info/doc/88

6. Survey: 9 Risk Categories Technology/Sector level • Power Market Risk • Permits Risk • Social Acceptance Risk • Resource & Technology Risk • Grid/Transmission Risk • Counterparty Risk • Financial Sector Risk • Political Risk • Currency/Macroeconomic Risk Macro level

7. Survey: Risk/Derisking Concepts The study uses a conceptual framework in order to quantify risks and the impacts of public de-risking instruments. Investor risk is broken down into three conceptual components (barriers; negative events; financial impact). De-risking instruments fall into two categories (barrier removal; risk transfer) • Conceptual framework for risks • Practical example: permits risk Drivers of Risk Components of Risk Drivers of Risk Components of Risk Negative events result in financial impact for investors Result in increased probability of negative events affecting wind farm Financial impact: Transaction costs; delayed revenues; under- or no investment Existence of barriers in investment environment Barriers: Lack of clear responsibility of different agencies for RET energy approvals Negative events: Uncertainty and delays due to poorly administered licensing • Barrier removal • Streamlined licensing process: Harmonized requirements, reduced licensing steps; priority areas/zoning • Policy • derisking • instruments • act to reduce barriers • Financial • derisking • instruments • act to transfer • risk (impact) to another actor

8. Survey: Questions and Assumptions Unlikely Very Likely • General Assumptions • 3 Key Questions for Each Risk 1 2 3 4 5 • Q1 : How would you rate the probability that the events underlying the particular risk occur? Please answer all questions based on the current status of the risks in the country’s investment environment today Assume you have the opportunity to invest in a 10-100 MW on-shore wind park Assume a high quality c-Si PV panel manufacturer with proven track record (eliminating certain technology risks) Assume an O&M insurance contract (eliminating certain technology risks) Assume that transmission lines with free capacities are located relatively close to the project site (within 10 km) Assume a build-own-operate business model and a construction sub-contract with high penalties for contract breach (eliminating certain technology risks) Assume a project finance structuring Low Impact High Impact 1 2 3 4 5 • Q2: How would you rate the financial impact of the events underlying the particular risk, should the events occur? High Effectiveness Low Effectiveness 1 2 3 4 5 • Q3: How would you rate the effectiveness of the identified de-risking instrument in mitigating the particular risk?

9. 1: Power Market Risk • Risk Definition:Risk arising from limitations and uncertainties in the power market, and/or suboptimal regulations to address these limitations and promote renewable energy markets Key Stakeholder Group:Public sector (legislators, policymakers) • Barriers • Market outlook: Lack of or uncertainties regarding governmental renewable energy strategy and targets • Market access/price: Suboptimal energy market liberalization; uncertainties regarding competitive and price outlook; limitations in PPA and/or PPA process • Market distortions: high fossil fuel subsidies • Negative events • Inability to secure a visible and viable outlook for cash flow generation • Examples: • Uncertainty on long term policy outlook • Difficult to negotiate PPAs • Uncompetitive with subsidised fossil fuels Financial impacts Q1 Q2 Q3 • Derisking Instrument #1: Public sector activities to create an enabled investment environment • Establish transparent, long-term national wind energy strategy and targets: National-level resource inventory/mapping; establish national energy office; review technology options; renewable energy targets • Establish well-designed and harmonized energy market liberalization and FIT (or similar instrument): Unbundling of the energy market (generation, transmission, distribution); establish well-designed and transparent procedures for FIT, PPA tendering (or similar); well-designed, transparent policy on key clauses for standard PPA • Reform of fossil fuel subsidies: Assessment of fuel subsidies, phase-out/down of subsidies, awareness campaigns, design of transfer programs to affected groups

10. 2: Permits Risk • Risk Definition: Risk arising from the public sector’s inability to efficiently and transparently administer renewable energy-related licensing and permits Key Stakeholder Group:Public sector (administrators) • Negative events • Project delays and operational uncertainties due to administration of permits • Examples: • Inability to advance permitting of project • Uncertainty and delays due to poorly administered licensing process • Limited/inability to have recourse in case of breach of contract or arbitrary decisions Financial impacts • Barriers • Labor-intensive, complex processes and long time-frames for obtaining licenses and permits (generation, EIAs, land title) for renewable energy projects • High levels of corruption. No clear recourse mechanisms Q1 Q2 Q3 • Derisking Instrument #1: Public sector activities to create an enabled investment environment • Establish a one-stop-shop for renewable energy permits; streamline processes for permits: Establish institutional champion with clear accountability and appropriate expertise for renewable energy; harmonisation of requirements; reduction of process steps; training of staff in renewable energy • Contract enforcement and recourse machanisms: Enforce transparent practices, wind energy related corruption control and fraud avoidance mechanisms; establish effective recourse mechanisms

11. 3: Social Acceptance Risk • Risk Definition: Risks arising from lack of awareness and resistance to wind energy in the general public Key Stakeholder Group: End-users, general public • Barriers • Lack of awareness of renewable energy in the general public: including, for example, consumers, end-users, local residents and labor unions • Negative events • Social and political resistance activities due to special interest groups • Example: • Protests or vandalism at project site • Delays in development, construction or operations of renewable energy plant Financial impacts Q1 Q2 Q3 • De-Risking Instrument #1: Public sector activities to create an enabled investment environment • Awareness raising of key stakeholders: Working with the media, awareness campaigns and stakeholder dialogue with end users, policymakers, and local residents • Community involvement at project sites: Community consultations including piloting models such as in-kind services (energy access, local employment; etc.) or equity stakes in renewable energy projects

12. 4: Resource & Technology Risk • Risk Definition: Risks arising from use of the renewable energy resource and technology (resource assessment; construction and operational use; hardware purchase and manufacturing) Key Stakeholder Group:Project developers, supply chain • Barriers • For resource assessment and supply: inaccuracies in early-stage assessment of renewable energy resource • For planning, construction, operations and maintenance: sub-optimal plant design; lack of local firms and skills. limitations in civil infrastructure (roads etc.) • For the purchase and, if applicable, local manufacture of hardware: purchaser's lack of information on quality, reliability and cost of hardware; lack of local industrial presence and experience with hardware • Negative events • Operational disruptions or underperformance due to technology disruptions or malfunctions • Examples: • Breakdown of hardware • Delays through prolonged repairs Financial impacts Q1 Q2 Q3 • Derisking Instrument #1: Public sector activities to create an enabled investment environment • For resource assessment and supply: Project development facility: capacity building for resource assessment • For planning, construction, operations and maintenance: Project development facility: feasibility studies; networking; training and qualifications • For the purchase and, if applicable, local manufacture of hardware: Research and development; technology standards; exchange of market information (e.g., via trade fairs)

13. 5: Grid/Transmission Risk Risk Definition: Risks arising from limitations in grid management and transmission infrastructure in the particular country Key Stakeholder Group:Utility (transmission company/grid operator) • Barriers • Grid code and management: limited experience or suboptimal operational track-record of grid operator with intermittent sources (e.g., grid management and stability). Lack of standards for the integration of intermittent, renewable energy sources into the grid • Transmission infrastructure: inadequate or antiquated grid infrastructure, including lack of transmission lines from the renewable energy source to load centres; uncertainties for construction of new transmission infrastructure • Negative events • Problems in connecting the renewable energy plant to the grid and transmitting electricity • Examples: • Delays in grid connection • Higher cost due to excessive grid code requirements • Inability to feed-in electricity due to poor grid management Financial impacts Q1 Q2 Q3 • Derisking Instrument #1: Public sector activities to create an enabled investment environment • Strengthen transmission company's operational performance, grid management and formulation of grid code: Develop a grid code for new renewable energy technologies; sharing of international best practice in grid management • Policy support for national grid infrastructure development: Develop a long-term national transmission/grid road-map to include intermittent renewable energy • Derisking Instrument #2: Take-or-Pay Clause in PPA • Addresses grid/transmission risks ((black-out/brown-out) and grid management (curtailment))

14. 6: Counterparty Risk • Risk Definition: Risks arising from the utility's poor credit quality and an IPP's reliance on payments Key Stakeholder Group:Utility (electricity purchaser) • Barriers • Limitations in the utility's (electricity purchaser) credit quality, corporate governance, management and operational track-record or outlook; unfavourable policies regarding utility's cost-recovery arrangements • Negative events • Inability to receive payments for wind energy generated and sold to the grid • Examples: • Non-payment of tariffs • Utility's credit profile deteriorates resulting in reduced or non-payment of tariffs Financial impacts Q1 Q2 Q3 • Derisking Instrument #1: Strengthen utility's management/operational performance • Establish international best practice in utility/distribution company's management, operations and corporate governance; implement sustainable cost recovery policies • Derisking Instrument #2: Guarantee of tariff /PPA • Depends on specific circumstances and division of risks in PPA. Can include, as necesssary: partial risk guarantees on PPA; counterparty guarantees as part of political risk insurance (PRI)

15. 7: Financial Sector Risk • Risk Definition: Risks arising from the lack of information and track record on financial aspects of wind energy, and general scarcity of investor capital (debt and equity), in the particular country Key Stakeholder Group:Investors (equity and debt) • Barriers • Capital scarcity: Limited availability of local or international capital (equity/and or debt) for green infrastructure due to, for example: under-developed local financial sector; policy bias against investors in green energy • Limited experience with renewable energy: Lack of information, assessment skills and track-record for renewable energy projects amongst investor community; lack of network effects (investors, investment opportunities) found in established markets; lack of familiarity with project finance structures • Negative events • Failure or delay in launch of wind project due to unfavorable or insufficient debt and/or equity financing • Examples: • High costs in soliciting investors and debt providers • Longer and more extensive process for closing on financing Financial impacts Q1 Q2 Q3 • Derisking Instrument #1: Public sector activities to create an enabled investment environment • Financial sector policy reforms: Assess trade-offs between financial stability regulation and renewable energy objectives (e.g. liquidity treatment); promote financial sector policy favorable to long-term infrastructure, including project finance • Strengthen investors‘ familiarity with and capacity regarding renewable energy projects: Industry-finance dialogues and conferences; workshops/training on project assessment and financial structuring • Derisking Instrument #1: Debt and equity products • Depends on specific financial circumstances. Can include as necessary: public loans; public loan guarantees; public equity

16. 8: Political Risk • Risk Definition: Risks arising from country-specific governance, social and legal characteristics Key Stakeholder Group:National Level • Barriers • Uncertainty or impediments due to war, terrorism, and/or civil disturbance • Uncertainty due to high political instability; poor governance; poor rule of law and institutions • Uncertainty or impediments due to government policy (currency restrictions, corporate taxes) • Negative events • Interferences to the operations and finances of the renewable energy plant due to socio-political instability • Examples: • Damage or delays to renewable energy plant due to violence • Expropriation of assets • Inability to repatriate cash flows Financial impacts Q1 Q2 Q3 • Derisking Instrument #1: Political Risk Insurance for equity and debt holders (PRI) • Provision of political risk insurance to equity holders covering (i) expropriation, (ii) political violence, (iii) currency restrictions and (iv) breach of contract

17. 9: Currency/Macroeconomic Risk • Risk Definition: Risks arising from the broader macroeconomic environment and market dynamics Key Stakeholder Group:National Level • Barriers • Uncertainty due to volatile local currency; unfavourable currency exchange rate movements • Uncertainty around inflation, interest rate outlook due to an unstable macroeconomic environment • Negative events • Exposure of project operations and cash flows to macroeconomic and market related changes • Examples: • Inability to sell electricity to the grid • Mismatching of currency for revenues and expenses • Unexpected rise in financing costs due to higher interest rates Financial impacts Q1 Q2 Q3 De-Risking Instrument: Partial-indexing of the PPA tariff • Addresses currency risk (the foreign exchange rate exposure that IPPs may face due to hard-currency lending with a local-currency denominated PPA)

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