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])
1
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
Sanju Deenapanray
oliver.waissbein@undp.org
New York, USA
+1 212 906 3637
sanju@ecolivinginaction.com
La Gaulette, Mauritius
+230 5924 3395
Energy Specialist
(Consultant to UNDP)
•
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)
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)
2
Outline of the [Tunisia] study
The Issue
Objective

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

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?

Methodology for the study:
•
•
Methodology

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
3
Study’s approach to risk and renewable energy
US$
Cost of Equity
Cost of Debt
US$
1.
Power Market Risk
2.
Permits Risk
3.
Social Acceptance Risk
4.
Resource & Technology Risk
Op Ex
5.
Grid/Transmission Risk
Cap Ex/
Depreciation
6.
Counterparty Risk
7.
Financial Sector Risk
8.
Political Risk
9.
Currency/Macroeconomic Risk
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
%
%
%
Best in Class
RE Investment
(Developed Country)
Cost of Equity/Debt
Macro level
Objective: Reduce
RE LCOE
2. Define 9 risk categories from an
investment perspective
Technology/Sector
level
1. Analyse renewable energy (RE)
using LCOE modeling
Risk #1
Risk #2
Risk #3
Pre de-risking
RE investment
(Developing Country)
Cost of Equity/Debt
Pre De-Risking De-risking
(Developing Country) instrument
#1
Cost of Equity/Debt
De-risking
instrument
#2
Post de-risking
(developing country)
Cost of Equity/Debt
4
The solar PV opportunity in [Tunisia]
Energy generation by resource
Tunisia Solar Plan’s 2030 objectives
•
•
•
Targets
• Solar PV at 10% of generation mix
• 1,930 MW installed capacity
Meet fast-growing energy demand
Reduce domestic fossil-fuel subsidies
Source: Chiffres Clés, Juin 2013 (ANME)
Solar resources
• Tunisia has some
of the best solar
resources in
North Africa
Current status
•
•
•
Source: http://solargis.info/doc/88
Current auto-production law
• Up to 30% sold to grid (70% autoconsumption)
New legislation for Independent Power
Producers (IPPs) currently in Parliament
Limited private sector investment to date
5
Survey: 9 Risk Categories
3. Social Acceptance Risk
4. Resource & Technology Risk
5. Grid/Transmission Risk
6. Counterparty Risk
7. Financial Sector Risk
8. Political Risk
9. Currency/Macroeconomic Risk
Macro level
2. Permits Risk
Technology/Sector level
1. Power Market Risk
6
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
Drivers of Risk
Existence of
barriers in
investment
environment
Policy
derisking
instruments
act to reduce
barriers
Components of Risk
Result in
increased
probability
of negative
events
affecting wind
farm
Negative
events result in
financial
impact for
investors
Financial
derisking
instruments
act to transfer
risk (impact) to
another actor
Practical example: permits risk
Drivers of Risk
Barriers:
Lack of clear
responsibility
of different
agencies for
RET energy
approvals
Components of Risk
Negative
events:
Uncertainty
and delays
due to poorly
administered
licensing
Financial
impact:
Transaction
costs; delayed
revenues;
under- or no
investment
Barrier removal
Streamlined
licensing process:
Harmonized
requirements,
reduced licensing
steps; priority
areas/zoning
7
Survey: Questions and Assumptions
3 Key Questions for Each Risk
Q1 : How would you rate the probability that
the events underlying the particular risk
occur?
Unlikely
1
Very Likely
2
3
4
5
Q2: How would you rate the financial impact
of the events underlying the particular risk,
should the events occur?
Low Impact
1
High Impact
2
3
4
5
Q3: How would you rate the effectiveness of
the identified de-risking instrument in
mitigating the particular risk?
High
Effectiveness
Low
Effectiveness
1
2
3
4
5
General Assumptions
1. Please answer all questions based on
the current status of the risks in the
country’s investment environment
today
2. Assume you have the opportunity to
invest in a 10-100 MW on-shore wind
park
3. Assume a high quality c-Si PV panel
manufacturer with proven track record
(eliminating certain technology risks)
4. Assume an O&M insurance contract
(eliminating certain technology risks)
5. Assume that transmission lines with
free capacities are located relatively
close to the project site (within 10 km)
6. Assume a build-own-operate business
model and a construction sub-contract
with high penalties for contract breach
(eliminating certain technology risks)
7. Assume a project finance structuring
8
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)
Q1
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
Q2
• Inability to secure a visible and viable outlook
for cash flow generation
Financial
impacts
Examples:
• Uncertainty on long term policy outlook
• Difficult to negotiate PPAs
• Uncompetitive with subsidised fossil fuels
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
9
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)
Q1
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
Q2
Negative events
• Project delays and operational uncertainties
due to administration of permits
Financial
impacts
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
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
10
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
Q1
Barriers
• Lack of awareness of renewable energy in
the general public: including, for example,
consumers, end-users, local residents and
labor unions
Q2
Negative events
Financial
impacts
• 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
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
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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
Q1
Barriers
• For resource assessment and supply: inaccuracies in earlystage assessment of renewable energy resource
• For planning, construction, operations and maintenance: suboptimal 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
Q2
Negative events
• Operational disruptions or
underperformance due to
technology disruptions or
malfunctions
Financial
impacts
Examples:
• Breakdown of hardware
• Delays through prolonged repairs
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)
12
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)
Q1
Barriers
Negative events
• 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
• Problems in connecting the renewable
energy plant to the grid and transmitting
electricity
• 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
• Higher cost due to excessive grid code
requirements
Q2
Financial
impacts
Examples:
• Delays in grid connection
• Inability to feed-in electricity due to poor
grid management
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))
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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)
Q1
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
Q2
Financial
impacts
Examples:
• Non-payment of tariffs
• Utility's credit profile deteriorates resulting in
reduced or non-payment of tariffs
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)
14
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)
Q1
Barriers
Q3
Q2
Negative events
• 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
• Failure or delay in launch of wind
project due to unfavorable or
insufficient debt and/or equity
financing
• 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
Examples:
Financial
impacts
• High costs in soliciting investors and
debt providers
• Longer and more extensive process
for closing on financing
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
15
8: Political Risk
Risk Definition: Risks arising from country-specific governance, social and legal characteristics
Key Stakeholder Group: National Level
Q1
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 sociopolitical instability
Q2
Financial
impacts
Examples:
• Damage or delays to renewable energy plant
due to violence
• Expropriation of assets
• Inability to repatriate cash flows
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
16
9: Currency/Macroeconomic Risk
Risk Definition: Risks arising from the broader macroeconomic environment and market dynamics
Key Stakeholder Group: National Level
Q2
Q1
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
Financial
impacts
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
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 localcurrency denominated PPA)
17
Thank you for your support.
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