Investigating Energy Auctions
December 5, 2012
By: John Paul Moscarella
Emerging Energy & Environment, LLC
1
WHO WE ARE
• Fund Management Company that
manages two specialized and regional
Private Equity Funds.
• Region: Latin America mainly Mexico,
Peru and Brazil, in the future, Chile,
Colombia and Central America
• Focused on Renewable Energy and Energy
Efficiency infrastructure
EMERGING ENERGY & ENVIRONMENT
2
WHO WE ARE: FUNDS UNDER MANAGEMENT
• Emerging Energy Latin America Fund II, L.P.
Primarily Renewable Energy and Energy Efficiency
Infrastructure.
Recent first closing
• CleanTech Fund, L.P.
Primarily energy efficiency, renewable energy, clean
technologies, sustainable transportation
Totally invested. Now divesting:
- 3 Mini hydros
- Efficient CNG
- Efficient Corn processing
- Hybrid Vehicles
- Biogas
EMERGING ENERGY & ENVIRONMENT
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MARKET SUMMARY
Market Growth Potential
Hydropower
Most countries in the region already use a good portion of their hydropower potential to generate electricity. Traditionally
these projects have been developed with larger dam operations, seeking the economies of scale characteristic of large
hydroelectric technologies. This practice has left a large portion of the small hydroelectric potential yet to be exploited. Given
the high rainfall indices and the topography of many countries, small hydropower offers an attractive alternative to supply
electricity, especially in remote sites.
Solar Energy
Solar energy is more evenly distributed, as good portions of the region lie within the Sun Belt Region of highest solar radiation.
Thus solar energy is a predictable and reliable resource, capable of being transformed to heat and electricity by means of
several commercially viable technologies in different stages of development.
Wind Power
The force of winds can be used to produce mechanical power and electricity by means of commercially available and costcompetitive technologies. Southeast Mexico, most Central American and Caribbean countries, as well as Northeast Brazil are
attractive wind regimes due to the prevailing Trade Winds. Wind regimes can also be found in the southern hemisphere. When
properly located and sized, wind has proven to be a reliable energy resource. The region’s governments are highly aware of
this clean and efficient power source and will continue to stimulate its rapid expansion.
EMERGING ENERGY LATIN AMERICA FUND II
CONFIDENTIAL – FOR PROFESSIONAL INVESTORS ONLY
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INVESTMENT STRATEGY AND SECTOR FOCUS
PRIMARY COUNTRY/REGIONAL FOCUS
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INVESTMENT TYPE
 Infrastructure-orientation
 Asset-centric
 Expansion and growth
Brazil
Colombia
Mexico
Peru
Chile
Central America
INVESTMENT SECTORS
Renewable Energy
 Small Scale Hydro (up to 30 MW)
 Wind
 Solar
EMERGING ENERGY LATIN AMERICA FUND II
Energy Services
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Energy Services Companies
Industrial Co-Generation
Renewable Energy Distribution
Renewable Energy Logistical Infrastructure
CONFIDENTIAL – FOR PROFESSIONAL INVESTORS ONLY
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INVESTMENT STRATEGY AND SECTOR FOCUS
 Portfolio Breakdown by Sector
-
Renewable Energy Infrastructure 80%
-
Energy Services Companies 20%
 Strategies:
- Portfolio Companies with
- Scalable and proven business and
technology models
 Portfolio Diversification
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Geography: <40% of the fund’s assets
will be invested in one single country
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Assets: <15% of the fund’s assets in a
single investment
EMERGING ENERGY LATIN AMERICA FUND II
-
Stable cash flow and resistance to
macroeconomic fluctuations
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Long term off take contracts with anchor
end-users
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Partnership with local management teams
with proven development expertise and
operational track records
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Clustering companies into attractive
portfolio acquisition targets
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Lead investor role with extensive control
over and influence on the operational
management of portfolio companies
CONFIDENTIAL – FOR PROFESSIONAL INVESTORS ONLY
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INVESTMENT STRATEGY AND SECTOR FOCUS - TYPE OF ASSETS
Fund II will principally invest in three types of assets:
 "Late stage" investments, with no early stage development risk, with construction risk, subject to completion
of one or more of the following:
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Resource identification and measurement
Basic engineering and design, construction budget reviewed and approved by third party
Site control and access to transmission
Key environmental permits and approvals, and execution contracts
Anchor revenue contracts
Project financing "highly likely" or in place
 Operating or brownfield assets:
 Assets with established operating profiles with potential for expansion ("low cost or free growth
option")
 Early stage assets:
 Strong pre-feasibility analysis
 Attractive resource, favorable regulation, and strong economic outlook
 Key contracts or permits still need to be obtained
EMERGING ENERGY LATIN AMERICA FUND II
CONFIDENTIAL – FOR PROFESSIONAL INVESTORS ONLY
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INVESTMENT STRATEGY AND SECTOR FOCUS - AGGREGATION
 EEE believes that there is an outstanding opportunity to aggregate smaller renewable energy
projects, which benefit from portfolio efficiencies in financing, implementation and operation
 Improvements in technology and economics, combined with the existence of strong resource base
(hydro, solar, wind) have made smaller projects economic and attractive
 The smaller projects, individually with enterprise value between $5-50 mm, is an overlooked and
capital-constrained niche in the market
 EEE will pursue a country-specific or a regional approach in the implementation of its roll-up
strategy
EMERGING ENERGY LATIN AMERICA FUND II
CONFIDENTIAL – FOR PROFESSIONAL INVESTORS ONLY
8
INVESTMENT STRATEGY AND SECTOR FOCUS - AGGREGATION
 Country-specific portfolios - key issues
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Lack of asset and geographic diversification
Country risk concentration
Resource risk diversity
Asset financing - single asset vs. portfolio - lender appetite may vary
Sector and electricity price outlook
Regulatory and institutional issues
Exit prospects
 Regional portfolios - key issues
 Portfolio diversification based on country, regulatory regime, hydrology variation, asset-type, assetstage
 Geographic composition of the portfolio - initial focus will be on countries with well-mitigated country
and regulatory profiles favorable to small hydro, as well as investment grade sovereign ratings
 Regional approach to financing is new but lender feedback is encouraging
 Target focus - Peru, Mexico, Brazil, Chile, Central America, Colombia
EMERGING ENERGY LATIN AMERICA FUND II
CONFIDENTIAL – FOR PROFESSIONAL INVESTORS ONLY
9
PIPELINE - TARGETED SECTORS AND DRIVERS FOR FUND II DEALFLOW
SMALL HYDRO POWER (SHP)
KEY DRIVERS
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Untapped existing river flows with established hydrological patterns
Modest capital cost due to lack of reservoirs
Low environmental impacts compared to large hydros
Relatively high capacity factors (>70% vs. 25% solar vs. 35% wind)
Supportive regulation that subsidizes O&M cost and taxes
KEY MARKETS
 Peru, Brazil, Chile, Mexico, Colombia and Central America are strong markets based on current EEE deal
flow
 Total installed small and mini hydro capacity is still much lower compared to potential capacity based
on untapped areas – current estimated resource is 2.8x total generating capacity, higher in some other
markets
SHP & SHP + Large Hydro:
 Peru – 3 GW (installed) vs. 58 GW (currently estimated feasible potential)
 Brazil – 3 GW vs. 15 GW
 Mexico – 210 MW vs. 3.3 GW
 Chile – 200 MW vs. 10 GW
 Central America - 4 GW vs. 11 GW (SHP + large hydro)
 Colombia –8.5 GW vs. x 48 (SHP + large hydro)
EMERGING ENERGY LATIN AMERICA FUND II
CONFIDENTIAL – FOR PROFESSIONAL INVESTORS ONLY
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EELAF II, L.P. PIPELINE OVERVIEW
Current Fund II active pipeline:
 Over 35 deals representing over US$2.7 billion of investment potential.
 Over US$2.2 billion of the pipeline represents wind, solar, and small hydro renewable energy
infrastructure.
BIOMASS, 8%
RECYCLING,
3%
CT INFRA,
8%
SOLAR,
14%
Central
America,
13%
SMALL
HYDRO, 26%
COGEN, 5%
Uruguay, 4%
Peru, 11%
Brazil, 21%
Chile, 9%
WIND, 32%
Mexico, 43%
BIOGAS, 3%
EMERGING ENERGY & ENVIRONMENT
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Auctions: here to stay?
Source: Energy contracting in Brazil and electricity prices, Hermes de Arauju (Dir.
General, CEPEL) et al, Brazil, 2007
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Brazil: Auctions as a policy response to 1990s privatization and
energy reforms
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Brazil Auctions Structure
 After 1990s privatization and energy reforms, generation was mainly owned
by public utilities (mostly government owned), while distribution was mostly
owned by private utilities: Issue was how to encourage investment and
signal pricing which would compensate sellers and not adversely affect
consumers
 Original wholesale market (“MAE” in Portuguese) design showed significant
flaws, including ownership  thus new wholesale market operator (“CCEE”
in Portuguese) was created as a non-profit owned by market players
 CCEE became the clearing house for all contracts, and auctions law was
passed in 2004  TRANSPARENCY
 Auctions for “Existing” energy started in 2005, and for “New” energy in 2006
(typically large hydro, A-5 auctions, and thermal, A-3 auctions)  gave the
market pricing for new generation
 To stimulate renewable energy, government passed law in 2008 for Small
Hydro (< 30 MW), wind, solar and biomas  First auction in 2009
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Brazil: (cont.)
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ACR and ACL markets created
 ACR is the regulated market for contracts wherein all the PPAs are
effectively signed with all the distribution companies via the CCEE, typically
tend to be more competitive leading to lower prices but strong “offtaker”
enhances creditworthiness and PPA is more “bankable”
 ACL are freely negotiated bilateral contracts between a generator and a
free customer
Since 2008 law, Energia Incentivada auctions have been held in
 2009: 1.8 GW of Wind projects awarded
 2010: over 2 GW of Wind projects awarded
 2011: 1.9 GW of wind projects awarded
 Pricing has come down every year from R$140/MWh to just over
R$100/MWh
Reflects the fact that most sellers are either large public utilities or new
renewable energy players looking to “get into” the market
Reserve auctions are also employed to contract renewable only
Since 2005, over 31 GW have been awarded, US$300 billion in contracts
About 40% is large hydro, and 20% is renewables
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Auction features
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Technical requirements
 Long list of requirements, i.e.
 Prior environmental license
 Financing capability
Specific offers:
 In the case of wind for example, prices tend to converge to PROINFA
(“feed-in tariff” like)
 Complex mechanisms to compensate for non-delivery
Auction committee:
 Several government agencies
 Define the process
 Set caps (if any)
 Coordination with transmission planning
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Brazil: Small hydro recent developments
SHP: Installed Capacity
3,500
3,066
3,000
2,700
2,500
•
•
•
2,237
2,000
•
1,500
1,000
500
450
0
1998
2008
2009
2011E
•
Source: CCEE Annual reports
•
2010: 7 projects awarded (131
MW)
2011: 41 projects registered (725
MW), but less than that awarded
2011: 4 projects totaling 318 MW
received awards
2012: Few SHP projects are
expected to be bid in the auctions
going forward (Dec. 2012), some
are same as 2011 projects
Have the Brazil auctions have
become “too competitive” for
acceptable rates of return to SHP
projects?
Is there competition with wind that
hampers SHP development?
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Peru: A market that is growing
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2009: Similar to Brazil, Peru enacted the “Ley de Recursos Energeticos
Renovables”  RER auctions
SHP is defined as < 20 MW
2010 – First 2 auctions held yielding the following results:
 First round
 17 Projects = 161 MW
 Price range US$55-74/MWh
 Second Round
 1 project = 19 MW
 Price = US$64/MWh
2011 – Second auction
 7 projects = 102 MW
 Price range = US$ 47- 55 MWh
2012 – No auction yet, RER expected in 2013
Likely pricing range ~ US$55/MWh
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Comp: Brazil wind auctions
Fuente: Impsa
Source: IMPSA, Argentina, 2012
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Comps: Wind price Latin America
Fuente Impsa, Mendoza, Argentina
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Other markets: Uruguay, Chile, Mexico
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Uruguay:
 Started with wind auctions in 2010 and has had three rounds so far, up 450
MW awarded in feb 2012, at US$63.50/Mwh
 Unclear whether SHP will be included in new rules
Mexico
 Self-generation market has proven slow to deploy SHP (circa 200-300 MW)
over last 10 years for SHP
 Widely expected Small Producer (< 30 MW) auctions to the federal utility to
start in 2013, marginal cost pricing for utility
Chile
 ERNC law since 2010 has led to few SHP projects, < 10 MW is dispatched
first
 Ministry is reviewing auction models, expect to launch, but unclear about
the timing
Auctions are becoming increasingly used as a policy tool to encourage
investment and keep prices for SHP and other renewables competitive.
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PPAs: Peru RER Example
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Main Features of Peru RER
 Counterparty = Ministry of Mines and Energy
 Payment terms – via the COES, wholesale market operator, for wholesale
market prices and OSINERGMIN pays the differences to the generator
(“contract for differences”)
 Term = 20 years
 Indexation = US CPI index
 Bidders:
 Firm energy amount – calculated as a % of the installed capacity
 Correction factor – one time correction of firm energy factor, if 4 periods
are < 85% of the firm energy
 Price = US$/MWh (blended cap + energy payment)
 Penalties for non delivery based on firm energy start to accrue unless force
majeure applies
 Contract allows bidder to pledge revenues based on PPA to secure project
financing, highly bankable
 Overage energy delivered paid premium based on “prima”
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Some conclusions
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Not all auctions are created equal
Overall, success of auctions in Brazil has led to billions of investment into new
SHP projects
Similarly, Peru has achieved circa 300 MW of new SHP investment in past few
years
But, prices are tending to become less and less attractive for investors
Conditions for developers are increasingly onerous
Overall, as a policy mechanism to encourage investment in renewables and
SHP in particular it shows it can work but continual monitoring and different
market conditions may hamper the future
If a significant share of wind capacity awarded in recent auctions fails to be
commissioned for example  RETHINKING
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