Turkey Wind Financing, IPEEC

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  • Although the VCM is only 1% of the global carbon market, it is 100% of the market in Turkey – fully 70% of the VCM projects are of Turkish origin. The nation has carved out a “niche” position for itself in this market by being the biggest player in it.
  • Capital expenditures (CAPEX or capex) are expenditures creating future benefits. A capital expenditure is incurred when a business spends money either to buy fixed assets or to add to the value of an existing fixed asset with a useful life that extends beyond the taxable year. Capex are used by a company to acquire or upgrade physical assets such as equipment, property, or industrial buildings. An operating expense, operating expenditure, operational expense, operational expenditure or OPEX is an on-going cost for running a product, business, or system. Its counterpart, a capital expenditure (CAPEX), is the cost of developing or providing non-consumable parts for the product or system. For example, the purchase of a photocopier is the CAPEX, and the annual paper and toner cost is the OPEX. For larger systems like businesses, OPEX may also include the cost of workers and facility expenses such as rent and utilities.
  • Capital expenditures (CAPEX or capex) are expenditures creating future benefits. A capital expenditure is incurred when a business spends money either to buy fixed assets or to add to the value of an existing fixed asset with a useful life that extends beyond the taxable year. Capex are used by a company to acquire or upgrade physical assets such as equipment, property, or industrial buildings. An operating expense, operating expenditure, operational expense, operational expenditure or OPEX is an on-going cost for running a product, business, or system. Its counterpart, a capital expenditure (CAPEX), is the cost of developing or providing non-consumable parts for the product or system. For example, the purchase of a photocopier is the CAPEX, and the annual paper and toner cost is the OPEX. For larger systems like businesses, OPEX may also include the cost of workers and facility expenses such as rent and utilities.
  • Policy Assistance Network is the strategic IPEEC’s umbrella network. It’s designed to strengthen energy efficiency policy design and implementation, support international and domestic EE actions, and promote ongoing communication between EE specialists that were brought together by IPEEC. Developing and supporting PAN is one of the strategic IPEEC goals, as it is inline with the main IPEEC task of increasing energy efficiency communication and knowledge and experience sharing worldwide.
  • Turkey Wind Financing, IPEEC

    1. 1. ExCo 05 // 20-22 September 2011 CEM02  February September 21, 2011,Istanbul15, 2011 Presentation Wind Power Financing & Investing in Turkey Author Amit Bando, Executive Director
    2. 2. ExCo 05 // 20-22 September 2011 01 What is IPEEC? 1
    3. 3. ExCo 05 // 20-22 September 2011 IPEEC is a high level international forum  Provides global leadership on energy efficiency by identifying and facilitating government implementation of policies and programs that yield high energy-efficiency gains.  Aims to promote information exchange on best practices and facilitate initiatives to improve energy efficiency.  Formally established in 2009 at the G8 summit in L'Aquila, Italy and resulting from the Heiligendamm Dialogue Process. 2
    4. 4. ExCo 05 // 20-22 September 2011 IPEEC is an autonomous entity Members account for over 75% of world GDP and energy use. EU Germany United Kingdom Italy France Russia Canada Japan USA Republic of Korea Mexico China India Brazil Australia The IPEEC Secretariatis located in Paris, France 3
    5. 5. ExCo 05 // 20-22 September 2011 IPEEC - guiding principles  Improving energy saving and energy efficiency is one of the quickest, greenest, and most cost-effective ways to address energy security and climate change as well as to ensure sustainable economic growth  All countries, both developed and developing, share common interests in improving their energy efficiency performance   There is abundant potential for international cooperation among them Will contribute to improvement of energy efficiency at the global level  Developed countries need to play an important role in cooperation with developing countries  Accelerating dissemination and transfer of best practices, efficient technologies and capacity building in developing countries 4
    6. 6. ExCo 05 // 20-22 September 2011 02 Wind Power in Turkey 5
    7. 7. ExCo 05 // 20-22 September 2011 Wind Value Chain is Increasingly Split Up  Two distinct segments developing: onshore and offshore 6
    8. 8. ExCo 05 // 20-22 September 2011 Onshore – Continued Growth, New Frontiers  Most installed capacity in Europe  Inside Europe fastest growth moving from traditional wind power producers (Germany & Spain) to new countries (France, UK, Italy and Ireland)  Fastest growth in US and Asia (particularly China and India).  Factors that impact growth:      Value chain bottlenecks Grid access limitations Legislation / Subsidies Cost relative to fossil fuels Availability of capital (credit crunch). 7
    9. 9. ExCo 05 // 20-22 September 2011 Onshore Wind Power – Subsidy Overview  Wind strength&subsidy regime define the onshore wind project economics 13
    10. 10. ExCo 05 // 20-22 September 2011 Market drivers  Wind strength and electricity shortages  Turkey‟s generally very favourable wind regime, with a long coastline, causes wind farms to register a high average capacity factor of 30-35% (globally 20-25%). This is a very important factor in the economic viability of a wind farm.  Export Credit Agencies can make robust projects work in difficult credit environments  Regulatory drivers:    Climate change concerns Security of domestic energy supply Domestic industry support 9
    11. 11. ExCo 05 // 20-22 September 2011 Market drivers (continued)  Energy prices:   High price paid for electricity on the wholesale market  However, state price guarantees insufficient to make projects financially viable in certain locations Increasing demand of energy: Turkey may face electricity shortages in the short to medium term future.  Grid strength is an issue, could be solved by partnering  Financial structure:   Combine guaranteed price with upside from wholesale market Mezzanine tranches (between senior debt and equity) to boost equity returns 10
    12. 12. ExCo 05 // 20-22 September 2011 Market drivers (continued)  Selling Carbon Credits to boost revenues:      Turkey ratified Kyoto Protocol in August, 2009. VCM is only 1% of Global Carbon Markets – it is 100% of market in Turkey (70% of VCM projects are of Turkish origin) Private sector has a “niche” position – learning-by-doing since 2005 IRR with carbon income is 5% higher than IRR without carbon income Price of VERs in the range of 5-10 Eur/tCO2e provide additional boost to wind power projects in Turkey. 11
    13. 13. ExCo 05 // 20-22 September 2011 Financial Market  Market dynamics have changed since 2008.  Banks have become increasingly risk averse and focussed on core clients.  Internal approval processes are uncertain and conservative.  Bank balance sheets are highly constrained and lending to new clients or new sectors is virtually non-existent.  Banks are unwilling or unable to offer underwriting.  Given market circumstances, with specific reference to PF deals in the Renewable sector, transactions will need to be arranged on a club basis. 12
    14. 14. ExCo 05 // 20-22 September 2011 Financial Market (continued)  Debt financing is likely to remain constrained and will require the collective use of balance sheet across a large group.  As a result deals will be smaller to ensure liquidity can be found. This will result in larger lead groups and organised club deals.  Underwriting will not return until balance sheet constraints are rectified and confidence and liquidity is restored in the market.  When this occurs, all underwritten transactions will need to have full market flexon pricing, fees and structure.  Limited recourse financing instead of non-recourse financing is an option to enhance availability of debt for strong sponsors. 13
    15. 15. ExCo 05 // 20-22 September 2011 Limited Risk Appetite - Focus on Project and Sponsor Quality  A strong focus on quality of the project developer and financial sponsor.  Utilities will be in a stronger position to attract finance.  Due diligenceis increasingly important in terms of technology risk and forecast assumptions.  Unproven technologywill prove increasingly difficult to attract debt capital.  Pricing - given banks higher costs of funds and capital costs, margins and fees will need to increase to maintain, let alone attract liquidity.  Tenor - given the cost to banks of sourcing longer term capital, there is substantial pressure to lend on a short term basis only.  Transaction tenors are expected to shorten (as much as is feasible). 14
    16. 16. ExCo 05 // 20-22 September 2011 Limited Risk Appetite - Focus on Project and Sponsor Quality (continued)  Structure – back to basics!      Stronger focus on forecast assumptions and due diligence. Loan life coverage will increase Strong desire for amortisation Increased focus on cash sweeps and dividends Transactions will require more equity.  Cost of credit is a significant driver of value.  Given the high cost of capital and shortage of liquidity, transaction IRRs will come under pressure. 15
    17. 17. ExCo 05 // 20-22 September 2011 Likelihood of success  Location, turbines, contracts, management  Geographic Location   Wind resources Grid Export Capacity  Off take arrangements    Prevailing Tariff Counter Party Strong PPA (Power Purchase Agreement) 16
    18. 18. ExCo 05 // 20-22 September 2011 Likelihood of success (continued)  Turbine Choice    Capex and Opex Technology Project Life (including re-powering potential)  Other Project Specific Factors   Project Team and Project Sponsors Financing and Security Structure 17
    19. 19. ExCo 05 // 20-22 September 2011 Risks and opportunities when financing wind energy  Overall - growth is expected to continue Opportunities:  Decreasing cost of wind energy generation through technical developmentscould make it even more economically viable globally  The need to improve grid access is becoming a focus for governments  Wind turbine production is increasing globally  Repowering could be a new market in „old‟ wind countries 18
    20. 20. Risks and opportunities when ExCo 05 // 20-22 September 2011 financing wind energy (continued) Risks:  Dependence on government support  Public opinion - increasing opposition against onshore wind farms  Permitting and regulatory challenges  Landscape and nature conservation  Safety, radar interference, etc.  Grid infrastructure limitations  Slow pace of grid improvements Electricity price effects  Turbine availability, increasing turbine prices&other value chain bottlenecks  19
    21. 21. ExCo 05 // 20-22 September 2011 Overall – A Great Opportunity Wind energy is  One of the cheapest forms of renewable energy  Large-scale  Fairly mature technology (on-shore)  Quick to install.  In principle, wind turbines do not harm the environment but they are not without their public opinion issues.  Wind energy will grow in the coming years, both on- and offshore. This presents a great opportunity. 20
    22. 22. ExCo 05 // 20-22 September 2011 Thank you For more information, contact the IPEEC Secretariat: Amit Bando, Executive Director: amit.bando@ipeec.org contact@ipeec.org 9 rue de la Federation, 75739 Paris Cedex 15, France www.ipeec.org 21

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