Omass Law Asia 2009 Financing Renewable Energy 10 Nov

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Financing Renewable Energy in Asia by Oliver Massmann

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  • Omass Law Asia 2009 Financing Renewable Energy 10 Nov

    1. 1. GOING GREEN AND FINANCING RENEWABLE ENERGY IN ASIA: THE BASICS<br />Oliver Massmann, Duane Morris Vietnam LLC – Hanoi, 12Nov 2009<br />
    2. 2. AGENDA<br />NO FEED-IN TARIFF, NO RENEWABLE ENERGY<br />FISCAL INCENTIVES ARE NECESSARY TO MAKE A PROJECT BANKABLE<br />LIMITED PROJECT FINANCE: CLASSICAL BUT EFFECTIVE <br />CERTIFIED EMISSION REDUCTIONS (“CER”) TRADING SHOULD BE TAKEN INTO CONSIDERATION<br />
    3. 3. NO FEED-IN TARIFF, NO RENEWABLE ENERGIES <br />A FEED-IN TARIFF (“FIT”) is a favorable price paid by power companies to purchase all electricity from eligible renewable energy (“RE”) producers in their service area over a long period of time (usually from 15 to 20 years) for each unit of electricity fed into the grid.<br />FIT system has been enacted in numerous Asian countries such as China, Korea, Mongolia, Thailand. <br />VIETNAM is considering the adaption of FIT for wind power. Duane Morris is assisting GTZ in drafting a Decree for FIT in renewable energy expected to come into effect in 2010.<br />
    4. 4. HOW DO FEED-IN TARIFFS WORK?<br />
    5. 5. ADVANTAGES OF FIT FOR INVESTORS<br />Strengthen the viability of the RE projects which largely depends on the reliability of the cash flow under the offtake agreement(s). <br />Enhancing the competitiveness of RE operator with heavily-subsidized conventional energy operators;<br />Create opportunities for development of the most efficient technology;<br />Feed-in-tariffs can operate in monopoly or oligopoly markets as the combination of tariff payment and purchase obligation established a stable framework for independent power purchaser <br />
    6. 6. DIFFICULTY FOR IMPLEMENTATION OF FEED-IN TARIFF LAW IN ASIAN COUNTRIES <br />Electricity consumers are vulnerable to electricity price increase. Meanwhile, in order to implement the feed-in tariff law, the payment is normally financed by distributing costs amongst all consumers;<br />Some additional costs might have to be covered by a national fund for renewable energy development which could undermine the stability of the support mechanism as governmental money or money from international donors will be included; <br />Developing countries might need to limit the installed renewable capacity in order to control costs for final consumer.<br />SOLUTION: RE PROJECT SHOULD BE IMPLEMENTED WHERE THERE EXISTS A CLEAR LEGAL FRAMEWORK FOR FIT!!!<br />
    7. 7. FISCAL INCENTIVES ARE NECESSARY FOR BANKABILITY OF RE PROJECTS<br />Asian countries have implemented numerous fiscal incentives to boost the development of renewable energy. <br />Tax reduction and exemption: Example from Vietnam <br />CIT incentive rate of 10% applies for a period of 15 years to newly-established enterprises investing in power plant projects;<br />If the projects are classified as large scale projects, using high or new technology and in special need of investment, the time for application of the preferential tax rate of 10% may be extended to less than 30 years in accordance with a Decision of the Prime Minister;<br />Exemption of import duties for equipments and machinery imported to create fixed assets of the projects is applicable to renewable power project<br />
    8. 8. FISCAL INCENTIVES ARE NECESSARY FOR BANKABILITY OF RE PROJECTS<br />Loan softening program: Example from India<br />Indian Ministry of New and Renewable Energy has successfully used the loan softening program (which includes either and interest subsidy or a partial guarantee) to enable commercial banks to make risk assessment-based investment in greentech sectors on concessionary terms.<br />PricesubsidyforCDMproject: ExamplefromVietnam<br />A CDM project which has the production cost greater than the contracting electricity selling price may file an application to the Environmental Protection Fund of Vietnam for price subsidy <br />
    9. 9. FISCAL INCENTIVES ARE NECESSARY FOR BANKABILITY OF RE PROJECTS<br />Feasibilitystudygrants<br />Application of fixed assets accelerated depreciation method<br />Investors should:<br /> Be aware and take advantage of these fiscal incentives<br />Make sure that the tax incentives are incorporated in the business incorporation certificate and/or the project contract where the project is in the form of a PPP project. <br />
    10. 10. LIMITED RECOURSE FINANCING: CLASSICAL BUT EFFECTIVE<br />Hallmarksoflimitedrecoursefinance:<br />The lenders shall recourse only to the earnings of the project as the source from which loan repayments will be made<br />Credit assessment is based on the project rather than the credit worthiness of the borrowing entity<br />The security taken by the lenders is largely confined to project assets <br />Necessity for establishment of a special purpose vehicle <br />
    11. 11. LIMITED RECOURSE FINANCE: CLASSICAL BUT EFFECTIVE<br />Advantages of limited recourse finance:<br />Ability to raise large amounts of capital<br />Risk sharing: Ability to legally isolate a high risk project from the parent company and to allow other investors to share risk<br />Leave rooms for innovative financing structures <br />Recommendations:<br />The project should be in the form of a BOT project;<br />Should be used in large-scale financing project rather than small projects;<br />Thorough due diligence must be conducted<br />
    12. 12. CERS TRADING SHOULD BE TAKEN INTO CONSIDERATION<br />Asian countries have large potential in generating CERs (e.g. Vietnam: 10 million CERs);<br />Although the CERs prices are decreased due to economic crisis, there is still good demand for CERs from projects with high sustainable development value to the local community;<br />CERs forward contract offers a long term foreign currency revenue stream.<br />
    13. 13. DIFFICULTIES FOR CERS TRADING <br />Uncertainties with post 2012 system<br />High validation risks<br />Vietnam: Among 85 projects uploaded for validation in Vietnam, only 8 projects have been validated so far. Among these 8 projects, only one project (Rang Dong oil field associated gas recovery and utilization ) has been granted CERs.<br />CDM project legal framework shortcoming (slow national approval) and the lack of accurate and official statistics to establish a baseline of the project.<br />SOLUTION: Focus on projects with low/medium valuation, verification and delivery risks + thorough knowledge on local laws on CDM projects. <br />
    14. 14. DUANE MORRIS VIETNAM LLC<br /> HO CHI MINH CITY OFFICEHANOI OFFICE<br />8th Floor, Suite 809, SaiGon TowerPacific Place<br />29 Le Duan, District 1 83B Ly Thuong Kiet <br /> Ho Chi Minh City Hanoi <br /> VIETNAM VIETNAM<br />Contact email: omassmann@duanemorris.com<br />

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