CCXG Global Forum March 2018, Climate, Growth and Infrastructure: Where to fr...
A Comparison of renewable energy financing in Europe and North America (November 2013)
1. 1
A Comparison of Renewable Energy Financing in Europe and North America
INTRODUCTION
In August2007, the Secretariatof the UnitedNationsFrameworkConventiononClimate
Change (UNFCCC) publishedatechnical paper, Investmentand FinancialFlowsto Address
Climate Change,whichestimatedthatUSD200-210 billioninadditional investmentwillbe
requiredannuallyby2030 to meetglobal greenhouse gas(GHG) emissionsreductiontargets.1
NewEnergyFinance,whichtracksdealsinthe renewableenergysector, believesthatannual investment
innewrenewable energycapacityissettorise by twoto four anda half timesbetweennow and2030.2
In a technical paperentitled “PublicFinance MechanismstoMobiliseInvestmentinClimateChange
Mitigation”,the UnitedNationsEnvironmenal ProtectionAgency(UNEP), observesthatthe lion’sshare
will needtocome fromthe private sectorand thatit will require substantialadditional publicfundingto
mobilise andleverage thatprivate capital.3
Thispaperaims to examine whatis requiredintermsof financial incentivesandvehiclesto
mobilise private capital into renewable energyprojects. Itwill focus onthree broadareas,the first
beinganexamination of the governmentpoliciessurroundingrenewable energy inOntarioandEurope,
particularlyastheyrelate tofeed-in-tarrifs(FITs). Asthe rate of returnisan essential factorinany
investmentdecision,half the paperwill be devotedtoexaminingthe currentFITregime inOntario,and
drawingcomparisonswithFITregimesinEurope. The secondareawill be a review of deal structures
for renewableenergyprojectsinOntarioandEurope,outliningthe variousfinancialtoolsused. After
thisinitial overviewof traditionalformsof financing,therewill be adiscussionof whatthe UNEPhas
1 Cited in Maclean,John et al (2008), Public FinanceMechanisms to MobiliseInvestment in Climate Change
Mitigation,United Nations Energy Program, SustainableEnergy FinanceInitiatives. Pg.5.
2 New Energy Finance(April 23 2013). Strong Growth for Renewables Expected through to 2030.Pg. 1.
3 supra note 1, pg. 5.
2. 2
termed“PublicFinance Mechanisms”,namelyfinancingvehiclesbywhichgovernmentinvestmentis
usedto leverage privatesectorcapital. The expectedratioof publictoprivate capital leveragedforeach
mechanismwill be included. The thirdareawill discussthe national andsupra-nationalbanksand
financial institutions whichprovide financialsupporttorenewable energyprojectsinEurope. Thispaper
will conclude withanevaluationof the OntarioFITregime,includingthe proposedchangestothe
regime,andwill discusswhetheritwouldbe possible inOntariotosimulate the financingvehicles
employedinEurope to betterleverage privatecapital forrenewable energyinvestment projects.
I. GOVERNMENT POLICIESAROUNDRENEWABLE ENERGY IN ONTARIOANDEUROPE
1. Criteriaforpolicies aroundinvestmentintorenewable energy
The finance sectorapproachesinvestmentinrenewableenergyinthe same manner asany
otherinvestment,andfinancial institutionswanttomake a returnproportional tothe riskthey
undertake. The renewable energy sectorutilisesfinancefromacrossthe entire risk-rewardspectrum.4
At the presenttime, the riskprofileof many renewable energies issuchthatthey are onlyan attractive
investmentoptionif theyare the subjectof fairlywide-rangingregulation. Industrywatchershave
notedthat theyare onlymarginallycompetitive withconventional fuel energy,due toanabsence of
economiesof scale,aswell asthe in-builtsubsidieswhichconventional fuelsenjoy. Furthermore,
lendersmaybe unfamiliarwiththese new typesof energies,andtherefore take anoverlycautious
approach ininvestinginrenewable energyprojects.5
Inlightof these facts, commentatorsare
unanimousinstatingthatgovernmentpoliciesaroundrenewableenergiesmustbe carefullythought
4 Justice, Sophie (December, 2009).Private Financingof Renewable Energy—A Guide for Policymakers.United
Nations Environment Programme, SustainableEnergy FinanceInitiative.Pg. 5.
5 ibid,pg. 15.
3. 3
out, and investmentwill flowtothose countriesormarketswiththe mosteffective policyregime.6
Several authors have delineatedthe specificqualitiessuchpoliciesmusthave,andtheyinclude the
following:clear,unambiguouspolicyobjectiveswithclearenforcementprovisions, astream-liningof
policyandregulationsacrossall aspectsof the deal,fromplanning approval todelivery,political stability
across a project-relevanttime period,andcarefullydesignedincentive orsupportmechanismsto
achieve setobjectives.7
These incentivesneedtobe financiallyworthwhile,sustainthe the financing
horizonof the deal for its time period,andbe implementedbyalegallystable regulatoryframework,to
buildconfidence forinvestinginlong-lifecapital-intensive projects.8
AssuccintlystatedbyDeutsche
Bank Climate Change Advisors,the policiesmustprovide “TLC”:transparency,longevityandclarity.9
2. Feed-inTarrifs(FITS) inOntarioandEurope
In parts of Europe and Ontario,thiscriterionof incentive has beenansweredbythe
establishmentof feed-in-tarrifs,orFITS. 10
Launchedin2009 by the OntarioLiberal governmentin
conjunctionwiththe Green Energy and Green Economy Act11
,Ontario’sFIT Programis the firstof its
kindinNorthAmerica12
,andis modelled afteritsGermancounterpart. Administeredbythe Ontario
PowerAuthority(OPA),itprovidesguaranteedpricingforelectricityproduction,andthese tarrifsare
designedtoprovide developerswithareasonable return,in additiontotheirprojectcosts.13
Insodoing,
the province aims tofill the productiongapleftbehindbyaplannedphase-outof coal-firedplantsby
6 Hamilton,Kristy (2009). UnlockingFinancefor Clean Energy: The Need for “Investment Grade” Policy,Chatham
House. Pg. 8.
7 ibid atpg. 16.
8 ibid.
9 Deutsche Bank ClimateChange Advisors (2009),Payingfor Renewable Energy: TLC at the Right Price - Achieving
Scalethrough Efficient Policy Advice. Pg. 5.
10 ibid,pg. 6.
11 Green Energy Act, 2009,S.O. 2009 c. 12.
12 Anonymous (June 2011),Fit for purpose? Project Financeand InfrastructureFinance.Pg. 1.
13 ibid,pg. 5.
4. 4
2014 and use local contentrulestoboostthe local economy (althoughinarulingof May 24 2013, the
WTO foundagainstOntarioina complaintbyEurope andJapan thatthe “MinimumRequiredDomestic
ContentLevel ”provisions of section8.4(a) of version2.1of FIT rules violatesGATT).14
In Ontario, a
developerof renewable energyentersintoa FIT contract withthe OPA,wherebythe OPA agreestopay
the developerafixedrate perkilowatthourof energyproduced. The developerconnectsitsenergy
generatedsystemtothe grid,andthe OPA pays the developerthe agreed-uponrate forthe durationof
the contract. For France,Germany andSpain,internal ratesof return(IRR’s) tendtobe 7 – 10%.
Ontario’sIRRis approximately11%,designedtoreflectadebt/equityratioof 30/70%.15
All literature onFITs isunanimousincitingthata successful FITprogrammustset expectations
and reduce investorrisk. Mostimportantly,the FITcontractmust ensure investorscanpredicttheir
returns,andrelyon these numbersforasufficientlylongperiod.16
Deutsche BankClimateChange
Advisors17
comparedthe featuresof FITcontractsin Europe,along withthe Ontario FIT,and distill what
theybelievetobe essentialelementsof asuccessful FITprogram, andwhichare foundinbothversions
2.1 and 3.0 of the FIT Contract and FIT Rulesforsmall-scalegenerationprojects. These include
guaranteedpayments,foundatsection 8.1 of the Rules(Price Schedule),particularlysubsection(a)
whichstatesthat « (…) any revisionsshall notaffectFITContractspreviouslyexecuted.The price
applicable inrespectof aFIT Contract shall be the price as posted onthe date of publicationof the Offer
List thatcontainsthe ApplicationcorrespondingtosuchFIT Contract. » , andsection 9.2 of the Rules
(Alternate PaymentSchedule),whichstatesthat“Notwithstandingotherpartiesbeinginvolvedinthe
settlementprocess,the OPA shall remainliable tothe Supplierforthe ContractPayments », as well as
section8.2 of the s (Price Escalation) whichforeseespaymentincreasesinaccordance withthe
14 http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds412_e.htm
15 ibid,pg. 6.
16 ibid,pg. 8.
17 supra note 9.
5. 5
ConsumerPrice Index. Underthe newversion3.0of the FIT Rules,large-generationprojectswill
respondtoRPFs issuedbythe OPA.
Withregard to element of longcontractduration,whichisalsolistedasanimportantelement
and referredtoat section8.1 (a) of bothversionsof the Rules,commentatorsmaintain that“Canadais
bestknown,andmostdear, to renewablesdevelopersforits20- to 25-year contractswithhighly-rated
publicutilities.”While Canada'sprovinceseachoperate theirownrenewablesregime,theyall offer
generous offtake structuresthatmake themthe envyof theirUK and US peers. The headof alternative
energy at investmentbankAmbrianinLondonarguesreturnsare higherinthe UK,for example,but
companiestargetCanadabecause of the stable revenues."Theytrade the longerduration[contracts]
againstthe lowertariff."18
However,before grantingrenewableenergygeneratorsacontract,the OPA looksfora track
record andtangible networth .Accordingto OPA tenderdocuments:"[A] proponentmustdemonstrate
that ithas successfully financedanothergenerationfacilitywithinthe last60 monthsthat isat least50%
of the contract capacityof the proposed[facility]."Italsoasksthat one equityprovideraccountforat
least20% of the projectcost, a depositof $25,000 perMW of capacityup to a maximumof $1 million,
and a standbyletterof creditfroma bank witha minimumcreditrating. Likewise, BCHydrotypically
doesnotask for a securitydepositbutdoesrequest aproposal submission fee,dependingonthe size of
the project,anda non-refundableregistrationfeeof $5,000, and financingcommitmentsaspart of each
bid.19
3. Criticismof FITs
18 Byrne, Katy (February 2009), Tarrifs of Terror, ProjectFinanceand InfrastructureFinance. Pg. 29 – 30
19ibid
6. 6
Commentatorsdonotdenythe positive attributesof fixedtarrifs,namely greatercertaintyof
revenue, whichis reflectedinthe strongnumberof dealsdone andsustainedmarketgrowth where
tarriffsare used.Entrepreneurs andsmallerscale investorshave beenabletoenterthe market,and
differentiatingthe tariffsbytechnology,asisthe case inOntario, has promoted diversification. 20
However,tariffsare notwithoutcriticism.
a) The burdento taxpayers
Althoughpriceshave decreasedforsolarpowerunderFIT3.0, rates forwindhave increasedand
those forbiogasand renewable biomasshave increased.21
Althoughthe pricesguaranteedbythe OPA
to renewable energydevelopersvarybytechnology,theyare all beingsubsidizedbythe government.
The OntarioProgressive Conservative Partyhas arguedthatelectricitypricesare toohigh,andthere is
no roomfor competitiontodrive downprices. Inresponse,manyobservers saythata Liberal
governmentwouldlikelylower,orevenentirelycut, tariff pricesovertime, allowingthe holdersof
contract offerstogo throughthe developmentcycle, ashasbeenthe case for similarregimesinEurope.
Under FIT3.0, large-scale renewable energyprojectswill be bidinresponse toRFPs. Nonetheless, the
future of the programme seemsuncertainif there isachange in provincial government.22
b) The danger of retroactive tariff adjustments
Followingthe introductionof FITsandthe rapidexpansionof the Spanishsolarphotovoltaic
industry in2008, Spainannounced in2010 that itwouldre-evaluateitsFITsystemandretroactively
reducedthe amountsthatwould be paidto powergeneratorswithlong-termcontracts 23
by as muchas
20 supra note 6 at, p. 24.
21 http://fit.powerauthority.on.ca/sites/default/files/news.
22 Sayles,Robin (Sep 2010),FIT-ted up, Project Financeand Infrastructure.
23 supra note 9 at p. 29.
7. 7
30%, and cap overall marketsize.24
Notonlydidthischange modifythe economicsof the project
financingonwhichdevelopersrelied,itreducedsupportforthe Europeanrenewable energyasa
whole.25
In January2011, ASIF,Spain’sleadingsolarenergyindustryassociation,announceditwould
sue the Spanishgovernmentoverthe reductions.26
Similarly,in2011 the CzechRepublicchangedthe
termsof itsFITs forprojectsthat hadalreadybeenimplementedin2009 and 2010.27
These eventshave beenattributedasmuchto faulty tariff designasto settingthe tariffsat
unsustainablyhighlevels. Incontrast, Germanyprescribedsteppedtariff reductions(digressions) have
producedsteadiergrowth.Althoughthe originalperiodof hightariffsin Spainkick-startedsignificant
industryactivity,the 2008 changesdiverted capital awayfromSpain (atthattime towardsItaly,also
witha solarFIT). While suchdramaticeventshave yettobe seeninOntario,itunderscoresthe
importance of designdetailssuchastariff duration,inflationindexingandthe degree of market
segmentation(andcapping,asthe FIT2.1 rulespresentanessentiallyuncappedmarket). The 2010
Spanishexperience highlightsthe overallcostborne by the tax-payer, andthe overall political
unsustainabilityof the mechanism.28
II. DEAL STRUCTURES IN RENEWABLEENERGY
1. ProjectFinance throughprivate debtandequity
As discussedinthe firstpartof thispaper,a properlyincentivizedFITregime offeringa
reasonable rate of returnisessential toprovidingimpetusforrenewable energyprojects. The
constructionof large-scale renewable energyprojectscancost hundredsof millionsof dollars,which
comesprimarilythroughprojectfinancingbywayof major banksand bankingsyndicates. A smaller
24 Liebreich, Michael (Sept. 1 2009). Feed-in-tarrifs – Solution or Time-bomb? New Energy FinanceVIP Comment.
Pg. 1.
25 ibid.
26 supra note 24 pg. 59.
27 ibid pg. 59.
28 Ibid.
8. 8
portioncomes fromequityfromthe projectdevelopersandsponsors,aswell asprivate equity investors
and private equityfunds thatmake bothprojectandcorporate equity investments.29
The diagram belowillustratesthe breakdownbetweendebtandequityonrenewable energy
dealsbetween2002 – 2008 on a global level.30
Asseen,anegligible amountof renewable energyasset
financingalsocomesfromthe issuance of bonds,whichwouldrequire the bondsbe ratedasinvestment
grade.31
Althoughventure capital investorstypicallydonotplaya role infinancingthe constructionof
renewable energyassets,ventureinvestorsfundpromisingrenewableenergytechnologiesinthe initial
stagesof the commercializationprocess.32
Ingeneral,venture capital intervenesinthe earlierlife-stage
of a technology,betweenthe researchanddevelopment uptothe demonstrationphase,andcanopen
29 MARS Market Insights,(2010),FinancingRenewableEnergy – AcceleratingOntario’s Green Energy Industry. Pg.
10.
30 ibid. Reproduced from Greenwood, Chris et al.(2009). Global Trends in SustainableEnergy Investment 2009:
Analysis of Trends and Issues in the Financingfor Renewable Energy and Energy Efficiency. Pg. 36.
31 supra note 29.
32 supra note 29 at pg. 11.
9. 9
bottlenecksindeal flow.33
Publicmarketsofferindirectfinancingtorenewableenergyprojectsby
channellingcapital torenewableenergytechnologymanufacturersandprojectdevelopers.34
2. PublicFinance Mechanisms
UNEP has suggestedthatthe following“PublicFinance Mechanisms”couldbe more widely
employedbythe publicsectortoleverage private sectorinvestmentinrenewable energybyseveral
multiples.35
a) Creditlines
UNEP suggeststhese canbe offered bygovernmentsatnominal ratestoencourage borrowing
intargetedsectors. Theyoften addressthe lackof liquiditytomeetmedium tolong-termfinancing
requirementsinmarketswhere highinterestratesare seenasa barrier. Creditlinesworkwell with
bothlarge- and medium- scale grid-connectedrenewableenergyprojects andtypicallyfund adefined
portionincludingthe long-termcomponentof projectloans. However, the amountof commercial
financingleveragedbyagivenamountof publicfundingis relativelylow,generallyinthe 2–4 times
range. 36
b) Subordinateddebt
Subordinated orjuniordebt isdebtwhichranksbehind otherdebtshouldacompanyfall into
bankruptcyor liquidation. Itcansubstitute forandreduce the amountof seniordebtina project’s
financial structure,thusaddressingthe debt-equitygapandreducingriskfromthe senior lender’spoint
of view. Itcan alsoreduce projectsponsorequityrequirementssetbyseniorlenders.Itistypicallyin
the range of 10-25 percentof a project’ssourcesof funds,andmostlyintendedtosupportsmall scale
33 supra note 29.
34 supra note 29 at pg. 11.
35 supra note 1.
36 supra note 1 at pg. 29.
10. 10
renewable energy projects. However,subordinateddebtfacilitiesonly obtainmoderatefund
mobilisationbysupporting andleveragingseniordebt.Subordinateddebtcanalsobe structuredina
differentform suchas convertible debtorpreferredshares. 37
c) Guarantees
The use of guaranteesisappropriate whenlendershave adequate mediumtolong-term
liquidity,butare unwillingtoprovide financing. A guarantee mobilisesfunding bysharinginthe credit
riskof projectloansthe lendersmake withtheirownresources.Guaranteesare generallyonly
appropriate infinancial marketswhere borrowingcostsare at reasonable levelsandwhere
a good numberof lendersare interestedinthe targetedmarketsegment. Typicallyguaranteesare
partial,thatis theycovera portionof the outstandingloan principal with50-80 percentbeingcommon.
Thisensuresthatthe lendersremainatriskfor a certainportionof theirportfoliotoensure prudent
lending. Guaranteescanachieve lowtohighleverage dependingonhow theyare structured,and
dependingontheirtargetmarketsegment. 38
d) Projectloanfacilities
Loan facilitiesare createdbygovernmentsasspecial vehiclesto provide debtfinancingdirectly
to projects,whereas creditlineswhich reduce the lendersrisk.39
UNEPstatesthatprojectloanfacilities
are warrantedinsituationswhere thereare large numbersof economic projectsthatare unable to
make it to financial closure because local lenderslackthe capacity or liquiditytoprovide the needed
financing. UNEPratesthe leverage potential of loanfacilitiesasonly medium, howeverthe availability
37 supra note 1 at pg. 30.
38 ibid.
39 supra note 1 at pg. 31.
11. 11
of projectfinance capital cangreatlyimprove accesstoother formsof financingforcleanenergy
projects.
e) Softloanprogrammes
Softloans are bridge loansoftenused duringthe pre-commercializationstages andduringactual
projectpreparation,whenthe developmentrisksare highand loansfromlendersare difficultto
access.40
Run byquasi-publicentities,softloanprogrammesprovide debtcapital at
concessional interestrates.Generallytheydonotrequire collateral althoughmatchingfundsare often
neededtoensure strongcommitmentfromthe developers.Softloanprogrammesallow deferred
repaymentuntil suchtime thatthe venturesreachthe operationand revenue-generatingstages.In
mostcases,debtis forgivenif the venturesdonotmaterialize. The GreenMunicipal InvestmentFund
(GMIF) whichis run bythe Federationof CanadianMunicipalities isanexample of asoftloanfacility
whichhelpsrenewable energyprojectscome tofruitionbyprovidingveryearlystage capital.41
III. EUROPE: LOAN GUARANTEES,ON-LENDINGANDCO-LENDINGFROMNATIONALAND
SUPRANATIONALFINANCIALINSTITUTIONSANDINFRASTRUCTUREBANKS
Supra-national financial institutions inEurope suchasthe EuropeanInvestmentBank,the
EuropeanBank forReconstructionandDevelopment,andthe financial armof the EuropeanCommission
act on pan-Europeanenergypolicydirectives tomobilize substantial capital tosupport majorrenewable
energyprojects. 42
Theireffectivenesscomesfrom reducingcommercial bankriskbyprovidingloan
guaranteesandfundsforon-lendingtonational commercial banks. Theydoso by borrowingfundson
40 ibid.
41 ibid.
42 supra note 29 at pg.13.
12. 12
the capital markets,whichtheylend onfavourable termstoprojectsfurtheringEUpolicyobjectives,
such as providingfinancingtoprojectsthatenhance Europe’senergysecurityandincreasingthe share
of renewableenergyinthe EU’senergymix.43
1. FIDEME
In 2003, the FrenchenvironmentagencyADEMEand the French commercial bankNatixis
launchedFIDEME,a €45 millionpublic-privatemezzaninefundaimedataddressing the fundinggapthat
had preventedthe establishmentof wind andotherrenewableenergyprojectsinFrance. Byhelping
commercial lendersreduce theirrisk,the double leveragestructure allowedFrance’senvironment
agencyto mobilize anamountof capital 20 timesgreaterthanitsowncontribution.The mechanism
employedwasasfollows: ADEMEcontributed€15 millionto FIDEMEas a subordinatedtranche within
the fund,which thenprovided subordinatedfinancingtocommercial bankingsyndicates, helpingto
attract seniorlenders. FIDEMEhas financed30 renewableenergyprojectsandcreated more than300
MW of energygenerationcapacity.44
AccordingtoMARs,these projectsrepresentmore thana third
accountedformore thana third of France’stotal wind energygenerationcapabilities. Evenmore
encouragingisthatNatixishassince launcheditssecondFIDEMEfund,this time ona fullycommercial
basis,since the renewable marketinFrance hasmaturedbeyondthe needforpublic financial support
fromADEME.45
AnnouncedinJune of 2008, EuroFIDEME, a €250 millionfund,hasdedicated60% of its
assetsforthe provisionof subordinateddebttoprojects, whilethe remaining40% will be investedas
equity,eitherinrenewable energyprojectsorinprojectdevelopment companies.The fundhasanEU-
wide mandate,butfocuseson opportunitiesinsouthernEurope. 46
43ibid.
44 supra note 29 at pg. 14.
45 ibid.
46 Ibid.
13. 13
In 2010, EDF EnergiesNouvelles,aFrench developerof renewableenergyprojects, enteredinto
a memorandumof understandingwiththe EIB,whichwouldallocate €500 million,withthe balance
beingprovidedbycommercial banks, toestablishafinancingvehicle foraportfolioof solarphotovoltaic
projectsinFrance and Italy. Giventhe volume of the projectportfolio,andbasedonfinancingterms
established fortwopilotprojects fundedinearly2010, subsequentprojectswillreplicate thesefinancial
structures,whichsimplifyandstreamline the fundingprocessforfuture projects fundedbythe
partners.47
2. Belwindsoff-shore wind project
Anotherexample of strongEIBsupportinthe renewablessectoristhe Belwindoffshore wind
projectbeingdevelopedbyaconsortiumof BelgianandDutch investorsoff the Belgiancoast. This
markedthe firsttime that the EIB assumedprojectfinance riskforanoffshore windfarm. 48
The project
isbeingfinancedwith€482.5 millioninnon-recourse debt,withamaturityof 15 yearsafter
construction,anda €63.43 millionnon-recourse mezzanine facility. The Belwindprojectinvolvesa
broad setof private and publicfinancinginstitutions.The EIBisproviding€300 milliontothe 165 MW
project,half of whichisbeingguaranteedbyEksportKreditFondend(EKF),Denmark’sstate export
creditagency. Once Belwind,whichwill be the largestBelgianoffshore windfarm,49
becomes
operational,the electricity itgenerates willbe soldtoElectrabel,Europe’sfifthlargest energygenerator
and distributor,underalong-termFITcontract. As statedbyMARs, the Belwinddeal exemplifiesthe
typical interplayof publicandprivate financinginstitutions,insurers,energypurchasers, carboncredit
47 ibid.
48 www.eib.org/projects/press/2009
49 ibid.
14. 14
sales(whichfallsoutside the scope of thispaper) andFITsthat characterize most majorrenewable
energyprojectsinEurope.50
3. Tax credits,tax exemptionsandlow-interestloans
Several Europeancountriesprovide generoustax exemptions, tax creditsandlow-interestloans
for the development of renewable energyprojects. Inadditiontoprovidingasustainable development
tax credit,France,forexample,provides low interestloanstosupportthe purchase of renewable energy
infrastructure. The Netherlandsprovidestax exemptionsthroughan energyinvestmentdeduction
scheme,which Dutchcompaniesthatinvestinsustainable energyand/orenergyefficientequipment
receive atax creditof up to 44% of the purchase and productioncosts,upto a maximumof €111
million. OtherDutchincentives includeexemptinggeneratorsfromthe eco-tax leviedon electricity
consumptionand providinglow-interestloans fromdesignated“GreenFunds.”51
Germany’snational
infrastructure bank,the KfW, andGerman regional andcommunitybanksalsoprovide incentivesto
small-scale projects.
CONCLUSION
Accordingto NewEnergyFinance,noothertype of regime canboast the successstoriesof FITs
for small-scalerenewable energygeneration.52
However,the long-termliabilities createdbyFITsfall on
the utilities,whointurnpassthemthroughto electricityusersviahigherpowerprices. Forexample,
existingprojectscoveredbyFITsinGermanywill drive upthe costof electricityby1.1 eurocent/kWhfor
the next22 years. The situationinSpain, previousdiscussed,hasresultedin the taxpayerpayingfora
colossal off-balance-sheetliability:one year’sconstructionof solarpowerinSpaincreatedagovernment
50 supra note 29 at pg. 14.
51 supra note 29 at pg. 16.
52 supra note 24.
15. 15
liabilityequivalentto8%of itsnational debt.53
New EnergyFinance admitsthatalthoughthe average
systemprices can be corrected, there will alwaysbe amispricingof renewableenergy,asthere isno
mechanismina FITs systemto ensure thatgovernmentprice controlswill be able tocorrectlyprice
renewable energyasit progressesdownthe costexperiencecurve,orundergoesprice spikesdue to
supply-side bottlenecks. Lookingintothe future, as renewableenergycontinuestogrow as a
proportionof the energymix,FITswill essentiallyspell price controlsoverelectricity,stiffling
competitivenessandgrowth.
Is thisa riskfor Ontarioas well? The recentchangestoFIT version3.0 suggestthatthe regulator
isaware of these potential pitfalls,andistakingstepstoavoidthem. Large-scale projectswill nowhave
to bidfor acceptance intothe FIT program, hopefullyresultingin“price discovery”,whichmaypossibly
needto be averagedoutinthe eventof anyrogue bids,or bidsthat otherwise undercutthe market.
While astate-runauctionmaynot be ideal,itwill hopefullyavoidthe dramaregardingretroactively
dimishedFITs asoccurred in Spain,aswell asavoidingprice controlsexertingananti-competitiveeffect
on the electricitymarket. Ithas beensuggestedthatacentral fundingpool – grants,tax breaks anda
loanguarantee scheme orthe like – wouldreduce the apparentcostto electricityconsumerstoa
politicallyacceptablelevel,atleastuntil renewableenergybecomesmore nearlycost-competitive with
othersources.54
How shouldOntariomobilise private capital? Ontariodoesnothave the benefitof the
government-backedpublicfundingmechanismstohelpmobiliseprivate lendingbyreducingrisk,nor
doesitenjoythe sponsorshipof national orsupra-national “green”banksorinstitutions. However,
some see opportunityforOntariotoprovide Canada-wideleadership inrenewableenergyfinance,as
the firstregionto adoptan uncappedfeed-intariff in NorthAmerica.55
ComparedtoUS banks,Canadian
53 ibid.
54 supra note 24.
55 supra note 29.
16. 16
financial institutionsare well positionedinthatthey are relativelysolvent,andhave experience
financingthe developmentandoperationof large resource-basedprojects. There are manywaysthat
Canadianlenderscanbecome more comfortable withinvestinginthese new technologies:startwith
smallerprojectstogainexperience;onlyworkingwithcertaintechnologies/partners/regions;working
alongside experience foreignrenewable energylenders/developers;andsoon.56
As an example of what
it seesasexcessivereticence, MARscitesseveralCanadianbanksthatare preparedtowork with
renewable energydevelopershavingatleastfive yearsexperience,howeverthe incentivesprogramhas
onlybeeninexistence forthree! Ultimately,the reticenceof Canadianlendersmaybe unfoundedin
that manyof the renewable energytechnologieshave rigorously proventheirvalue and“bankability” in
Europe, andhave beensteadily generatinginvestorreturnsinothercountriesfordecades. The success
of the original FIDEMEfund (andits successorfunds) exemplifiesthis,andthe new OntarioFITseemsto
be positionedtoavoidthe mistakesmade bycertainEuropeancountries. However,since the Ontario
FIT regime ismodelledcloselyonthe Germanscheme,itisprobable thatGermanbankswill continueto
playa leadrole infinancinglarge-scalerenewable energyprojectsinOntario.57
Ultimately,there maybe alesserdegree of publicinvolvementinthe issue of renewable
energiescomparedtoEurope,resultinginlittle political willto establish“greenbanks”andother
institutionsavailable toEuropeanUnionmemberstates. Infact,strong local oppositiontowindfarms
suggeststhatthe Canadianpublicmaynot have fullyembracedthe waythe new energylandscapewill
take form. Hopefullyasglobalizationcontinuestohelpinformationspread,OntarioandCanadaasa
whole cancontinue tobenefitfromthe experiencesof ourEuropeanneighbours,withoutreplicating
theirmistakes.
56 ibid.
57 supra note 29.
