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UNFCCC Workshop on Innovative Options for Financing the Development and Transfer of Technologies 27-29 September 2004 Private Sector Perspectives on Risk.

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Presentation on theme: "UNFCCC Workshop on Innovative Options for Financing the Development and Transfer of Technologies 27-29 September 2004 Private Sector Perspectives on Risk."— Presentation transcript:

1 UNFCCC Workshop on Innovative Options for Financing the Development and Transfer of Technologies September 2004 Private Sector Perspectives on Risk Charles Donovan Commercial Manager, Transactions CAT Alliance Ltd. T: E:

2 Slide 2 Enviros Consulting: Founding Member of CAT Alliance Ltd. Europe’s largest resource base for environmental due diligence Owned by three environmental / energy consulting firms: Enviros (UK), Tauw (Netherlands), and COWI (Denmark) Total staff of and combined turnover of $400+ million Transaction support to investors and developers in the global clean technology sector

3 Slide 3 CAT Alliance Geographical Coverage

4 Slide 4 Let’s Start with the Basics Risk Tolerance and Required Financial Return HIGH LOW Common Equity Preferred Equity Mezzanine Debt Subordinated Debt Senior Debt

5 Slide 5 Let’s Start with the Basics Cost of Financing HIGH LOW Common Equity Preferred Equity Mezzanine Debt Subordinated Debt Senior Debt

6 Slide 6 Private Sector Demands on Project Evaluation Technology Risk Operational Risks Construction / Commissioning Risks Counterparty Credit Risk Commodity Price Risks Exchange Rate Risks Political Risks Environmental Compliance Risks

7 Slide 7 Overview of Credit Risk Management Screening of counterparties Development of trading limits and transaction limit processes Monitoring and reporting of financial exposure against limits Testing exposure to financial losses on individual transactions Development of credit support packages (e.g. netting) that support efficient allocation of credit risk for multiple transactions What is my expected risk-adjusted return on capital?

8 Slide 8 Credit Enhancement in the Renewable Energy Sector Financial risk can be influenced by a large number of factors – credit risk is one area where governments and multilateral institutions can make a tremendous difference. Energy financing is still recovering from unprecedented default events in 2001 and Industry is very focused on credit risk issues. Few well capitalised developers and suppliers (e.g. GE Energy) The use of output-based subsidies to support renewable energy projects (e.g. Renewable Energy Certificates, CDM carbon credits) may lead investors to have complex and unwanted credit risk exposure. Financing renewable energy is at least as pressing a problem as how to make new projects economically viable. Public-private partnerships urgently need to address the credit gap.

9 Slide 9 Commodity Price Risk: What is the Value of Carbon Credits? Source: Enviros Consulting EU ETS Price Forecast

10 Slide 10 Can We Expect Bank Credit Committees to Understand This? Demand for Allowances Supply of Allowances Sector Surplus or Shortfall Allowance Prices Traded Volumes Baseline Emissions Phase I Allocations Phase II Allocations Allowance Allocation Historical Emissions Data Technological Uptake Forecasts Production Forecasts CO2 Emission Projections Sector Cost Abatement Curves Fuel Price Forecasts JI/CDM Cost Abatement Curves Banking and Borrowing Weather Economic Growth Future development

11 Slide 11 Looking Back: UK ETS Price Activity What sets the price when supply and demand are artificial? Source: TFS, ICAP 2002 vintage 2003 vintage Today’s price ~ £2.00/tonne

12 Slide 12 Case Study: Durban, South Africa eThekwini Municipality (Durban) in South Africa is developing a 10 MW landfill gas-to-electricity project on three landfill sites. Recently signed an Emissions for the sale of $15 million in CDM carbon credits to the World Bank Prototype Carbon Fund. An innovative project in many respects: One of very few independent power producers in South Africa, multi-site landfill gas collection system, and the project involves the largest waste transfer facility in Southern Africa. No legally binding power purchase agreement (PPA) Funded from the Municipal Balance Sheet – City of Durban was able to access low cost funds due to low inflation and very strong credit profile.

13 Slide 13 How do we create more successes like this? Is there a role for lease financing to reduce capital expenditure? Can these projects gain debt financing from private financial institutions? How can you access large-scale private sector debt investments?


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