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Published byRudolph Booker Modified over 7 years ago
FE Clean Energy Group Inc. George Sorenson Chairman, FE Clean Energy Group Clean Energy Finance and Private Equity Funds Energy Week March 2006
FE Clean Energy Group Inc. 2 Built energy businesses in emerging markets, having outperformed key market indices since inception. Manages three funds in Central Europe, Latin America and Asia Built a unique niche in the Clean Energy business: – First private equity investor to own ESCO businesses in emerging markets – A pioneer in the development of a project-centric approach to returns from carbon credit market – Only Fund positioned to use its management team and technical talent to cross-fertilize ideas and experiences across major regions of the developing world Pioneered structures to minimize cash flow volatility and exit risk by using a business model based on contracted returns and dividends and predetermined divestment prices. FE Clean Energy Group – Uniquely Positioned in the Energy Industry
FE Clean Energy Group Inc. 3 Some Comments on the Project Development/Fund Model Clean/Renewable Energy projects entail significant risks for project developers/fund managers. The energy sector is characterized by investment in long lived infrastructure projects that are not easy to reconfigure from a financial standpoint if things go wrong. Clean/Renewable Energy projects tend to be smaller in size, and therefore will be relatively more numerous than fossil fuel or nuclear plants. Clean/Renewable Energy, especially biomass based projects, will often be tied to some sort of other manufacturing process. With the possible exception of run of the river hydro projects and carbon credit from methane projects, Clean/Renewable energy projects require some sort of preferred treatment. Special electric tariffs Tax relief Other subsidies such as CO2 credits or grants
FE Clean Energy Group Inc. 4 Some Comments on the Project Development/Fund Model Funds tend to have finite lives, usually much shorter than the operating lives of the projects in which they invest. Solving exit risk Most Clean/Renewable Energy projects yield gross returns in the 15-20% range (exception methane capture projects). For many financial investors this return is marginal in light of the perceived project risk, especially in regard to projects undertaken in countries with higher risk factors. Perceived as VC like from a risk/return standpoint Often there is a lack of understanding by traditional financial investors of the issues regarding Clean/Renewable Energy investment in emerging markets (includes Gatekeepers and Pension Board members). Accessing the deep pockets, pension funds and insurance companies Clean/Renewable Energy projects usually require some leverage in order to make the equity investment return targets, and many emerging markets do not have a financing infrastructure to finance these types of projects. Contract verses collateral lending
FE Clean Energy Group Inc. 5 How Can the World Bank Help? Clean Energy project cash flows are highly dependent on long term government policy clarity, and at least a modicum of longer term market pricing certainty. Lack of clarity will result in increased risk for energy developers/clean energy funds and reduced project undertakings. The World Bank can act as a bridge in educating and assisting the development of coherent and stable government policies regarding Carbon Credits and policies for clean energy electric and heat tariffs. Policies in this regard must take into account the longer term investment lead times that characterize energy investment. In countries that clearly cannot afford to pay an adequate tariff to allow for project investment the World Bank may be able to develop subsidy programs enabling project investment. Tariff policy guarantees (a MIGA like approach) The EU sponsored Patient Capital Initiative Subsidy phase outs Programs to minimize exchange risk
FE Clean Energy Group Inc. 6 How Can the World Bank Help? Multilateral institutions need to exercise flexibility in using cash flows from carbon sales as an additional source of collateral for loans made in a conventional project lending format. If the loan is made specifically for the development of a project whose sole or substantial revenue source is from the sale of Carbon Credits then the traditional approach of using the carbon credits for collateral is OK. If the loan is made on a project in which revenues from Carbon Credits comprise is a smaller component of the revenue source of the project, garnishing all of the carbon as yet another source of cash flow to repay a loan will result in a reduced rate of return on the project, and may make the project less feasible from the equity holder’s perspective.
FE Clean Energy Group Inc. 7 How Can the World Bank Help? In a number of markets a key issue is a lack of adequate debt financing from local financial institutions, especially for clean energy projects that involve energy efficiency and shared savings contracts. Energy efficiency is the base of the clean energy pyramid, and can provide developing economies with dramatic and immediate improvements in energy use. Contract based lending verses collateralized loans, the Mexican experience. Streamlined World Bank lending initiatives that can either finance or backstop local lenders in this area.
FE Clean Energy Group Inc. 8 Other Clean Energy Development Risks Because of the smaller size of many types of renewable energy projects, and energy efficiency projects in particular, it is critical for the World Bank to develop programs that streamline the ability of equity investors to access World Bank lending or guarantee programs in an expeditious and cost effective manner.. Long time lags in project approvals severely impact the number of projects undertaken. Arriving at a multiple drawdown system or program for projects of a similar type. Minimizing bureaucracy
FE Clean Energy Group Inc. 9 Summary Most Clean Energy project types require some type of preferential financial treatment at this time. Long term investments in the Clean Energy sector will require consistent government policies with regard to tariffs and the world Bank is in an excellent position to contribute in this area. Programs that address necessary project enabling tariff increases in those countries less able to raise tariffs can be of great benefit. New loan programs to address contract based shared savings energy efficiency contract are needed. A solution must be arrived at allowing for greater speed and simplicity in accessing World Bank programs
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