REEEP/AEI/TERI Workshop Assessment of Financial Risk Management Instruments for Renewable Energy Projects REEEP/AEI/TERI Workshop February 6, 2008 New Delhi Fatma Ben Fadhl UNEP Project Manager Energy Branch Renewable Energy Finance Unit

Topics to be covered UNEP Structure and RE Finance Unit Programme objectives and activities Assessment of Financial risk management instruments for Large Scale Projects Case Study: Risk Assessment for large scale projects in China and India Assessment of Financial risk management instruments for Small Scale Projects Feasibility Studies Next Steps 06 February 2008 UNEP Energy Branch http://www..unep.fr/energy/finance/risk

United Nations Environment Programme (UNEP) Structure Division of Technology, Industry and Economics (DTIE) International Environmental Technology Centre Chemicals Economics and Trade Sustainable Consumption and Production Energy OzonAction Renewable Energy and Finance Unit Energy and Transport Policy Unit 06 February 2008 UNEP Energy Branch http://www..unep.fr/energy/finance/risk

Renewable Energy and Finance Unit Help overcome market barriers and increase investment flows to sustainable energy projects Partner with financial services and Insurance Develop financial support mechanisms to promote sustainable energy in developing countries Plan and execute credit enhancement, equipment loan and financial risk management programmes for access to RE 06 February 2008 UNEP Energy Branch http://www..unep.fr/energy/finance/risk

UNEP/GEF Assessment of Financial Risk Management Instruments Funded by the Global Environment Facility (GEF) UNEP as the UN Implementing Agency 06 February 2008 UNEP Energy Branch http://www..unep.fr/energy/finance/risk

Objectives Identify promising financial risk management instruments and approaches for RE projects Develop risk mitigation solutions that continue to exist without or with limited public monitoring Awareness raising for stakeholders 06 February 2008 UNEP Energy Branch http://www..unep.fr/energy/finance/risk

Programme of action Define main challenges faced by Investors, Insurers and RE project developers Identify main financial risks associated with small/medium and large scale RE projects Select promising risk management mechanisms Initiate Public-Private Partnerships Provide financial support to feasibility studies Develop follow-up activities 06 February 2008 UNEP Energy Branch http://www..unep.fr/energy/finance/risk

Challenges for the RE sector Major concerns for most technologies New / Prototypical / Scale Up technologies Technical perils in handling, erecting, testing Major concerns for some technologies Lack of sound O&M practices Lack of experience (project participants/contractors etc) Developing country issues Lack of adequate financial, legal and service infrastructure Lack of credit worthy local insurers Limited distribution channels 06 February 2008 UNEP Energy Branch http://www..unep.fr/energy/finance/risk

Risk Management for Large Scale Projects Mostly Grid Connected Numerous project development phases Diversified risk portfolio Combination of equity and debt financing Finance often provided on a non-recourse basis Need for tailored insurance 06 February 2008 UNEP Energy Branch http://www..unep.fr/energy/finance/risk

Main risks to be addressed Traditional project risks Political risk Certified Emissions Reduction risk Weather risk Resources risk Credit risk Equipment risk 06 February 2008 UNEP Energy Branch http://www..unep.fr/energy/finance/risk

Milestones for the insurance industry Development and marketing of insurance products for RE projects through: Improved information flows Training and knowledge management New pricing methodologies Design, engineering and operating standards / verification for “unproven technologies” Bundling of small/medium scale projects and packaging of risks Portfolios diversification 06 February 2008 UNEP Energy Branch http://www..unep.fr/energy/finance/risk

Operating Cash Flows With and without standard Insurance Source: Marsh Case Study: Insurance solutions for a Wind Farm in Popular Republic of China Source: Marsh 06 February 2008 UNEP Energy Branch http://www..unep.fr/energy/finance/risk

Risk Mitigation Solutions Insurance facilities Weather risk management instruments e.g. weather derivatives, futures contracts Technology specific insurance packages Public/Private Risk Capital or Guarantee facilities Awareness raising among project developers, financial services/investors, insurers, and public institutions 06 February 2008 UNEP Energy Branch http://www..unep.fr/energy/finance/risk

Financial risk instruments for RE projects in India 06 February 2008 UNEP Energy Branch http://www..unep.fr/energy/finance/risk

Case Study: Financial risk assessment for a Wind Farm in India (56,25 MW; 108 GWh/year; US$51.25M) 06 February 2008 UNEP Energy Branch http://www..unep.fr/energy/finance/risk

Case Study: Financial risk assessment for a Medium Scale Biomass Project in India (50MW, 200GWh/year; US$75M) 06 February 2008 UNEP Energy Branch http://www..unep.fr/energy/finance/risk

Risk Management for Small Scale Projects End-borrowers profiles: Small scale renewable energy suppliers (SSRE) Small scale end-users (non-productive consumers e.g. households, SMEs) Main risks Equipment risk Transaction size Credit risk 06 February 2008 UNEP Energy Branch http://www..unep.fr/energy/finance/risk

Barriers for the development of Small Scale Renewable Energy projects Lack of economically/financially viable projects Inadequate engagement of local FIs in small scale project financing, including MFIs High transaction costs of small scale projects Performance risks Lack of consumer awareness/demand for RE Lack of access to long term financing matched to project life 06 February 2008 UNEP Energy Branch http://www..unep.fr/energy/finance/risk

Risk Mitigation Instruments for Small Scale Projects End-User Credit Enhancement Instruments e.g. insurance covers, buyback agreements, fees for extra FI loss reserves Developer/Sponsor Partial Credit & Risks Guarantee Instruments Contingent Grants Private Public Risk Capitals Small Scale RE Project Preparation Assistance Programmes 06 February 2008 UNEP Energy Branch http://www..unep.fr/energy/finance/risk

General feasibility criteria for introducing FRMIs Large Scale RE Projects level of domestic financial market development sanctity of contracts governing off-taker and other agreements Maturity of financial markets access by foreign reinsurers to developing countries’ markets Small Scale RE Projects Public interventions to initiate and boost demand Inventory of technologies and applications Financial incentive programmes fostering local FIs’ leadership in RE finance 06 February 2008 UNEP Energy Branch http://www..unep.fr/energy/finance/risk

Feasibility studies Wind Power Derivative for Large Scale Wind Farm Projects in Mexico, Marsh Finances and Paris Re Renewable Energy Insurance Facility for Wind Farm Projects in the People's Republic of China (PRC), Marsh UK and Lloyd's Ascot Renewco Global Renewable Energy Insurance Facility for Large and Medium Scale Renewable Energy Projects, Carbon Re, Munich Re, Royal & SunAlliance, Climate Capital, GSDP, PRS and UPCAR Tunisia Insurance Solutions for Small Scale Biomass Power Projects in India, Crestar Capital and IFFCO/Tokyo General Insurance Co. LTD Risk Capital or Guarantee mechanism for small scale renewable energy (under evaluation) 06 February 2008 UNEP Energy Branch http://www..unep.fr/energy/finance/risk

F/S Expected Outcome Thorough market, legal and quantitative analysis Implementation plans and/or pilot studies Implementation of the instrument by private partners Benchmark and best practices studies 06 February 2008 UNEP Energy Branch http://www..unep.fr/energy/finance/risk

Next Steps Presentation of F/S results and recommendations Development and Implementation of follow-up programmes 06 February 2008 UNEP Energy Branch http://www..unep.fr/energy/finance/risk

Thank you for you attention 06 February 2008 UNEP Energy Branch http://www..unep.fr/energy/finance/risk

Division of Technology, Industry and Economics Energy Branch 15 rue de Milan, 75009 Paris France   tel. : +33.1.44.37.14.68 fax. : +33.1.44.37.14. 74 e-mail: fbenfadhl@unep.fr www.unep.fr/energy/finance/risk 06 February 2008 UNEP Energy Branch http://www..unep.fr/energy/finance/risk