1. Public instruments to promote
Guidance:
These slides were prepared for a UNDP study in Tunisia.
If being applied in other studies, much of the these slides are generic. However certain slides would need to be adapted as appropriate. Version 1.3 (Sep 2014)
UNDP Study:
Public instruments to promote
renewable energy investments in [Tunisia]
Materials for Investor Interviews ([Solar PV])
[Month] [Year] (Version [x.x])

2. UNDP contact details UNDP at a glance:
UNDP is the UN’s development agency; active in 135 country offices; annual $5bn budget
Assists developing countries to create enabled investment environments for low-carbon growth
Active $500m portfolio ($4bn additional co-financing) of support to developing countries in renewable energy
More information at
Oliver Waissbein
New York, USA
Finance Advisor (Energy and Environment Group at UNDP)
Formerly Associate at Goldman Sachs in M&A and corporate finance
MA in international affairs, BA/MA in molecular biology (Columbia, Oxford)
Sanju Deenapanray
La Gaulette, Mauritius
Energy Specialist (Consultant to UNDP)
Formerly Climate Change Coordinator, UNDP Mauritius; Fellow at the Australian National University (ANU)
PhD in Semiconductor Physics, MBA in Technology Management, MSc Physics, BEng (ANU, Pretoria, LaTrobe)

3. Outline of the [Tunisia] study
Despite strong potential for renewable energy in Tunisia, the reality is that private sector face significant barriers to investment and investment is yet to flow.
Tunisia is now introducing legislation for independent power producers (IPPs) and seeking to put in place an enabled investment environment. UNDP is supporting Tunisia.
Public instruments - such as well-designed legislation, loan guarantees, new grid codes - can assist the private sector through reducing investment risk
The Issue
Objective of the study:
What is the best selection of public instruments to promote large-scale renewable energy investment in Tunisia?
Objective of these investor interviews:
How does the private sector view investment risks surrounding renewable energy?
How does the private sector view the impact of public instruments on reducing these risks?
Objective
Methodology for the study:
Focuses on wind power and/or solar PV
Uses “Levelized-Cost-Of-Electricity” (LCOE) modeling to study how current renewable energy LCOEs can be made competitive with fossil-based energy
Methodology for the investor interviews:
Introduces a risk framework and asks interviewee to score risks between 1 to 5
All responses will be treated with full confidentiality; all data will be blended within the entire study and no names or traceable facts will be published
Methodology

4. Study’s approach to risk and renewable energy
1. Analyse renewable energy (RE) using LCOE modeling
2. Define 9 risk categories from an investment perspective
Objective: Reduce
RE LCOE
Technology/Sector level
Power Market Risk
Permits Risk
Social Acceptance Risk
Resource & Technology Risk
Grid/Transmission Risk
Counterparty Risk
Financial Sector Risk
Political Risk
Currency/Macroeconomic Risk
US$
Cost of Equity
US$
Cost of Debt
Op Ex
Cap Ex/
Depreciation
Macro level
Current LCOE of
Renewable Energy
Target LCOE
3. These 9 risk categories form part of the cost of equity/debt for renewable energy
4. Public instruments can reduce these risks and thereby decrease cost of equity/debt % % % %
Best in Class
RE Investment (Developed Country)
Cost of Equity/Debt
Risk #1
Risk #2
Risk #3
Pre de-risking
RE investment (Developing Country)
Cost of Equity/Debt
Pre De-Risking (Developing Country)
Cost of Equity/Debt
De-risking instrument #1
De-risking instrument #2
Post de-risking
(developing country)
Cost of Equity/Debt

5. The solar PV opportunity in [Tunisia]
Energy generation by resource
Tunisia Solar Plan’s 2030 objectives
Targets
Solar PV at 10% of generation mix
1,930 MW installed capacity
Meet fast-growing energy demand
Reduce domestic fossil-fuel subsidies
Source: Chiffres Clés, Juin 2013 (ANME)
Solar resources
Current status
Tunisia has some of the best solar resources in North Africa
Current auto-production law
Up to 30% sold to grid (70% auto-consumption)
New legislation for Independent Power Producers (IPPs) currently in Parliament
Limited private sector investment to date
Source:

6. Technology/Sector level
Survey: 9 Risk Categories
Technology/Sector level
Power Market Risk
Permits Risk
Social Acceptance Risk
Resource & Technology Risk
Grid/Transmission Risk
Counterparty Risk
Financial Sector Risk
Political Risk
Currency/Macroeconomic Risk
Macro level

7. Conceptual framework for risks Practical example: permits risk
Survey: Risk/Derisking Concepts
The study uses a conceptual framework in order to quantify risks and the impacts of public de-risking
instruments. Investor risk is broken down into three conceptual components (barriers; negative events;
financial impact). De-risking instruments fall into two categories (barrier removal; risk transfer)
Conceptual framework for risks
Practical example: permits risk
Drivers of Risk
Components of Risk
Drivers of Risk
Components of Risk
Existence of
barriers in investment environment
Result in increased probability of negative events affecting wind farm
Negative events result in financial impact for investors
Barriers:
Lack of clear responsibility of different agencies for RET energy approvals
Negative events:
Uncertainty and delays due to poorly administered licensing
Financial impact:
Transaction costs; delayed revenues; under- or no investment
Policy
derisking
instruments
act to reduce barriers
Financial
derisking
instruments
act to transfer
risk (impact) to another actor
Barrier removal
Streamlined licensing process: Harmonized requirements, reduced licensing steps; priority areas/zoning

8. 3 Key Questions for Each Risk
Survey: Questions and Assumptions
3 Key Questions for Each Risk
General Assumptions
Q1 : How would you rate the probability that the events underlying the particular risk occur?
Please answer all questions based on the current status of the risks in the country’s investment environment today
Assume you have the opportunity to invest in a MW on-shore wind park
Assume a high quality c-Si PV panel manufacturer with proven track record (eliminating certain technology risks)
Assume an O&M insurance contract (eliminating certain technology risks)
Assume that transmission lines with free capacities are located relatively close to the project site (within 10 km)
Assume a build-own-operate business model and a construction sub-contract with high penalties for contract breach (eliminating certain technology risks)
Assume a project finance structuring 1 2 3 4 5
Unlikely
Very Likely
Q2: How would you rate the financial impact of the events underlying the particular risk, should the events occur? 1 2 3 4 5
Low Impact
High Impact
For assumption 1 add: so no further de-risking instruments in place
Q3: How would you rate the effectiveness of the identified de-risking instrument in mitigating the particular risk? 1 2 3 4 5
Low Effectiveness
High
Effectiveness

9. 1: Power Market Risk
Risk Definition: Risk arising from limitations and uncertainties in the power market, and/or suboptimal regulations to address these limitations and promote renewable energy markets
Key Stakeholder Group: Public sector (legislators, policymakers) Q1 Q2
Barriers
Market outlook: Lack of or uncertainties regarding governmental renewable energy strategy and targets
Market access/price: Suboptimal energy market liberalization; uncertainties regarding competitive and price outlook; limitations in PPA and/or PPA process
Market distortions: high fossil fuel subsidies
Negative events
Inability to secure a visible and viable outlook for cash flow generation
Examples:
Uncertainty on long term policy outlook
Difficult to negotiate PPAs
Uncompetitive with subsidised fossil fuels
Financial impacts Q3
Derisking Instrument #1: Public sector activities to create an enabled investment environment
Establish transparent, long-term national wind energy strategy and targets: National-level resource inventory/mapping; establish national energy office; review technology options; renewable energy targets
Establish well-designed and harmonized energy market liberalization and FIT (or similar instrument): Unbundling of the energy market (generation, transmission, distribution); establish well-designed and transparent procedures for FIT, PPA tendering (or similar); well-designed, transparent policy on key clauses for standard PPA
Reform of fossil fuel subsidies: Assessment of fuel subsidies, phase-out/down of subsidies, awareness campaigns, design of transfer programs to affected groups

10. 2: Permits Risk
Risk Definition: Risk arising from the public sector’s inability to efficiently and transparently administer renewable energy-related licensing and permits
Key Stakeholder Group: Public sector (administrators) Q1 Q2
Barriers
Labor-intensive, complex processes and long time-frames for obtaining licenses and permits (generation, EIAs, land title) for renewable energy projects
High levels of corruption. No clear recourse mechanisms
Negative events
Project delays and operational uncertainties due to administration of permits
Examples:
Inability to advance permitting of project
Uncertainty and delays due to poorly administered licensing process
Limited/inability to have recourse in case of breach of contract or arbitrary decisions
Financial impacts Q3
Derisking Instrument #1: Public sector activities to create an enabled investment environment
Establish a one-stop-shop for renewable energy permits; streamline processes for permits: Establish institutional champion with clear accountability and appropriate expertise for renewable energy; harmonisation of requirements; reduction of process steps; training of staff in renewable energy
Contract enforcement and recourse machanisms: Enforce transparent practices, wind energy related corruption control and fraud avoidance mechanisms; establish effective recourse mechanisms

11. 3: Social Acceptance Risk
Risk Definition: Risks arising from lack of awareness and resistance to wind energy in the general public
Key Stakeholder Group: End-users, general public Q1 Q2
Barriers
Lack of awareness of renewable energy in the general public: including, for example, consumers, end-users, local residents and labor unions
Negative events
Social and political resistance activities due to special interest groups
Example:
Protests or vandalism at project site
Delays in development, construction or operations of renewable energy plant
Financial impacts Q3
De-Risking Instrument #1: Public sector activities to create an enabled investment environment
Awareness raising of key stakeholders: Working with the media, awareness campaigns and stakeholder dialogue with end users, policymakers, and local residents
Community involvement at project sites: Community consultations including piloting models such as in-kind services (energy access, local employment; etc.) or equity stakes in renewable energy projects

12. 4: Resource & Technology Risk
Risk Definition: Risks arising from use of the renewable energy resource and technology (resource assessment; construction and operational use; hardware purchase and manufacturing)
Key Stakeholder Group: Project developers, supply chain Q1 Q2
Barriers
For resource assessment and supply: inaccuracies in early- stage assessment of renewable energy resource
For planning, construction, operations and maintenance: sub- optimal plant design; lack of local firms and skills. limitations in civil infrastructure (roads etc.)
For the purchase and, if applicable, local manufacture of hardware: purchaser's lack of information on quality, reliability and cost of hardware; lack of local industrial presence and experience with hardware
Negative events
Operational disruptions or underperformance due to technology disruptions or malfunctions
Examples:
Breakdown of hardware
Delays through prolonged repairs
Financial impacts Q3
Derisking Instrument #1: Public sector activities to create an enabled investment environment
For resource assessment and supply: Project development facility: capacity building for resource assessment
For planning, construction, operations and maintenance: Project development facility: feasibility studies; networking; training and qualifications
For the purchase and, if applicable, local manufacture of hardware: Research and development; technology standards; exchange of market information (e.g., via trade fairs)

13. 5: Grid/Transmission Risk
Risk Definition: Risks arising from limitations in grid management and transmission infrastructure in the particular country
Key Stakeholder Group: Utility (transmission company/grid operator) Q1 Q2
Barriers
Grid code and management: limited experience or suboptimal operational track-record of grid operator with intermittent sources (e.g., grid management and stability). Lack of standards for the integration of intermittent, renewable energy sources into the grid
Transmission infrastructure: inadequate or antiquated grid infrastructure, including lack of transmission lines from the renewable energy source to load centres; uncertainties for construction of new transmission infrastructure
Negative events
Problems in connecting the renewable energy plant to the grid and transmitting electricity
Examples:
Delays in grid connection
Higher cost due to excessive grid code requirements
Inability to feed-in electricity due to poor grid management
Financial impacts Q3
Derisking Instrument #1: Public sector activities to create an enabled investment environment
Strengthen transmission company's operational performance, grid management and formulation of grid code: Develop a grid code for new renewable energy technologies; sharing of international best practice in grid management
Policy support for national grid infrastructure development: Develop a long-term national transmission/grid road-map to include intermittent renewable energy
Derisking Instrument #2: Take-or-Pay Clause in PPA
Addresses grid/transmission risks ((black-out/brown-out) and grid management (curtailment))

14. 6: Counterparty Risk
Risk Definition: Risks arising from the utility's poor credit quality and an IPP's reliance on payments
Key Stakeholder Group: Utility (electricity purchaser) Q1 Q2
Barriers
Limitations in the utility's (electricity purchaser) credit quality, corporate governance, management and operational track-record or outlook; unfavourable policies regarding utility's cost-recovery arrangements
Negative events
Inability to receive payments for wind energy generated and sold to the grid
Examples:
Non-payment of tariffs
Utility's credit profile deteriorates resulting in reduced or non-payment of tariffs
Financial impacts Q3
Not so important if no answer on Q3 for the financial instrument
Derisking Instrument #1: Strengthen utility's management/operational performance
Establish international best practice in utility/distribution company's management, operations and corporate governance; implement sustainable cost recovery policies
Derisking Instrument #2: Guarantee of tariff /PPA
Depends on specific circumstances and division of risks in PPA. Can include, as necesssary: partial risk guarantees on PPA; counterparty guarantees as part of political risk insurance (PRI)

15. 7: Financial Sector Risk
Risk Definition: Risks arising from the lack of information and track record on financial aspects of wind energy, and general scarcity of investor capital (debt and equity), in the particular country
Key Stakeholder Group: Investors (equity and debt) Q1 Q2
Barriers
Capital scarcity: Limited availability of local or international capital (equity/and or debt) for green infrastructure due to, for example: under-developed local financial sector; policy bias against investors in green energy
Limited experience with renewable energy: Lack of information, assessment skills and track-record for renewable energy projects amongst investor community; lack of network effects (investors, investment opportunities) found in established markets; lack of familiarity with project finance structures
Negative events
Failure or delay in launch of wind project due to unfavorable or insufficient debt and/or equity financing
Examples:
High costs in soliciting investors and debt providers
Longer and more extensive process for closing on financing
Financial impacts
Not so important if no answer on Q3 for the financial instruments Q3
Derisking Instrument #1: Public sector activities to create an enabled investment environment
Financial sector policy reforms: Assess trade-offs between financial stability regulation and renewable energy objectives (e.g. liquidity treatment); promote financial sector policy favorable to long-term infrastructure, including project finance
Strengthen investors‘ familiarity with and capacity regarding renewable energy projects: Industry-finance dialogues and conferences; workshops/training on project assessment and financial structuring
Derisking Instrument #1: Debt and equity products
Depends on specific financial circumstances. Can include as necessary: public loans; public loan guarantees; public equity

16. 8: Political Risk
Risk Definition: Risks arising from country-specific governance, social and legal characteristics
Key Stakeholder Group: National Level Q1 Q2
Barriers
Uncertainty or impediments due to war, terrorism, and/or civil disturbance
Uncertainty due to high political instability; poor governance; poor rule of law and institutions
Uncertainty or impediments due to government policy (currency restrictions, corporate taxes)
Negative events
Interferences to the operations and finances of the renewable energy plant due to socio- political instability
Examples:
Damage or delays to renewable energy plant due to violence
Expropriation of assets
Inability to repatriate cash flows
Financial impacts
Not so important if no answer on Q3 Q3
Derisking Instrument #1: Political Risk Insurance for equity and debt holders (PRI)
Provision of political risk insurance to equity holders covering (i) expropriation, (ii) political violence, (iii) currency restrictions and (iv) breach of contract

17. 9: Currency/Macroeconomic Risk
Risk Definition: Risks arising from the broader macroeconomic environment and market dynamics
Key Stakeholder Group: National Level Q1 Q2
Barriers
Uncertainty due to volatile local currency; unfavourable currency exchange rate movements
Uncertainty around inflation, interest rate outlook due to an unstable macroeconomic environment
Negative events
Exposure of project operations and cash flows to macroeconomic and market related changes
Examples:
Inability to sell electricity to the grid
Mismatching of currency for revenues and expenses
Unexpected rise in financing costs due to higher interest rates
Financial impacts Q3
De-Risking Instrument: Partial-indexing of the PPA tariff
Addresses currency risk (the foreign exchange rate exposure that IPPs may face due to hard-currency lending with a local-currency denominated PPA)

18. Thank you for your support.