Deal making in emerging markets
A chief executive of a UK wind energy association was recently
reported as saying: ?There is a real danger that a snapshot taken
of UK renewables at the end of the century will turn out to capture
only its swansong. Unless there is a rapid movement towards planned
and predictable orders for new capacity, the industry will look to
overseas markets.?
The newly-created energy regulator in the UK, the Office of Gas & Electricity Markets, has announced a cut in the Fossil Fuel Levy from 0.7% to 0.3% as of October 1 1999. Proceeds from the levy are used to fund the Non-Fossil-Fuel-Obligation system, which is the prime support mechanism for renewable electricity in England and Wales. The levy, which is applied to all electricity consumers' bills, will be cut because the rate of commissioning of new renewable schemes has slowed down.
The good thing about renewables is that they rely on the indigenous resources of a developing country ? importing fossil fuels might well be questionable ? in addition to the environmental benefits that they bring.
There are good deals to be done, but we need to make careful choices. This is not a leap of faith, but commercial viability is not helped by the beards and sandals image that is often associated with the renewables sector. At the Commonwealth Development Corporation (CDC) we are trying to change attitudes to encourage investment in renewables deals.
Renewable energy is by definition a variable energy resource, and it is sometimes difficult to assess. But there is no need to carry out exhaustive feasibility studies to get an understanding of a good deal. If the projected return is poor, no amount of detail is going to help. Basic cash flow and likely return on investment is required, with quality partners and common objectives established at a early stage. We have to look at these renewable projects as businesses.
Governments in emerging markets can start by setting the right environment for renewable energy. They must not just look at one part of the electricity market ? fossil fuels ? during liberalization, but should create the enabling environment for renewable energy. Some are now beginning to do so, but they need to do more.
The process centres on clarity, certainty and consistency. Clarity ? what governments really want. They need to fully understand and express why they are inviting the private sector to participate. Certainty ? reasonable assurance that a government intends to follow acceptable proposals through to completion. As for Consistency ? changing does not help. The private sector looses patience and goes away.
It is important both that the right policy signals for renewables are set and that suitable rules to encourage the penetration of renewables are established.
As for sponsors, they should start talking to partners they never dreamed they would want to talk to. Not just to power companies, but to the sugar industry, rice millers and distilleries. Renewable energy is multi-disciplinary. Project size often raises difficulties ? small projects can be too small. But the solution is to create a portfolio whereby several sponsors pool their projects. Several benefits can accrue ? the risk is spread, so there is no total reliance on the income stream of just one project, and costs can be reduced.
Financing structures for emerging markets renewables deals need to be creative and layered, in case the primary plan fails. The challenge is to structure private sector deals where historically a mind-set of aid and subsidy has existed. Aid has not provided capacity building. A number of international institutions have learnt to stop making gifts ? better to structure a private sector renewable energy deal that leverages off a whole series of soft-financing, some benevolent in nature. CDC has positioned itself to take development and early stage equity stakes. The continued development of country specific funds also provides further opportunities to identify and focus on small and medium-scale renewable businesses. But we have to make careful choices.
An example of this creativity and layering can be found in a CDC $2.3 million equity stake in a geothermal deal, Guatemala's Orzunil deal.
One of the lowest-cost power producers in the country, it is covered by a take-or-pay component for 90% of its electrical energy despatch. The financing is structured to provide acceptable equity returns through dividends, with additional returns expected from exit realisation. Geothermal power's high capital cost requires financing of long tenor to maintain adequate debt service cover. For this reason use was made of loans with mortgage, or annuity-style debt service that included balloon repayments of principal. The tenor and terms of the debt substantially assisted viability. The risks in the project finance deal were well allocated and mitigated through the project agreements.
The best renewable energy deals in the next millennium will be done in the emerging markets, and by talking to renewable energy partners you never dreamed you would want to talk to. There is no partner as good as the one who has been there before, learnt the lessons and has a contact network already.
Welcome to private sector renewable energy deal making.
Dr Derrick Fielden is manager of renewable energy at the Commonwealth Development Corporation in London. His responsibilities include financing of private sector renewable energy businesses. Tel: (+44) 171 963 3873
Fax: (+44) 171 963 3956. Email: dfielden@cdc.co.uk
The newly-created energy regulator in the UK, the Office of Gas & Electricity Markets, has announced a cut in the Fossil Fuel Levy from 0.7% to 0.3% as of October 1 1999. Proceeds from the levy are used to fund the Non-Fossil-Fuel-Obligation system, which is the prime support mechanism for renewable electricity in England and Wales. The levy, which is applied to all electricity consumers' bills, will be cut because the rate of commissioning of new renewable schemes has slowed down.
The good thing about renewables is that they rely on the indigenous resources of a developing country ? importing fossil fuels might well be questionable ? in addition to the environmental benefits that they bring.
There are good deals to be done, but we need to make careful choices. This is not a leap of faith, but commercial viability is not helped by the beards and sandals image that is often associated with the renewables sector. At the Commonwealth Development Corporation (CDC) we are trying to change attitudes to encourage investment in renewables deals.
Renewable energy is by definition a variable energy resource, and it is sometimes difficult to assess. But there is no need to carry out exhaustive feasibility studies to get an understanding of a good deal. If the projected return is poor, no amount of detail is going to help. Basic cash flow and likely return on investment is required, with quality partners and common objectives established at a early stage. We have to look at these renewable projects as businesses.
Governments in emerging markets can start by setting the right environment for renewable energy. They must not just look at one part of the electricity market ? fossil fuels ? during liberalization, but should create the enabling environment for renewable energy. Some are now beginning to do so, but they need to do more.
The process centres on clarity, certainty and consistency. Clarity ? what governments really want. They need to fully understand and express why they are inviting the private sector to participate. Certainty ? reasonable assurance that a government intends to follow acceptable proposals through to completion. As for Consistency ? changing does not help. The private sector looses patience and goes away.
It is important both that the right policy signals for renewables are set and that suitable rules to encourage the penetration of renewables are established.
As for sponsors, they should start talking to partners they never dreamed they would want to talk to. Not just to power companies, but to the sugar industry, rice millers and distilleries. Renewable energy is multi-disciplinary. Project size often raises difficulties ? small projects can be too small. But the solution is to create a portfolio whereby several sponsors pool their projects. Several benefits can accrue ? the risk is spread, so there is no total reliance on the income stream of just one project, and costs can be reduced.
Financing structures for emerging markets renewables deals need to be creative and layered, in case the primary plan fails. The challenge is to structure private sector deals where historically a mind-set of aid and subsidy has existed. Aid has not provided capacity building. A number of international institutions have learnt to stop making gifts ? better to structure a private sector renewable energy deal that leverages off a whole series of soft-financing, some benevolent in nature. CDC has positioned itself to take development and early stage equity stakes. The continued development of country specific funds also provides further opportunities to identify and focus on small and medium-scale renewable businesses. But we have to make careful choices.
An example of this creativity and layering can be found in a CDC $2.3 million equity stake in a geothermal deal, Guatemala's Orzunil deal.
One of the lowest-cost power producers in the country, it is covered by a take-or-pay component for 90% of its electrical energy despatch. The financing is structured to provide acceptable equity returns through dividends, with additional returns expected from exit realisation. Geothermal power's high capital cost requires financing of long tenor to maintain adequate debt service cover. For this reason use was made of loans with mortgage, or annuity-style debt service that included balloon repayments of principal. The tenor and terms of the debt substantially assisted viability. The risks in the project finance deal were well allocated and mitigated through the project agreements.
The best renewable energy deals in the next millennium will be done in the emerging markets, and by talking to renewable energy partners you never dreamed you would want to talk to. There is no partner as good as the one who has been there before, learnt the lessons and has a contact network already.
Welcome to private sector renewable energy deal making.
Dr Derrick Fielden is manager of renewable energy at the Commonwealth Development Corporation in London. His responsibilities include financing of private sector renewable energy businesses. Tel: (+44) 171 963 3873
Fax: (+44) 171 963 3956. Email: dfielden@cdc.co.uk
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