Presentation by Anat Prapasawad

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Mr. Anat Prapasawad

Executive Officer

Business Development Department

TMB Bank Public Company Limited

Financing Sustainable Energy Projects-

A Lender Point of View

Presented by

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Opportunities

Overview of the barriers and/or risks affecting investment in RE projects

Risk / Return analysis to asses each major risk and the means to mitigate its potential impact on the project

Financial risk management instruments currently supporting RE projects and those that could be developed to reduce uncertainty as barriers

Innovative financial services

CDM

TopicsTopics

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Opportunities Opportunities AdvantagesAdvantages

Making more profit with acceptable risk

Differentiate from other banks through innovative financial services

Enable to access new customers while maintain existing customers

Good image for the bank;Better partner, better value

While supporting government policy

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Opportunities Opportunities Technologies DistributionTechnologies Distribution

Renewable• Biofuel

(biodiesel ethanol)

• PV• Biomass gen,

Co-gen• Waste to energy• Wind Turbine• Hydro• Geothermal• Etc.

Energy Efficiency

• Controling

• Replacing

• Modifying

Fuel Switching

Conventional fuel

Biofuel/NG

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TE = Traditional Energy

NRE = New & Renewable

Energy

2011

NRE0.5%

TE16.5%

CommercialEnergy83.0. %

200252,939 KTOE

81,753 KTOE

TE11%

NRE8%

CommercialEnergy

81%

TARGET

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Thailand Thailand TTargets in 2011argets in 2011

RE Power1,060 KTOE (2,400 MW*)

Liquid Biofuel1,570 KTOE

Heat3,910 KTOE

6,540 KTOE8%

of final energy use

in 2011 (81,753 KTOE)

* Existing 560 MW

• Industry• Agriculture

• Transport• Agriculture

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RE Power ProductionRE Power Production

Solar 200 MWWind 100 MWMSW(ขยะ) 100 MW

Biomass 740 MWSmall Hydro 350 MWSolar Home System 50 MWSPP 300 MW

1840 MW*(+560 MW)

* Existing SPP 560 MW

RPS 5% Obligation for newfossil power plant

Incentives• Guaranteed buy back• Soft loan• Tax incentive

MSW=Municipal Solid Waste

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Thailand Target of REThailand Target of RE

2003 2012 5% 8%

Electricity 2,400 MW (1,060 KTOE)

Heat 4,000 KTOE ; Industry + Agri.

Biofuel 1,570 KTOE ; Transport + Agri.

Measures: 1. RPS 5% (Renewable Portfolio Standard)2. Incentives3. R&D

970Ethanol

600Biodiesel

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NanNan Y Y ang ang Cogeneration ProjectCogeneration Project

Start Savings: Oct 05

Energy Conservation Measure (ECM) Project Investment Cost = 154.6

MB

Energy Cost Savings = 49.2 MB/Year

Payback Period = 3.1 Years

IRR = 31.7 %

NPV (DR @ 4%) = 333.7 MB

Cogeneration22 tph Boiler and 1.8 MW Steam Turbine-Generator (Fuel: Coal)

Located: Samutsakhon Province

Case StudyCase Study

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Energy Conservation Measure (ECM) Project Investment Cost = 170 MB

Energy Cost Savings = 35 MB/Year

Payback Period = 5 Years

IRR (15 years) = 19 %

NPV (DR @ 6%) = 186 MB

Cogeneration3 MW Steam Turbine Generator and 35 TPH Boiler (Fuel: Palm Residue)

Start Savings: 2007

Siam Modern PalmSiam Modern Palm

Located: Krabi Province

Case StudyCase Study

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Energy Conservation Measure (ECM)

Biogas system with Gas

Engine 3 MW

Project Investment Cost = 167 MB

Energy Cost Savings = 119 MB/Year

Payback Period = 1.4 Years

Case StudyCase Study

SANGUAN WONGSE INDUSTRIESSANGUAN WONGSE INDUSTRIES

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Sofitel Central Huahin ResortSofitel Central Huahin Resort

Start Savings: Sep 04

Energy Conservation Measure (ECM) Project Investment Cost = 8.9

MB

Energy Cost Savings = 3.2 MB/Year

Payback Period = 2.94 Years

IRR = 34.83 %

NPV (DR@ 3%) = 19.0 MB

Ozone for LaundryHeat Pump Chiller Replacement

Located: Prachuab Khirikhan Province

Case StudyCase Study

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Barriers risks?Barriers risks?

“Financial risk management is a key element of any commercial investment in conventional energy …, yet little attention has been

paid to its use in the development of renewable energy technologies, particularly in developing countries, … if used

transfer certain types of risks away from investors and lender.”

Monique BarbutDirector

Division of Technology, Industry and EconomicsUNEP

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“The financial incentive package for each country is carefully crafted to suit its economic, legal, and fiscal system. The types of

incentives used include concessional import duties, excise tax benefits, corporate and income tax benefits (including tax

exemptions, holidays, credits, and deduction as well as depreciation), subsidies against investment cost, low interest

loans, and premium power purchase prices.”

World Bank Discussion Paper No. 391

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Project Finance (PF)Project Finance (PF)

Funding of major capital

Cashflow of the project as sources of fund for repayment

Asset of the project as collateral

Risk management through transference (allocate to parties best able and willing to accept)

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Corporate Finance Comparison Corporate Finance Comparison with Project Financewith Project Finance

< Corporate Finance>

Financiers

Company

Project Assets

< Project Finance>

Sponsor Companies Financiers

GovernmentContractorsSuppliersCustomersManagersInsurers

Limited resourse

Contractual Assignment

Project Entity

Project Assets

FinanceR

isk transfe

rence

to co

ntra

ct

ConsultantsESCO

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Major Risk & ManagementMajor Risk & Management

Major risk categories

(throughout project cycle)

Control of risks

(identifying, analyzing, allocating)

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Major Risk CategoriesMajor Risk Categories(throughout project cycle)(throughout project cycle)

Project Identification

Project Development

Project Appraisal

Project Implementation

Project Operation

Project Cycle

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Typical BarriersTypical Barriers

High transactionRelatively small sizeLow marginal returnPerceived weak credit worthiness of companiesResource availability and supply riskCountry risk (political & economy instability)

Other priority investmentUnfamiliarity with technologiesCollateral problemLack of expertise in companyFI lack of knowledgeBenefit sharing

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Risk ManagementRisk Management

Identifying prepare risk / return analysis

Analyzing assess major risks

Allocating means to mitigate its impact

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Risk Management InstrumentsRisk Management Instruments

Contracts (gov., suppliers, consultant, ESCO)Insurance / ReinsuranceCredit enhancement productsAlternative risk transfer instrumentsGuarantee fundPrivate sector risk managementRisk poolingSecuritization structureBundling small projects (reduce transaction cost)

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How to build portfolio?How to build portfolio?Lesson LearnedLesson Learned

BarriersBarriers

1. 1 Access ability to financial resources1.2 Low priority projects 2. Technical Barriers2.1 Unfamiliarity with technologies2.2 Lack of capacity to develop projects2.3 Bad experience with consultants/suppliers 3. Management Barriers3.1 Lack of time3.2 No policy to invest

1. Financial Barriers

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Lesson LearnedLesson LearnedRemoval of BarriersRemoval of Barriers

1. 1 Access ability to financial resources PFI

1.2 Low priority projects PFI

Technical Barriers

2.1 Unfamiliarity with technologies ESCO

2.2 Lack of capacity to develop projects ESCO

2.3 Bad experience with consultants/suppliers FI

Management Barriers

3.1 Lack of time PFI

3.2 No policy to invest PFI

Financial Barriers

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Private Finance Initiatives (PFI)Private Finance Initiatives (PFI)

1. Loan + ESCO (+ CDM)

Energy Finance + Plus

2. Equity + ESCO + BOT (+CDM)

Energy Partner + Plus

3. Loan

Energy Finance

PFI : with proper design can eliminate all barriers

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ESCO : Energy Service Company

Enterpris

eLoan

Repayment

Machinery supplier

ESCO

Buy machinery

Investment Grade Audit

ProcurementSaving

GuaranteeEPC

contract

TMB Energy Finance +PlusTMB Energy Finance +Plus(Soft Loan + ESCO + CDM)(Soft Loan + ESCO + CDM)

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SPC : Special Purpose Company

SPC

(share by

Fund 70-

100%)

Benefit from SPC

operation

Loan

Repayment

Fund

Enterprise

Invest in SPC

Sell energyTransfer SPC

TMB Energy Partner +PlusTMB Energy Partner +Plus((EquityEquity + ESCO + CDM) + ESCO + CDM)

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Project Cycle

How to develop projects (FI views)How to develop projects (FI views)

PI : Project Identification (financial & technical screening)

PD : Project Development (feasibility & engineering design)

PA : Project Approval (FI + Shareholders)

PR : Procurement

OM : Operation + Maintenance (Repayment)

PG : Performance Guarantee

PDD : Project Due Diligence

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TMB’s experiences in RE projects TMB’s experiences in RE projects

• Existing renewable Energy Projects:

– BIOGAS :

• US$ 3.70 Million for 6 projects in swine farms sector

• US$ 14.95 Million for 10 projects in starch industries

• US$ 1.90 Million for 2 projects in palm oil industries

– BIOMASS :

• US$ 60.72 Million for 3 Projects in power plant

• US$ 8.25 Million for 2 Projects in Co-generation plant

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TMB’s experiences in RE projects TMB’s experiences in RE projects

• Projects in pipeline– BIOGAS :

• US$ 4.38 Million for 3 projects in swine farms sector

– BIOMASS :

• US$ 70.90 Million for 9 projects in rice mill

• US$ 1.13 Million for 1 project in seed plant

• US$ 4.5 Million for 1 project in palm oil industry

• US$ 1.25 Million for 1 project in rubber glove industry

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Clean Development MechanismClean Development Mechanism

(CDM)(CDM)

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Global Warming

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IntroductionIntroduction

• Climate change the most profound environmental

Treats to human future (drought, rain, flood, deceases,

low crops, disasters).

• Reducing emissions of CO2 and GHGs is a key challenge.

• The Kyoto Protocol and ETS provide an opportunity for

OECD countries to reduce GHG and help developing

countries invest in environmentally friendly

technologies.

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The Kyoto ProtocolThe Kyoto Protocol

• UNFCCC adopted in Rio de Janeiro, Brazil in 1992

• Adoption took place at COP convention, held at Kyoto, Japan December 11, 1997

• Enter into force since… forcing Annex 1 countries to reduce emissions to a total cut of at least 5% from 1990 levels in the commitment period 2008-2012

• The Mechanism of the Kyoto Protocol namely JI,ET,CDM

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CDM OverviewsCDM Overviews

CDM are project based mechanisms and involve

developing and implementing projects that reduce

greenhouse gas emission overseas, thereby generating

carbon credits that could be sold on carbon market to

Annex 1 (39 developed countries).

Clean Development Mechanism (CDM)

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Technologies distribution of CDM projectsTechnologies distribution of CDM projects

• Biofuel (biodiesel, ethanol)

• PV

• Biomass

• Energy Efficiency

• Waste management

• Gas flaring

• Wind

• Small Hydro

• Geothermal

• Etc.

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CDM and renewablesCDM and renewables

• CDM a mechanism to monetize the carbon

benefits or environmental value of renewables.

• The projects will be more attractive to investors

and financiers with CDM benefit.

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Certified Emission Reductions (CERs)Certified Emission Reductions (CERs)

a) Represent GHG mitigation contribution of a project,

Measured in tonnes of CO2

b) A second product produced by RE, EE projects

c) CERs can be sold in exchange of hard currency

d) Reduction before 2008 (1st year of commitment period)

can be included

e) Can be counted towards Kyoto compliance and bought by

Annex I countries (Mostly OECD countries with GHG

targets under Kyoto)

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Simplified CDM Project CycleSimplified CDM Project Cycle

Project identification

Project feasibility

Project development

Project implementation

Monitoring

Verification/Certification/

Issue of credits

Portfolio analysis Identification of projects

Quantify potential GHG benefits Identify host government requirements

Develop Project Design Document (PDD) Obtain host country government approval Project validation Registration

Install additional monitoring equipment (if necessary)

Monitor project (and baseline) performance

Have emission reductions verified and certified, after which the carbon credits can be issued and sold

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Crediting PeriodCrediting Period

• Two choices

– 7 years with an option for renewal at most 2 times

– A maximum of 10 years with no option of renewal

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Price and PaymentPrice and Payment

• Price of CERs in non-Annex I is $3-$6 per ton CO2

• Price will be determined by supply and demand

• Contract types and pricing varies

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CDM Requirements and CostsCDM Requirements and Costs

a) The CDM status will be given only to projects which

cannot be implemented without it

b) Those projects which can be implemented as

business as usual are disqualified

Additionality

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Carbon Revenues Can Augment Cash FlowCarbon Revenues Can Augment Cash Flow

Carbon Sales Can Add Alternative Revenue Source:

Project Assets

Energy Revenue

Emission Reductions

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IRR ImpactIRR Impact

Country Project Type %IRR %IRR IRR increase % IRR

w/o w/cer’s (% points) increase

Romania District heating 10.5 11.4 0.9 9Costa Rica Wind 9.7 10.6 0.9 9

Hydro 7.1 9.7 2.6 37Nicaragua Bagasse 14.6 18.2 3.6 25Guyana Bagasse 7.2 7.7 0.5 7Brazil Biomass 8.3 13.5 5.2 63Latvia Methane 11.4 18.8 7.4 65India Methane 13.8 18.7 4.9 36Malaysia Biomass 7.7 17.7 10.0 130

Thailand Methane 2.2 11.8 9.6 436

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Carbon Cash Flow Can Improve Debt Service

How Carbon Cash Flow How Carbon Cash Flow Can Improve Capital StructuresCan Improve Capital Structures

Applying Carbon Cash Flow to Debt Service Can Result in more favorable Capital Structures

Higher DSCR (More Debt Carrying Capacity) means less Equity Requirement – Thereby Increasing ROE

Allows Project to be Financed Because Increases DSCR past Predetermined Threshold set by the Lender

Either Way, Both Project Developer and Project Lender are Better Off