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ExCo 05 // 20-22 September 2011 Author Present ation C E M 0 2 F e b r u a r y 1 5 , 2 0 1 1 Amit Bando, Executive Director S e p t e m b e r 2 1 , 2 0 1 1 , I s t a n b u l Wind Power Financing & Investing in Turkey
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Page 1: Turkey Wind Financing, IPEEC

ExCo 05 // 20-22 September 2011

Author

Presentation CEM

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Amit Bando, Executive Director

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Wind Power Financing & Investing in Turkey

Page 2: Turkey Wind Financing, IPEEC

ExCo 05 // 20-22 September 2011

What is IPEEC?01

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Page 3: Turkey Wind Financing, IPEEC

ExCo 05 // 20-22 September 2011IPEEC is a high level international forum

Provides global leadership on energy efficiency by identifying and facilitating government implementation of policies and programs that yield high energy-efficiency gains.

Aims to promote information exchange on best practices and  facilitate initiatives to improve energy efficiency.

Formally established in 2009 at the G8 summit in L'Aquila, Italy and resulting from the Heiligendamm Dialogue Process.

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Page 4: Turkey Wind Financing, IPEEC

ExCo 05 // 20-22 September 2011IPEEC is an autonomous entity

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The IPEEC Secretariat is located in Paris, France

Members account for over 75% of world GDP and energy use.

Italy

Russia

Japan

Republic of KoreaChina

India

Australia

GermanyUnited

KingdomFrance

Canada

USA

Mexico

Brazil

EU

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ExCo 05 // 20-22 September 2011IPEEC - guiding principles Improving energy saving and energy efficiency is one of the

quickest, greenest, and most cost-effective ways to address energy security and climate change as well as to ensure sustainable economic growth 

All countries, both developed and developing, share common interests in improving their energy efficiency performance

There is abundant potential for international cooperation among them

Will contribute to improvement of energy efficiency at the global level

Developed countries need to play an important role in cooperation with developing countries

Accelerating dissemination and transfer of best practices, efficient technologies and capacity building in developing countries

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ExCo 05 // 20-22 September 2011

Wind Power in Turkey

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Page 7: Turkey Wind Financing, IPEEC

ExCo 05 // 20-22 September 2011Wind Value Chain is Increasingly Split Up

Two distinct segments developing: onshore and offshore

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Page 8: Turkey Wind Financing, IPEEC

ExCo 05 // 20-22 September 2011

Onshore – Continued Growth, New Frontiers

Most installed capacity in Europe Inside Europe fastest growth moving from traditional wind power

producers (Germany & Spain) to new countries (France, UK, Italy and Ireland)

Fastest growth in US and Asia (particularly China and India).

Factors that impact growth: Value chain bottlenecks Grid access limitations Legislation / Subsidies Cost relative to fossil fuels Availability of capital (credit crunch).

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ExCo 05 // 20-22 September 2011

Wind strength & subsidy regime define the onshore wind project economics

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Onshore Wind Power – Subsidy Overview

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ExCo 05 // 20-22 September 2011

Market driversWind strength and electricity shortages

Turkey’s generally very favourable wind regime, with a long coastline, causes wind farms to register a high average capacity factor of 30-35% (globally 20-25%). This is a very important factor in the economic viability of a wind farm.

Export Credit Agencies can make robust projects work in difficult credit environments

Regulatory drivers: Climate change concerns Security of domestic energy supply Domestic industry support

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Page 11: Turkey Wind Financing, IPEEC

ExCo 05 // 20-22 September 2011Market drivers (continued)Energy prices:

High price paid for electricity on the wholesale market However, state price guarantees insufficient to make

projects financially viable in certain locations

Increasing demand of energy: Turkey may face electricity shortages in the short to medium term future. Grid strength is an issue, could be solved by partnering

Financial structure: Combine guaranteed price with upside from wholesale

market Mezzanine tranches (between senior debt and equity) to

boost equity returns

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ExCo 05 // 20-22 September 2011Market drivers (continued)

Selling Carbon Credits to boost revenues:

Turkey ratified Kyoto Protocol in August, 2009. VCM is only 1% of Global Carbon Markets – it is 100% of

market in Turkey (70% of VCM projects are of Turkish origin)

Private sector has a “niche” position – learning-by-doing since 2005

IRR with carbon income is 5% higher than IRR without carbon income

Price of VERs in the range of 5-10 Eur/tCO2e provide additional boost to wind power projects in Turkey.

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Page 13: Turkey Wind Financing, IPEEC

ExCo 05 // 20-22 September 2011

Financial MarketMarket dynamics have changed since 2008.

Banks have become increasingly risk averse and focussed on core clients.

Internal approval processes are uncertain and conservative.

Bank balance sheets are highly constrained and lending to new clients or new sectors is virtually non-existent.

Banks are unwilling or unable to offer underwriting. Given market circumstances, with specific reference to PF deals in

the Renewable sector, transactions will need to be arranged on a club basis.

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ExCo 05 // 20-22 September 2011Financial Market (continued)

Debt financing is likely to remain constrained and will require the collective use of balance sheet across a large group.

As a result deals will be smaller to ensure liquidity can be found. This will result in larger lead groups and organised club deals.

Underwriting will not return until balance sheet constraints are rectified and confidence and liquidity is restored in the market.

When this occurs, all underwritten transactions will need to have full market flex-on pricing, fees and structure.

Limited recourse financing instead of non-recourse financing is an option to enhance availability of debt for strong sponsors.

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ExCo 05 // 20-22 September 2011

A strong focus on quality of the project developer and financial sponsor.

Utilities will be in a stronger position to attract finance.

Due diligence is increasingly important in terms of technology risk and forecast assumptions.

Unproven technology will prove increasingly difficult to attract debt capital.

Pricing - given banks higher costs of funds and capital costs, margins and fees will need to increase to maintain, let alone attract liquidity.

Tenor - given the cost to banks of sourcing longer term capital, there is substantial pressure to lend on a short term basis only.

Transaction tenors are expected to shorten (as much as is feasible).

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Limited Risk Appetite - Focus on Project and Sponsor Quality

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ExCo 05 // 20-22 September 2011

Structure – back to basics!

Stronger focus on forecast assumptions and due diligence.

Loan life coverage will increase Strong desire for amortisation Increased focus on cash sweeps and dividends Transactions will require more equity.

Cost of credit is a significant driver of value. Given the high cost of capital and shortage of liquidity,

transaction IRRs will come under pressure.

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Limited Risk Appetite - Focus on Project and Sponsor Quality (continued)

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Likelihood of success

Location, turbines, contracts, management

Geographic Location Wind resources Grid Export Capacity

Off take arrangements Prevailing Tariff Counter Party Strong PPA (Power Purchase Agreement)

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Likelihood of success (continued)

Turbine Choice Capex and Opex Technology Project Life (including re-powering potential)

Other Project Specific Factors Project Team and Project Sponsors Financing and Security Structure

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Page 19: Turkey Wind Financing, IPEEC

ExCo 05 // 20-22 September 2011Risks and opportunities when

financing wind energy

Overall - growth is expected to continue

Opportunities: Decreasing cost of wind energy generation

through technical developments could make it even more economically viable globally

The need to improve grid access is becoming a focus for governments

Wind turbine production is increasing globally Repowering could be a new market in ‘old’ wind

countries

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Risks and opportunities when

financing wind energy

(continued)Risks:

Dependence on government support Public opinion - increasing opposition against

onshore wind farms Permitting and regulatory challenges Landscape and nature conservation Safety, radar interference, etc. Grid infrastructure limitations

Slow pace of grid improvements Electricity price effects Turbine availability, increasing turbine prices &

other value chain bottlenecks20

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Overall – A Great OpportunityWind energy is

One of the cheapest forms of renewable energy Large-scale Fairly mature technology (on-shore) Quick to install.

In principle, wind turbines do not harm the environment but they are not without their public opinion issues.

Wind energy will grow in the coming years, both on- and offshore. This presents a great opportunity. 21

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ExCo 05 // 20-22 September 2011

Thank you

For more information, contact the IPEEC Secretariat:

Amit Bando, Executive Director: [email protected]@ipeec.org

9 rue de la Federation, 75739 Paris Cedex 15, France

www.ipeec.org

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