Download - Private Sector Perspectives on Risk
![Page 1: Private Sector Perspectives on Risk](https://reader036.vdocument.in/reader036/viewer/2022062408/568141f9550346895dadd6eb/html5/thumbnails/1.jpg)
UNFCCC Workshop on Innovative Options for Financing the
Development and Transfer of Technologies
27-29 September 2004
Private Sector Perspectives on Risk
Charles Donovan
Commercial Manager, Transactions
CAT Alliance Ltd.
T: +44 20 7421 6359
![Page 2: Private Sector Perspectives on Risk](https://reader036.vdocument.in/reader036/viewer/2022062408/568141f9550346895dadd6eb/html5/thumbnails/2.jpg)
Slide 2
Enviros Consulting: Founding Member of CAT Alliance Ltd.
• Europe’s largest resource base for environmental due diligence
• Owned by three environmental / energy consulting firms: Enviros (UK), Tauw (Netherlands), and COWI (Denmark)
• Total staff of 5000+ and combined turnover of $400+ million
• Transaction support to investors and developers in the global clean technology sector
![Page 3: Private Sector Perspectives on Risk](https://reader036.vdocument.in/reader036/viewer/2022062408/568141f9550346895dadd6eb/html5/thumbnails/3.jpg)
Slide 3
CAT Alliance Geographical Coverage
![Page 4: Private Sector Perspectives on Risk](https://reader036.vdocument.in/reader036/viewer/2022062408/568141f9550346895dadd6eb/html5/thumbnails/4.jpg)
Slide 4
Let’s Start with the Basics
Risk Tolerance and Required Financial Return
HIGH
LOW
Common Equity
Preferred Equity
Mezzanine Debt
Subordinated Debt
Senior Debt
![Page 5: Private Sector Perspectives on Risk](https://reader036.vdocument.in/reader036/viewer/2022062408/568141f9550346895dadd6eb/html5/thumbnails/5.jpg)
Slide 5
Let’s Start with the Basics
Cost of Financing
HIGH
LOW
Common Equity
Preferred Equity
Mezzanine Debt
Subordinated Debt
Senior Debt
![Page 6: Private Sector Perspectives on Risk](https://reader036.vdocument.in/reader036/viewer/2022062408/568141f9550346895dadd6eb/html5/thumbnails/6.jpg)
Slide 6
Private Sector Demands on Project Evaluation
• Technology Risk
• Operational Risks
• Construction / Commissioning Risks
• Counterparty Credit Risk
• Commodity Price Risks
•Exchange Rate Risks
•Political Risks
•Environmental Compliance Risks
![Page 7: Private Sector Perspectives on Risk](https://reader036.vdocument.in/reader036/viewer/2022062408/568141f9550346895dadd6eb/html5/thumbnails/7.jpg)
Slide 7
Overview of Credit Risk Management
• Screening of counterparties
• Development of trading limits and transaction limit processes
• Monitoring and reporting of financial exposure against limits
• Testing exposure to financial losses on individual transactions
• Development of credit support packages (e.g. netting) that
support efficient allocation of credit risk for multiple
transactions
What is my expected risk-adjusted return on capital?
![Page 8: Private Sector Perspectives on Risk](https://reader036.vdocument.in/reader036/viewer/2022062408/568141f9550346895dadd6eb/html5/thumbnails/8.jpg)
Slide 8
Credit Enhancement in the Renewable Energy Sector
• Financial risk can be influenced by a large number of factors – credit risk is one area where governments and multilateral institutions can make a tremendous difference.
• Energy financing is still recovering from unprecedented default events in 2001 and 2002. Industry is very focused on credit risk issues.
• Few well capitalised developers and suppliers (e.g. GE Energy)
• The use of output-based subsidies to support renewable energy projects (e.g. Renewable Energy Certificates, CDM carbon credits) may lead investors to have complex and unwanted credit risk exposure.
• Financing renewable energy is at least as pressing a problem as how to make new projects economically viable.
• Public-private partnerships urgently need to address the credit gap.
![Page 9: Private Sector Perspectives on Risk](https://reader036.vdocument.in/reader036/viewer/2022062408/568141f9550346895dadd6eb/html5/thumbnails/9.jpg)
Slide 9
Commodity Price Risk: What is the Value of Carbon Credits?2012
2011
2010
2009
2008
2007
2006
2005
Decem
ber - 2004
Novem
ber - 2004
October - 2004
Septem
ber - 2004
August - 2004
July - 2004
June - 2004
May - 2004
April - 2004
0
5
10
15
20
25
30
35
40
45
50
Allo
wa
nc
e C
os
t (€
/tC
O2
)
Market PricesProjected
CBM Price ProjectionsCurrent Phase I Phase II
50
%ile Range
90
%ile Range
Source: Enviros Consulting EU ETS Price Forecast
![Page 10: Private Sector Perspectives on Risk](https://reader036.vdocument.in/reader036/viewer/2022062408/568141f9550346895dadd6eb/html5/thumbnails/10.jpg)
Slide 10
Can We Expect Bank Credit Committees to Understand This?
Demand for Allowances
Supply of Allowances
Sector Surplus or Shortfall
Allowance Prices
Traded Volumes
Baseline Emissions
Phase I Allocations
Phase II Allocations
Allowance Allocation
Historical Emissions Data
Technological Uptake Forecasts
ProductionForecasts
CO2 Emission
Projections
Sector Cost Abatement Curves
Fuel Price Forecasts
JI/CDM Cost Abatement Curves
Banking and
Borrowing
Weather
Economic Growth
Future development
![Page 11: Private Sector Perspectives on Risk](https://reader036.vdocument.in/reader036/viewer/2022062408/568141f9550346895dadd6eb/html5/thumbnails/11.jpg)
Slide 11
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
13/02/2002 04/04/2002 24/05/2002 13/07/2002 01/09/2002 21/10/2002 10/12/2002 29/01/2003
Looking Back: UK ETS Price Activity
What sets the price when supply and demand are artificial?
Source: TFS, ICAP
2002 vintage
2003 vintage
Today’s price ~
£2.00/tonne
![Page 12: Private Sector Perspectives on Risk](https://reader036.vdocument.in/reader036/viewer/2022062408/568141f9550346895dadd6eb/html5/thumbnails/12.jpg)
Slide 12
Case Study: Durban, South Africa
• eThekwini Municipality (Durban) in South Africa is developing a 10 MW landfill gas-to-electricity project on three landfill sites.
• Recently signed an Emissions for the sale of $15 million in CDM carbon credits to the World Bank Prototype Carbon Fund.
• An innovative project in many respects: One of very few independent power producers in South Africa, multi-site landfill gas collection system, and the project involves the largest waste transfer facility in Southern Africa.
• No legally binding power purchase agreement (PPA)
• Funded from the Municipal Balance Sheet – City of Durban was able to access low cost funds due to low inflation and very strong credit profile.
![Page 13: Private Sector Perspectives on Risk](https://reader036.vdocument.in/reader036/viewer/2022062408/568141f9550346895dadd6eb/html5/thumbnails/13.jpg)
Slide 13
• How do we create more successes like this?
• Is there a role for lease financing to reduce capital expenditure?
• Can these projects gain debt financing from private financial institutions?
• How can you access large-scale private sector debt investments?