oliver yates, clean energy finance corporation: merchant markets - changing finance models and power...

© Clean Energy Finance Corporation

Australian Wind Energy Conference

Merchant Markets: Changing finance models and power purchase agreements in the clean energy market

19 November 2013

© Clean Energy Finance Corporation 2

About the CEFC

� The CEFC was established to accelerate Australia’s transition to a low carbon future

� CEFC is a specialist financier that bridges the gap between private and public sector funding for renewables, energy efficiency and low emissions projects

� Access to $10 billion in funds legislated to the CEFC Special Account as $2 billion per annum from 2013 to 2017 inclusive

� Operates commercially with a public policy purpose, with investment decisions made by experienced private sector board, independently of Government

� Invests responsibly and manages risk to achieve its target rate of return and achieve financially self-sufficiency before 2016

� In a short timeframe, the CEFC has achieved significant carbon abatement at a negative cost through its 11 recent investments, investing almost $500 million

CEFC Mission

Accelerate Australia's transformation towards a more competitive economy in a

carbon constrained world, by acting as a catalyst to increase investment in

emissions reduction


The CEFC role is to enable Australian Renewable Energy and Low Emissions projects

The CEFC can:

� Catalyse the opening of new markets

� Provide global best practice in finance terms in Australia

� Facilitate the required scale to lower costs

Emerging market opportunities and innovative models:

� Project Financing: Wind, solar, biogas and waste-to-energy, precinct level

distributed generation

� Corporate Loans: energy efficiency and low emissions projects (food processing

and manufacturing facilities replacing equipment with more efficient low emissions

technologies, building upgrades to increase efficiency; transportation upgrades for

energy efficient operations )

� Fund Strategies/ Co-Financing Models: Residential Solar PV financing models,

Environmental upgrade of properties, council street lighting, BOOM financing for

distributed generation


Why is the CEFC needed?

Catalysing private sector investments by:

� Providing liquidity

� Catalysing transactions

� Assisting Australian industry and jobs

� Facilitating commercial bank participation

in the sector

� Matching financing to the asset life

� Changing the risk profile

� Enabling projects without a PPA

� Lower required returns

� Aggregation funding


What has CEFC achieved so far?

� CEFC investment has catalysed over $2.2 billion of investment into clean

energy, energy efficiency and low emissions projects, including $536 million

from the CEFC

� CEFC investments are responsible for 3.88 million tonnes of carbon

abatement

� Emissions reduction is generated at a negative cost (net benefit) of $2.40

per tonne of CO2e abated

� CEFC committed investments to date are earning an average return of

approximately 7% which is 4% above the 5 year government bond rate

� The CEFC has a strong pipeline of emissions reductions proposals that

support current government policy and a dedicated and experienced team

ready to execute these transactions


What has the CEFC financed?

Wind

� $37.5m of senior debt finance for

the construction and operation of

the Taralga Wind Farm

� $50m towards the refinancing of

Macarthur Wind Farm

� $70 million in debt financing for

Pacific Hydro’s Portland Wind Farm

Solar

� $40m of senior debt to co-finance

a major solar greenhouse

development near Port Augusta

� $60.0m of senior debt for Moree

Solar Farm

Energy Efficiency

� $50m funding for CBA Energy

Efficiency Loans for businesses

� $50m funding for CBA Energy

Efficiency Loans for not-for-profits

� $550,000 loan to Baw Baw Shire

Councils to upgrade street lights

� $7.0m of on-bill financing for Origin

Energy customers

Low Emissions

� $75 million corporate loan to EDL for

waste to energy projects


Current market conditions

� Three major energy retailers will continue to have concentrated economic

power – there are significant financial barriers to entry

� Large retailers are venturing into renewable development and generation

� There is a risk that the renewable energy targets (RET) will be adjusted,

lowering demand for LGCs and therefore lowering prices

� Renewable energy developers are generally unable to secure PPAs for the

electricity and LGCs (which make the projects more readily bankable)

� Developers are facing the need to take Merchant Energy Price Risk, at least in

the short to medium term

� Merchant Energy Price Risk is presenting as a significant challenge for

new clean energy project proponents and their financiers


Future electricity price uncertainty

� Regulatory uncertainty – renewable energy targets, licensing, NSP

regulatory regime

� Falling electricity demand – record high electricity prices and falling

demand

� Decentralisation – rooftop solar, commercial & industrial scale

renewables

� Demand management – whilst this has barely begun in Australia,

demand management could significantly change electricity prices in

the future

� Energy efficiency measures

� Newer players in the market make some PPAs less bankable


Predicting future energy prices

� We are seeing highly variable forecasts for future energy prices

60

80

100

120

140

160

180

De

c-1

3

Ma

y-1

4

Oct

-14

Ma

r-1

5

Au

g-1

5

Jan

-16

Jun

-16

No

v-1

6

Ap

r-1

7

Sep

-17

Feb

-18

Jul-

18

De

c-1

8

Ma

y-1

9

Oct

-19

Ma

r-2

0

Au

g-2

0

Jan

-21

Jun

-21

No

v-2

1

Ap

r-2

2

Sep

-22

Feb

-23

Jul-

23

De

c-2

3

Ma

y-2

4

Oct

-24

Ma

r-2

5

Au

g-2

5

Jan

-26

Jun

-26

No

v-2

6

Ap

r-2

7

Sep

-27

Feb

-28

Jul-

28

De

c-2

8

Ma

y-2

9

Oct

-29

Ma

r-3

0

Au

g-3

0

Jan

-31

Jun

-31

No

v-3

1

Ap

r-3

2

Sep

-32

Feb

-33

Jul-

33

All-in Energy Forecasts ($/MWh)

Forecast 1 - 7/2013 Forecast 2 - 6/2013 Forects 3 - 6/2013 Forecast 4 Forecast 5

Forecast 6 Forecast 7 - 5/2013 Forecast 8 - 12/2012 Forecast 9 - 9/2013 Average(9/2013)


Predicting future energy prices

� There is particular uncertainty around LGC pricing

0

20

40

60

80

100

De

c-1

3

Ma

y-1

4

Oct

-14

Ma

r-1

5

Au

g-1

5

Jan

-16

Jun

-16

No

v-1

6

Ap

r-1

7

Sep

-17

Feb

-18

Jul-

18

De

c-1

8

Ma

y-1

9

Oct

-19

Ma

r-2

0

Au

g-2

0

Jan

-21

Jun

-21

No

v-2

1

Ap

r-2

2

Sep

-22

Feb

-23

Jul-

23

De

c-2

3

Ma

y-2

4

Oct

-24

Ma

r-2

5

Au

g-2

5

Jan

-26

Jun

-26

No

v-2

6

Ap

r-2

7

Sep

-27

Feb

-28

Jul-

28

De

c-2

8

Ma

y-2

9

Oct

-29

Ma

r-3

0

Au

g-3

0

Jan

-31

Jun

-31

No

v-3

1

Ap

r-3

2

Sep

-32

Feb

-33

Jul-

33

LGC Price Forecasts ($/MWh)

Forecast 1 - 7/2013 Forecast 2 - 6/2013 Forects 3 - 6/2013 Forecast 4 Forecast 5

Forecast 6 Forecast 7 - 5/2013 Forecast 8 - 12/2012 Forecast 9 - 9/2013 Average(9/2013)


Merchant Energy Price Risk

� Understanding and accepting a certain level of exposure to market risk

is necessary to enable investment in renewable energy in the current

environment

� CEFC is accepting a certain level of merchant risk where:

� There is no PPA available

� The PPA does not cover the full period of loan amortisation

� There is a material risk that the PPA may not survive (or may

survive on different terms)

� We are also seeing commercial banks willing to take these risks to a

certain level of exposure


How do we get comfortable with merchant risk?

� To take merchant risk, we de-risk the transaction by the following:

� Ensuring a break-even electricity price above a certain level

� Debt sizing:

� Debt service coverage ratios required will be higher

� Maximum gearing levels will be lower

� Debt terms: negotiated to provide downside protection and upside

opportunity in the event of major fluctuations in black and green

energy prices:

� Review events – accelerated amortisation for material reduction

in electricity prices

� Excess Profits Allocation – for significant outperformance due to

electricity prices


Other considerations in taking merchant risk

� When CEFC takes merchant risk, the impact of other projects risks

must also be considered:

� Whether there is construction risk

� The financial profile of the sponsor

� The operational and project development track record of the

sponsor

� The tenor of the investment and amortisation profile

� Different levels of finance in the capital structure can get

comfortable with different levels of price risk (for example,

mezzanine financing could finance up to a lower break-even power

price)


Direct to customer model

� Generators can create contracts directly with customers for electricity

� The electricity still flows into the grid and is taken from the grid, so

network and transmission charges still apply, but the user/generator

can negotiate a price for the underlying electricity asset

� There is a market such that customers and generators can hedge

wholesale price exposure to limit risk

� Hedging LGCs is still difficult as there is no real index to trade against


Challenges to the direct to customer model

� Regulatory uncertainty

� How do generators find revenue contracts that are bankable?

� How do you find the right customers?

� Large enough customers to be worth the effort

� Customers with a demand profile that is well matched to the

generation profile

� Are they able to manage demand to avoid a value of lost load

(“VoLL”) event?

� What form should the contract take? Hedging? Cap and collar?

� Most customers won’t contract for longer than 2-3 years

� Need to be a registered participant


Taralga Wind Farm

$37.5 million senior debt finance from CEFC

� The CEFC is a co-financier providing $37.5m in senior debt for the $280m

construction and operation of the Taralga Wind Farm, NSW

� The CEFC is a co-lender alongside ANZ and EKF as part of an international

consortium of Australian and overseas financiers

� The Taralga Wind Farm will have the capacity to generate 106.8MW and supply

approx. 45,000 homes, avoiding carbon emissions by 250,000 tonnes p.a.

� The project will utilise Australian manufactured

towers made in Portland from BlueScope

steel, providing a boost to local industry

� During the two year construction phase a workforce

of up to 200 will be required and local contractors

and suppliers will be used whenever possible


Macarthur Wind Farm Refinancing

Creating market liquidity

� The CEFC provided $50 million as part of a $529m debt package to refinance a

50% stake in Macarthur Wind Farm (S-W Victoria)

� CEFC’s involvement is on the same terms as the other syndicated members to

provide market liquidity

� CEFC investment helped demonstrate that

developers of large-scale renewable projects in

Australia can successfully complete a

development-finance-exit cycle

� The $1 billion Macarthur Wind Farm is the largest

in the southern hemisphere and consists of 140

turbines with a capacity of 420 megawatts

� Fully operational since January 2013

Summary

� Current conditions are not conducive to new PPAs for renewable and clean energy developments

� There is a need for developers and financiers to take Merchant Energy Pricing Risk

� The CEFC is comfortable taking this risk provided other measures are in place to de-risk the transaction by sizing the debt appropriately and altering the debt terms

� Direct to customer models are potentially available but face significant challenges



Visit our website for more information

cleanenergyfinancecorp.com.au

Follow us on Twitter @CEFCAus

Disclaimer

Disclaimer: The information in this document is provided for general guidance only. It is not legal advice, and should not be used as a substitute for consultation with professional legal or other advisors. No warranty is given to the correctness of the information contained in this document, or its suitability for use by you. To the fullest extent permitted by law, no liability is accepted by the Clean Energy Finance Corporation for any statement or opinion, or for an error or omission or for any loss or damage suffered as a result of reliance on or use by any person of any material in the document.

This publication is copyright. Apart from any use as permitted under the Copyright Act 1968, it may only be reproduced for internal business purposes, and may not otherwise be copied, adapted, amended, published, communicated or otherwise made available to third parties, in whole or in part, in any form or by any means, without the prior written consent of the Clean Energy Finance Corporation.

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