CEI Bratislava 24 November 2005

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Financing Sustainable Energy in Transition
Economies

• CEI Bratislava 24 November 2005

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The opportunity is compelling
ENERGY EFFICIENCY
FUEL SWITCHING
Data source IEA (www.iea.org/Textbase/stats/index
.asp) Ref. year 2002
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The case for Energy Efficiency

• Higher fossil fuel prices, tariff rises and
  re-balancing
• Waste is becoming more costly
• EU environmental regulations
• Directives on buildings, energy services, IPPC,
  etc.
• Emission Trading Scheme carbon has a price!
• New EC Green paper on EE
• Intensified international competition as trade
  increases
• Cut costs and enhance cash flow
• Security of supply
• Most CEE countries reliant on fossil fuel imports
• Closure of unsafe NPPs e.g. Kozloduy

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Energy Efficiency Strategy

• Dedicated energy efficiency team
• Main approaches
• Systematically pursuing EE opportunities in
  industrial projects
• Making energy supply systems more efficient
• Supporting providers of EE services, e.g. ESCOs
• Reaching out to small projects through local
  financial intermediaries, e.g. credit lines
• Promoting Carbon Finance as a co-financing source

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Industrial Energy Efficiency Approach

• Goal is to optimise EE component in all relevant
  Bank operations
• Screen all projects at concept stage and identify
  those with EE potential ratings are given (E0,
  E1, E2)
• Provide free energy audits funded with TC funds
• Structure an add-on to direct debt or equity
  financing enhances company cash flow
• Advise on off balance sheet solutions ESCOs,
  Outsourcing, Leasing energy assets
• Energy Management training modules where
  appropriate

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Industrial Energy Efficiency Example
TogliattiAzot (Russia) 2004

• 160mln senior corporate loan comprising a
  100mln A-loan and up to 60mln B-loan
• Largest ammonia producer in FSU, approx. 7.6 of
  world market
• Project consists of complete revamp and
  modernisation of 4 production units and capacity
  increase
• Energy audit funded by Dutch Government

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Industrial Energy Efficiency Example
TogliattiAzot II

• ToAz consumes approximately 1 of Russias
  domestic gas, largest single-site user!
• Reduce gas consumption for existing production in
  the revamped plants by 20 with a cost saving of
  up to 20mln/yr at current gas prices
• Annual gas saving (on existing production output)
  is approximately equal to the average monthly
  consumption of Switzerland
• Reduction of CO2 emissions (on existing
  production output) in excess of 550,000 tonCO2/yr
  EBRD is structuring a JI transaction

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Energy Alliance (Ukraine) - 2004

• First privately-owned Ukrainian ESCO Start-up
  company Sponsor is Western NIS Enterprise Fund
• Focus on leasing small (1-3 MW) co-generation and
  electricity generation engines to industrial
  clients
• 10 mln EBRD loan 5 mln syndicated to RZB
• Lease payments calculated based on current grid
  heat and electricity prices minus a discount
• Assets transferred to client at pay-out
• 1st Project with KOEP, a large Ukrainian edible
  oil extraction plant in Kirovograd oblast
  constr. of a 4 MW co-generation station fuelled
  by sunflower seed peels (natural by-product of
  the client) for USD 3.0 mln

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UkrEsco (Ukraine) a Public ESCO

• State-owned ESCO created in 1998 through an
  initiative between Ukraine, EBRD and the EU
• EBRD extended a 30 million loan to UkrEsco,
  secured by a sovereign guarantee
• UkrEsco targets industrial commercial clients
• Payment to ESCO is similar to servicing a loan
  is due regardless of actual savings
• Model for countries where perceived risks are too
  high
• Follow on loan of 20 m to be signed in Q4 2005

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Bulgaria Credit Line 1 Industrial EE and
Renewable Energy - 2004

• 50mln EBRD credit line framework with Bulgarian
  banks for on-lending to private sector for
  industrial energy efficiency and small renewable
  energy projects.
• 10mln grant from Kozloduy International
  Decommissioning Support Fund for
• Cash incentives to local banks and sub-borrowers
  (80)
• and a technical assistance package project
  preparation and project validation (20)
• 6 loans signed in 2004 for the full 50 mln
  amount
• 22 projects already approved

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Bulgaria Credit Line 2 Residential Sector - 2005

• 50 mln EBRD Credit Line Framework with Bulgarian
  banks for on-lending to individuals for EE
  investments in residential sector
• 35 of Bulgarias energy saving potential, owing
  to poor insulation of dwellings and overuse of
  electricity
• i) insulation ii) biomass efficient
  heaters/boilers, iii) solar water heaters, iv)
  efficient gas boilers
• Average rebate of 20 of the investment cost
• Potential borrowers 250,000 households - budget
  sized for circa 30,000 Sub-loans
• 10 mln grant from Kozloduy Decommissioning Fund
• Preparation/ Marketing/Verification 0.7
  million
• Incentives to sub-borrowers and Participating
  Banks and 9.3 million
• 3 loans signed as of 30 June 2005

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Carbon Finance

• EBRD manages a 35 mln cooperation fund buying
  carbon credits from 13 JI countries for the
  account of the Netherlands
• Working on the establishment of a multi-donor
  fund (MCCF) which will cover most CoOs also open
  to private companies cooperation with EIB
• New marketing tool for the Bank
• Project enhancement new cash flow stream
• Project finance brings (free) Carbon finance
• EBRD can offer one-stop shop

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Characteristics of EBRDs approach

• Public or private clients
• Variety of instruments stand-alone debt or
  equity indirect via equity funds or credit lines
• Risk appetite limited recourse to parent
  company start-ups high ratio of debt to equity
  high of project costs
• Ability to mobilise and use grant funding
  Bulgaria, Lodz, etc.
• Ability to engage host Governments
• Stand-alone from 10m in project costs if below
  equity fund or credit line are best suited
• Carbon finance e.g. UBB (Bulgaria)
• As quick asthe client allows
• Market-related pricing reflecting risk

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Renewable Energy Key Issues (I)

• Significant technical potential for biomass, wind
  and mini hydro (although the latter only in
  certain places)
• Hardly any projects currently developed - only
  significant sector is small scale heat production
  from biomass - mostly inefficient domestic
  boilers but some co-firing for power (e.g.
  Hungary, Poland)
• Main driver for scaling up is regulatory
  framework and main driver for that is EU, hence
  EU8 have or are adopting EU model based on the
  Directive (i.e. 2010 target for power generated
  from renewables backed up by either green certs.
  or feed-in tariffs)
• Markets still at early stage as regulatory
  frameworks only implemented last year and largely
  untested. Still considerable uncertainties and
  investor caution
• secondary legislation is not ready yet in most
  countries - so conditions of operating licences
  not known (Hungary), long term price of green
  certificates still unclear (Poland - although
  because market is new not because legislation not
  complete),

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Renewable Energy Key Issues (II)

• However - in a few countries competition for
  operating licences is intense (Poland because of
  grid connection constraints and variable wind
  quality and Hungary because technical potential
  exceeds what is required to meet target and there
  is a generous feed-in tariff). As a consequence
  many corners being cut, e.g. environmental due
  diligence (particularly as local requirements
  seem way below acceptable international
  standards, e.g. only limited public
  consultation)
• Also local banks are falling over themselves to
  get mandates but mostly don't have the capability
  to do detailed technical due or care much about
  potential environmental liabilities - whether
  they would actually lend the money when or if the
  projects get the go-ahead may be a different
  story
• Important role for the Bank in providing equity
  and debt but also in helping address project
  preparation and due diligence needs (e.g.
  environmental appraisal) and, crucially,
  providing insulation against regulatory risk - we
  have a high profile and a lot of influence
• Huge potential for biomass. Much more complex
  market- needs integrating with agribusiness and
  involves heat as well as power. Similarly
  biofuels - supply potential immense and huge
  potential demand given high oil prices. Market
  hardly taken off yet so much work over coming
  years.