UNEP GEF Assessment of FRM instruments for large scale renewable energy projects

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Assessment of Financial Risk Management
Instruments for Renewable Energy Projects
REEEP/AEI/TERI Workshop February 6, 2008 New
Delhi
Fatma Ben FadhlUNEP Project ManagerEnergy
BranchRenewable Energy Finance Unit
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Topics to be covered

• UNEP Structure and RE Finance Unit
• Programme objectives and activities
• Assessment of Financial risk management
  instruments for Large Scale Projects
• Case Study Risk Assessment for large scale
  projects in China and India
• Assessment of Financial risk management
  instruments for Small Scale Projects
• Feasibility Studies
• Next Steps

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United Nations Environment Programme (UNEP)
Structure
UNEP Division of Technology, Industry and
Economics (DTIE)
International Environmental Technology Centre
Chemicals
Economics and Trade
Sustainable Consumptionand Production
Energy
OzonAction
Renewable Energy and Finance Unit
Energy and Transport Policy Unit
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Renewable Energy and Finance Unit

• Help overcome market barriers and increase
  investment flows to sustainable energy projects
• Partner with financial services and Insurance
• Develop financial support mechanisms to promote
  sustainable energy in developing countries
• Plan and execute credit enhancement, equipment
  loan and financial risk management programmes for
  access to RE

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UNEP/GEF Assessment of Financial Risk Management
Instruments

• Funded by the Global Environment Facility (GEF)
• UNEP as the UN Implementing Agency

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Objectives

• Identify promising financial risk management
  instruments and approaches for RE projects
• Develop risk mitigation solutions that continue
  to exist without or with limited public
  monitoring
• Awareness raising for stakeholders

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Programme of action

• Define main challenges faced by Investors,
  Insurers and RE project developers
• Identify main financial risks associated with
  small/medium and large scale RE projects
• Select promising risk management mechanisms
• Initiate Public-Private Partnerships
• Provide financial support to feasibility studies
• Develop follow-up activities

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Challenges for the RE sector

• Major concerns for most technologies
• New / Prototypical / Scale Up technologies
• Technical perils in handling, erecting, testing
• Major concerns for some technologies
• Lack of sound OM practices
• Lack of experience (project participants/contracto
  rs etc)
• Developing country issues
• Lack of adequate financial, legal and service
  infrastructure
• Lack of credit worthy local insurers
• Limited distribution channels

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Risk Management for Large Scale Projects

• Mostly Grid Connected
• Numerous project development phases
• Diversified risk portfolio
• Combination of equity and debt financing
• Finance often provided on a non-recourse basis
• Need for tailored insurance

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Main risks to be addressed

• Traditional project risks
• Political risk
• Certified Emissions Reduction risk
• Weather risk
• Resources risk
• Credit risk
• Equipment risk

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Milestones for the insurance industry

• Development and marketing of insurance products
  for RE projects through
• Improved information flows
• Training and knowledge management
• New pricing methodologies
• Design, engineering and operating standards /
  verification for unproven technologies
• Bundling of small/medium scale projects and
  packaging of risks
• Portfolios diversification

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Operating Cash Flows

• With and without standard Insurance

Case Study Insurance solutions for a Wind Farm
in Popular Republic of China
Source Marsh
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Risk Mitigation Solutions

• Insurance facilities
• Weather risk management instruments e.g. weather
  derivatives, futures contracts
• Technology specific insurance packages
• Public/Private Risk Capital or Guarantee
  facilities
• Awareness raising among project developers,
  financial services/investors, insurers, and
  public institutions

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Financial risk instruments for RE projects in
India
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Case Study Financial risk assessment for a Wind
Farm in India (56,25 MW 108 GWh/year US51.25M)
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Case Study Financial risk assessment for a
Medium Scale Biomass Project in India (50MW,
200GWh/year US75M)
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Risk Management for Small Scale Projects

• End-borrowers profiles
• Small scale renewable energy suppliers (SSRE)
• Small scale end-users (non-productive consumers
  e.g. households, SMEs)
• Main risks
• Equipment risk
• Transaction size
• Credit risk

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Barriers for the development of Small Scale
Renewable Energy projects

• Lack of economically/financially viable projects
• Inadequate engagement of local FIs in small scale
  project financing, including MFIs
• High transaction costs of small scale projects
• Performance risks
• Lack of consumer awareness/demand for RE
• Lack of access to long term financing matched to
  project life

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Risk Mitigation Instruments for Small Scale
Projects

• End-User Credit Enhancement Instruments e.g.
  insurance covers, buyback agreements, fees for
  extra FI loss reserves
• Developer/Sponsor Partial Credit Risks
  Guarantee Instruments
• Contingent Grants
• Private Public Risk Capitals
• Small Scale RE Project Preparation Assistance
  Programmes

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General feasibility criteria for introducing FRMIs

• Large Scale RE Projects
• level of domestic financial market development
• sanctity of contracts governing off-taker and
  other agreements
• Maturity of financial markets
• access by foreign reinsurers to developing
  countries markets
• Small Scale RE Projects
• Public interventions to initiate and boost demand
• Inventory of technologies and applications
• Financial incentive programmes fostering local
  FIs leadership in RE finance

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Feasibility studies

• Wind Power Derivative for Large Scale Wind Farm
  Projects in Mexico, Marsh Finances and Paris Re
• Renewable Energy Insurance Facility for Wind Farm
  Projects in the People's Republic of China (PRC),
  Marsh UK and Lloyd's Ascot Renewco
• Global Renewable Energy Insurance Facility for
  Large and Medium Scale Renewable Energy Projects,
  Carbon Re, Munich Re, Royal SunAlliance,
  Climate Capital, GSDP, PRS and UPCAR Tunisia
• Insurance Solutions for Small Scale Biomass Power
  Projects in India, Crestar Capital and
  IFFCO/Tokyo General Insurance Co. LTD
• Risk Capital or Guarantee mechanism for small
  scale renewable energy (under evaluation)

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F/S Expected Outcome

• Thorough market, legal and quantitative analysis
• Implementation plans and/or pilot studies
• Implementation of the instrument by private
  partners
• Benchmark and best practices studies

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Next Steps

• Presentation of F/S results and recommendations
• Development and Implementation of follow-up
  programmes

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Thank you for you attention

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Division of Technology, Industry and
Economics Energy Branch 15 rue de Milan, 75009
Paris France   tel. [phone] fax.
33.1.44.37.14. 74 e-mail fbenfadhl_at_unep.fr www.u
nep.fr/energy/finance/risk