MARS MARKET INSIGHTS - FINANCING RENEWABLE ENERGY ACCELERATING ONTARIO'S GREEN ENERGY INDUSTRY
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MaRS Market Insights
Financing Renewable Energy
Accelerating Ontario’s Green Energy Industry
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01
Table of Contents
Introduction / 01
The Ontario Green Energy and Green Economy Act (GEA) / 01
Eliminating “dirty coal” / 01
Accelerating the development and adoption of renewable energy / 01
Ontario’s feed-in tariff program / 01
Successful renewable energy programs are an economic driver / 05
US renewable energy policy / 07
Financing renewable energy assets / 07
Private equity / 08
Venture capital / 08
Public markets / 08
Deal structures in the renewable energy sector / 08
European practices in renewable energy financing / 09
Loan guarantees, on-lending and co-lending from national and supra-national
financial institutions and infrastructure banks / 10
Commercial banks / 12
Tax exemptions, tax credits and low-interest loans / 13
Large-scale renewable energy projects in Ontario / 13
Skypower “First Light” / 14
First Solar / 14
Starwood SSM1 / 14
Adoption of renewable energy in Ontario / 14
Opportunity for Canadian leadership in renewable energy finance / 14
Capital mobilization / 15
Popular support for renewable energy / 15
Carbon trading / 15
The road ahead / 16
Further reading / 16
References / 17
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01
Acronyms
CHP—Combined heat and power
CSP—Concentrated solar power
FIT—Feed-in tariff
GEA—The Ontario Green Energy and Green Economy Act, 2009
kW—Kilowatts
mW—Megawatts
PV—Photovoltaic
RE—Renewable energy
REC—Renewable energy certificates
RPS—Renewable portfolio standards
MaRS Discovery District, © January 2010
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01
Introduction • Conserve 6,000 megawatts (MW) of provincial energy
use by 2015, with an additional 2.5% annual reduction
in energy resource needs thereafter;
According to the Ontario Power Authority (OPA), an
• Install 10,000 MW of new renewable energy capacity by
estimated 25% of Ontario’s electricity is generated from
2015 (above 2003 levels);
renewable energy sources.1 While this is commendable,
hydroelectric power accounts for the vast majority of the • Install 1,500 MW of new clean distributed energy by
2015, up to 3,000 MW by 2025; and
province’s renewable energy production. Solar and wind-
based energies make up only a small fraction of our overall • Achieve a 30% reduction in natural gas consumption
energy supply. With the recent passage of new renewable by 2017.4
energy laws, the OPA projects that 4,200 MW in wind and
1,760 MW in solar and biomass generating capacity will
come online by 2014.2 Eliminating “dirty coal”
The Green Energy Act will enable the province to eliminate
With attractive renewable energy resources and strong
“dirty coal” as a power source by 2014. This is anticipated
support from the province’s lawmakers, renewable energy
to reduce greenhouse gas emissions by 30 megatonnes.
is set to play a significant role in Ontario’s economic
Ontario’s commitment to eliminate “dirty coal” represents
future. The province’s commitment to a new renewable
one of the most ambitious climate change initiatives in
energy feed-in tariff creates an opportunity for lenders
North America. The GEA will help achieve this target by:
and investors to profit from renewable energy projects and
manufacturing centres established in Ontario. What follows • Expanding the development of renewable energy
projects across the province;
is a discussion of Ontario’s new renewable energy laws as
well as renewable energy legislation in other nations, and • Investing in new forms of renewable peaking power to
the funding practices that have helped European countries help balance the intermittent nature of some forms of
to emerge as world leaders in renewable energy generation. renewable energy;
• Providing Ontario residents, businesses and institutions
with the tools needed to monitor and reduce their
energy usage; and
The Ontario Green Energy and • Creating a 21st century “smart” energy system to
Green Economy Act (GEA) better manage the energy supply mix, allowing for
broader utilization of renewable power.5
Under the purview of the Ontario Ministry of Energy and
Infrastructure, the GEA is the cornerstone of Ontario’s Accelerating the development and adoption
strategic response to climate change. The purpose of the of renewable energy
Act is to “facilitate the development of a sustainable energy
Ontario’s Green Energy Act proposes to expedite the growth
economy that protects the environment while streamlining
of clean, renewable sources of energy, such as wind, solar,
the approvals process, mitigating climate change, engaging
hydro, biomass and biogas. It will ensure that renewable
communities and building a world-class green industrial
energy projects are able to come online more quickly by
sector.”3 The GEA is expected to result in the creation of
removing administrative barriers, and streamlining the
more than 50,000 green collar jobs and billions of dollars of
application process.
economic activity within the first three years.
The GEA will help to encourage the development of more
As part of Ontario’s Climate Change Strategy, the Green renewable energy by:
Energy Act is designed to help the province to reach the • Delivering a feed-in tariff to provide guaranteed pricing
following goals: structures to help boost investor confidence and
• Eliminate “dirty coal” as a power source by 2014; increase access to financing for projects of varying sizes;
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01
02
• Providing “As of Right” grid connections to ensure that renewable sources. The FIT Program includes standardized
renewable energy projects meeting technical, economic program rules, prices and contracts in order to undertake a
and other regulatory requirements are able to connect renewable energy project. The Program is administered by
to the grid; the Ontario Power Authority (OPA). FIT prices are designed
• Creating service guarantees to ensure that wait to help developers cover renewable energy project costs
times for approvals are more transparent and that and provide a reasonable return on investment over the
information is publicly accessible; term of each contract.
• Streamlining the approvals process for renewable Renewable energy sources qualifying for FIT funding include:
energy projects, eliminating duplication and barriers • Bioenergy—biogas, biomass, landfill gas;
while ensuring that health, safety and environmental
• Solar photovoltaic (PV);
concerns are adequately addressed;
• Water power; and
• Establishing a Renewable Energy Facilitator to help
community proponents to navigate the project • Wind
approvals process, ensuring compliance with necessary
The program is divided into two streams—FIT and microFIT.
requirements; and
The FIT Program is for renewable energy projects that are
• Investing in a “smart grid” to facilitate and maximize the able to generate more than 10 kilowatts (kW) of electricity.
development of new renewable energy projects, making Very small projects, such as residential installations, that
it easier to connect to the system and setting the stage are able to generate 10 kW or less are eligible for the
for new technologies such as plug-in electric cars.6 microFIT Program.
The purpose of feed-in tariffs
Ontario’s feed-in tariff program
The planning, organization, development, ownership
Ontario’s Feed-In Tariff (FIT) Program is the first program
and operation of electricity generating facilities in most
of its kind in North America. It provides a comprehensive,
countries has traditionally been financed with public dollars.
guaranteed pricing structure for electricity production from
In recent years, many countries have begun the slow
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02transformation of their energy infrastructure from fossil-
fuels to renewable energies and from publicly financed, FIGURE 1
Contract
owned and operated, to private. Technology Capacity price ¢/kWh
Unlike public energy utilities, the cost of renewable energy Biomass
generation is most commonly paid for by electricity ≤ 10 MW 13.8
consumers, or “ratepayers”. As such, feed-in tariff schemes > 10 MW 13.0
help to unlock private cash flows for energy infrastructure.
Many predict that in the future only energy distribution will Biogas
remain the responsibility of public entities. On-farm ≤ 100 kW 19.5
On-farm > 100kW ≤ 250kW 18.5
One study, conducted by the Cleantech Group, LLC sets Biogas ≤ 500 kW 16.0
the price of transitioning the world’s energy generation Biogas > 500 kW ≤ 10MW 14.7
infrastructure to 100% renewable sources at $9 trillion dollars.
Biogas > 10 MW 10.4
While this sum would be crippling to government budgets, it is
not unrealistic to imagine that FIT programs will play a role in Waterpower
this privately-managed renewable energy future, lessening the
≤ 10 MW 13.1
taxpayer burden, and accelerating the transition.
> 10 MW ≤ 50MW 12.2
How the FIT program works Wind
On-shore Any size 13.5
Parties interested in establishing a qualifying renewable
Off-shore Any size 19.0
energy generating system enter into a contract agreement
with the OPA. Under this FIT agreement, the OPA agrees Solar PV
to pay the renewable energy generator a fixed rate per Any type ≤ 10 kW 80.2
kilowatt hour of energy produced. The renewable energy
Rooftop > 1 0kW ≤ 250 kW 71.3
generator connects their energy generation system to the
Rooftop > 250 kW ≤ 500kW 63.5
grid, and the OPA pays the generator the agreed-upon rate
for the duration of the contract. Contracts are long term, Rooftop > 500 kW 53.9
and are designed to effectively guarantee a particular rate Ground- > 10 kW ≤ 10 MW 44.3
mounted
of return to the provider of renewable energy. For France,
Germany and Spain, investor internal rates of return Landfill Gas
(IRRs) tend to be in the 7% to 10% range. Ontario’s policy ≤ 10 MW 11.1
estimates a target return on equity of 11% based on a debt/ > 10 MW 10.3
equity ratio of 30/70. 8
Source: Reproduced from Ontario Power Authority: FIT Price Schedule.
Contract rates for renewable energy projects of varying Updated September 30, 2009.9
sizes are listed in Figure 1.
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03In addition to the contract FIT rates, renewable energy percentage of the proposed project content (activities, not
producers are also eligible to receive an additional financial value) must come from Ontario sources. Figure
amount per kWh of energy produced based on the equity 3 highlights domestic content requirements for certain
participation of community or aboriginal groups, as seen in system types.
Fugre 2.
The domestic content requirement provides a guaranteed
FIGURE 2 customer base for national and international corporations
Maximum Maximum
that elect to establish a location in Ontario, integrating
Aboriginal community
into the value chain to meet gaps in areas that may not be
price adder price adder
Renewable Fuel currently met by Ontario manufacturers.
(cents/kWh) (cents/kWh)
One example is the recently announced deal struck between
Wind 1.5 1.0
the Ontario government and a consortium led by South
Solar PV 1.5 1.0
Korean industrial and electronics powerhouse, Samsung.
(ground-mounted)
Samsung and its partners have committed to build 2,500
Water 0.9 0.6 MW of wind and solar energy generation capacity in the
province.12 The deal also calls for Samsung to establish an
Biogas 0.6 0.4
Ontario base of operations for the manufacture of wind and
Biomass 0.6 0.4 solar energy equipment.13 The Korean consortium plans
to work with major partners to build four manufacturing
Landfill Gas 0.6 0.4
plants in Ontario, and has pledged to create 16,000 direct
and indirect jobs over the next five years.14 If Samsung
Source: Reproduced from Ontario Power Authority: FIT Price Schedule.
Updated September 30, 2009.10 fulfills these commitments, the company will receive $437
million in incentive payments over the course of the 25-year
agreement from the Ontario government.15 Ontario has
Since these so-called “adders” can increase the income per
also guaranteed Samsung priority access to the province’s
kWh of renewable energy projects by as much as 4%, there is
electricity grid.16
substantial value in aboriginal and community involvement.
Other companies considering expanding manufacturing
Domestic content requirement operations or relocating to Ontario include Atlantic Wind and
To qualify for a FIT agreement, wind and solar energy Solar and ATS Automation Tooling Systems. ATS has entered
producers must fulfill a “domestic content requirement.” into a joint venture with French company, Photowatt for their
The domestic content requirement indicates that a certain Ontario operations. GE Canada is considering retrofitting an
FIGURE 3
From From From
System Type/Size 10/01/2009 01/02/2011 01/02/2012
FIT program (> 1 0kW)
Wind 25% 25% 50%
Solar 50% 60% 60%
MicroFIT program (< or = >10kW)
not applicable not applicable not applicable
Wind
40% 60% 60%
Solar
Source: Ontario Power Authority, FIT Program FAQ11
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04existing plant for solar manufacturing and Canadian Solar Key success factors in FIT program design
plans to open a manufacturing plant in Ontario for solar
At their core, successful FIT programs set expectations
modules, although cells will still be built in China.17
and reduce investor risk. They do so by creating conditions
that allow investors to closely predict their returns from
financing renewable energy projects.
Successful renewable energy programs are
an econmic driver In their comparison of FIT programs implemented in
Western European countries have a long record of different countries, Deutsche Bank, an industry leader in
experience in FIT design and implementation. Despite its renewable energy financing, noted several “core principles”
often cloudy skies, Germany has had a FIT program in that underpin successful FIT programs.23
place since 1990, and has become a world leader in solar
energy.18 France and Spain have also enjoyed a substantial • Must-take regulations: Both Germany and Ontario’s
increase in renewable energy production capacity since FIT programs regulate that the purchase of energy
they implemented FIT programs. from renewable sources by grid operators must take
priority over carbon-based fuel sources. This effectively
Germany The German FIT regime has enabled the guarantees that 100% of the energy produced from
German renewable energy sector to expand renewable sources will be bought.24
by 75% since 2000. Cumulative investment • Mandatory interconnection: In Germany, Spain
in renewables grew to €30 billion in 2008 and Ontario, interconnection rules legislate that
and installed renewable energy capacity renewable energy generation installations must receive
has tripled in eight years.19 Employment in guaranteed access to the grid.25
the sector has risen to more than 300,000,
• Guaranteed payments: Guaranteed payments are a
with an estimated 42,000 working in key feature of all successful FIT programs. Payment of
photovoltaic manufacturing.20 the FIT rates for an agreed-upon time period that is
contractually or legislatively assured relieves capital
France In France, the number of individuals providers of a substantial portion of the risk involved in
employed directly in the wind sector has financing renewable energy projects.26
risen from fewer than 100 in 1993 to 7,000 • Setting the price based on generation cost plus a
in 2007.21 profit: The most successful FIT programs establish
FIT pricing for renewable energy through a formula
Spain As of 2007, 188,000 work directly and indirectly that utilizes the cost of generating energy plus a
in Spain’s renewable energy sector. 22 sufficient profit margin for a reasonable return. Many
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05FIT programs target specific rates of return based on renewable energy projects are generally reviewed on
common project debt/equity ratios.27 a periodic basis. Where appropriate, these rates are
• Streamlined application process: Germany and Ontario adjusted downward to reflect scale advantages achieved
have gone to significant lengths to enhance transparency by equipment manufacturers.29
and reduce administrative costs for government and The following is drawn from information presented by
investors seeking to participate in renewable energy Deutsche Bank in their December 2009 study entitled
projects. Ontario recently introduced a Renewable “Paying for Renewable Energy: Transparency, Longevity and
Energy Facilitation Office designed specifically to assist in Certainty at the Right Price.”30 The table compares various
launching new renewable energy projects.28 dimensions of FIT policy among countries with successful
• Grid parity: While FIT programs are designed to feed-in tariff programs.
compensate energy generators for the additional
cost of renewable energy projects (over coal-based
energy), the ultimate goal is for energy generated from
renewable sources to become cost competitive with
conventional fossil fuels. To this end, FIT rates for new
FIT Design Feature France Germany Netherlands Ontario Spain
Year first FIT established 2001 1990 2003 2009 1997
Eligible Technologies wind, solar, wind, solar, wind, solar, wind, solar, wind, solar
geothermal, geothermal, biomass, hydro, (PV & CSP),
small hydro, small hydro, biogas, CHP biomass, geothermal,
biomass, biomass, biogas small hydro,
biogas biogas biomass,
biogas
Specified tariff by technology yes yes yes yes yes
Guaranteed payment yes yes yes yes yes
Guaranteed interconnection yes yes yes yes yes
Contract term 15-20 years 20 years 15 years 20 years 15-25 years
“Must take” provision no yes no yes yes
FIT costs borne by ratepayer ratepayer taxpayer ratepayer ratepayer &
taxpayer
Internal rate of return target 8% 5-7% no 11% 7-10%
Periodic FIT rate review no yes yes yes yes
Grid parity target no yes no no no
Project size cap varies no yes PV only yes
Eligible for other incentives yes yes yes yes yes
Source: Reproduced from Deutsche Bank Climate Change Advisors analysis, December 2009, Paying for Renewable Energy: TLC at the Right Price31
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06US renewable energy policy renewable energy facilities comes primarily from debt in
the form of project financing from major banks and banking
The US renewable energy policy framework is highly complex. syndicates. A smaller portion comes from equity from the
At its core are the Renewable Portfolio Standards (RPS), project developers and sponsors, as well as private equity
which have been implemented in 35 states, and have been investors. Equity investors in clean energy assets include
put forward as a national strategy in the 2009 American developers who identify the clean energy resource and put the
Clean Energy and Security Act.32 Renewable Portfolio project together, equity sponsors who help fund the project
Standards establish targets for renewable energy in the through its construction phase with the goal of selling the
energy supply mix, frequently by technology. Compliance completed asset, and those that invest in operating renewable
with Renewable Portfolio Standards is tracked by Renewable energy assets. A negligible amount of renewable energy asset
Energy Certificates (RECs).33 These certificates are issued financing also comes from the issuance of bonds. Participation
when a renewable energy generator delivers renewable- in the project bond market requires that bonds be rated as
based power to a grid operator. RECs are tradable by utilities investment grade. Onerous rating requirements for investment
across grid operator borders.34 RECs are often bundled into grade renewable bonds have made renewable energy project
power purchase agreements (PPAs) between electricity bond issuance a relative rarity.38
generators and electricity retailers.35 Unlike FITs, PPAs are not
standard offers, do not include provisions for mandatory grid In 2008, the financing of renewable energy assets accounted
interconnection and have no “must take” provisions.36 PPAs for the majority of new investment in clean energy. A total of
are negotiated bilaterally on a case-by-case basis, creating $136.1 billion flowed to renewable energy assets in 2008, a
an overall lack of transparency for potential investors in 23% increase over the previous year.39
renewable energy projects.
PPAs attempt to capture the value of renewable energy Figure 4 New renewable energy Figure 5
incentives, which include federal production tax credits asset financing by security type, asset fin
(PTCs) and investment tax credits (ITCs), convertible ITCs and
ITC cash grants, as well as state and local tax credits, loan 2002-2008 ($ US billions) ($US bil
guarantees and the tax equity market.37 These incentives are
97
used to counterbalance the cost premium of renewable energy
over fossil fuel- based energy generation and to generate
85
a profit for investors. Since these incentives often expire or
are subject to frequent amendment, this adds risk to the
renewable energy generation market and deters investors.
50
Several US states, including Vermont, New Jersey and
California have or are planning to implement programs similar
to FITs. A proposal for a national FIT bill is also underway,
28
alongside a national cap-and-trade program and a national
RPS program in the US. 14 10
10 6
6
Financing renewable energy 2002 2003 2004 2005 2006 2007 2008
2002 200
assets Bond/other
Middle Ea
Project finance
While FIT programs ensure a reasonable return on South Am
Balance sheet/syndicated equity
investment for renewable energy projects, the construction Asia & O
of large-scale renewable energy assets can cost hundreds Source: Reproduced from Greenwood, Chris et al. (2009). Global Trends
in Sustainable Energy Investment 2009: Analysis of Trends and Issues in
of millions of dollars. Financing for the construction of Source: Reprodu
the Financing for Renewable Energy and Energy Efficiency. Pg. 36. 40
in Sustainable En
the Financing fo
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07With well-established and transparent FIT programs that While the financial crisis and onset of the economic recession
contractually guarantee a certain return, European countries led to plummeting share values, private equity funds with
have an advantage over North America in attracting cash to invest, such as pension funds, have taken advantage
financing for renewable energy projects. of opportunities in the clean energy sector. Danish pension
fund ATP has committed to investing up to US$400 million
in late-stage private equity firm, Hudson Clean Energy
ergy Figure 5 New renewable energy Partners.44 CalPERS, the retirement fund for California state
type, asset financing by region employees and a leading California clean technology investor,
announced that it had committed US$200 million to a new
($US billions) 97 US$1 billion clean technology investment fund set up by Sun
Microsystems founder Vinod Khosla.45
97
85
Venture capital
Although venture capital investors typically do not play
50 a role in financing the construction of renewable energy
assets, venture investors fund promising renewable energy
technologies in the initial stages of the commercialization
process. In 2008, there was strong interest from venture
28
investors in thin-film technology as the next evolution in solar
14 panel design.
10
6
Public markets
Bank A
7 2008 (mandated
INSURER
Public markets offer indirect B financing
lead arranger)
Bank Bank
C
Bank
D to renewable
2002 2003 2004 2005 2006 2007 2008
energy projects by channelling capital to renewableOpertional energy
maintenance
Middle East & Africa North America technology manufacturersDEBT and project developers. $ Due
company
to
the financial crisis, public companies in the renewable energy equity
South America Europe investors
sector received substantially less capital through Project
developer /
the$public
PR
OF
IT
Asia & Oceania owner
lobal Trends markets in 2008 than in previous
RENEWABLE years. Total public market
ENERGY
and Issues in
Source: Reproduced from Greenwood, Chris et al. (2009). Global Trends investment in the renewable sector in 2008 was $11.8 billion.46
PROJECT
Pg. 36. 40
in Sustainable Energy Investment 2009: Analysis of Trends and Issues in This is down more than 50% from 2007’s $
$23.4 billion. 47
Tax Credits
FI
T
dit
the Financing for Renewable Energy and Energy Efficiency. Pg. 37.41
ra
te
cre
/k
w
O2
h
El
ITS
/C
ec
t
ED
ric
TE
Deal structures in the renewable
ity
CR
RA
ON
Electricity
RB
retailers
CA
energy sector Electricity
buyer
Private equity
Major renewable energy 2
CO Credit
projects require the participation of
Buyers
Rather than funding the construction of individual renewable numerous debt and equity funders, assessment consultants, Consumers
energy installations, private equity funds participate in the insurers, project developers, equipment suppliers, project
renewable energy market by taking an equity stake in, or operation and maintenance companies, energy purchasing
buying out, promising renewable energy project developers and distribution companies, as well as the carbon markets and
or equipment manufacturers. In 2008, Grupo Naturener, a government players who administer FIT programs, tax credits
Spanish renewable energy developer, raised €132 million from and other incentives in the renewable energy sector. As energy
existing private equity investors.42 In another major 2008 production capacity for a given project increases, so does the
private equity deal, German thin-film module maker Sulfurcel complexity of its financial structure. The following diagram
secured €85 million from a syndicate of major private equity illustrates the major financial flows typical of a large renewable
firms, including Intel Capital and Climate Change Capital.43 energy project.
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08Bank A
(mandated
lead arranger) Bank
B
Bank
C
Bank
D } INSURER
Operation &
maintenance
DEBT $ company
Debt Payments
equity
investors
Pro
fit
Project
developer /
$
owner
RENEWABLE
ENERGY
PROJECT
$
Tax Credits
FI
T
dit
ra
te
cre
$
/k
W
O2
h
El
/C
ec
s
dit
tr
ic
TE
Cre
ity
RA
on
Electricity Electricity
rb
retailers
Ca
Electricity
buyer
CO2 Credit
Buyers
Consumers
Club deals
European practices in
With the recent turmoil in the credit markets, many
commercial lenders active in the renewable energy sector renewable energy financing
are unwilling to take the lead in major financings. The result
Europe is home to supra-national financial institutions such
has been an increase in “club deals,” where all parties to a
as the European Investment Bank, the European Bank for
debt financing agree to the same terms. Since all financiers
Reconstruction and Development, and the financial arm of
must agree to identical terms, protracted negotiation periods
the European Commission. Acting on pan-European energy
are common. Also, since risk-averse banks prefer to take a
policy directives, these institutions are able to mobilize
relatively smaller stake in club deals, a financing of US$500
substantial capital to support major renewable energy
million can involve up to 10 different lending institutions.48
projects, reducing commercial bank risk by providing loan
guarantees and funds for on-lending from commercial
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09project financing syndicates to the project developers. the construction of renewable energy assets by lending
funds either directly to developers or to commercial banks
In April of 2009, the European Commission welcomed the that are arranging project financing.52 In general, the EIB’s
formal adoption of an Energy and Climate Change package. contribution represents no more than 50% of the total
The package sets legally binding targets to cut greenhouse financing for each project.
gas emissions to 20% below 1990 levels and to increase
the share of renewable energy to 20%, both by 2020. It will In 2008, the EIB provided €2.2 billion in financing to
also help to achieve the EU’s objective of improving energy renewable energy projects. This represents a fourfold
efficiency by 20% within the same timeframe.49 increase over 2006 financing levels. Wind projects received
34% of the funding, while 28% went to solar.53 In 2009,
Following the announcement, German environment minister the EIB provided approximately €3 billion in financing to
Sigmar Gabriel noted, “Our task is now to join together renewable energy projects. 54
with our European neighbours to move towards those
targets. A massive increase in the use of renewable energies
and in energy efficiency will make a vital contribution to EIB and EDF Energies Nouvelles partnership
Europe’s energy security, to climate protection and to peace
A major financing initiative announced in late December
building.”50 In Germany and throughout Europe, public and
2009 sees the EIB entering into a partnership with EDF
private financing institutions are carrying out this pledge
Energies Nouvelles (EDF EN), a France-based developer
in support of renewable energy by channelling significant
of renewable energy projects.55 Through this partnership,
capital to the sector.
the EIB and EDF EN will establish a financing vehicle for a
portfolio of solar PV projects in France and Italy. Based on
Several major European commercial banks have divisions
financing terms established for two pilot projects that will
dedicated to mobilizing and facilitating capital deployment
be funded in early 2010, subsequent projects will replicate
for renewable energy projects. This expertise has led to
these financial structures.56 This is expected to simplify
global leadership in renewable energy project financing.51
and streamline the funding process for future projects
Many public and private European banks also offer
funded by the partners. The EIB plans to allocate €500
assessment services, technical expertise, industry linkages
million in financing to these initiatives. Each project will
and other supporting services to assist their renewable
be implemented with the financial participation of several
energy sector clients. European banks are extremely active
commercial banks.57
outside of Europe as well, participating in and leading
renewable asset financing syndicates for projects in the US
and Canada, and other developed and developing nations.
Belwind offshore wind installation
Another example of strong EIB support in the renewables
Loan guarantees, on-lending and co-lending sector is the Belwind offshore wind project being developed
by a consortium of Belgian and Dutch investors off the
from national and supra-national financial
Belgian coast. The project is being financed with €482.5
institutions and infrastructure banks million in non-recourse debt, with a maturity of 15 years
European Investment Bank (EIB) after construction, and a €63.43 million non-recourse
mezzanine facility.58
The European Investment Bank is the European Union’s
financing institution. The shareholders of the EIB include
The Belwind project involves a broad set of private and
the 27 member states of the EU. The EIB borrows funds on
public financing institutions. The EIB is providing €300
the capital markets, which it lends on favourable terms to
million to the 165 MW project, half of which is being
projects furthering EU policy objectives. One of the main
guaranteed by Eksport Kredit Fondend (EKF), Denmark’s
missions of the EIB is to provide financing to projects that
state export credit agency.59 Cleantech, climate and
enhance Europe’s energy security and increase the share of
energy are some of EKF’s key business areas, and the
renewable energy in the EU’s energy mix. The EIB supports
__
10EKF is owned and guaranteed by the Danish state. The energy service companies, energy efficiency service and
balance of debt financing will be raised by, and channelled supply companies, and renewable energy projects.69
through, mandated lead arrangers Dexia and Rabobank in
the amount of €182.50 million.60 The mezzanine facility
will be provided by Rabobank and Participatie Maatschappij Natixis and ADEME
Vlaanderen.61
In 2003, the French environment agency ADEME and the
French commercial bank Natixis launched FIDEME, a €45
Once Belwind becomes operational, the electricity it
million public-private mezzanine fund aimed at addressing
generates will be sold to Electrabel, Europe’s fifth largest
the funding gap that had prevented the establishment of wind
energy generator and distributor, under a long-term FIT
and other renewable energy projects in France.70 ADEME
contract.62 The carbon credits allocated to Belwind for
contributed €15 million to FIDEME as a subordinated tranche
renewable energy generation will be sold to Elia, Belgium’s
within the public-private fund.71 The fund then provided
grid operator, at prevailing rates.63
subordinated financing to commercial banking syndicates,
helping to attract senior lenders.72 By helping commercial
The Belwind deal exemplifies the typical interplay of public
lenders reduce their risk, this double leverage structure
and private financing institutions, insurers, energy purchasers,
allowed France’s environment agency to mobilize an amount of
carbon credit sales and FIT tariffs that characterize most
capital 20 times greater than its own contribution.73
major renewable energy projects in Europe.
FIDEME financed 30 renewable energy projects and created
more than 300 MW of energy generation capacity.74 In 2006,
this accounted for more than one-third of France’s total wind
Southeast Europe Energy Efficiency Fund
energy generation capabilities.75
The Southeast Europe Energy Efficiency Fund (SE4F) was
established by the United Nations Economic Commission for Natixis has since launched its second FIDEME fund, this
Europe in December of 2009. The goal of the Fund will be time on a fully commercial basis, since the renewable
to finance energy efficiency and renewable energy projects market in France has matured beyond the need for public
undertaken by small and medium-sized enterprises and financial support from ADEME. Announced in June of 2008,
households in Albania, Bosnia-Herzegovina, Croatia, FYR EuroFIDEME, a €250 million fund, has dedicated 60% of its
Macedonia, Montenegro, Serbia and Turkey.64 The SE4F is assets for the provision of subordinated debt to projects,
financed by the European Investment Bank (EIB), German while the remaining 40% will be invested as equity, either
infrastructure bank KfW Bankengruppe, the European Bank for in renewable energy projects or in project development
Reconstruction and Development (EBRD) and the European companies. The fund has an EU-wide mandate, but focuses on
Commission (EC).65 The EIB, KfW and the EBRD are each opportunities in southern Europe.
planning to contribute €25 million and the EC is providing
close to €20 million to the Fund.66 The founding institutions
aim to increase the Fund’s size to €400 million by attracting The Bulgarian Energy Efficiency and Renewable
additional capital from public and private investors. 67 Energy Credit Line (BEERECL)
The Fund will be an accredited investment vehicle within The BEERECL is a renewable energy financing facility
the UN system, allowing it to participate in special project established by the European Bank of Reconstruction and
financing initiatives and to receive UN grants for Kyoto Development. The BEERECL provides assistance to seven
Protocol and climate change-related projects. 68 Bulgaria-based commercial banks that on-lend the funds to
private sector industrial energy efficiency and renewable
The Fund’s financing will be provided mainly as loans to energy projects. 78 Development assistance is also provided
financial institutions, which will on-lend to small and medium for projects, including energy auditing, financial analysis,
enterprises and residential customers. A part of the SE4F’s risk assessment, formulation of loan applications and deal
funds will also be available for direct investment in specialist structuring.79 The facility is partly supported by the nuclear
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11power plant Kozloduy International Decommissioning Support of supporting renewable energy projects in Germany
Fund (KIDSF).80 Borrowers receive an incentive grant from the and abroad. Within its “Programme for the Promotion of
KIDSF upon successful project commissioning, worth 15% of Renewable Energies,” KfW offers a series of soft loan credit
the loan for efficiency projects and 20% for renewables.81 lines for smaller renewable energy projects.87 Partner
banks on-lend the financing provided by KfW and assume
the credit risk in return for risk-adjusted margins. Loans can
be granted for up to €5 million with a maximum three-year
Marguerite
interest-free grace period and partial debt relief provided by
Several public financial institutions in Europe have recently the German Federal Ministry for the Environment (BMU).88
launched a pan-European infrastructure fund, dubbed In 2007, a total of approximately €11 billion went to fund
Marguerite. The EIB, Caisse des Dépôts (France), Cassa the expansion of renewable energies in Germany.89 KfW
Depositi e Prestiti (Italy), KfW (Germany), Instituto de Crédito contributed nearly half of this amount, and continues to
Oficial (Spain) and PKO Bank Polski (Poland) have each aggressively fund renewable energy projects in Germany
agreed to commit €100 million to the new fund to finance and elsewhere.90
infrastructure projects linked to key EU policies in the areas of
climate change, energy security and trans-European transport KfW’s Special Facility for Renewable Energies and
and energy networks.82 With the participation of a broader Energy Efficiency has been particularly effective at
pool of investors, it is expected that the fund will reach a final spurring investment in renewable energies in developing
closing of €1.5 billion by 2011.83 Marguerite is anticipated to economies. Acting on behalf of the German Federal
serve as a model for the establishment of other similar equity Ministry for Economic Cooperation and Development, KfW
funds in the EU wishing to combine market-based equity Entwicklungsbank committed €300 million in 2008 to fund
financing principles with the pursuit of public policy objectives. nine projects.91 KfW is currently planning to dedicate a
further €500 million to this initiative.92
Marguerite is among the first “post-crisis” equity funds to be
launched and was also one of the largest fundraising exercises
in Europe in late 2009.84 It will provide equity or quasi-equity
to companies proposing to create renewable energy assets Commercial banks
and other infrastructure projects. With a 20-year timeframe,
Several Europe-based commercial banks have leading clean
Marguerite is a long-term investor and is intended to be fully
energy financing practices, including France and Belgium-
invested by 2014. The participants in the fund also intend to
based Dexia, through Dexia Renewable Energy Project
establish a debt co-financing mechanism with up to €5 billion
Finance, and Germany’s Deutsche Bank, through DE Asset
available as a source of long-term debt for the projects that
Management.
Marguerite invests in.85
With a €1.6 billion exposure to the wind sector and €0.9 billion
Many other European funds providing loans to renewable
exposure to the solar sector, Dexia is one of the top three
energy projects are established jointly between domestic
arrangers and lenders in renewable energy.93 According to a
banks and national energy or infrastructure agencies in
recent industry presentation, Dexia has the most diversified
Europe.
renewable energy portfolio of any bank in the sector, spanning
16 countries and five continents, and has completed more
than 90 transactions in renewable energy.94 With expertise in
KfW BankenGruppe
offshore wind farms, Dexia is particularly strong in the wind
The German development and reconstruction bank, KfW, sector, having acted as mandated lead arranger in more than
spends approximately 20% of its total financing volume 50 projects in the past 15 years.
on national and international climate projects. 86 The bank
recently overtook the World Bank as the largest funder of Deutsche Bank also has a strong renewable energy financing
renewable energy projects in developing countries. KfW practice. The asset management arm of Deutsche Bank has
has developed several financing facilities for the purpose more than $4 billion in assets under management in the
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12renewable energy sector. This makes DeAM one of the largest France
climate change investors in the world.95 France recently implemented a “Sustainable Development
Tax Credit” similar to the system in place in the
Other banks that are extremely active in renewable energy Netherlands.99 Corporations can effectively reduce their
project financing include BNP Paribas, Netherlands-based tax liability by claiming part of the cost of renewable
Rabobank and Standard Chartered Bank based in the UK. energy production equipment. France also provides low-
interest loans to support the purchase of renewable energy
infrastructure.
Tax exemptions, tax credits and low- Germany
interest loans
Several German states provide renewable subsidies and low-
Several European countries provide generous tax exemptions,
interest loans.100 Regional and community banks also provide
tax credits and low-interest loans for the development of
incentives to small-scale projects. Germany’s national
renewable energy projects. The following are some examples
infrastructure bank, the KfW, also provides low-interest loans.
of programs currently in place.
The Netherlands
The Netherlands provides tax exemptions through an Large-scale renewable energy
Energy Investment Deduction scheme. The program gives
tax relief to Dutch companies that invest in sustainable
projects in Ontario
energy and/or energy efficient equipment. The EIA
Despite a lack of domestic, government-backed debt
subtracts up to 44% of the purchase and production costs
instruments for the renewable energy sector, several large-
of the investment from annual profits.96 A maximum of
scale projects are planned or have recently come online
€111 million can be deducted under this program, reducing
in Ontario with the help of foreign lenders. These projects
the taxable profits of a company. 97 Other Dutch incentives
were undertaken under the Renewable Energy Standard
include exempting generators from the eco-tax levied on
Offer Program (RESOP). This renewable energy pricing
electricity consumption and providing low-interest loans
regime preceded the implementation of the FIT Program.
from designated “Green Funds.”98
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13Under RESOP, solar projects were guaranteed a price financing from Norddeutsche Landesbank, the company will
of $0.42/kWh of energy delivered to the Ontario power fund the construction of two 10 MW solar photovoltaic power
grid. RESOP arrangements did not include local content generation facilities near the city of Sault Ste. Marie, Ontario.
requirements for equipment or labour.
Starwood, which is providing equity financing for the facilities,
recently acquired the project from Pod Generating Group, a
Skypower “First Light”
developer of community-scale solar power generating facilities
First Light is a 9.1 MW solar energy project brought online on and the original developer of the project. The Sault Ste. Marie
September 30, 2009. The project had originally negotiated facility is being financed with an investment from Starwood
financing from Lehman Bros., but this deal collapsed alongside Energy Infrastructure Fund, L.P. The Fund has total equity
the recent financial crisis and the disappearance of Lehman capital commitments of $433 million and targets investments
from the market. German bank, Norddeutsche Landesbank in energy generation and transmission assets in North
then stepped into the role of lead project financier.101 Project America.
contributors include Sun Edison, a solar energy services
provider and financial backer, and SkyPower, a leading The facility is scheduled to come online in the third quarter of
developer of renewable energy projects in Canada. Project 2010. The 20 MW project, once built, will provide power for up
supporters also include Hydro One and the OPA.102 to 8,000 Ontario homes. The facilities will also reduce yearly
carbon emissions by an amount equivalent to planting more
The First Light ground-mounted solar farm covers 90 acres of than 16 million trees in Ontario’s forests.108
limited use, non-agricultural land with approximately 126,000
thin-film PV solar panels.103 During the first year of operation,
First Light is projected to produce more than 11.5 million
kilowatt hours of solar energy, which is enough to power
nearly 1,000 average Canadian homes.104
Adoption of renewable energy
in Ontario
First Solar
Opportunity for Canadian leadership in
Construction is currently underway on what is to become the
renewable energy finance
largest photovoltaic solar energy production facility in North
America, located near Sarnia, Ontario. Currently with 20 MW As the first region to adopt an uncapped feed-in tariff in
of production capacity online, Arizona-based First Solar and North America, Ontario’s FIT creates broad opportunities
facility-owner Enbridge propose to expand production capacity for players in Canada’s financial sector. There is an
to 80 MW by December of 2010.105 Originally developed by urgent need to develop innovative financial mechanisms
OptiSolar, the company’s development rights for the Sarnia- appropriate for renewable energy asset leasing, large
based solar installation were purchased by First Solar in March project financing and financing for the consumer renewable
of 2009. First Solar then sold the installation to Enbridge with energy product market in North America. Compared to US
an agreement to expand the solar farm a further 60 MW at a banks, Canadian financial institutions are well positioned
cost of $300 million.106 to meet this need. They are relatively solvent, and have
experience financing the development and operation of
The power output of the 80 MW facility will be sold to OPA large resource-based projects. The result is that for a brief
pursuant to 20-year power purchase agreements under the moment in time, Canadian banks have an uncontested
terms of the Ontario Government’s RESOP program.107 opportunity to enter and dominate the renewable energy
finance market in North America.
Starwood SSM1 To do so, banks may first choose to participate in the
renewable energy market on an experimental basis by
On January 7, 2010, the Canadian affiliate of Connecticut- investing in or financing smaller projects. This would
based Starwood Energy Group LLC announced that with alleviate the financial risk to the bank while simultaneously
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14creating a local base of financing experience in renewable new Ontario FIT program, it is reasonable to expect that
energy. Alternatively, Canadian banks may elect to de-risk Canadian lenders will begin to participate more actively in
renewable energy finance by setting specific agreement renewable energy project financings in Ontario.
terms. Banks could specify the regions, technologies and
project development partners they would be willing to
Popular support for renewable energy
finance. Some Canadian banks have begun this process
by indicating that they are prepared to work with project Europe enjoys a stable, well-understood regulatory
developers as long as they have at least 5 years experience. framework and strong popular and political support for
While this is an excellent start, renewable energy production renewable energy. When asked in a recent survey how they
incentives have only been in place in Ontario for 3 years. felt about a large increase in the number of wind farms in
One workaround might be for Canadian banks to agree their home country, 87% of Europeans surveyed responded
to participate in projects that involve an experienced that they were in favour of such a move.109 This sentiment
renewable energy developer from outside the country, is partly driven by energy security concerns, and partly by a
working alongside a Canadian firm through a joint venture. strong culture of environmental responsibility in Europe.
With regard to renewable energy technology, many With a natural resource base rich in fossil fuels, Canadians
Canadian banks perceive renewable energy projects as are not subject to the same energy security concerns that
having extremely high technology risk. In most cases, this are top-of-mind in many European countries. As such,
is a cultural hang-up rather than a well-founded objection. the development of renewable energies at an additional
Many renewable energy technologies have rigorously expense for electricity consumers in Ontario may not enjoy
proven their value and “bankability” and have been steadily the same popular support as in Europe.
generating investor returns in other countries for decades.
The new Ontario FIT program represents a one-time
Carbon trading
opportunity to establish Canadian leadership in renewable
energy finance in North America. With the industry looking The slow-developing demand for renewable energies in
on, it is hoped that 2010 will mark the beginning of a lasting Ontario may also be due to the absence of a local carbon-
and profitable tenure for renewable energy in Canada and trading program. Cap-and-trade systems increase the
the US. effective price of producing energy with fossil-fuels. By
helping to bring the cost of fossil-fuel- based energy
production in line with renewable energy production,
Capital mobilization carbon trading plays an important role in fostering green
energy demand. Although plans for an Ontario-Quebec
The availability of sufficient capital is a challenge for
cap-and-trade program were announced in June 2008, little
Canadian projects. This is due to the high initial cost of
progress has been made on this front.
constructing major renewable energy projects, and the lack
of a Canada-wide financing institution willing and able to
mobilize capital and mitigate the risk of providing sums on
the order of hundreds of millions of dollars to renewable
energy projects. To date, most of Canada’s major renewable
energy projects have been financed by American and
European banks and banking syndicates.
Since the Ontario FIT regime is modelled closely on the
German system, it is likely that in the very near term, German
banks will continue to play a lead role in financing large-scale
renewable energy projects in Ontario. As the credit markets
relax and success stories begin to circulate as a result of the
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15The road ahead Further reading
For two excellent reports on renewable energy finance
Based on the most successful FIT programs worldwide,
around the world, see:
Ontario’s feed-in tariff scheme will play an important role
in jumpstarting the province’s green economy through
Fulton, Mark and Kevin Parker. (December 2009). Paying
job creation, the development of local expertise in the
for Renewable Energy: TLC at the Right Price. DB Climate
construction and operation of renewable energy projects,
Change Advisors, Deutsche Bank Group. Available for
and establishing Ontario as a North American leader in the
download: http://www.dbcca.com/dbcca/EN/investment-
manufacture of renewable energy equipment.
research/investment_research_2144.jsp
While financing major renewable energy projects continues
Greenwood, Chris et al. (2009). Global Trends in Sustainable
to present challenges to risk-averse lenders, particularly in
Energy Investment 2009: Analysis of Trends and Issues in
the current economy, Ontario’s new FIT program creates
the Financing of Renewable Energy and Energy Efficiency.
significant opportunities to profit from renewable energy
United Nations Environment Programme, Sustainable
projects in the province. For lenders and equity investors,
Energy Finance Initiative. Available for download: http://
Ontario’s FIT program guarantees generous and predictable
sefi.unep.org/english/globaltrends2009.html
rates of return for solar, wind, waterpower and bioenergy
projects, large and small.
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16References
1. Ontario Power Authority. Retrieved from: http://www.opa.com (accessed December 18, 2009).
2. Ontario Power Authority. Retrieved from: http://www.opa.com (accessed December 18, 2009).
3. The Liberal Party of Ontario’s official Green Energy Act Website. (2009). Renewable Green Energy for Ontario. Retrieved from: http://www.
ontariogreenenergyact.ca/renew.html (accessed December 18, 2009).
4. The Liberal Party of Ontario’s official Green Energy Act Website. (2009). Renewable Green Energy for Ontario. Retrieved from: http://www.
ontariogreenenergyact.ca/green.html (accessed December 18, 2009).
5. The Liberal Party of Ontario’s official Green Energy Act Website. (2009). Renewable Green Energy for Ontario. Retrieved from: http://www.
ontariogreenenergyact.ca/green.html (accessed December 18, 2009).
6. The Liberal Party of Ontario’s official Green Energy Act Website. (2009). Renewable Green Energy for Ontario. Retrieved from: http://www.
ontariogreenenergyact.ca/renew.html (accessed December 18, 2009).
7. Parker, Nick. (September, 2008). Presentation: Cleantech—A Global Innovation Industry Emerges. The Cleantech Group, LLC. Pg. 8.
8. Fulton, Mark and Kevin Parker. Paying for Renewable Energy: TLC at the Right Price. DB Climate Change Advisors, Deutsche Bank Group.
December 2009.
9. Ontario Power Authority. (2009, September). FIT Price Schedule. Retrieved from: http://fit.powerauthority.on.ca/Page.
asp?PageID=1115&SiteNodeID=1052 (accessed December 17, 2009).
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asp?PageID=1115&SiteNodeID=1052 (accessed December 17, 2009).
11. Ontario Power Authority: FIT Program FAQs.
12. Ontario Ministry of Energy and Infrastructure. (January 21, 2010). Ontario Delivers $7 Billion Green Investment. Retrieved from: http://news.
ontario.ca/mei/en/2010/01/backgrounder-20100121.html (accessed January 25, 2010).
13. Ontario Ministry of Energy and Infrastructure. (January 21, 2010). Ontario Delivers $7 Billion Green Investment. Retrieved from: http://news.
ontario.ca/mei/en/2010/01/backgrounder-20100121.html (accessed January 25, 2010).
14. Ontario Ministry of Energy and Infrastructure. (January 21, 2010). Ontario Delivers $7 Billion Green Investment. Retrieved from: http://news.
ontario.ca/mei/en/2010/01/backgrounder-20100121.html (accessed January 25, 2010).
15. Ontario Ministry of Energy and Infrastructure. (January 21, 2010). Ontario Delivers $7 Billion Green Investment. Retrieved from: http://news.
ontario.ca/mei/en/2010/01/backgrounder-20100121.html (accessed January 25, 2010).
16. Ontario Ministry of Energy and Infrastructure. (January 21, 2010). Ontario Delivers $7 Billion Green Investment. Retrieved from: http://news.
ontario.ca/mei/en/2010/01/backgrounder-20100121.html (accessed January 25, 2010).
17. Fulton, Mark and Kevin Parker. (2009, December). Paying for Renewable Energy: TLC at the Right Price. DB Climate Change Advisors,
Deutsche Bank Group.
18. Bayley, Caroline. (January 10, 2008). Germany’s sunny revolution. Retrieved from: http://news.bbc.co.uk/2/hi/business/7181866.stm
(accessed January 25, 2010).
19. Fulton, Mark and Kevin Parker. Paying for Renewable Energy: TLC at the Right Price. DB Climate Change Advisors, Deutsche Bank Group.
December 2009.
20. Fulton, Mark and Kevin Parker. Paying for Renewable Energy: TLC at the Right Price. DB Climate Change Advisors, Deutsche Bank Group.
December 2009.
21. Fulton, Mark and Kevin Parker. Paying for Renewable Energy: TLC at the Right Price. DB Climate Change Advisors, Deutsche Bank Group.
December 2009
22. Renner, Michael et al. (September, 2008). Green Jobs: Towards Decent Work in a Sustainable, Low-Carbon World. United Nations
Environment Programme and the International Labour Organization.
23. Fulton, Mark and Kevin Parker. Paying for Renewable Energy: TLC at the Right Price. DB Climate Change Advisors, Deutsche Bank Group.
December 2009.
24. Fulton, Mark and Kevin Parker. Paying for Renewable Energy: TLC at the Right Price. DB Climate Change Advisors, Deutsche Bank Group.
December 2009.
25. Fulton, Mark and Kevin Parker. Paying for Renewable Energy: TLC at the Right Price. DB Climate Change Advisors, Deutsche Bank Group.
December 2009.
26. Fulton, Mark and Kevin Parker. Paying for Renewable Energy: TLC at the Right Price. DB Climate Change Advisors, Deutsche Bank Group.
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