MARS MARKET INSIGHTS

MARS MARKET INSIGHTS

MARS MARKET INSIGHTS

__ 01 Financing Renewable Energy MaRS Market Insights Accelerating Ontario’s Green Energy Industry

MARS MARKET INSIGHTS

__ 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

MARS MARKET INSIGHTS

__ 01 MaRS Discovery District, © January 2010 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 Acronyms

MARS MARKET INSIGHTS

__ 01 According to the Ontario Power Authority (OPA), an estimated 25% of Ontario’s electricity is generated from renewable energy sources.1 While this is commendable, hydroelectric power accounts for the vast majority of the province’s renewable energy production.

Solar and wind- based energies make up only a small fraction of our overall energy supply. With the recent passage of new renewable 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 With attractive renewable energy resources and strong support from the province’s lawmakers, renewable energy is set to play a significant role in Ontario’s economic future. The province’s commitment to a new renewable energy feed-in tariff creates an opportunity for lenders and investors to profit from renewable energy projects and manufacturing centres established in Ontario.

What follows is a discussion of Ontario’s new renewable energy laws as well as renewable energy legislation in other nations, and the funding practices that have helped European countries to emerge as world leaders in renewable energy generation. Under the purview of the Ontario Ministry of Energy and Infrastructure, the GEA is the cornerstone of Ontario’s strategic response to climate change. The purpose of the Act is to “facilitate the development of a sustainable energy economy that protects the environment while streamlining the approvals process, mitigating climate change, engaging communities and building a world-class green industrial sector.”3 The GEA is expected to result in the creation of more than 50,000 green collar jobs and billions of dollars of economic activity within the first three years.

As part of Ontario’s Climate Change Strategy, the Green Energy Act is designed to help the province to reach the following goals: • Eliminate “dirty coal” as a power source by 2014; The Green Energy Act will enable the province to eliminate “dirty coal” as a power source by 2014. This is anticipated to reduce greenhouse gas emissions by 30 megatonnes. Ontario’s commitment to eliminate “dirty coal” represents one of the most ambitious climate change initiatives in North America. The GEA will help achieve this target by: • Expanding the development of renewable energy projects across the province; • Investing in new forms of renewable peaking power to help balance the intermittent nature of some forms of renewable energy; • Providing Ontario residents, businesses and institutions with the tools needed to monitor and reduce their energy usage; and • Creating a 21st century “smart” energy system to better manage the energy supply mix, allowing for broader utilization of renewable power.5 Ontario’s Green Energy Act proposes to expedite the growth of clean, renewable sources of energy, such as wind, solar, hydro, biomass and biogas.

It will ensure that renewable energy projects are able to come online more quickly by removing administrative barriers, and streamlining the application process.

The GEA will help to encourage the development of more renewable energy by: • Delivering a feed-in tariff to provide guaranteed pricing structures to help boost investor confidence and increase access to financing for projects of varying sizes; Introduction The Ontario Green Energy and Green Economy Act (GEA) • Conserve 6,000 megawatts (MW) of provincial energy use by 2015, with an additional 2.5% annual reduction in energy resource needs thereafter; • Install 10,000 MW of new renewable energy capacity by 2015 (above 2003 levels); • Install 1,500 MW of new clean distributed energy by 2015, up to 3,000 MW by 2025; and • Achieve a 30% reduction in natural gas consumption by 2017.4 Eliminating “dirty coal” Accelerating the development and adoption of renewable energy

MARS MARKET INSIGHTS

__ 02 02 Ontario’s Feed-In Tariff (FIT) Program is the first program of its kind in North America. It provides a comprehensive, guaranteed pricing structure for electricity production from The planning, organization, development, ownership and operation of electricity generating facilities in most countries has traditionally been financed with public dollars. In recent years, many countries have begun the slow Ontario’s feed-in tariff program The purpose of feed-in tariffs • Providing “As of Right” grid connections to ensure that renewable energy projects meeting technical, economic and other regulatory requirements are able to connect to the grid; • Creating service guarantees to ensure that wait times for approvals are more transparent and that information is publicly accessible; • Streamlining the approvals process for renewable energy projects, eliminating duplication and barriers while ensuring that health, safety and environmental concerns are adequately addressed; • Establishing a Renewable Energy Facilitator to help community proponents to navigate the project approvals process, ensuring compliance with necessary requirements; and • Investing in a “smart grid” to facilitate and maximize the development of new renewable energy projects, making it easier to connect to the system and setting the stage for new technologies such as plug-in electric cars.6 renewable sources.

The FIT Program includes standardized program rules, prices and contracts in order to undertake a renewable energy project. The Program is administered by the Ontario Power Authority (OPA). FIT prices are designed to help developers cover renewable energy project costs and provide a reasonable return on investment over the term of each contract.

Renewable energy sources qualifying for FIT funding include: • Bioenergy—biogas, biomass, landfill gas; • Solar photovoltaic (PV); • Water power; and • Wind The program is divided into two streams—FIT and microFIT. The FIT Program is for renewable energy projects that are able to generate more than 10 kilowatts (kW) of electricity. Very small projects, such as residential installations, that are able to generate 10 kW or less are eligible for the microFIT Program.

__ 03 Technology Biomass Landfill Gas FIGURE 1 Biogas On-farm On-farm Biogas Biogas Biogas Solar PV Any type Rooftop Rooftop Rooftop Ground- mounted Wind On-shore Off-shore Waterpower ≤ 10 MW > 10 MW ≤ 10 MW > 10 MW ≤ 100 kW > 100kW ≤ 250kW ≤ 500 kW > 500 kW ≤ 10MW > 10 MW ≤ 10 kW > 1 0kW ≤ 250 kW > 250 kW ≤ 500kW > 500 kW > 10 kW ≤ 10 MW Any size Any size ≤ 10 MW > 10 MW ≤ 50MW 13.8 13.0 11.1 10.3 19.5 18.5 16.0 14.7 10.4 80.2 71.3 63.5 53.9 44.3 13.5 19.0 13.1 12.2 Capacity Contract price ¢/kWh Source: Reproduced from Ontario Power Authority: FIT Price Schedule.

Updated September 30, 2009.9 Parties interested in establishing a qualifying renewable energy generating system enter into a contract agreement with the OPA. Under this FIT agreement, the OPA agrees to pay the renewable energy generator a fixed rate per kilowatt hour of energy produced. The renewable energy generator connects their energy generation system to the grid, and the OPA pays the generator the agreed-upon rate for the duration of the contract. Contracts are long term, and are designed to effectively guarantee a particular rate of return to the provider of renewable energy. For France, Germany and Spain, investor internal rates of return (IRRs) tend to be in the 7% to 10% range.

Ontario’s policy estimates a target return on equity of 11% based on a debt/ equity ratio of 30/70. 8 Contract rates for renewable energy projects of varying sizes are listed in Figure 1.

How the FIT program works transformation of their energy infrastructure from fossil- fuels to renewable energies and from publicly financed, owned and operated, to private. Unlike public energy utilities, the cost of renewable energy generation is most commonly paid for by electricity consumers, or “ratepayers”. As such, feed-in tariff schemes help to unlock private cash flows for energy infrastructure. Many predict that in the future only energy distribution will remain the responsibility of public entities. One study, conducted by the Cleantech Group, LLC sets the price of transitioning the world’s energy generation infrastructure to 100% renewable sources at $9 trillion dollars.

While this sum would be crippling to government budgets, it is not unrealistic to imagine that FIT programs will play a role in this privately-managed renewable energy future, lessening the taxpayer burden, and accelerating the transition.

__ 04 Wind Water Biogas Biomass Solar PV (ground-mounted) Landfill Gas FIGURE 2 FIGURE 3 FIT program (> 1 0kW) Wind Solar MicroFIT program (< or = >10kW) Wind Solar 1.5 0.9 0.6 0.6 1.5 0.6 1.0 0.6 0.4 0.4 1.0 0.4 Maximum Aboriginal price adder (cents/kWh) Maximum community price adder (cents/kWh) Renewable Fuel Source: Reproduced from Ontario Power Authority: FIT Price Schedule. Updated September 30, 2009.10 Source: Ontario Power Authority, FIT Program FAQ11 In addition to the contract FIT rates, renewable energy producers are also eligible to receive an additional amount per kWh of energy produced based on the equity participation of community or aboriginal groups, as seen in Fugre 2.

Since these so-called “adders” can increase the income per kWh of renewable energy projects by as much as 4%, there is substantial value in aboriginal and community involvement. To qualify for a FIT agreement, wind and solar energy producers must fulfill a “domestic content requirement.” The domestic content requirement indicates that a certain Domestic content requirement System Type/Size 25% 50% not applicable 40% 25% 60% not applicable 60% 50% 60% not applicable 60% From 10/01/2009 From 01/02/2011 From 01/02/2012 percentage of the proposed project content (activities, not financial value) must come from Ontario sources.

Figure 3 highlights domestic content requirements for certain system types.

The domestic content requirement provides a guaranteed customer base for national and international corporations that elect to establish a location in Ontario, integrating into the value chain to meet gaps in areas that may not be currently met by Ontario manufacturers. One example is the recently announced deal struck between the Ontario government and a consortium led by South Korean industrial and electronics powerhouse, Samsung. Samsung and its partners have committed to build 2,500 MW of wind and solar energy generation capacity in the province.12 The deal also calls for Samsung to establish an Ontario base of operations for the manufacture of wind and solar energy equipment.13 The Korean consortium plans to work with major partners to build four manufacturing plants in Ontario, and has pledged to create 16,000 direct and indirect jobs over the next five years.14 If Samsung 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 also guaranteed Samsung priority access to the province’s electricity grid.16 Other companies considering expanding manufacturing operations or relocating to Ontario include Atlantic Wind and Solar and ATS Automation Tooling Systems.

ATS has entered into a joint venture with French company, Photowatt for their Ontario operations. GE Canada is considering retrofitting an

__ 05 Western European countries have a long record of experience in FIT design and implementation. Despite its often cloudy skies, Germany has had a FIT program in place since 1990, and has become a world leader in solar energy.18 France and Spain have also enjoyed a substantial increase in renewable energy production capacity since they implemented FIT programs. At their core, successful FIT programs set expectations and reduce investor risk. They do so by creating conditions that allow investors to closely predict their returns from financing renewable energy projects.

In their comparison of FIT programs implemented in different countries, Deutsche Bank, an industry leader in renewable energy financing, noted several “core principles” that underpin successful FIT programs.23 • Must-take regulations: Both Germany and Ontario’s FIT programs regulate that the purchase of energy from renewable sources by grid operators must take priority over carbon-based fuel sources.

This effectively guarantees that 100% of the energy produced from renewable sources will be bought.24 • Mandatory interconnection: In Germany, Spain and Ontario, interconnection rules legislate that renewable energy generation installations must receive guaranteed access to the grid.25 • Guaranteed payments: Guaranteed payments are a key feature of all successful FIT programs. Payment of the FIT rates for an agreed-upon time period that is contractually or legislatively assured relieves capital providers of a substantial portion of the risk involved in financing renewable energy projects.26 • Setting the price based on generation cost plus a profit: The most successful FIT programs establish FIT pricing for renewable energy through a formula that utilizes the cost of generating energy plus a sufficient profit margin for a reasonable return.

Many The German FIT regime has enabled the German renewable energy sector to expand by 75% since 2000. Cumulative investment in renewables grew to €30 billion in 2008 and installed renewable energy capacity has tripled in eight years.19 Employment in the sector has risen to more than 300,000, with an estimated 42,000 working in photovoltaic manufacturing.20 In France, the number of individuals employed directly in the wind sector has risen from fewer than 100 in 1993 to 7,000 in 2007.21 As of 2007, 188,000 work directly and indirectly in Spain’s renewable energy sector. 22 Successful renewable energy programs are an econmic driver Key success factors in FIT program design Germany France Spain existing plant for solar manufacturing and Canadian Solar plans to open a manufacturing plant in Ontario for solar modules, although cells will still be built in China.17

__ 06 FIT programs target specific rates of return based on common project debt/equity ratios.27 • Streamlined application process: Germany and Ontario have gone to significant lengths to enhance transparency and reduce administrative costs for government and investors seeking to participate in renewable energy projects. Ontario recently introduced a Renewable Energy Facilitation Office designed specifically to assist in launching new renewable energy projects.28 • Grid parity: While FIT programs are designed to 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 renewable energy projects are generally reviewed on a periodic basis. Where appropriate, these rates are adjusted downward to reflect scale advantages achieved by equipment manufacturers.29 The following is drawn from information presented by Deutsche Bank in their December 2009 study entitled “Paying for Renewable Energy: Transparency, Longevity and Certainty at the Right Price.”30 The table compares various dimensions of FIT policy among countries with successful feed-in tariff programs.

FIT Design Feature Year first FIT established 2001 1990 2003 2009 1997 Eligible Technologies Specified tariff by technology Guaranteed payment Guaranteed interconnection Contract term “Must take” provision Internal rate of return target Periodic FIT rate review Grid parity target Project size cap Eligible for other incentives FIT costs borne by wind, solar, geothermal, small hydro, biomass, biogas yes yes yes 15-20 years no 8% no no varies yes ratepayer wind, solar, geothermal, small hydro, biomass, biogas yes yes yes 20 years yes 5-7% yes yes no yes ratepayer wind, solar, biomass, biogas, CHP yes yes yes 15 years no no yes no yes yes taxpayer wind, solar, hydro, biomass, biogas yes yes yes 20 years yes 11% yes no PV only yes ratepayer wind, solar (PV & CSP), geothermal, small hydro, biomass, biogas yes yes yes 15-25 years yes 7-10% yes no yes yes ratepayer & taxpayer France Germany Ontario Spain Netherlands Source: Reproduced from Deutsche Bank Climate Change Advisors analysis, December 2009, Paying for Renewable Energy: TLC at the Right Price31

__ 07 The US renewable energy policy framework is highly complex. At its core are the Renewable Portfolio Standards (RPS), which have been implemented in 35 states, and have been put forward as a national strategy in the 2009 American Clean Energy and Security Act.32 Renewable Portfolio Standards establish targets for renewable energy in the energy supply mix, frequently by technology. Compliance with Renewable Portfolio Standards is tracked by Renewable Energy Certificates (RECs).33 These certificates are issued when a renewable energy generator delivers renewable- based power to a grid operator.

RECs are tradable by utilities across grid operator borders.34 RECs are often bundled into power purchase agreements (PPAs) between electricity generators and electricity retailers.35 Unlike FITs, PPAs are not standard offers, do not include provisions for mandatory grid interconnection and have no “must take” provisions.36 PPAs are negotiated bilaterally on a case-by-case basis, creating an overall lack of transparency for potential investors in renewable energy projects.

PPAs attempt to capture the value of renewable energy incentives, which include federal production tax credits (PTCs) and investment tax credits (ITCs), convertible ITCs and ITC cash grants, as well as state and local tax credits, loan guarantees and the tax equity market.37 These incentives are used to counterbalance the cost premium of renewable energy over fossil fuel- based energy generation and to generate 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. 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, alongside a national cap-and-trade program and a national RPS program in the US.

While FIT programs ensure a reasonable return on investment for renewable energy projects, the construction of large-scale renewable energy assets can cost hundreds of millions of dollars. Financing for the construction of US renewable energy policy Financing renewable energy assets renewable energy facilities comes primarily from debt in the form of project financing from major banks and banking syndicates. A smaller portion comes from equity from the project developers and sponsors, as well as private equity investors. Equity investors in clean energy assets include developers who identify the clean energy resource and put the project together, equity sponsors who help fund the project through its construction phase with the goal of selling the completed asset, and those that invest in operating renewable energy assets.

A negligible amount of renewable energy asset financing also comes from the issuance of bonds. Participation in the project bond market requires that bonds be rated as investment grade. Onerous rating requirements for investment grade renewable bonds have made renewable energy project bond issuance a relative rarity.38 In 2008, the financing of renewable energy assets accounted for the majority of new investment in clean energy. A total of $136.1 billion flowed to renewable energy assets in 2008, a 23% increase over the previous year.39 2002 2003 2004 2005 2006 2007 2008 97 85 50 28 14 10 6 2002 200 10 6 Source: Reprodu in Sustainable En the Financing fo Bond/other Project finance Balance sheet/syndicated equity Middle Ea South Am Asia & O Figure 4 New renewable energy asset financing by security type, 2002-2008 ($ US billions) Figure 5 asset fin ($US bil Source: Reproduced from Greenwood, Chris et al.

(2009). Global Trends in Sustainable Energy Investment 2009: Analysis of Trends and Issues in the Financing for Renewable Energy and Energy Efficiency. Pg. 36. 40

__ 08 With well-established and transparent FIT programs that contractually guarantee a certain return, European countries have an advantage over North America in attracting financing for renewable energy projects. 7 2008 97 2002 2003 2004 2005 2006 2007 2008 97 85 50 28 14 10 6 Source: Reproduced from Greenwood, Chris et al. (2009). Global Trends in Sustainable Energy Investment 2009: Analysis of Trends and Issues in the Financing for Renewable Energy and Energy Efficiency. Pg. 37.41 Middle East & Africa South America Asia & Oceania North America Europe ergy type, Figure 5 New renewable energy asset financing by region ($US billions) Bank A (mandated lead arranger) Tax Credits Project developer / owner Consumers CO2 Credit Buyers INSURER Bank B Bank C Bank D DEBT RENEWABLE ENERGY PROJECT PROFIT C A R B O N C R E D IT S R A T E / C O 2 c r e d it F I T r a t e / k w h E l e c t r i c i t y equity investors Opertional maintenance company $ $ $ Electricity buyer Electricity retailers lobal Trends and Issues in Pg.

36. 40 Rather than funding the construction of individual renewable energy installations, private equity funds participate in the renewable energy market by taking an equity stake in, or buying out, promising renewable energy project developers or equipment manufacturers. In 2008, Grupo Naturener, a Spanish renewable energy developer, raised €132 million from existing private equity investors.42 In another major 2008 private equity deal, German thin-film module maker Sulfurcel secured €85 million from a syndicate of major private equity firms, including Intel Capital and Climate Change Capital.43 Although venture capital investors typically do not play 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 investors in thin-film technology as the next evolution in solar panel design.

Public markets offer indirect financing to renewable energy projects by channelling capital to renewable energy technology manufacturers and project developers. Due to the financial crisis, public companies in the renewable energy sector received substantially less capital through the public markets in 2008 than in previous years. Total public market investment in the renewable sector in 2008 was $11.8 billion.46 This is down more than 50% from 2007’s $23.4 billion.47 Major renewable energy projects require the participation of numerous debt and equity funders, assessment consultants, insurers, project developers, equipment suppliers, project operation and maintenance companies, energy purchasing and distribution companies, as well as the carbon markets and government players who administer FIT programs, tax credits and other incentives in the renewable energy sector.

As energy production capacity for a given project increases, so does the complexity of its financial structure. The following diagram illustrates the major financial flows typical of a large renewable energy project.

Private equity Venture capital Public markets Deal structures in the renewable energy sector While the financial crisis and onset of the economic recession led to plummeting share values, private equity funds with cash to invest, such as pension funds, have taken advantage 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 Partners.44 CalPERS, the retirement fund for California state employees and a leading California clean technology investor, announced that it had committed US$200 million to a new US$1 billion clean technology investment fund set up by Sun Microsystems founder Vinod Khosla.45

__ 09 With the recent turmoil in the credit markets, many commercial lenders active in the renewable energy sector are unwilling to take the lead in major financings. The result has been an increase in “club deals,” where all parties to a debt financing agree to the same terms. Since all financiers must agree to identical terms, protracted negotiation periods are common. Also, since risk-averse banks prefer to take a relatively smaller stake in club deals, a financing of US$500 million can involve up to 10 different lending institutions.48 Bank A (mandated lead arranger) Tax Credits Project developer / owner Consumers CO2 Credit Buyers INSURER Bank B Bank C Bank D DEBT } RENEWABLE ENERGY PROJECT Profit Debt Payments C a r b o n C r e d i t s R A T E / C O 2 c r e d i t F I T r a t e / k W h E l e c t r i c i t y Electricity equity investors Operation & maintenance company $ $ $ $ Electricity buyer Electricity retailers Club deals Europe is home to supra-national financial institutions such as the European Investment Bank, the European Bank for Reconstruction and Development, and the financial arm of the European Commission.

Acting on pan-European energy policy directives, these institutions are able to mobilize substantial capital to support major renewable energy projects, reducing commercial bank risk by providing loan guarantees and funds for on-lending from commercial European practices in renewable energy financing

__ 10 project financing syndicates to the project developers. In April of 2009, the European Commission welcomed the formal adoption of an Energy and Climate Change package. The package sets legally binding targets to cut greenhouse gas emissions to 20% below 1990 levels and to increase the share of renewable energy to 20%, both by 2020. It will also help to achieve the EU’s objective of improving energy efficiency by 20% within the same timeframe.49 Following the announcement, German environment minister Sigmar Gabriel noted, “Our task is now to join together 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 Europe’s energy security, to climate protection and to peace building.”50 In Germany and throughout Europe, public and private financing institutions are carrying out this pledge in support of renewable energy by channelling significant capital to the sector.

Several major European commercial banks have divisions dedicated to mobilizing and facilitating capital deployment for renewable energy projects. This expertise has led to global leadership in renewable energy project financing.51 Many public and private European banks also offer assessment services, technical expertise, industry linkages and other supporting services to assist their renewable energy sector clients. European banks are extremely active 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.

The European Investment Bank is the European Union’s financing institution. The shareholders of the EIB include the 27 member states of the EU. The EIB borrows funds on the capital markets, which it lends on favourable terms to projects furthering EU policy objectives. One of the main missions of the EIB is to provide financing to projects that enhance Europe’s energy security and increase the share of renewable energy in the EU’s energy mix. The EIB supports A major financing initiative announced in late December 2009 sees the EIB entering into a partnership with EDF Energies Nouvelles (EDF EN), a France-based developer of renewable energy projects.55 Through this partnership, the EIB and EDF EN will establish a financing vehicle for a portfolio of solar PV projects in France and Italy.

Based on financing terms established for two pilot projects that will be funded in early 2010, subsequent projects will replicate these financial structures.56 This is expected to simplify and streamline the funding process for future projects funded by the partners. The EIB plans to allocate €500 million in financing to these initiatives. Each project will be implemented with the financial participation of several commercial banks.57 Another example of strong EIB support in the renewables sector is the Belwind offshore wind project being developed by a consortium of Belgian and Dutch investors off the Belgian coast.

The project is being financed with €482.5 million in non-recourse debt, with a maturity of 15 years after construction, and a €63.43 million non-recourse mezzanine facility.58 The Belwind project involves a broad set of private and public financing institutions. The EIB is providing €300 million to the 165 MW project, half of which is being guaranteed by Eksport Kredit Fondend (EKF), Denmark’s state export credit agency.59 Cleantech, climate and energy are some of EKF’s key business areas, and the Loan guarantees, on-lending and co-lending from national and supra-national financial institutions and infrastructure banks European Investment Bank (EIB) EIB and EDF Energies Nouvelles partnership Belwind offshore wind installation the construction of renewable energy assets by lending funds either directly to developers or to commercial banks that are arranging project financing.52 In general, the EIB’s contribution represents no more than 50% of the total financing for each project.

In 2008, the EIB provided €2.2 billion in financing to renewable energy projects. This represents a fourfold increase over 2006 financing levels. Wind projects received 34% of the funding, while 28% went to solar.53 In 2009, the EIB provided approximately €3 billion in financing to renewable energy projects. 54

__ 11 EKF is owned and guaranteed by the Danish state. The balance of debt financing will be raised by, and channelled 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 Vlaanderen.61 Once Belwind becomes operational, the electricity it generates will be sold to Electrabel, Europe’s fifth largest energy generator and distributor, under a long-term FIT contract.62 The carbon credits allocated to Belwind for renewable energy generation will be sold to Elia, Belgium’s grid operator, at prevailing rates.63 The Belwind deal exemplifies the typical interplay of public and private financing institutions, insurers, energy purchasers, carbon credit sales and FIT tariffs that characterize most major renewable energy projects in Europe.

The Southeast Europe Energy Efficiency Fund (SE4F) was established by the United Nations Economic Commission for Europe in December of 2009. The goal of the Fund will be to finance energy efficiency and renewable energy projects undertaken by small and medium-sized enterprises and households in Albania, Bosnia-Herzegovina, Croatia, FYR Macedonia, Montenegro, Serbia and Turkey.64 The SE4F is financed by the European Investment Bank (EIB), German infrastructure bank KfW Bankengruppe, the European Bank for Reconstruction and Development (EBRD) and the European Commission (EC).65 The EIB, KfW and the EBRD are each 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 additional capital from public and private investors.

67 The Fund will be an accredited investment vehicle within the UN system, allowing it to participate in special project financing initiatives and to receive UN grants for Kyoto Protocol and climate change-related projects. 68 The Fund’s financing will be provided mainly as loans to financial institutions, which will on-lend to small and medium enterprises and residential customers. A part of the SE4F’s funds will also be available for direct investment in specialist In 2003, the French environment agency ADEME and the French commercial bank Natixis launched FIDEME, a €45 million public-private mezzanine fund aimed at addressing the funding gap that had prevented the establishment of wind and other renewable energy projects in France.70 ADEME contributed €15 million to FIDEME as a subordinated tranche within the public-private fund.71 The fund then provided subordinated financing to commercial banking syndicates, helping to attract senior lenders.72 By helping commercial lenders reduce their risk, this double leverage structure allowed France’s environment agency to mobilize an amount of capital 20 times greater than its own contribution.73 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 energy generation capabilities.75 Natixis has since launched its second FIDEME fund, this time on a fully commercial basis, since the renewable market in France has matured beyond the need for public financial support from ADEME.

Announced in June of 2008, EuroFIDEME, a €250 million fund, has dedicated 60% of its assets for the provision of subordinated debt to projects, while the remaining 40% will be invested as equity, either in renewable energy projects or in project development companies. The fund has an EU-wide mandate, but focuses on opportunities in southern Europe.

The BEERECL is a renewable energy financing facility established by the European Bank of Reconstruction and Development. The BEERECL provides assistance to seven Bulgaria-based commercial banks that on-lend the funds to private sector industrial energy efficiency and renewable energy projects. 78 Development assistance is also provided for projects, including energy auditing, financial analysis, risk assessment, formulation of loan applications and deal structuring.79 The facility is partly supported by the nuclear Southeast Europe Energy Efficiency Fund Natixis and ADEME The Bulgarian Energy Efficiency and Renewable Energy Credit Line (BEERECL) energy service companies, energy efficiency service and supply companies, and renewable energy projects.69

__ 12 power plant Kozloduy International Decommissioning Support Fund (KIDSF).80 Borrowers receive an incentive grant from the KIDSF upon successful project commissioning, worth 15% of the loan for efficiency projects and 20% for renewables.81 Several public financial institutions in Europe have recently launched a pan-European infrastructure fund, dubbed Marguerite. The EIB, Caisse des Dépôts (France), Cassa Depositi e Prestiti (Italy), KfW (Germany), Instituto de Crédito Oficial (Spain) and PKO Bank Polski (Poland) have each agreed to commit €100 million to the new fund to finance infrastructure projects linked to key EU policies in the areas of climate change, energy security and trans-European transport and energy networks.82 With the participation of a broader pool of investors, it is expected that the fund will reach a final closing of €1.5 billion by 2011.83 Marguerite is anticipated to serve as a model for the establishment of other similar equity funds in the EU wishing to combine market-based equity financing principles with the pursuit of public policy objectives.

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 and other infrastructure projects. With a 20-year timeframe, Marguerite is a long-term investor and is intended to be fully invested by 2014. The participants in the fund also intend to establish a debt co-financing mechanism with up to €5 billion available as a source of long-term debt for the projects that Marguerite invests in.85 Many other European funds providing loans to renewable energy projects are established jointly between domestic banks and national energy or infrastructure agencies in Europe.

Several Europe-based commercial banks have leading clean energy financing practices, including France and Belgium- based Dexia, through Dexia Renewable Energy Project Finance, and Germany’s Deutsche Bank, through DE Asset Management. With a €1.6 billion exposure to the wind sector and €0.9 billion exposure to the solar sector, Dexia is one of the top three arrangers and lenders in renewable energy.93 According to a recent industry presentation, Dexia has the most diversified 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 offshore wind farms, Dexia is particularly strong in the wind sector, having acted as mandated lead arranger in more than 50 projects in the past 15 years.

Deutsche Bank also has a strong renewable energy financing practice. The asset management arm of Deutsche Bank has more than $4 billion in assets under management in the The German development and reconstruction bank, KfW, spends approximately 20% of its total financing volume on national and international climate projects. 86 The bank recently overtook the World Bank as the largest funder of renewable energy projects in developing countries. KfW has developed several financing facilities for the purpose Marguerite Commercial banks KfW BankenGruppe of supporting renewable energy projects in Germany and abroad.

Within its “Programme for the Promotion of Renewable Energies,” KfW offers a series of soft loan credit 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 interest-free grace period and partial debt relief provided by the German Federal Ministry for the Environment (BMU).88 In 2007, a total of approximately €11 billion went to fund the expansion of renewable energies in Germany.89 KfW contributed nearly half of this amount, and continues to aggressively fund renewable energy projects in Germany and elsewhere.90 KfW’s Special Facility for Renewable Energies and Energy Efficiency has been particularly effective at spurring investment in renewable energies in developing economies.

Acting on behalf of the German Federal Ministry for Economic Cooperation and Development, KfW Entwicklungsbank committed €300 million in 2008 to fund nine projects.91 KfW is currently planning to dedicate a further €500 million to this initiative.92

__ 13 Several European countries provide generous tax exemptions, tax credits and low-interest loans for the development of renewable energy projects. The following are some examples of programs currently in place. The Netherlands provides tax exemptions through an Energy Investment Deduction scheme. The program gives tax relief to Dutch companies that invest in sustainable energy and/or energy efficient equipment. The EIA subtracts up to 44% of the purchase and production costs of the investment from annual profits.96 A maximum of €111 million can be deducted under this program, reducing the taxable profits of a company.

97 Other Dutch incentives include exempting generators from the eco-tax levied on electricity consumption and providing low-interest loans from designated “Green Funds.”98 France recently implemented a “Sustainable Development Tax Credit” similar to the system in place in the Netherlands.99 Corporations can effectively reduce their tax liability by claiming part of the cost of renewable energy production equipment. France also provides low- interest loans to support the purchase of renewable energy infrastructure.

Several German states provide renewable subsidies and low- interest loans.100 Regional and community banks also provide incentives to small-scale projects. Germany’s national infrastructure bank, the KfW, also provides low-interest loans. Tax exemptions, tax credits and low- interest loans The Netherlands France Germany renewable energy sector. This makes DeAM one of the largest climate change investors in the world.95 Other banks that are extremely active in renewable energy project financing include BNP Paribas, Netherlands-based Rabobank and Standard Chartered Bank based in the UK. Despite a lack of domestic, government-backed debt instruments for the renewable energy sector, several large- scale projects are planned or have recently come online in Ontario with the help of foreign lenders.

These projects were undertaken under the Renewable Energy Standard Offer Program (RESOP). This renewable energy pricing regime preceded the implementation of the FIT Program. Large-scale renewable energy projects in Ontario

__ 14 First Light is a 9.1 MW solar energy project brought online on September 30, 2009. The project had originally negotiated financing from Lehman Bros., but this deal collapsed alongside the recent financial crisis and the disappearance of Lehman from the market. German bank, Norddeutsche Landesbank then stepped into the role of lead project financier.101 Project contributors include Sun Edison, a solar energy services provider and financial backer, and SkyPower, a leading developer of renewable energy projects in Canada. Project supporters also include Hydro One and the OPA.102 The First Light ground-mounted solar farm covers 90 acres of 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 Construction is currently underway on what is to become the largest photovoltaic solar energy production facility in North America, located near Sarnia, Ontario.

Currently with 20 MW of production capacity online, Arizona-based First Solar and facility-owner Enbridge propose to expand production capacity to 80 MW by December of 2010.105 Originally developed by OptiSolar, the company’s development rights for the Sarnia- based solar installation were purchased by First Solar in March of 2009. First Solar then sold the installation to Enbridge with an agreement to expand the solar farm a further 60 MW at a cost of $300 million.106 The power output of the 80 MW facility will be sold to OPA pursuant to 20-year power purchase agreements under the terms of the Ontario Government’s RESOP program.107 Skypower “First Light” First Solar Under RESOP, solar projects were guaranteed a price of $0.42/kWh of energy delivered to the Ontario power grid.

RESOP arrangements did not include local content requirements for equipment or labour.

On January 7, 2010, the Canadian affiliate of Connecticut- based Starwood Energy Group LLC announced that with Starwood SSM1 Opportunity for Canadian leadership in renewable energy finance As the first region to adopt an uncapped feed-in tariff in North America, Ontario’s FIT creates broad opportunities for players in Canada’s financial sector. There is an urgent need to develop innovative financial mechanisms appropriate for renewable energy asset leasing, large project financing and financing for the consumer renewable energy product market in North America. Compared to US banks, Canadian financial institutions are well positioned to meet this need.

They are relatively solvent, and have experience financing the development and operation of large resource-based projects. The result is that for a brief moment in time, Canadian banks have an uncontested opportunity to enter and dominate the renewable energy finance market in North America.

To do so, banks may first choose to participate in the renewable energy market on an experimental basis by investing in or financing smaller projects. This would alleviate the financial risk to the bank while simultaneously Adoption of renewable energy in Ontario financing from Norddeutsche Landesbank, the company will fund the construction of two 10 MW solar photovoltaic power generation facilities near the city of Sault Ste. Marie, Ontario. Starwood, which is providing equity financing for the facilities, recently acquired the project from Pod Generating Group, a developer of community-scale solar power generating facilities and the original developer of the project.

The Sault Ste. Marie facility is being financed with an investment from Starwood Energy Infrastructure Fund, L.P. The Fund has total equity capital commitments of $433 million and targets investments in energy generation and transmission assets in North America.

The facility is scheduled to come online in the third quarter of 2010. The 20 MW project, once built, will provide power for up to 8,000 Ontario homes. The facilities will also reduce yearly carbon emissions by an amount equivalent to planting more than 16 million trees in Ontario’s forests.108

__ 15 Capital mobilization Popular support for renewable energy Carbon trading The availability of sufficient capital is a challenge for Canadian projects. This is due to the high initial cost of 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 Europe enjoys a stable, well-understood regulatory framework and strong popular and political support for renewable energy. When asked in a recent survey how they felt about a large increase in the number of wind farms in their home country, 87% of Europeans surveyed responded that they were in favour of such a move.109 This sentiment is partly driven by energy security concerns, and partly by a strong culture of environmental responsibility in Europe.

With a natural resource base rich in fossil fuels, Canadians are not subject to the same energy security concerns that are top-of-mind in many European countries. As such, the development of renewable energies at an additional expense for electricity consumers in Ontario may not enjoy the same popular support as in Europe.

The slow-developing demand for renewable energies in Ontario may also be due to the absence of a local carbon- trading program. Cap-and-trade systems increase the 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, carbon trading plays an important role in fostering green energy demand. Although plans for an Ontario-Quebec cap-and-trade program were announced in June 2008, little progress has been made on this front.

creating a local base of financing experience in renewable energy.

Alternatively, Canadian banks may elect to de-risk renewable energy finance by setting specific agreement terms. Banks could specify the regions, technologies and project development partners they would be willing to finance. Some Canadian banks have begun this process by indicating that they are prepared to work with project developers as long as they have at least 5 years experience. While this is an excellent start, renewable energy production incentives have only been in place in Ontario for 3 years. One workaround might be for Canadian banks to agree to participate in projects that involve an experienced renewable energy developer from outside the country, working alongside a Canadian firm through a joint venture.

With regard to renewable energy technology, many Canadian banks perceive renewable energy projects as having extremely high technology risk. In most cases, this is a cultural hang-up rather than a well-founded objection. Many renewable energy technologies have rigorously proven their value and “bankability” and have been steadily generating investor returns in other countries for decades. The new Ontario FIT program represents a one-time opportunity to establish Canadian leadership in renewable energy finance in North America. With the industry looking on, it is hoped that 2010 will mark the beginning of a lasting and profitable tenure for renewable energy in Canada and the US.

new Ontario FIT program, it is reasonable to expect that Canadian lenders will begin to participate more actively in renewable energy project financings in Ontario.

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