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Financing Renewable Energy

MaRS Market Insights

Accelerating Ontario’s Green Energy Industry

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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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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

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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

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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.

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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

CapacityContract 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.

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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 communityprice 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 applicable40%

25%60%

not applicable60%

50%60%

not applicable60%

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

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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

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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 SpainNetherlands

Source: Reproduced from Deutsche Bank Climate Change Advisors analysis, December 2009, Paying for Renewable Energy: TLC at the Right Price31

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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

1410

6

2002 2003 2004 2005 2006 2007 2008

97

85

50

28

1410

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

Bond/other

Project finance

Balance sheet/syndicated equity

Middle East & Africa

South America

Asia & Oceania

North America

Europe

Figure 4 New renewable energy asset financing by security type, 2002-2008 ($ US billions)

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

INSURERBank

BBank

CBank

D

DEBT

RENEWABLE ENERGY

PROJECT

PROFIT

CAR

BON

CR

EDIT

S

RAT

E /

CO2

cred

it

FIT rate/kwhElectricity

equity investors

Opertional maintenance

company

$

$

$

Electricitybuyer

Electricityretailers

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

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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.

2002 2003 2004 2005 2006 2007 2008

97

85

50

28

1410

6

2002 2003 2004 2005 2006 2007 2008

97

85

50

28

1410

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

Bond/other

Project finance

Balance sheet/syndicated equity

Middle East & Africa

South America

Asia & Oceania

North America

Europe

Figure 4 New renewable energy asset financing by security type, 2002-2008 ($ US billions)

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

INSURERBank

BBank

CBank

D

DEBT

RENEWABLE ENERGY

PROJECT

PROFIT

CAR

BON

CR

EDIT

S

RAT

E /

CO2

cred

it

FIT rate/kwhElectricity

equity investors

Opertional maintenance

company

$

$

$

Electricitybuyer


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

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

INSURERBank

BBank

CBank

D

DEBT

}

RENEWABLE ENERGY

PROJECT

Profit

Deb

t P

aym

ents

Carb

on C

redi

ts

RAT

E /

CO2

cred

it

FIT rate/kWhElectricity

Electricity

equity investors

Operation & maintenance

company

$

$

$

$

Electricitybuyer


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

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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

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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

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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

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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

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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.

__16

Further reading

For two excellent reports on renewable energy finance

around the world, see:

Fulton, Mark and Kevin Parker. (December 2009). Paying

for Renewable Energy: TLC at the Right Price. DB Climate

Change Advisors, Deutsche Bank Group. Available for

download: http://www.dbcca.com/dbcca/EN/investment-

research/investment_research_2144.jsp

Greenwood, Chris et al. (2009). Global Trends in Sustainable

Energy Investment 2009: Analysis of Trends and Issues in

the Financing of Renewable Energy and Energy Efficiency.

United Nations Environment Programme, Sustainable

Energy Finance Initiative. Available for download: http://

sefi.unep.org/english/globaltrends2009.html

Based on the most successful FIT programs worldwide,

Ontario’s feed-in tariff scheme will play an important role

in jumpstarting the province’s green economy through

job creation, the development of local expertise in the

construction and operation of renewable energy projects,

and establishing Ontario as a North American leader in the

manufacture of renewable energy equipment.

While financing major renewable energy projects continues

to present challenges to risk-averse lenders, particularly in

the current economy, Ontario’s new FIT program creates

significant opportunities to profit from renewable energy

projects in the province. For lenders and equity investors,

Ontario’s FIT program guarantees generous and predictable

rates of return for solar, wind, waterpower and bioenergy

projects, large and small.

The road ahead

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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).

10. 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).

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).





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).



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.




26. Fulton, Mark and Kevin Parker. Paying for Renewable Energy: TLC at the Right Price. DB Climate Change Advisors, Deutsche Bank Group.

References

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