UNFCCC Workshop on Innovative Options for Financing the

Development and Transfer of Technologies

27-29 September 2004

Private Sector Perspectives on Risk

Charles Donovan

Commercial Manager, Transactions

CAT Alliance Ltd.

T: +44 20 7421 6359

E: cwd@cat-alliance.com

Slide 2

Enviros Consulting: Founding Member of CAT Alliance Ltd.

• Europe’s largest resource base for environmental due diligence

• Owned by three environmental / energy consulting firms: Enviros (UK), Tauw (Netherlands), and COWI (Denmark)

• Total staff of 5000+ and combined turnover of $400+ million

• Transaction support to investors and developers in the global clean technology sector

Slide 3

CAT Alliance Geographical Coverage

Slide 4

Let’s Start with the Basics

Risk Tolerance and Required Financial Return

HIGH

LOW

Common Equity

Preferred Equity

Mezzanine Debt

Subordinated Debt

Senior Debt

Slide 5

Let’s Start with the Basics

Cost of Financing

HIGH

LOW

Common Equity

Preferred Equity

Mezzanine Debt

Subordinated Debt

Senior Debt

Slide 6

Private Sector Demands on Project Evaluation

• Technology Risk

• Operational Risks

• Construction / Commissioning Risks

• Counterparty Credit Risk

• Commodity Price Risks

•Exchange Rate Risks

•Political Risks

•Environmental Compliance Risks

Slide 7

Overview of Credit Risk Management

• Screening of counterparties

• Development of trading limits and transaction limit processes

• Monitoring and reporting of financial exposure against limits

• Testing exposure to financial losses on individual transactions

• Development of credit support packages (e.g. netting) that

support efficient allocation of credit risk for multiple

transactions

What is my expected risk-adjusted return on capital?

Slide 8

Credit Enhancement in the Renewable Energy Sector

• Financial risk can be influenced by a large number of factors – credit risk is one area where governments and multilateral institutions can make a tremendous difference.

• Energy financing is still recovering from unprecedented default events in 2001 and 2002. Industry is very focused on credit risk issues.

• Few well capitalised developers and suppliers (e.g. GE Energy)

• The use of output-based subsidies to support renewable energy projects (e.g. Renewable Energy Certificates, CDM carbon credits) may lead investors to have complex and unwanted credit risk exposure.

• Financing renewable energy is at least as pressing a problem as how to make new projects economically viable.

• Public-private partnerships urgently need to address the credit gap.

Slide 9

Commodity Price Risk: What is the Value of Carbon Credits?2012

2011

2010

2009

2008

2007

2006

2005

Decem

ber - 2004

Novem

ber - 2004

October - 2004

Septem

ber - 2004

August - 2004

July - 2004

June - 2004

May - 2004

April - 2004

0

5

10

15

20

25

30

35

40

45

50

Allo

wa

nc

e C

os

t (€

/tC

O2

)

Market PricesProjected

CBM Price ProjectionsCurrent Phase I Phase II

50

%ile Range

90

%ile Range

Source: Enviros Consulting EU ETS Price Forecast

Slide 10

Can We Expect Bank Credit Committees to Understand This?

Demand for Allowances

Supply of Allowances

Sector Surplus or Shortfall

Allowance Prices

Traded Volumes

Baseline Emissions

Phase I Allocations

Phase II Allocations

Allowance Allocation

Historical Emissions Data

Technological Uptake Forecasts

ProductionForecasts

CO2 Emission

Projections

Sector Cost Abatement Curves

Fuel Price Forecasts

JI/CDM Cost Abatement Curves

Banking and

Borrowing

Weather

Economic Growth

Future development

Slide 11

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

13/02/2002 04/04/2002 24/05/2002 13/07/2002 01/09/2002 21/10/2002 10/12/2002 29/01/2003

Looking Back: UK ETS Price Activity

What sets the price when supply and demand are artificial?

Source: TFS, ICAP

2002 vintage

2003 vintage

Today’s price ~

£2.00/tonne

Slide 12

Case Study: Durban, South Africa

• eThekwini Municipality (Durban) in South Africa is developing a 10 MW landfill gas-to-electricity project on three landfill sites.

• Recently signed an Emissions for the sale of $15 million in CDM carbon credits to the World Bank Prototype Carbon Fund.

• An innovative project in many respects: One of very few independent power producers in South Africa, multi-site landfill gas collection system, and the project involves the largest waste transfer facility in Southern Africa.

• No legally binding power purchase agreement (PPA)

• Funded from the Municipal Balance Sheet – City of Durban was able to access low cost funds due to low inflation and very strong credit profile.

Slide 13

• How do we create more successes like this?

• Is there a role for lease financing to reduce capital expenditure?

• Can these projects gain debt financing from private financial institutions?

• How can you access large-scale private sector debt investments?