MAY2011

MarkCrandall
ContinentalWindPartners
25May2011
EnergyCommunityInvestmentChallenges:FightingClimateChangeConference
Vienna,Austria
MAY2011 PAGE2
COMPANYINTRODUCTION
CWP develops
projects in Europe
and Australia
Mark Crandall is
CWPs founder and
major investor
CWPMarkets
Poland 600MW
Romania 610MW
Bulgaria 400MW
Serbia 300MW
Australia 3,000MW
PL
RO
BG
HR
AU
SR
NZ
CONTINENTALWINDPARTNERS(CWP)
CWPsabilitytoidentifypromisingmarketsandtospreadriskacrossgeographiesallowsittoentermarketsearly,to
selectthebestlocalpartnersandtosecureaccesstositeswiththebestwindresourcesandgridconnections
CWPinitiallytargetedEUaccessioncountriesPolandandRomania,whichpresentedanoptimalmixofthesefactors,
andsubsequentlyenteredAustraliawithastronglocalpartner
CWP has more recently entered promising new markets such as Bulgaria and Serbia, and is continually evaluating
additionalmarketswithstrongpotential
MARKCRANDALL
MarkestablishedtheCompanyin2007andcurrentlyisCWPsChairman.MarkhasrecentlymovedtoBelgrade
BeforethatMarkhadacareerinenergy trading at Morgan Stanley, Glencore and finally as one of the founders of
Trafigura
MAY2011 PAGE3
WHYDEVELOPLARGESCALEWIND?
CWPfocusesonprojectsabove100MW,andtheaveragesizeismorethan200MW
EconomiesofScale lowerdevelopmentcostperMW
Lowercostsforenvironmentalmonitoringandotheressentialstudies
Largerbudgetallowsformorespecialistsandconsequentlybettersuccessrate
Larger budget allows us to follow international standards for preparing environmental
assessments (Equator Principles) even if these are more rigorous than local country
requirements
Largescalewindfarmsarebigenoughtomovetheneedle forlargebanksandlargeinvestors,
so we believe it is easier to attract both international debt and international equity finance to
largeprojects,somethingwhichisinherentlydifficultinsmallerscaleprojects,whetherofwind,
solar,orbiomass
EUROPESLARGESTWINDFARM FANTANELEINROMANIA
MAY2011 PAGE4
MUCHTALK,LITTLEBUILDING
Bulgaria
Romania
Serbia
Macedonia
Albania
Croatia
Bosniaand
Hercegovina
Montenegro
Alpiq 50MW
AES 156MW
CEZ 300MW
EDP 90+30MW
Note:Slidereferstoinstalledcapacitygreaterthan50MW
MAY2011 PAGE5
SOUTHEASTERNEUROPE
LARGEOPERATINGWIND
Romania
PesteraandCernavoda 90+30MW(EDP) BalanceSheetFinancing*
Fantanele 300MW(CEZ) BalanceSheetFinancing
Bulgaria
Suvorovo 60MW(EolicaBulgaria) ProjectFinancing(EBRD,BSTDBandUniCredit)
Kazanlak 50MW(Alpiq) BalanceSheetFinancing
St.Nikolai 156MW(AES) ProjectFinancing(EBRD,IFC)
No large wind in Serbia, Croatia, Albania, Macedonia, Montenegro, Ukraine and Bosnia and
Herzegovina
*EBRDandIFCfinancedpartofthecostsafterconstructionbegan
MAY2011 PAGE6
PRACTICALCHALLENGESTODEVELOPINGLARGESCALEWINDPROJECTS
Large wind farms
are harder and
riskier to develop.
Goodgridaccessiscomplicated oneneedstofindalocationthat
hasacombinationofgoodwindandtheabilitytoconnectalarge
scale wind farm to the local grid, objectives which are often in
conflict
Debt will be provided by international lenders so development
must follow (expensive) international standards; the size of the
projects is usually larger than the local banking markets can
handle so international banks and international best practice is
inevitable
Regulatory regime must be very robust and enforceable, as
international banks with less familiarity with local country
conditionsaretheactorsdecidingwhethertolend noholes in
theregulatoryregimecanbeallowed
Grid connection cost is high, because of the need to connect at
high voltage, offsetting some of the economies of scale of large
scaleversussmallscaledevelopment
Environmental impact is inherently larger, so environmental
permitting requires much greater resource than for smaller
projects
Permitting uncertainty exists because of lack of experience in
windfarmdevelopment
MAY2011 PAGE7
DO THE BALKAN COUNTRIES REALLY WANT LARGE SCALE IMPLEMENTATION OF RENEWABLE
ENERGY?ORARETHEYJUSTGOINGTHROUGHTHEMOTIONS TOSATISFYTHEEUAGENDA?
Renewableslook expensive,thoughtheyusuallyarenotasexpensiveastheycan look,ifoneadopts
alongtermprospective,whichpoliticiansoftendonot:
Gridstrengtheningcosts
Costoffeedintariffs/subsidyregimes
Balancingcosts
Currentlywholesalepowerpricesareartificiallylow,sorenewableslookevenmoreexpensivefrom
ashorttermperspective
Future wholesale power prices likely to be much higher because of natural convergence of
wholesale prices to European levels, because of higher hydrocarbon prices, and because of
highercarbontaxation.Throughthisevolutiontheprice of wind will remain fixed, meaning the
relativecostofwindenergycomparedtoconventionalsourceswillfall
In the richer parts of Europe, the cost of renewables is easier to accept as the countries can better
affordtosubsidizethem.Neitherthegridstrengtheningcostsnorthesubsidiesrepresentsucha
largeburdentothepopulation
GOVERNMENTCHALLENGESTOLARGESCALERENEWABLEPROJECTS THEPROBLEM
MAY2011 PAGE8
Changesintariffsortariffreviewmechanismswhichincreaseuncertainty(e.g.Bulgaria)
Limitationsonavailabilityofsupportregimewhichincreaseuncertainty(e.g.Serbia)
Grid access used as gating mechanism to slow down renewable development (e.g. Bulgaria,
Croatia,andRomania)
NonEurodenominatedsupportregimes(e.g.Croatia,Bulgaria)
All these problems essentially arise from a government desire not to overshoot renewables
targetsorconsumetoomuchmoneyonsupportregimes
GOVERNMENTCHALLENGESTOLARGESCALERENEWABLEPROJECTS
THECONSEQUENCES
MAY2011 PAGE9
MANAGINGTARIFFS
Governmentsneedtomanagetariffstobalanceencouragingrenewableswithmanagingcosts
Technologyshiftscanlowercost(e.g.solar)andthereforejustifytariffreduction
Inthecaseofwind,technologyisimprovingbutbettersitesgetbuiltfirstleavingthelesswindy
forlatesttechnology
The advantages of changing tariffs to meet new conditions have to be balanced against the
disadvantagesofmakingtheenvironmentlesspredictableandimpossiblefordeveloperstoplan
forthefuture
MAY2011 PAGE10
BULGARIACASESTUDY LAWOFUNINTENDEDCONSEQUENCES
WHYBULGARIACHANGEDITSTARIFFSTRUCTURE?
Thecountrywouldhavefinishedwithmuchmoresolarandtoolittlewind
Changingsolartechnologymadeoriginaltariffsunbearable
Our calculation is that the change in the solar tariff has decreased the solar capacity from around
1000MWto200MW
Undertheprevioustariffregimesolarwasoverencouraged,biomasswasunderencouragedand
windwasneutral
Had Bulgaria stuck with the old tariff it would have ended up paying, within two years, about
340millionperyeartosubsidizesolar clearlyunsustainableforacountryof7millionpeople
Andnow, with the new tariff, it will save this crushing solar cost, but probably will not develop
morewind,thecheapestrenewabletechnologyforthepublic,asithasmadeituneconomic
The saved 800MW of solar, even with the new tariff, would cost budget circa 165 million,
whiletheequivalentamountofwindgeneratedpowerwouldcostthebudget35million
Currently wind is completely stopped because of general uncertainty, the tariff setting
mechanismsetpostconstruction(impossibletofinance)andtariffbeingtoolow
MAY2011 PAGE11
Thefeedintariffisthepreferredsystemwhenlookingforoutsidedebtfinancing
OthercountriesthathavefeedintariffinSEEareMacedonia,Ukraine,BosniaandHerzegovina
Countries without feedin tariffs use a certificate based system to incentivize renewable
production
FEEDINTARIFFS
Feed-In tariffs are
the most successful
way to boost
renewables.
WindEnergyFeed InTariffs
Country Tariff(/MWh) Tenor(Years) InflationIndexed
Bulgaria new 96
1
12 No
Bulgaria old 96
1
15 Yes
Croatia 99
2
12 Yes
Serbia 95
3
12 No
1
TariffisinBulgarianLevwithEUinflationwhenapplicable
2
TariffandInflationrelatedtoCroatianKuna
3
TariffinEUR
4
LevelizedTariffinEURfor12yearsbasedontheGCsystemexpectations
5
LevelizedTariffinEURfor15yearsbasedontheGCsystemexpectations
WindEnergyCertificateBasedPrice
Country EstimatedPrice(/MWh) Tenor(Years)
Poland 123
4
15
Romania realistic 117
5
15
Romania optimistic 131
5
15
MAY2011 PAGE12
ROMANIA GREENCERTIFICATES
Romania is the
country with
working GC quota
system. However,
there are a lot of
adjustments
needed if large
wind projects are
to be project
financed.
Romania is the only country in SEE where the quota system (based on Green Certificates) has
been established. Other countries with similar regulatory framework in the EU include UK and
Poland
The system requires all suppliers of electricity to show that part of the electricity delivered is
from renewable sources. To do that they have to purchase Green Certificates (GC) on a
specializedmarket
ThepriceoftheGCisbetween2755/GCplusinflationwithwindcurrentlyreceiving1GC but
expectedtostartgettinga2
nd
soon(newlegislationstillnotcompleted)
Thepromotionschemeisfor15yearswith2GCforwinduntil2017and1GCafterwards
Thereareseveralmajorissueswiththelegislation
If there is excess of GC (GCs over the quota for the year) the Government does not
guaranteetherewillpurchasersfortheadditionalcerts
Thepromised2
nd
GChasnotyetarrivedinactualsecondarylegislation
The quota is adjusted each year based on the renewable energy produced so no real
marketincentivesexisttoencouragedevelopmentofrenewables
Missingtransparencyandmethodologyonhowthelegislationmaychangeinthefuture
NolongtermPPAsavailablewhichmakesprojectfinancingimpossible
Investors perceive a lot more risk in the GC system, which makes financing projects more
difficultforthesmallerplayersonthemarket
MAY2011 PAGE13
WHOARETHEWINNERSANDWHOARETHELOSERS?
EQUATIONWITHMANYMOVINGPARTS
Keep in mind that countries may not want to be winners here because they may not want any
morethanbareminimumofrenewablesinplace
Capitalisinternational soitwillflowtothebestreturns
Absolute returns are not definitive varying perceptions of country risk, currency risk, and
corporate or fund investment guidelines (EU vs nonEU, Euro vs nonEuro) can make countries
withseeminglyhigherabsoluteinvestmentreturnsattractlesscapital
PAGE14 MAY2011
ASSUMPTIONS HYPOTHETICALWINDFARMWITHOUTACOUNTRY
ProjectAssumptions
Capacityfactor
Gross 32%
Power MW 250 Guaranteedavailability 96%
Annualhoursofoperation hours/year 2,296 Internalcablelosses 3%
Electricityproduced MWh 573,955 Net 30%
CPI % 2.0%
Incometaxrate % 20% CAPEX
CAPEX 1000/MW 1,580 Turbineprice(/MW) 1,100,000
OPEX /MW 43,000 BOPcost,noconnection(/MW) 200,000
Depreciationrate % 5% Connectioncost 30,000,000
FinancingonFC Bankfees 10,000,000
Leverage % 70% Others 30,000,000
Term years 10 Total(/MW) 1,580,000
LIBOR % 4.0%
SpreadoverLIBOR % 4.0% OPEX
DSRArequirement* %ofannualdebtservice 50.0% O&M(/MW) 25,000
VATrateforlocalconstructionworks % 18.0% landlease/municipaltax(%ofrevenues) 5,000
VATwithholdingperiod years(full) 1 Insurance(/MW) 6,000
Developmentcosts 1,000 5,000 Others(/MW) 7,000
Developerpremium 1,000 5,000 Total(year1) 43,000
*levered
Note:Withblueinputstothemodel
MAY2011 PAGE15
HYPOTHETICALPROJECTS RESULTS
Capacity
Factor
TaxRate LevelizedTariff LevelizedPrice EquityIRR
Romania realistic 30% 16% 117 115 17.60%
Romania optimistic 30% 16% 131 128 22.03%
Poland 27% 19% 123 120 17.63%
Serbia 30% 10% 95 94 11.10%
Bulgaria new 30% 10% 96 94 11.37%
Bulgaria old 30% 10% 107 106 15.37%
Croatia 26% 20% 112 109 10.58%
SOWHEREWILLTHESMARTMONEYGO?
WillanybodyinvestinBulgariawiththenewtariffsinplace?
WilltheansweronBulgariachangeifBulgariajoinstheEurozone?
Will anybody invest in Serbia, a nonEU country, when apparently considerably better returns
are available in Romania, which is an EU country, especially since there has never been direct
foreign investment in Serbias energy sector before? Would anybody invest in Serbia when
returnsarejustmarginallyaboveCroatia's,whenCroatiaisabouttojointheEUandisperceived
asmuchmorestable?
Is Croatia, as a soontoaccede country, a sufficiently better risk than Serbia or Bulgaria to
attractinvestmentdespiteapparentlylowerratesofreturn?
From the table, is it any surprise that seemingly every major European utility wants to build
wind farms in Poland? Will the Balkan countries be able to attract investment with Poland as
competition?
MarkCrandall
mark.crandall@postscriptum.com
+44(20)74095409(London)
+381(1)13284425(Belgrade)