David Markey, Akin Gump and Thomas P Byrne, True Green Capital Management, LLC
December 28, 2012 | 2 Comments
In January 2012, Uganda implemented a 20-year technology-based FiT. It ranges from $0.07/kWh (hydro) to $0.64/kWh (small-scale solar PV), and also includes wind, geothermal, landfill gas and biomass.
While just a sample of the policy developments in emerging markets, these examples point to a future where the deployment of renewable energy broadens and the competition for investment increases. However, although the statistics appear to make attractive reading for potential investors, they will need to be convinced that the additional risks of investing in those markets can be effectively mitigated and that projected returns justify the enhanced risk.
Political and Policy Stability
The dynamic events in the Middle East in 2011 remind us that a country's political landscape must be well understood. Political swings can bring renewable energy projects, and supporting policies, to a halt. They could lead to the nationalisation of a project or company, or discriminatory treatment. Civil strife could endanger workers on the project. Short of these more dramatic risks, politics also touches offtake and transmission arrangements.
The 73 MW Changwat Lop Buri project in Thailand was recently brought online by a syndicate of lenders to which the Asian Development Bank contributed US$70 million. (ADB)
Policy stability must also be considered. Will a change in leadership compromise a nation's renewable energy policy? Investors may be attracted to new incentive schemes, but a change of leadership could quickly reverse these incentives. Of course this risk is not limited to developing countries, as evidenced by the retroactive reduction in European FiTs and the lack of consistent policy in the US. But investors may consider it a greater risk where they are less familiar with a nation's politics.
Investors may be able to mitigate political risk by purchasing political risk insurance. However, they will need to consider what risks remain and factor in the additional cost of premiums.
Creditworthy and Reliable Offtakers
Another risk factor in developing countries is the quality of offtakers. Renewable energy projects usually generate most of their revenue from a long-term PPA. In emerging markets even state-owned entities may not be creditworthy. Investors will want adequate assurances that the offtaker can pay for power over the term of the contract.
Even with these assurances, there remains the risk that the offtaker will, at some point in the future, lose its appetite for higher cost renewable energy, particularly when it is buying it from a foreign-owned entity. Foreign investors will want to protect themselves against early termination of their power contracts. Even then, contractual protections are only as strong as the institutions that enforce them.
Investors also need to ensure that their projects can obtain cost-effective grid access. While most developed countries have clear regulatory frameworks that allocate costs of transmission upgrades, developing countries tend to be more confusing. Since transmission and interconnection are typically long lead items in the development process, investors should learn this process early. Transmission cost allocations - together with the challenges of land acquisition and permitting needed for transmission in a foreign jurisdiction - could make an investment unworkable.
Land Development and Permitting Risks
Since large-scale renewable energy projects cover huge swathes of land, property ownership is fundamental. Some countries may prohibit foreign ownership of property, while others may place restrictions on it. It can also be hard to determine land ownership, which could lead to time-consuming processes, including protracted legal challenges.
General Business Risk Factors
Investors will need to consider general foreign business risk when investing in developing countries. There may be barriers to investment, including laws which prevent or restrict foreign ownership of certain assets classes, such as land or energy generation assets, or at least require a percentage of domestic ownership. Some countries restrict even passive foreign investment, or attach so much red tape that investment is less desirable. Understanding the regulatory framework of a nation is a prerequisite to investing there.
The 140 MW Tangiers I Dhar Saadane facility in Morocco. (GREENPEACE/MARKEL REDONDO)
Investors will also need to determine the cost and process of repatriating their investment returns and to assess currency risk over the life of their investment. They will also need to carefully consider the most favourable tax structure to minimise adverse tax consequences from investing in an unfamiliar jurisdiction.
US-based investors and companies listed in the US will need to consider the impacts of the Foreign Corrupt Practices Act. This establishes anti-bribery and accounting practices those investors will need to adhere to.
Another topical consideration is the integrity of the country's sovereign debt. Recent history has shown that even seemingly strong economies can experience difficult times with their sovereign debt. Investors will want to get comfortable that their investment will not be wiped out by a sovereign debt default and will need to bear in mind that emerging markets may not be immune from the economic troubles that have plagued developed countries in recent years.
Financing Projects in Emerging Markets
Despite these risks, some emerging economies and projects have already shown they are strong enough to attract private investment. For example, the UAE's flagship project in western Abu Dhabi, the Shams I CSP plant, recently financed its first 100 MW phase. The $600 million project brought together Total, Masdar and Abengoa as sponsors, with 22-year debt financing from 10 private banks.
Fintech Energy invested in Emgasud, the winner of numerous contracts under the Argentine government's power contract tender programme, Genren. Emgasud recently closed financing on a 5 MW solar facility, and last year closed a bond financing for an 80 MW wind farm totalling $157 million.
Multilateral Banks and Public Finance
Since there is a higher perceived risk, many projects will benefit from the support of multilateral banks and public finance entities, including export credit agencies, World Bank institutions, the Asian Development Bank and other similar entities. These institutions often provide the support needed to push projects through financing, and there is evidence that they are taking note of the push toward renewables.
The Brazilian Economic Development Bank has provided a significant portion of the debt financing for renewable energy projects in Brazil, while the Vietnam Development Bank secured a $1 billion loan from the Export-Import Bank of the US, which will also act as guarantor, for four wind projects that will deploy GE wind turbines. The 73 MW Changwat Lop Buri project in Thailand recently became operational, assisted by a syndicate of lenders and $70 million from the Asian Development Bank.
Nordex recently inked 250 MW of turbine supply contracts for Pakistani wind farms. The Pakistani government is providing financing guarantees to ensure that projects are carried through construction.
In November 2011, the US Export-Import Bank awarded $103.2 million in loans for two solar PV projects being developed in India using PV modules from US companies First Solar and SolarWorld.
While emerging markets introduce new risks and challenges to Western developers and investors, they also offer vast opportunities. With policies incentivising renewable energy and money following close behind, while uncertainty looms in certain Western markets, now may be the perfect time for investors and developers to position themselves in these new markets.
David Markey is counsel at Akin Gump. Thomas P Byrne is director and counsel at True Green Capital Management, LLC.
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