Public Private Partnerships in the Baltics and EuropeVilnius, 22-23 November 2006

I. The Energy Sector in the Baltics

3. Renewable Energy Transactions in Europe

Thomas WexlerPartner, Projects GroupBerwin Leighton Paisner LLP, London

Vilnius, 23 November 2006

[5442230]

Renewable energy: necessity or luxury?

Global demand for energy is increasingTraditional energy sources (fossil fuels)– Decline in resources – Dependence on imports– Volatility of exporting regions such as the Middle East and

Russia

Impact of fossil fuels on environment– Increase in green-house emissions lead to international

action via the Kyoto Protocol and successor treaties– Increase in extreme weather conditions– Financial and economic consequences (as well as human

consequences)

Renewable energy: part of the solution

Renewable Energy Sources (RES)– Solar

– Wind

– Hydro

– Biomass

– Geothermal

– Wave/Tidal

Possible use of RES– Heating

• Solar thermal• Geothermal• Biomass

– Electricity• Solar PV• Hydro• Wind (on/off-shore)• Wave/tidal

– Fuel• Biofuels

Renewable energy: already in use today

Approximate share of RES in energy consumption:– Latvia (35%), Sweden (30%), Finland (24%), Austria (20%)

Approximate share of RES in electrical consumption:– Austria (78%), Latvia (50%), Sweden (46%), Slovenia (30%)

Germany: leading photovoltaic market in the world, delivering over 400MWp to the gridHungary: largest user of medium and low temperature geothermal energy in Europe

Source: Figures for 2004 taken from “2005 European Barometer of Renewable Energies” by EurObserv’ER

Renewable energy: key characteristics

Renewable energy projects – Smaller in scale than traditional energy projects– Geographic variations depending on local resources– Local generation

Technologies– Smarter and more efficient technologies– Investment costs have fallen

Regulatory environment– National support/incentives for certain technologies– Mandatory national/international targets impact on market for renewables

Off-take market– Certainty of demand – Products:

• energy/electricity• regulatory certificates and levy exemption certificates

– Emissions trading market

Renewable energy: project financing a renewables project

Renewable energy projects:– Various factors provide for a degree of uncertainty:

• regulatory environment (permits, subsidies)• market for product• intermittent / uncertain “feedstock”• new technologies

In a project financing context: uncertainty means risk and risk needs to be allocated

Project financing: renewable energy off-take agreements

Scope and content of off-take agreements vary depending on RESTerm– Creativity may be needed to achieve a financeable term

Off-take profile– Flexibility needed to reflect volatility of feedstock supply

Incorporate regulatory incentives to maximise revenue– Regulatory certificates and levy exemption certificates– Certificates issued under Emissions Trading regime– Financial benefits obtained under balancing/connection codes

Assessing the value of additional incentives and benefits

Project financing: construction contract

Construction agreements– Generic issues

• availability of suitable contractors prepared to work on a lump sum turn key basis

• liability for completion of construction work• long-term warranties from turbine suppliers

– Technology issues• market for licensed technology• interface issues between EPC contractors and licensors

Project financing: feedstock and financing

Feedstock supply agreements– Terms of supply agreements vary significantly– Use of framework supply agreements

Financing Agreements– Debt/equity ratios vary significantly– Security package

• direct agreement• assigning rights under contracts to lenders

Project financing: other issues

Licensing and planning requirements– Onerous licensing requirements can impact on

construction and operation– Complex and lengthy planning process

• impact on the scope to develop renewable energy projects

Compliance with environmental law: allocation of responsibility

Project financing renewable energy projects: conclusion

Renewable energy projects are set to increase

Project financing will increasingly be used for renewable energy projects

Understand the characteristics and “uncertainties” of each project

Creativity needed to manage the “uncertainties” in a project financing context

Vilnius, 23 November 20063. Renewable Energy Transactions in Europe

Thomas WexlerPartner, Projects Group

t: +44 (0)20 7760 4650e: thomas.wexler@blplaw.com

Berwin Leighton Paisner LLPAdelaide HouseLondon BridgeLondon EC4R 9HA

t: +44 (0)20 7760 1000f: +44 (0)20 7760 1111 www.blplaw.com