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Sector REPORT

11 November 2016

Renewable Energy
Ownership Strategies

Table of contents

1 Executive summary ............................................................................................................................................................................... 3

2 Metrics that influence the energy world ............................................................................................................................................... 5

3 Megatrends in energy ............................................................................................................................................................................ 6

4 Macro environment .............................................................................................................................................................................. 16

5 Asset owner financial analysis............................................................................................................................................................ 19

6 Transaction multiple analysis ............................................................................................................................................................. 31

7 Financing and cost of capital .............................................................................................................................................................. 34

8 New business models .......................................................................................................................................................................... 37

9 Market screening scorecard ................................................................................................................................................................ 48

10 Target IRR table.................................................................................................................................................................................... 51

Renewable Energy Ownership Strategies

11 November 2016 2

1 Executive summary

Renewable asset owners saw some interesting thematic developments in 2015 and 2016. The most drastic impact came from
low wholesale power prices across key markets such as Germany, France, Denmark and the US. Brown energy based power
generators that were locked into supply agreements for coal and gas saw their margins evaporate. Essentially, their revenue
streams were exposed to the market (spot power prices) and their supply costs were fixed over the short-run. The reduction in
wholesale power prices came from further renewables penetration – as it has been observed over the past decade, as well as
low (or negative) power consumption growth. Even though several power generators had hedged their revenue streams using
financial instruments, these hedges were short-dated. As the hedges rolled off, market conditions further exacerbated the finan-
cial problems of predominantly coal and gas based power generators. This, in effect, led to a significant deterioration of the bal-
ance sheet conditions and capital market availability for these companies. During the same window, the owners of renewable
energy assets – typically with fixed PPAs and FITs– emerged as winners, since they were protected to a certain extent from
spot power price reductions.

From a macro standpoint, experts who claim to have forecasted the last recession are continuing to call a China hard landing
and predicting oncoming tumult in capital markets in 2016 and in 2017. The data reveals that the macro environment is still one
of low rates, FX volatility and equity markets going sideways. This means that renewable asset owners should continue to ex-
plore opportunities to refinance their debt capital stack and should build natural hedges on the demand side. For instance,
power generation assets should be held in multiple countries, providing a hedge against systemic changes such as Brexit.

From a financial health standpoint, a look through the ongoing wave of asset impairments and the increasing amount of lever-
age reassures us that asset owners, predominantly those in brown energy, will not have the capability to expand their renewa-
ble asset portfolios easily. Several are already in the risk zone (i.e., significantly overleveraged and having difficulties raising
capital due to poor credit quality). In Europe, firms such as RWE and EON have been forced to cough up billions in cash escrow
accounts to pay for nuclear clean-up costs. In the US, renewable asset owners such as NRG have been forced to bear environ-
mental costs as imposed by the EPA. US utilities are also facing the systemic threat of declining levels of Return on equity
(ROE) as awarded by the rate case commissions. MAKE expects this deteriorating balance sheet trend to continue for primarily
brown energy generators.

Nonetheless, all hope for struggling asset owners is not lost. Capital rotation is being adopted by utilities and IPPs as a strategy
to grow renewable energy asset portfolios. MAKE tracked close to 60 billion USD in M&A activity (2015-2016 YTD) and esti-
mated the multiples paid by counterparties for asset investments and divestments. As more financial asset owners such as pen-
sion funds and private equity funds enter the market in the ‘chase for yield’, MAKE sees this as a positive development for the
industry. Financial asset owners are mostly interested in minority asset purchases, as they only seek cash yields, and IPPs and
utilities are only interested in minority sales due to a desire to maintain control. MAKE expects deal activity to grow in the renew-
ables segment, and further growth in ownership of private capital (e.g., private equity funds and infrastructure funds).

Emerging markets – thematically – continue to be a topic impossible to ignore. Several emerging countries in Southeast Asia
and Africa will exhibit power consumption growth to the tune of approximately 10x current levels over the next few decades.
However, entering such markets requires an understanding of their unique challenges and nuances. There is no clear cut an-
swer as to who is more likely to be first to take action (local developers, global utilities or IPPs). It mostly comes down to inves-
tor expectations. If global renewable asset owners want to grow their portfolios they will need to enter emerging markets in one
form or another. Thus the choice becomes mostly between low or no growth vs. growth at lower margins (i.e., lower IRR over
WACC spreads) and in higher risk environments.

The growth of solar power is also proving to be an interesting development in the renewable energy industry. However, the
choice between solar and wind is not a trivial one. The return profiles of solar assets are significantly different than those of wind
assets. Typically, the leverage levels offered are higher due to lower complexity and shorter construction times of projects.
MAKE estimates that IRR spreads of 200-300 bps over WACC is what most asset owners should expect, which is significantly
lower than that for wind (at 600-700 bps). As a result, the decision to grow for many asset owners will lead to lower blended re-
turn levels – which requires explanation to shareholders.

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Renewable Energy Ownership Strategies
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Another topic that is important for renewable asset owners is the ageing fleet of assets. Northern Europe has the oldest fleet of
wind and solar assets, which can provide interesting opportunities. Asset owners need to consider the decision to either re-
power their assets or retrofit them. There are many variables to consider, since the NPV profile is different under both scenarios.
Relevant to this, asset owners also need to consider decisions related to choosing the O&M service provider for their fleets. As
fleets age, the probability of unscheduled maintenance goes up, which is significantly more expensive than scheduled mainte-
nance. As highlighted in MAKE’s O&M report, – renewable asset owners are expected to try to develop in-house capabilities in
the O&M segment in order to reduce OPEX costs and to prevent turbine OEMs from keeping all maintenance knowledge to
themselves. This development might pose a threat to turbine and solar OEMs, who provide service contracts. Niche and spe-
cialized service providers will continue to play an important role in the offshore wind sector.

An additional trend that is becoming evident is that declining power consumption growth might reverse with the oncoming wave
of use of the Electric Vehicles (EV). For decades, the International Energy Association has been projecting reduced and nega-
tive power consumption growth in developed markets – attributable to energy efficiency – but this might change over the next 5-
10 years. As vehicles migrate from liquid fuel consumption to power consumption, power generators might have the opportunity
to build new power plants for growth instead of focusing on the decommissioning of existing assets.

There was an abundance of new business model development over the 2015-2016 timeframe. Most prominently, the Yieldco
market crashed due to investor pessimism as well as a lack of understanding of the vehicle. MAKE believes that Yieldcos are
not broken. Rather, it is their growth component that doesn’t make sense. Yieldco issuers overpromised the deliverables of this
new investment vehicle in 2015, but MAKE expects that Yieldcos will continue to exist over the long-term, albeit, with more real-
istic expectations.

Load intermittency is also an ongoing development in many markets. As renewable penetration increases, utilities are struggling
to deal with additional load volatility. Utilities are experimenting with virtual power plant models, in which batteries are bundled
with solar and wind to create load shift to off-peak hours. Battery costs need to come down significantly for this business model
to gain mainstream popularity.

There is no doubt that the renewable landscape is going to continue to evolve over the next decade. Renewable asset owners
have a plethora of tools available to put to work for them, but growth will come at lower IRR levels. As more markets achieve
grid parity, regardless of the current low power price environment, MAKE expects the thematic development of decarbonisation
to continue and renewable energy capacity (wind and solar) to continue to grow globally over the next decade.

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Renewable Energy Ownership Strategies
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2 Metrics that influence the energy world

Figure 1. The world in 2010 vs. 2015 (1/2) Figure 2. The world in 2010 vs. 2015 (2/2)

2010 2015 % Change 2010 2015 % Change

Cost of commodities Global climate metrics

Brent Oil (USD/bbl) 91.8 37.7 -58.9% HDD (days) 4,471 4,592 2.7%

Iron Ore (USD/MT) 168.5 39.6 -76.5% CDD (days) 1,445 1,277 -11.6%

German natural gas 8.7 5.8 -33.3% CO2 emissions (billion-tons) 32.35 33.51 3.6%
(USD/mmbtu)
Air particles (micrograms / 14.89 14.00 -6.0%
Japanese LNG (USD/mmbtu) 9.9 10.2 3.0% cubic meters)

Coal (USD/MT) 92.5 56.6 -38.8% Prices of power

Cost of capital US PJM (USD/MWh) 50 46 -8.0%

10-year US treasury (%) 3.38 2.32 -31.4% US ERCOT (USD/MWh) 40 31 -22.5%

10-year German yield (%) 2.28 0.63 -72.4% UK (EUR/MWh) 55 58 5.5%

10-year British yield (%) 3.35 1.96 -41.5% Italy (EUR/MWh) 90 56 -37.8%

BAA corporate spreads (bps) 610 546 -10.5% Germany (EUR/MWh) 60 32 -46.7%

Cost of energy technology Global consumption (TWh)

German turbine prices 1,050 850 -23.5% Nuclear 2,767 2,577 -6.9%
(TEUR)
Solar 33 253 666.7%
Chinese solar module price 1.6 0.53 -66.9%
(USD) Wind 341 841 146.6%
Cost to frack a shale well 7.5 7.5 0.0% Hydro 3,465 3,946 13.9%
(million USD/well)
Biomass 400 518 29.5%
Market price of blockchain 0 429 N/A
(USD) Capital markets
Cost of labour World market capitalization 39.3 47.9 21.9%
(trillion USD)
Germany labor cost index 95 107 12.6%
(Index begins 1996) Emerging market 12.0 13.7 14.2%
Capitalization (trillion USD)
Chinese average yearly 30,700 55,324 80.2%
wages in manufacturing Investments in energy with private participation
(CNY/year)
Latin America 15.45 5.53 -64.2%
Currency wars
South Asia 38.86 1.02 -97.4%
EUR/USD 1.3 1.1 -15.4%
East Asia & Pacific 1.24 0.16 -87.1%
GBP/USD 1.56 1.48 -5.1%
RMB/USD 0.14 0.15 7.1%
INR/USD 0.021 0.015 -28.6%

Note: LNG = Liquefied natural gas; shale frack point represents Eagle Ford. Note: HDD = heating degree days, CDD = cooling degree days. Data is as of
Data is as of last day in month or last recorded point. Bps = basis point last day in month or last recorded point.
Source: MAKE, BP statistical review, NYU – Damodaran, EIA, IMF, World Source: MAKE, EPA, NOAA, BP statistical review, EROT, NYISO, PJM, EC
Bank, OECD, PV Insights, PV Exchange, FRED, BEA, EUROBOR, ECB, EU, IEA, IMF, World Bank, World Federation of Exchanges, Quandl
Blockchain.info, ILO, Quandl

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Renewable Energy Ownership Strategies
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However. Aus. prices exhibit a 18 120 high degree of correlation 16 Commodity exporting nations such as the US. they are having to re-invent how to 60 8 manage their budgets and prevent their currencies from fall- 40 6 ing into steep declines. Europe Coal. but what can be observed is that coal and natural gas 20 India prices have exhibited a strong correlation with oil. US tions. Global refinery output As gas further penetrated the energy mix over the past dec- ade and renewables exhibited unprecedented cost reduc. Cheap oil and gas prices have fundamentally challenged not only the business models of many oil & gas E&P firms. Furthermore. US commodity price environment. Fore- casters are challenged by a ‘new normal. Other Asia Pacific 0 eration asset owners and not oil itself. and MAKE doesn’t 140 20 Base commodity expect that to change in 2016-2017. but production efforts have not been pared back by any means. but history confirms that the global economy has still not recov. 4 20 2 Commodity markets have gone through boom and bust eras 0 0 several times over the past 50 years. Figure 4.’ defined as a low Crude oil. Japan 10 it is low coal and natural gas prices that impacted power gen. as FX reserves 10 run dry in these markets. South Afican Liquefied natural gas. but have put into question the future of what the world might look like from an energy perspective. but not so much for power generation. As per Moody’s. 2000 2005 2010 2014 This low commodity price environment will inhibit growth of Note: bbl = barrels renewable assets in utility portfolios as thermal will continue Source: MAKE. Figure 3. Crude oil is used for many things that we need in 40 Africa day-to-day life. Coal / crude prices (USD) Gas prices (USD) ered from almost a decade of low growth. Therefore. WTI Natural gas. Quandl. Norway and the UAE are still hurting from steep price 12 80 declines through 2015-2016. Brent Natural gas. gas and coal firms. 70 Mexico S. BP. more than 50% of the bankruptcies in 2015 were related to oil. America 60 Europe & Eurasia However. IMF Exploration and production (E&P) firms have scaled back new exploration investments. World Bank. whether it is truly a Crude oil.3 Megatrends in energy Energy markets in a new normal? The current macro environment might seem considerably dif. the global power generation mix tilted away from high Refinery throughput (millions bbl) 80 Canada carbon emitting sources such as coal. Source: MAKE. 11 November 2016 Renewable Energy Ownership Strategies 6 . statistical review to be competitive. However. 30 China ties. 100 14 tralia. but certain relationships 01/2012 01/13 01/14 01/15 01/16 that were deemed to be normal are officially broken. Global commodity prices ferent from previous episodes of economic stagnation. Japan ‘new normal’ cannot be said with certainty. Less Australasia than 5% of global power is generated through oil-fired facili. this was not something that happened overnight. this does not mean that oil refinery output has 50 Middle East slowed. & Cent. Canada.

America Total Africa looking to diversify their Independent Service Provider (ISP) Total Europe & Eurasia Total Asia Pacific list for their renewable assets as well. Several own. Carbon emission trends and gas segment and some price stability in the spot crude market throughout 2016 and first half of 2017. with a tilt towards mov- ing away from wind turbine OEMs as service providers.000 12.0 66. Venezuela Source: MAKE. Europe and Eurasia have seen a three-fold in- crease in natural gas injection volumes – from ~50 billion cubic meters (bcm) to ~150 bcm over the past 10 years. even if prices start to see some up- tick. The world will consume less oil for power generation purposes.In. 16.MAKE also expects further bankruptcies in the distressed oil Figure 5.4 3. Brazil.000 As competition further toughens in the offshore wind services 0 market. BP statistical review Further to the increasing amounts of refinery output.1 3. 7. Commodity price forecast Figure 7. natural gas production volumes have been sky-rocketing as well.6 150 (USD/bbl) 100 Natural gas . gas will continue to be a flexible solution as peaker plants can be turned on and off fairly easily.1 7. Peru. 2016.0 Total Europe & Eurasia Total Asia Pacific export markets (USD/MT) Note: Petroleum price is average of spot prices for Brent in the U. BP.000 ward pressure on oil prices.1 3.3 4. Scotiabank Source: MAKE. Note: Index beginning year = 1965 Source: MAKE.0 3.Australian. & Cent.0 50. This is not a bad short- 18. Trinidad & Tobago.3 4. Natural gas implied injection volume 2016 2017 2018 2019 2020 2021 (billion cubic meters) Spot crude 44. margins still remain high when compared to regular 1960 ‘70 ‘80 ‘90 ‘00 ‘10 20e onshore wind and solar maintenance services. Several firms will trans. One of the 10. 4.US. DB. America Total Africa Coal .3 4. Chile.4 56. Total North America Total Middle East ers of power generation assets (large utilities and IPP’s) are Total S.3 4. the amount of natural gas that is being kept in storage has increased significantly in key markets. albeit with some modifications. but were plugged due to high break-even price levels) might be brought back online.000 decades of experience these firms have in offshore field op- 6. MAKE expects gas prices to stay around 3-4 USD/mmbtu over the next few years. OECD.000 erations can be transferred to the offshore wind power mar- ket.3 4. there exists enough storage volume to keep gas prices at current levels.3 7. 2.0 3. 14. Thus. 2. The 8.000 term strategy. This can be C02 emissions attributed to the fact that many oil producers are waiting for (tonnes of carbon) smaller participants to go bankrupt. dor. Whether the future is going to be more or less carbon intensive is not something that can be attributed to any single factor or trend. Dubai and Note: South and Central America = Argentina. since it will force several market players to exit.2 decades Henry Hub -200 (USD/mmbtu) Total North America Total Middle East Total S.1 54. & Cent. up.1 7.6 53. 50 many (USD/mmbtu) 0 1965 70 75 80 85 90 95 2000 05 2010 Natural gas .. +109% pushing downward pressure on supply and subsequently.000 All hope is not lost for oil and gas independents.0 66. Statistical Review 11 November 2016 Renewable Energy Ownership Strategies 7 . As prices recover. stranded production assets (assets that were being developed.3 66. Unsurprisingly.3 57.0 66.1 -50 donesian in Ja- pan (LNG) -100 Large gas storage capacity has (USD/mmbtu) created a highly volatile gas -150 environment over the past few Nat gas .000 mute from offshore oil experts into offshore wind amateurs. Figure 6. IMF.000 key transferable skills they possess is human capital. 4. 63.3 68.1 7. Columbia.1 7. forecast as of October 25. Ecua- West Texas Intermediate.3 Russian in Ger.K.

it’s not clear what truly encompasses ‘de. 80 eign agreements will be required to achieve ‘well below’ tar- gets. More asset owners +130% will seek to diversity not only their generation mix. without any focus on energy efficiency and non-CO2 emissions.0 comes to portfolio strategy.0 8. South Asia Each developed country was assigned a target. 60 veloping’. These measures only encompass current In- tended Nationally Determined Contributions. whereas no targets were assigned to developing countries. APAC countries were the largest emitters over the past 5 years. Current Policy Projections 1. Note: OECD = Organization of Economic Cooperation and Development both classified as developing markets. A sovereign-level agreement was agreed upon in December 2015 during COP 21 and includes 4 key pillars (emphasis by MAKE):  GHG emissions will peak as soon as possible and achieve a balance between sources  Global temperature increases will be kept well below 2 degrees Celsius. Even with significant efficiency Business as usual 2C consistent improvements and cutting edge technological progress. but also +47% East Asia their customer and capital allocation mix. there is still a long way to go to cut emissions in 1996 ‘12 ‘28 ‘44 ‘60 ‘76 ‘92 these markets. OECD modity price volatility and systemic risks. Thus. The perhaps purposely vague text is a reminder that only 40 some of the problems in the Kyoto agreement have been ad- dressed.0 2.578% 2000’s COP 21: Mostly hot air? Sub-Saharan Africa 1990’s 1980’s The Kyoto Protocol required reductions of 6 greenhouse gas 1970’s (GHG) emissions by 5% relative to 1990 as a base year. A new wave of population growth may take -20 place in Sub-Saharan Africa. Furthermore. The main focus of the Kyoto Protocol was fossil fuel reductions.0 30. global emissions skyrocketed. High income: newables in order to construct a natural hedge against com. as emissions in India and China.The consensus amongst owners of large global power gener. Power consumption by decade ation assets is that there is no such thing as policy stability when it comes to renewables. World Bank ilar to COP 21. Figure 8. and there is no such thing as a KWh / capita (000’s) predictable commodity price environment. asset owners across the globe are seeking to diversify their portfolio mix to include more re.0 10. went unchecked.5 de- grees Celsius  Progress will be reviewed every 5 years and every country will report on reductions achieved Figure 9.0 4. and what exactly is meant by ‘progress on targets’. and efforts will be pursued to reach 1. Sim. Even though the growth in emissions 0 has slowed. but it never came into full force. the Kyoto agreement was supposed to be legally binding. & Pacific +70% +2. Thus. when it 0. Climate action tracker 11 November 2016 Renewable Energy Ownership Strategies 8 . Note: Pledges are as of the COP 21 agreement during the December 2015 meeting Source: MAKE. Sub. and countries failed to meet their commitments without any consequences.0 6. so further sover. COP 21 pledges: Scenario analysis  100 billion USD financing will be provided annually till 2020 for developing countries (Giga-tonne CO2) There are several open questions in the agreement yet to be 100 answered. Source: MAKE. 20 As an example.5C consistent Saharan Africa is still extremely behind high income OECD Pledges countries in power consumption per capita.

Carbon markets Figure 10. policymakers have been (% of GDP) touting the implementation of carbon trading mechanisms.2 8.g. have close to 100% power supply security. As of July 2016. whereas 12 12 10 10 3 mining operations that need larger amounts of power (e. to ~25. 2% Europe & Central Asia The Market Strategic Reserve mechanism for carbon prices European Union also proved to be ineffective. the kWh/capita consumed has increased every single decade. While solar will grow in the off-grid 40 57 55 segment (along with small-scale micro-grids). Pricing needs to 4. energy use Note: OECD = Organization of Economic Cooperation and Development Emerging markets: An unavoidable theme for Source: MAKE.4 10. Households that need 20 18 power for daily uses will be more suited for solar. Moreover. distributed generation for wind still 100 146 150 requires heavy investment in transmission & distribution infra- 90 structure. 2008 2009 2010 2011 2012 2013 2014 2015 2016e Coal prices (ATW) Emission reduction prices (CER) Note: CER = carbon emission reductions. MAKE remains pessimistic about carbon pricing reaching GDP per unit of those levels over the next 3-5 years. In comparison. 0 0 0 0 0 0 cobalt mining in Congo) are more suited for wind. World Bank. installation of filters). which is typically inadequate in these markets. where most people are not familiar with the concept of regular and scheduled power supply shortages. it can also be said with much assurance that these regions will provide opportunities that others won’t for asset owners in both solar and wind power. which drove down the prices of Carbon Emission Reduction units (CERs) to almost zero. Solar and wind will compete on different plat- 50 70 forms in these markets.6 EUR/MT. power consumption per capita in many emerging countries will in- crease from sub-2000 kWh/capita.8 6. the prices -2% of EUAs have hovered around 5. 8). Quandl. Predominantly coal- using power generators have found it easier to use abate. In addition. (See market assessment table on page 49 for a ranking table of key countries and the IRR section for WACC and target return levels).. high income OECD countries.g.000 kWh/capita over the next few decades. as high income OECD countries passed through decades (as can be seen in Fig. As expected. 122 80 MAKE expects new markets to play a more important role for 70 owners of large power generation assets that are currently 92 93 100 highly concentrated in developed markets with low power de- 60 82 75 mand growth. than to purchase 8% emission reduction permits. Figure 11. ATW = coal prices in Europe Source: MAKE. Value lost due to electrical outages As far as developed markets go. EU ETS 11 November 2016 Renewable Energy Ownership Strategies 9 . Sub-Saharan Africa ment techniques (e. Carbon prices Low rural electrification in South Asia and Sub-Saharan Af- rica will provide opportunities in distributed generation and CER (USD/tonne) ATW (USD/tonne) off-grid solar. World Bank power markets The power market earnings pool (as measured by EBIT) lost due to electrical outages is greater than 5% in East Asia Pacific and Sub-Saharan Africa.8 12. 10% but those have mostly proven ineffective. wind can thrive 50 30 in the captive power market segment. the 900 million tons of 0% surplus European Union Allowances (EUAs) will continue to circulate in the market until 2019. Regardless of efficiency improvements. An 6% Middle East & North Africa important lesson learned along the way was that determining the volume of permits and prices of such instruments is ex- 4% tremely difficult.0 7. Even if all the permits currently East Asia & Pacific High income: OECD in circulation reach optimal pricing.. though the increases were slower every year.0 increase to 30 EUR/MT levels to reach a switching point.

This model is just one of the ways capital can be attracted to such markets. However. India. bubble size represents GDP Source: MAKE. such as the before-mentioned markets. What enhances the business case for solar is the oppor- tunity in countries with low GDP/capita. developers are unlikely to get a foothold in Iran.400 1. The Iranian central bank has made it clear that the Iranian development fund is not exclusively to guarantee PPAs. Solar module costs Figure 13.600 1.800 2. European participants can penetrate the market and gain on- the-ground experience. Without non-recourse debt. PV Trends. Global solar insolation USD/watt GDP/capita (000’s USD) 80 -99% -75% 105 70 90 60 75 50 60 40 45 2016 price = USD ~50 cents/watt 30 30 20 15 10 0 0 600 800 1. Traditional bank lenders are unlikely to fund such initatives unless clear long-term PPAs exist. Pakistan. Iran. Egypt. GEO Solar 11 November 2016 Renewable Energy Ownership Strategies 10 . developers have come up with innovative solutions to tackle this issue. Balance sheet financing for a 100MW project is unlikely to exist with local developers in the region. which doesn’t seem to be the case so far. it might help other asset owners and developers enter the Iranian market. financing remains one of the key challenges for Iran.g. The developer essentially doesn’t make any returns until the projects hits an IRR level of 12% and then makes an incremental share of the return.. a leading solar project developer in India.200 1. MAKE expects Export Credit Agencies (ECA) to play a key role in financing the wind and solar market in Iran. Figure 12. Kenya. EKF (Danish Export Credit agency) previously financed a developer order through Vestas in Turkey. While US companies are not yet able to access this new market. and fuelled the research needed to lower costs of solar modules and associated tech- nologies. Even though the high cost of capital remains a problem in emerging markets. As an example. PV Insights. Iranian wind market: Rushing too fast? Many developers and turbine OEMs have become very optimistic about the Iranian market following the lifting of sanctions as a condition of the nuclear deal. Cleanmax. has developed an IRR sharing model. The cost structure has come closer to the point of grid parity for power generation in countries with summer load growth (e. Along with KfW. even though the PPAs have a roll over term of 10 years.000 1.000 1975 ‘80 ‘85 ‘90 ‘95 ‘00 ‘05 ‘10 2015 Solar insolation Low GDP/capita High GDP/capita Silicon module costs Medium GDP/capita Source: MAKE. and the Philippines). PV Exchange. World Bank. Growth in solar power has a tailwind behind it Germany was once the pioneer in solar. Fraunhaufer Note: Solar insolation depicted in hours/year.

if these policies continue to exist. Installers such as So. US solar installed capacity that are at or near the point of distribution.MAKE defines distributed generation (DG) units as facilities Figure 14. which can be problematic in many emerging 22 markets. down storage + solar LCOE to grid parity levels. others will. A future with micro. Fraunhofer ISE solar+storage solution. Residential and commercial customers can both be distributed. Although elimination of net-metering remains a risk. Spain and Italy eliminated strong incentives for utility. Solar can provide on-peak generation. solve many problems that utilities are facing with increased renewables penetration. Storage solutions combined with wind and solar can ling growth in the residential segment. tomer acquisition costs to eventually match current German system prices over the next 5 years. which implies an LCOE of 350 USD/MWh for a Source: MAKE. Source: MAKE. with the 2 elimination of ROCs. Third party ownership is popular in the US. thus effectively reducing residential LCOE targets. 8 veloped markets from pre-2010 days. customers 80% can be provided distributed solar and storage 70% solutions to make their homes self-sufficient under 60% leasing models. As sys- tem costs have come down significantly. but is also gain.. 24 reliable grid. new innovative financ- ing vehicles such as Solar Asset Backed Securities are fuel. With public sector capital (e. 14 grids can be a suitable alternative. Utilities are finding ways to enter 50% this market. and more financing Note: DG = distributed generation. batteries cost ~900 USD/kW. 12 10 Solar in residential applications is making a comeback in de. The biggest advantage in favour of residential solar is that it competes with retail power prices. 2016 includes data up to July 2016 is available to back third party ownership – where the cus. hard cost and soft costs might come down to levels of grid parity over the next decade. 40% Gas peaker plants that have traditionally provided 30% flexibility are in an unfavourable position due to this 20% development. the US and India are some markets where net-metering policies exist. IEAPVPS. the UK followed suit in 2015. Solar system size evolution in Germany important problem of increasing intermittancy and insufficient grid charges can be addressed by this model. because if they don’t do it. Italy. Storage ing popularity in Germany.g. which will bring larCity and Vivent are targeting a significant reduction in cus. pension 0 funds) having to find new ways to make a significant return. and have residential installers aggressively lowering their sales costs. Policymakers in Ger. Furthermore. The key value (GW) proposition for DG is that it doesn’t need to depend on an un. 6 +93% many. 10% 0% Wind farms combined with large commercial 2010 2011 2012 2013 2014 2015 batteries can also provide captive power for Up to 10KW 100 to 500KW communities and sites that are far away from grids. 11 November 2016 Renewable Energy Ownership Strategies 11 . 100% which can be bundled with large batteries to 90% balance and shift the load. The most Figure 15. 2008 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 more money is crowding into residential solar across key Eu- Utility DG Total (Years) ropean markets to promote residential installations. MAKE expects that battery costs will fall to 160-200 USD/kW. and not wholesale power prices in many countries. 4 scale solar in 2010. EIA tomer doesn’t have to front a significant amount of the instal- lation costs – residential solar will gain further popularity. 10 to 100KW >= 500KW Currently. In the US. A significant amount of energy is already lost due to 20 electrical outages in Asia Pacific countries such as India and 18 almost all of Sub-Saharan African markets. where a lot of the 16 growth in energy demand is expected.

Second. commodity prices rebound substantially. The western part of the Australian grid is isolated from the rest of the country and lacks interconnection to the eastern power grid and thus operates independently (similar to ERCOT in the US). the agency doing the load forecast grossly over-esti- mated the power consumption growth. The most recent development has been the introduction of capacity markets. where generators bid their offers of future capacity several years ahead. they are compensated for ‘capacity’ that they provide to ensure electrical supply security. PIRA Power plant operators are compensated for 2 different things. No mechanism has worked perfectly 01/2015 07/15 01/16 07/16 01/17e 07/17e 01/2018e for more than a decade. However. PJM Germany France Italy and NYISO have capacity markets. Power market reform timeline Note: Not depictive of a specific market Source: MAKE. This excess capacity payment paid to power supply providers ended up pushing the effective baseload power prices from ~32 AUD/MWh to ~50 AUD/MWh. Thus introduction of capacity markets ended up being a 11 November 2016 Renewable Energy Ownership Strategies 12 . 40 35 +17 % Power market design 30 25 Wholesale power markets have gone through waves of regu- 0 lation and re-regulation. MAKE expects baseload prices to remain 65 low for the next few years. and upward pressure on French 70 baseload prices. unless carbon taxes are increased 60 significantly. First. or large 55 numbers of old power plants are retired. Note: Represents baseload wholesale power prices. using the reserve auction scheme. various electricity market system operators Australia introduced capacity markets in the western region of the grid. and ERCOT is planning to introduce one. EUR rope prices in mid-2016.Power price dynamics in Europe: State of play Figure 16. The excess capacity auctioned was ~1GW – not a small number by any means (roughly 25% more than the actual amount needed). this is unlikely to change anytime soon. the most common is a forward auction. but the program backfired. In the US. Low baseload power 50 +65 % prices have been a negative margin driver for many genera- 45 +2 % tors and utilities globally. Figure 17. Power price forecast for Europe The market was pricing a slight increase in continental Eu. Although vari- ous mechanisms exist for capacity markets. prices until July 2016 are actual values Source: MAKE. they are compensated for power sold in the spot market at given rates. The government wanted to ensure power supply security and used a capacity auction based on a load forecast.

MAKE expects a positive side to this development. renewable developers cannot provide ‘supply security. BOJ.6 100 1.9 Renault Zoe 100 6. intermittency is expected to become more prominent. Germany opted against introduction of a ca- pacity market. As more EVs come online. This case is commonly quoted as a cautionary tale for other adopters. Battery cost index (base = 100) As renewables gain further market share in baseload genera- 110 tion. Lithium ion battery pack cost reductions are driving this increased adop. This implies further opportunities for renewables portfolio growth. At a fundamental level. 2010 to 2016 developed markets.0 % 80 Electric Vehicles: Not just a Tesla phenomenon Worldwide EV sales are expected to quadruple over the next 70 69 decade.’ Thus.1 19. battery costs have fallen signifi- cantly.commercial 0 2 0 Plug-in Diesel 2010 2011 2012 2013 2014 2015 Full EV .0 30 0 30 2015 2020e 2025e 20 10 5 Hybrid Full EV . renewable assets are at risk of being 90 marginalized by future capacity mechanism adoptions.0 Volkswagen e-Golf 70 80 70 Audi A3 e-tron 75 18. Note: Cost index represents CPI for batteries. DB 11 November 2016 Renewable Energy Ownership Strategies 13 . over the past 5 years.3 20. Base year = 2010 Source: MAKE. Further to increased renewable penetration.7 0. automobiles will shift from transportation fuel consumption to power consumption.’ 01/2010 01/12 01/14 01/16 01/2018 China. Utilities are most concerned about this evolving systemic change. as EVs emerge as an important vehicle class. Lithium battery prices.passenger Gasoline Source: MAKE.big bill for the average customer down the value chain. where the government provides hefty subsidies for EV Lithium-ion batteries adoption. and 60 an increasing variety cures the problem of ‘range anxiety. despite the growing popularity of this model in Figure 18. if charging occurs during the day. MAKE expects that EV adoption in general will create opportunity for investment in renewable generation capacity.4 80 +349% 0.0 76. the challenge for renewable asset own- ers is that older conventional power plants have a competitive 100 advantage. EV trailing 5-year Figure 20. thus incentivising a load shift. Projected electric vehicle demand demand growth Number of cars (million units) registered (000’s) 115 140 133 Mitsubishi Outlander P-HEV 110 130 9.0 Volkswagen Golf GTE 85 0. and the business model requires further validation and study. EVs will create demand for additional on-peak load.0 60 70 50 73.9 110 Tesla Model S 95 0.3 BMW i3 90 90 2. will represent 40% of the global market. which might possibly turn negative load growth countries into positive load growth countries. -32. JATO dynamics Source: MAKE. and will be able to use their ‘batteries’ for home use along with EV use. EV and battery market players will provide several partnering opportunities Figure 19. Subsequently. Due to the intermittent nature of load generated by renewable assets.6 0.0 40 67. Press releases. company data. Utilities could incentivise EV charging in off-peak hours by providing a lower off-peak tariff for EV owners. QUANDL tion.9 0. EV users will be able to charge their batteries during night and off-peak hours.4 2.0 Nissan Leaf 105 120 3.

5 USD/MMBtu. is not in the distant future. At the Henry Hub. Floating LNG – an oncoming hydrocarbon threat to renewables deployment Renewables technologies are not the only ones that are dis. but an existing reality. Shell Prelude. factors that effectively make the price of shipment-ready US LNG to be around ~6. The shale 300 revolution. However. Japan. Liq- uefaction of gas costs ~USD 1/MMBtu. summer prices in 2016 hovered around 0 Taipei Tower Shell Prelude Burj Khalifa Sears Tower CN Tower Shanghai centre Empire state building ~2 USD/MMBtu. Scale of Floating LNG terminals rupting the energy value chain. No other nation in the world has gas so 100 cheaply and abundantly available. FLNG might pose a threat to renewables deployment in countries that don’t have a large amount of domestic hydrocarbon re- sources but are still highly developed and have funded renewables extensively. Countries that stand to gain the most from 600 583 FLNG are Japan and other high energy consumers that lack sufficient domestic gas or hydrocarbon resources. The US already exports LNG to the Middle East. importing gas from the US doesn’t make sense for countries with domestic resources. provided a large supply in North America. Korea. With the introduction of FLNG.5 USD/MMBtu. all the stranded gas assets that exist in offshore fields that are uneconomical at current price levels might become profitable again with this new technology. At this level. Singapore and Australia might scale back subsidies for renewables. or for gas sellers nearby. As a result of FIT-based funding. rather than back to shore in the 700 traditional model. This might change soon with the oncoming wave of FLNG ter. Floating Liquefied Natural Gas (FLNG) may cause major waves in global supply of energy (meters) over the next decade.5-7. 200 ence in the US. which added 12GW of solar capacity over the past 5 years. where EVs and batteries will be used with smart-grids to manage peak load. Utilities such as RWE and Fortum have been working on prototypes of such Virtual Power Plants structures. Figure 21. The ship is then 800 sent to the point of delivery. 509 492 488 500 442 400 381 Natural gas is the second most abundant hydrocarbon cur- rently being used after coal in power generation. transportation of gas is expensive. Furthermore. National Post minals. the most liquid point in the US. will come online in 2017 off the coast of Australia. and the largest ever fa- cility. Future sales of LNG might become more popular. which might shift the appetite of policymakers from funding renewables to purchasing cheaper hydrocarbons. or the fracking revolution.through direct power contracting with generators at favourable rates to guarantee supply. and transportation costs ~USD 3/MMBtu. and winter prices are currently around ~3. which caused a new wave of energy independ. 11 November 2016 Renewable Energy Ownership Strategies 14 . The technology is now mature. The whole notion of a ‘virtual power plant’. FLNG terminals are significantly more 900 cost effective than onshore delivery gas terminals. Take the case of Japan. because the 828 gas is explored and liquefied on the ship itself. soaring energy supply costs have broken Japan’s fiscal budgets due to extensive policy support for renewables. Source: MAKE.

. ‘-’ indicates a negative outlook. . supply security is prioritized Higher EV penetration Mostly a positive since higher EV pen- etration implies higher on-peak and off- = + + peak load growth (i. . ‘?’ indicates mixed outlook Source: MAKE 11 November 2016 Renewable Energy Ownership Strategies 15 .e.Figure 22. power prices ? = . potential negative for + + + asset owners with large floating rate debt exposures Capacity market introduction Mixed with a bias towards negative if ? = . eration asset set owner set owner with owner power retailing business Low commodity price environment/low Diversified generators are hedged. LNG = Liquified Natural Gas. Thematic catalyst impact to asset owners – summary table Catalyst Diversified Diversified Renewables Comments power power only power gen- generation as. FX hedging causes high frictional and transaction costs – .-’ indicates a strong negative outlook. ‘=’ indicates a neutral outlook. FX = Foreign Exchange. generation as. more power ca- pacity needed) Floating LNG Mixed with a negative bias. ment of emissions Low interest rate environment Mostly a positive. thus possess a negative earnings effect all in Note: EV = Electric Vehicle. ‘+’ indicates a positive outlook. possess domestic hydrocarbon re- sources FX volatility Mostly negative. ‘. renewables marginalized in countries which do not = = . pure renewables are more exposed COP 21 = + + Generally a positive for all Low EUA price Low EUA prices disincentives abate- = = .

40 to keep the yuan depressed. albeit in different countries.20 making the local banking industry unprofitable.75 0. 0.90 import more Chinese products. 1. the global 0. but Japan wants to devalue Avg. The ECB succeeded in 2 out of 3 of these measures.85 Japan even went as far as to take its interest rates negative.. which is essentially a way to reduce sovereign debt obligations denominated in Euros and thus effectively reduce the EU zone full debt-load indirectly A common tool used to measure policy divergence is the TED spread. but the 0. 0.6 a standard policy tool central banks use to stimulate the Policy economy in downturns. FX and inflation on asset owners Ever since the global financial crisis. Euro Zone GBP Source: MAKE.4 Macro environment Impact of interest rates. OECD Germany.5%. which corroborates our thesis that EU stimulus is not over yet. The US Fed- eral Reserve finally raised rates in December 2015. Policy divergence in interest rates world have been low and effectively negative (e.00 0. whereas the 10-year average is about 1. interest rates across the Figure 23.15 Figure 24. In order to provide an additional wave 0.1 European Central Bank (ECB) did not. but the US wants to make its exports cheaper for Europe 1.80 0. Interest rate (%) ative).30 its currency as well.00 0. central bankers around the world have turned to unconventional tools. FX targets are USD / EUR USD / GBP never unanimous and involve multiple simultaneous games of chicken. Even with pro. to make its exports globally competitive.10 MAKE expects history to repeat itself and the EUR/USD ex- 0. USD/EUR and USD/GBP trends USD/EUR. global FX movements are not so simple.60 and the rest of the world. 0. but are 0.0 01/2011 01/12 01/13 01/14 01/15 01/16 01/2017 The ECB measures success of its policy tools in 3 ways: Source: MAKE.2 rope is still not showing signs of a comeback. There are clear signs of policy divergence between US interest rate policy and ECB interest rate policy. which is the difference between the LIBOR rate and the US Overnight Index Swap rate – both short-term lending rates.5 Divergence of liquidity to their economies. 0. = 0. Europe wants to make its exports cheaper for the 1.10 0. has managed to keep its FX rate depressed and was able to boost sales in 11 November 2016 Renewable Energy Ownership Strategies 16 . and the 0.84 0. 0. Eu. FRED.3 Troubled Asset Recovery Program (US only).95 0. How- ever. BBA.3 economy is still showing only modest signs of recovery. real yields on Treasury Inflation-Protected Securities in the US are neg. 0.00 change rate to revert to the long-term mean over the next 1995 2000 2005 2010 2015 decade. China’s policies are intended 0. along with other key EU countries. so that Japan and the US can 0.30.4 TED spread grams such as bond-buybacks (globally active). FX rates (EUR/USD) hovered around 1.05 1.g.70 US. Low interest rates are not a new phenomenon. Federal Reserve 1) Keeping rates low to fuel economic growth 2) Keeping FX low and thus keeping euro-denominated exports cheap on a global level 3) Keeping inflation at 1.15 0.50 Then we have the Asian tigers.

6 1.4 1.3 Note: FX dates for quarters are end of the month dates respectively.0 become more expensive.09 1.8 0. FX and inflation forecast 2016 2017 Q3 Q4 Q1 Q2 Q3 Q4 Rates US Fed 0. but it is not possible given 5.0 export driven growth engine. Rates.08 GBP/USD 1.7 2.24 1.50 0.1 2.7 0.24 1.1 2. IMF. capital goods Long term 2.7 0. and estimated the possible impact on income deterioration. Chinese capital goods will 0.0 velopers will need to revisit their procurement strategies to avoid steep increases in their cost structures.0 Germany 0.8 2.10 4.0 current labour dynamics.00 0.00 0.5 become cheaper on a global basis (with pricing relative to the 1. To see the potential impact on this.6 1.2 5.25 6.9 0. Trading Economics 11 November 2016 Renewable Energy Ownership Strategies 17 .24 1. At the same time. German policy tools are going to stop being an effec- tive mechanism.1 6.25 6.75 0.0 2.10 4.5 1.25 6. 3.25 6. we estimated the floating rate por- tion of debt in the capital structure for asset owners. due to the weaker euro.11 1. but China is catching up to them.10 Bank of India 6. The structural problem is that the EU wants Inflation (%) to be an exporter of capital goods. A structural transformation is needed in labour markets for the EU to be able to return to an 4. ECB inflation target Soon. Figure 25. Figure 26.00 Bank for China 4.0 target from highly specialized countries in Europe will continue to 1.5 1.10 4.2 1.75 0.high value capital goods.10 1.75 0.6 1. Thus.0 Source: MAKE.23 USD/JPY 102 103 104 105 106 105 Inflation US 1.25 1.9 5.10 4.0 US) as they have been over the past 3-5 years.50 6.8 China 1.2 2.24 1.0 This impacts asset owners in 2 ways.08 1. forecast as of November 2016 Source: MAKE.12 1.1 India 4.75 ECB 0.00 0.00 0. de. EU-domiciled asset owners are in a favourable position to a certain extent due to cheap financing over the next 3-5 years.00 0.10 4. ECB Secondly. the US will reduce easing efforts further over the next few quarters (US rates are expected to increase in 2017. -1.6 6. First. See the asset owner financial analysis in Section 5 for further insight on this topic. -2. whereas EU rates are expected to stay near zero).25 5. even though MAKE doesn’t expect the stimulus to end within the EU.2 1.50 FX EUR/USD 1.8 UK 1.75 0. as Chinese pricing power increases 1995 2000 2005 2010 2015 2020 and Chinese manufacturing wages continue to rise.9 1.9 1.

Over the long-term. but because of its historic nature. As the RMB strengthens due to strengthening long-term economic parameters.8% of GDP. MAKE expects some sort of re-negotiation talks to commence. by not having access to the EU market via labour and capital. The least bad outcome would be a model like Norway’s (where Norway pays the EU for ac- cess to labour. This is unlikely. If the revenue stream is coming from GBP exposure. Many questions still remain un- answered as to how the actual exit will work. GDP expansion is expected to slow by 500 bps in 2016-2017. its fiscal deficit is ~2. London might become less of a financial hub. this is unlikely to continue. since a depressed currency will make British goods cheaper and will promote stronger exports of high-value capital goods from Britain.Brexit blues The referendum in the UK was an outcome no market participant had fully priced in to their forecasts. then the financing vehicles used and procurement contracts should also be GBP-denominated China macro environment The scale of China’s economy usually has a significant and material impact on export-import dynamics in the US and Europe. since something of that nature would trigger a wave of referendums and invoke many other countries to threaten to exit. the GBP crashed against other countries. which is a low number when compared to advanced economies. wiping out billions in market capitalization. owners with large floating rate exposures might find their financing expenses rise if government steps up base rates. Asset owners with exposure to GBP-denominated operations may layer on natural hedges. 11 November 2016 Renewable Energy Ownership Strategies 18 . firms in Britain will find it much harder to continue to do business the way it has historically. China has the necessary fiscal means to support the economy in transition. but doesn’t participate in the formal legislative decision making). The British government believes that it will be able to negotiate a deal with terms that are better than those of existing EU members. Many businesses will have to move out of the UK and into the EU in order to avoid tariffs. Asset owners should remain cognizant that China’s interest rate is expected to come up. The growth rate of the service sector will continue to exceed that of the manufacturing sector by a wide margin. Brexit will lead to a positive potential outcome for the British economy. When the vote eventually happened. which is unlikely given the public sentiment around the referendum. Weaker economic data in the UK and the rest of Europe will adversely impact future Chinese GDP estimates. Furthermore. making the economic system less prone to systemic shocks. On the positive side for the EU. Recent stimulus injections by the Chinese government have stabilized the domestic economy for the time be- ing. Brexit schematic Market access to the EU Participation in EU legislative processes EU Norway Full market access Market access Switzerland United by negotiation Kingdom Turkey UK’s future position in Non-EU Europe will remain undecided until new trade No financial Full financial terms are negotiated contribution contribution Sharing of sovereignty Source: MAKE Over the short-term. Figure 27. local high-value goods will not be as competitive in the future.

79% Telecommunication Services 25/50 Index 9. utilities includes IPP’s Source: MAKE. short-term return 5-year return (%) 18 Consumer Discretionary Index 16 Health Care Index Consumer Staples Index 14 Information Technology Index 12 Utilities Index Industrials Index Financials Index Real Estate Index 10 Telecommunication Services 25/50 Index 8 6 Materials Index Energy Index -2 -15 -10 -5 0 5 10 15 1-year return (%) Note: Utilities includes IPP’s Note: MSCI = Morgan Stanley Corporation Indices. utilities performance Figure 30.32% 10. we expect asset owners to un- derperform in high P/E environments (throughout 2016.88% 9. Morgan Stanley 11 November 2016 Renewable Energy Ownership Strategies 19 . Real Estate Index 7. pension and insurance funds have en. utilities have remained remarkably resilient over the past decade.57% 11.37% 12.25% 15. Figure 29. because of the stability of cash flow they offer.25% tered into the market.38% 10. From a European stand.69% 5. MSCI index returns utilities and IPPs.25% as a benchmark.08% 16.46% 14.02% 6. Typi- Note: MSCI = Morgan Stanley Corporation Indices.12% 10. an overall underperformance of government debt instruments in Europe. Long-term vs. but over the 2014-2016 timeframe. this has not held true. and even today. utilities index includes IPP’s cally. 10-year EU bond yields are a good proxy for utility sec. With a yield of ~10% over the short-term (1-year) and long-term (5-year). as Materials Index -5. Financials Index -0.29% 7.78% 11. as investors will seek more cash flow and return stability than big upsides. we will consider a utility/IPP index as a Health Care Index -5.37% Utilities have surprisingly been able to maintain their equity Utilities Index 14.68% 10.54% 10. some relationships have broken down recently. where cyclically adjusted price to earnings for S&P 500 hovers around ~17x) but over-perform in low P/E environments. Morgan Stanley tor performance.99% 7. Regardless of the ongoing wave of deleveraging in asset owners’ balance sheets.75% 8.10% strategic.76% -1.76% 12.51% mix has changed significantly over the past 5-8 years. financial.64% 0. American and Chinese utilities. MAKE estimates that it is partly attributable to a fundamental shift from regulated to deregulated generators.24% 12. The MSCI Index 1 Yr 3 Yr 5 Yr 10 Yr Energy Index -13. Due to the historic relevance of utilities Consumer Discretionary Index 1. Bonds vs.99% 8.38% Information Technology Index 0. Source: MAKE. ECB statistical warehouse Source: MAKE.22% 3.24% -4.5 Asset owner financial analysis Sector returns and asset owner financial performance Renewable energy assets have been owned historically by Figure 28. Industrials Index 0.89% 15. Renewables-dominated asset owners such as Iberdola and DONG will perform favourably during down and flat markets. a large portion of assets are owned by European. Many things could be accountable for this devi- ation.59% 11.32% 9.36% proxy for renewable energy asset owners.76% 7.07% 9. and lower IRR and return guarantee levels for generators.94% N/A point.08% 12.21% 8.13% 13.87% performance over the past decade.20% Consumer Staples Index 9.

or solar PV panels to generate more cash flow. they don’t have bilateral hedges that pay Figure 32. company data clear that blended ROE declined by over 10%.5 10 35 3. balanced by the type of asset owner and geography (see Figure 41 for list of names) and tried to extrapolate some conclusions.0 45 14 4.0 8 2.5 +18% -53% 40 12 4.5 16 5.0 1. Gener- ally.0 2006 ‘07 08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 2015 0 Return on equity (%) 2006 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 2015 Return on assets (%) Gross margin (%) EBT margin (%) Financial leverage (x) Operating margin (%) Net margin (%) Source: MAKE. Asset owner return on equity vs. Exam- ples include almost all traditional manufacturing companies. One might question as to why gross margin declined in a low commodity price environment. MAKE defines non-capital intensive businesses as those where growth is limited by factors other than capital. MAKE defines a capital intensive business as one where the size of the business is limited by the amount of capital invested in it. Asset owner return on equity Figure 33.0 50 5.5 5 0 0. Capital in this definition includes both fixed assets and working capital. as well as increases in selling. Asset owner profitability analysis decomposition (%) (x) (%) 18 6.. Note: Economic cycles are MAKE estimates based on equity and credit conditions. regardless of an increase in leverage over the past decade.5 10 4 1. There are 2 types of businesses in general: capital intensive and non-capital intensive. company data 11 November 2016 Renewable Energy Ownership Strategies 20 . general and administrative (SG&A) () expenses. When the capital doesn’t add to the returns. this means intellectual capital or human resources.0 2 0. we constructed an index of 19 firms. but the answer to that is simple: Generators lose reve- nue when wholesale power prices decline – and they have unhedged exposure (i. bubble size represents blended average ROE An analysis of the asset owner index we constructed makes it Source: MAKE.e. lever- age For the selected asset owners. retailers and most energy asset owners. a distribution centre or simply capital to fund growing working capital for buying tur- bines.Return on equity analysis Figure 31. The reductions in net income came from reductions in gross margin. growth requires another plant. then ROE doesn’t matter.0 3.5 15 6 2. most financial institutions. distribution companies. In these busi- nesses. Return on as- sets and net income contributed to a significant material decline in asset owner ROE. company data Source: MAKE.

and stock selection based on discrepancies be- tween a firm’s ROIC-based warranted valuation and market 20 -10% valuation yields positive shareholder value creation over the long-term. company data tortion here. Return on invested capital (ROIC) analysis Note: ROE = Return on equity = net income / shareholders’ equity. Figure 34.e. and not exogenous factors. renewables intensity depicted by re- As far as free cash flow improvements go. have led to lower awarded ROEs most years. and utilities will come under further distress as the traditional business model is challenged. an asset class which exhib- 2006 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 2015 its very low volatility.out when power prices are low). power generation asset owners 10 generate ~5% ROIC. Across the board. and the underlying drivers should be well understood before making capital allocation decisions 11 November 2016 Renewable Energy Ownership Strategies 21 . Plant & Equipment ered positive ROIC vs. it is hard to conclude that the true fundamentals. bubble size represents renewables as % of portfolio. MAKE believes that several asset owners are not in- vesting a baseline amount of maintenance CAPEX and thus will require larger than expected maintenance capital invest. Due to such factors. However. Asset owner cash flow performance ments in the future. ROE ductions are a cause of high expenses for capitalized invest- ments as well as higher general expenses. FCF = Free cash flow. Furthermore. (%) There are several benefits to using ROIC as a quantitative 70 valuation screening methodology and certain drawbacks to each of the other Miller and Modigliani valuation drivers. These spreads should be used with caution. China-based asset owners have deliv. -10 CAPEX as % of sales FCF as % of sales Another clear trend is that several European. their cost of capital). similar to the ROE analysis provided above. for example. SG&A expenses are not easy to reduce overnight. but there is some dis. Figure 35. the investments they made over the past 5-10 years did not earn Note: CAPEX = capital investments. Another distorting factor is the Chinese policy of providing low rates and on-off bail-outs to power generators. which is one of the lowest across all in- +243% dustries. Market distortion One detail to keep in mind during this ROE analysis is that many generators in a regulated environment are awarded guaranteed ROEs. the margin re.and US-based Net PP&E as % of balance sheet asset owners are negative or low ROIC generators (i. 60 -4% ROIC has proven empirically to be strongly correlated with valuation.. it is evident that all newables as % of generation mix cash flows recovered were a result of reductions in growth Source: MAKE. which most likely contrib- uted to some of the positive ROIC vs. always drive the value of these busi- nesses. PP&E = Property. Rate cases filed in the US over the past decade. Renewables intensity vs. since owners of renewable assets are 0 predominantly utilities and IPPs. The Chinese government has historically provided below-market average lending rates to local companies. This trend is likely to continue. WACC spreads. many institutional investors deem this to be sufficient. Company data CAPEX. WACC spreads. Source: MAKE.

ROIC as a metric Measurability Efficiency Fundamental in. Debt-fuelled lower WACC 7 6 LIBOR Interest Rates and benchmarks (%) US Fed Funds 5 Euribor 4 3 2 1 0 2006 ‘08 ‘10 ‘12 ‘14 ‘16 Note: Monthly averages of ICE LIBOR. US Fed.Figure 36. Effective Federal Funds Rate Note: WACC = weighted average cost of capital and Euribor Source: MAKE. WACC = weighted average cost of capital. Global rates Figure 38. NOPAT = net operating profit after tax. Guggenheim – The ROIC curve Figure 37. ICE. Cross correlation Efficacy sight factor ROIC NOPAT Growth Rate WACC Sustainable competitive advantage Weak  Strong Note: ROIC = return on invested capital. Source: MAKE. company data Source: MAKE. EMMI 11 November 2016 Renewable Energy Ownership Strategies 22 .

US utility awarded ROE vs. Impact of 100 bps increase in interest rates on WACC (%) (%) 0. Based 12 on available information. floating rate exposure impact estimated based on floating rate portion of debt (where available) or short-term debt as a portion of capital structure Source: MAKE. company data. 1 0 1988 ‘92 ‘96 ‘00 ‘04 ‘08 ‘12 2016 Average awarded ROE Average 10-Year Treasury Yield Note: ROE = Return on equity = net income / shareholders’ equity Source: MAKE. US Fed.Impact of portfolio technology choice and age on Figure 39. (%) ity of information.12 35 30 0. NYU – Damodaran.14 40 0. 10 tion and not necessarily preference. Speaking to the age.16 45 0. Edison electric institute Figure 40. tax authorities 11 November 2016 Renewable Energy Ownership Strategies 23 . 9 -78 % ropean asset owners have some of the oldest fleets in global 8 markets. it’s challenging to isolate and identify which 13 -19 % technology guarantees better financial performance.10 25 0. and American asset owners come next with fleets 7 between 5-8 years (for the asset owners mentioned here). ICE. EMMI.02 14 12 10 9 5 7 6 6 5 4 0.00 0 Pattern Energy EDP ENGIE EON Iberdola ENEL Acciona EDF RWE NextEra Huadian Datang NRG SSE China Resources Huaneng China Longyuan China Power +100 bps impact (left axis) Floating rate exposure (right axis) Note: Floating rate exposure = % of debt exposed to interest rate spikes. 6 Last come the APAC asset owners with the youngest fleets.08 44 20 0.06 28 15 0.04 23 22 22 20 19 10 0. 5 Although it looks like APAC based asset owners are the best 4 performing financially. Eu. 10-year treas- financial performance ury yield Due to the nature and scale of asset ownership and availabil. it can only be conclusively said that 11 portfolio technology choice is a function of technology evolu. Several other factors (as discussed in the previous section) are responsible for 2 this. it’s not possible to attribute age and 3 technology choice to this performance.

8 Water utility 5.3 3.9 50 3 45 2 40 1 35 0 0 Pattern Energy Acciona EDP Iberdola ENGIE EON Datang NextEra EDF RWE Huadian ENEL SSE NRG China Resources Huaneng China Longyuan China Power WACC (left axis) Debt as portion of capital structure (right axis) Source: MAKE. date range considered = 1985-2013 Source: MAKE.3 4.T.1 Foreign electronics 7.0 Oil/gas distribution 6.8 6.2 Railroad 11.4 Power 4.1 60 4 3.6 Note: Power includes power generation through utilities as well as IPP’s.9 3. tax authorities Figure 42. Asset owner cost of capital estimates (%) (%) 8 7. NYU 11 November 2016 Renewable Energy Ownership Strategies 24 .Figure 41.I.2 5.1 Newspaper 11.4 4. US Fed. Cross industry ROIC levels 0 2 4 6 8 10 12 28 (%) Tobacco 28. ICE. 14.2 4.1 65 5 4.3 80 7 6.3 4.8 75 70 6 5.1 Retail building supply 12.8 Funeral services 7. company data.E.5 5.0 R.1 Healthcare information 9. NYU – Damodaran.8 4.5 Natural gas utility 8.8 55 3.4 7. EMMI.2 2.8 Automotive 7.

Green implies a positive metric vs. CAPEX = capital investments. Key asset owner financial performance scorecard Return Free CapEx Financial Asset Gross EBT Net on Interest SG&A as Debt/ cash as % of leverage turnover Master Company name margin margin margin invested coverage % of equity flow/net sales (average) (average) score (%) (%) (%) capital (x) sales (%) (x) income (%) (x) (x) (%) (%) Huaneng Y Y Y Y Y N Y Y Y N Y 9 EDF Y Y Y Y N Y Y Y Y N N 8 Datang Y N Y Y Y na Y N Y N Y 7 Huadian Y N Y Y Y na N Y Y N Y 7 China Power Y N Y Y Y N N Y Y N Y 7 China Longyuan Y N Y Y N Y N N Y N Y 6 China Resources Y N Y Y N N N Y Y N Y 6 SSE Y N N N N Y N Y Y N Y 5 Acciona N N Y Y Y N na N N Y Y 5 Iberdola Y N N N N na Y Y Y N Y 5 NextEra N N Y Y Y N na N N Y Y 5 Pattern Energy N N N N N Y Y N Y Y N 4 NRG N N N N N Y Y N N Y Y 4 EDP N N N N Y N N Y Y N Y 4 ENEL N Y N N Y N na N Y N N 3 RWE N N N N N Y N N N Y Y 3 EON N N N N N Y N N N Y N 2 ENGIE N N N N N Y na N N N N 1 Note: Grey shading implies a negative metric vs. Key asset owner wind technology mix Source: MAKE 11 November 2016 Renewable Energy Ownership Strategies 25 . trailing 5 years. SG&A = selling. trailing 5 years. EBT = earnings before tax.Figure 43. score = count of green metrics / total metrics Source: MAKE. company data Figure 44. general and administrative. higher score implies better performance.

spread calculated as ROIC minus WACC Source: MAKE. wind asset fleet age Note: ROE = Return on Equity Source: MAKE 11 November 2016 Renewable Energy Ownership Strategies 26 . company data. US Fed. ICE. NYU – Damodaran. Asset owner financial performance vs. WACC = weighted average cost of capital. EMMI. ROIC vs. WACC spread Note: ROIC = return on invested capital.Figure 45. tax authorities Figure 46.

Asset owner wind power technology mix vs. wind asset age (2/2) ROE (%) ROE (%) 25 25 20 Huadian 20 Huadian Huaneng Huaneng 15 CR Power EDPR 15 EDPR CR Power EDF Acciona Energía EDF Acciona Energía 10 10 Iberdrola Iberdrola Datang Datang 5 Enel Green Power 5 Enel Green Power 0 0 RWE RWE -5 NRG Energy NextEra Energy -5 NRG Energy NextEra Energy -10 E. age (years) IPP Utility Wind only Diversified Renewables only Note: ROE = Return on Equity Note: ROE = Return on Equity Source: MAKE. Owner type vs. company data 11 November 2016 Renewable Energy Ownership Strategies 27 .ON -15 -15 Pattern Energy Pattern Energy -20 -20 0 1 2 3 4 5 6 7 8 9 10 11 0 1 2 3 4 5 6 7 8 9 10 11 = 5.000GW Avg. wind asset age (1/2) Figure 49.Figure 47. company data Source: MAKE.000GW Avg. age (years) = 5. Owner type vs.ON -10 E. financial performance Note: ROE = Return on Equity Source: MAKE Figure 48.

centration risk due to ada and South Africa. IPO of US of 600 million combination of greenfield backlog IRR plays due to diffi. high con. Regulators exacerbated the problem by stepping in and forcing nuclear operators to pay additional clean up costs to the tune of 23 billion EUR for efforts associated with nuclear waste management.8 not clearly dis- ing rate bonds @ 3. EUR. (i. company filings 11 November 2016 Renewable Energy Ownership Strategies 28 . projects in EU. and more utlities to expand their renewable energy asset fleets.. Yieldco vehicle abandoned.28%. which were designed for baseload power prices of 50-60 EUR/MWh. the fundamentals haven’t changed. New markets could Further strengthening of 2016 CAPEX Energia on non-OEM business. Can. MAKE expects further write downs of gas and coal assets over the next decade. level (i. The loss-making brown energy assets. fied asset mix and potentially be negative capital structure. Key asset owner business model analysis (1/3) Company Current business model Main strength Main weakness Potential move forward Renewables CAPEX plan & return targets Acciona Divestment of AWP. China) jects approved Note: H1 = first half. but what can be said is that the additional optionality is good for investors. 2/3 in en- and inorganic deal flow. A fundamental difference between France and Germany is that Germany doesn’t have the same political support for its nuclear operations as France does. grid curtailment ing-out” to build overseas IRR target. already operates a large porfolio of green assets and is expanding aggressively in markets in Latin America. focus Internationally diversi. USA. Those who believe that wholesale power prices will recover to pre-2011 levels (~60 EUR/MWh) can invest in the brown energy business unit stock. year tranche of corpo. issues at the country high-quality and profitable Long-term Canadian capital markets Successful issue of 5. press research. and thus French utilities have yet to deal with such problems.e. asset concentration in GW of offshore wind pro. ergy assets First mover strategy in ronments els due to transition year of new markets 2016 China One of the largest asset Access to globally low Decreasing utilization Accelerated focus on “go. After being somewhat behind others in investing in renewable assets. gained access to ple's Bank of China. Even though the restructurings were well-intentioned in principle. Figure 50. for example. ment. Other European utilities have already learned from this issue and are investing heavily n renewable assets. cult regulatory envi. CAPEX plan to raise lower cost financ. CAPEX = capital expenditure Source: MAKE. The fundamental reason for doing this has been to provide options to shareholders. realized margins come down). 1. hours. are going to have to deal with further margin reductions as some of the hedged power contracts roll off. and those who want to invest only in the renewable energy business units can do so through the standalone entity stocks. EON and RWE restructuring: Splitting halves? EON and RWE are going through what some have labeled as the most radical restructurings in the history of Germany. Iberdola of Spain. financing through Peo.. closed S&P rating of A. historically low CAPEX lev. both German utilities have committed to splitting their green energy units from their brown energy units in 2016. The full outcome of the EON and RWE restructuring can not be measured at this point on a Total Shareholder Return (TSR) basis.e. No disclosed Longyuan owners in the wind seg.

renewables lated/contracted busi. impact from interest target by 2020. solar installs ganic growth track record China Increase renewable Needs access to Decreasing profitabil. new tion program over 2015- outperformance of re. which clean energy at 4. renewables account for tail offsets weak quality of off-takers 36% merchant busi. 12 billion HKD ture for construction of wind/PV/hydro plants Datang Wind generation Strong position in Balance sheet weak. Increase renewables 2016 CAPEX plan of 23 Re. ago). reductions. further expansion to billion EUR. across the wind and of the bank loans are shore wind on the south. 2017-2020 H1 2016 ment of end user capital markets business CAPEX plan of customer retailing so. advance off. capital rotation target through in-house shore of 1.5% ble growth. with blended contract ness. 200MW power market liberali. EUR. CAPEX plan of 4. Self-funding model. newable investments. exposure in renewa. plants nical upgrades through en- plan based on availa. Vigorous development of CAPEX in 2015 increased growth of 4. several innova. out of interna. high risk of cur.000MW in wind and lutions.Figure 51. lated. generation business projects. ergy CAPEX. and solar CAPEX of 2. of asset mix. new markets. selective Avg. nesses because of low base. ness due to high lev. no clear 2016-18: On-shore wind guidance on majority vs. Current business Main strength Main weakness Potential move Renewables CAPEX plan pany model forward and return targets China Non hydro renewa.3GW of wind) could be beneficial renewables not #1 0. move up the project risk tailment development curve E.6 der construction. IRR levels disclosure newables from nuclear business planned so far EDPR Selective and profita.4 tional of solar installed in zation and develop. (200 bps lower vs. some speeds. tion rights. future to grow capac. Strong or. Strengthening of US foot. rope/North America load prices ing projects. retrofit high billion HKD: Approximately sources 1. explor. Already established 63% floating rate debt Focus on low curtailment 2016 CAPEX forecasted at power bles still less than 2% business plan for exposure. press research. Key asset owner business model analysis (2/3) Com. EV/MW of 1.4 billion EUR EDF EDF renewables Robust pipeline un. on traditional power partners in renewable get blended spread of 500 business. by selling stakes on exist. 500-1. 1. energy capacity by 1. for 2016 CAPEX. tive patents filed els of leverage. wind tender values.8 billion EUR until 2020 (offshore = ~10%.5GW every year. No split of re. no clear plans power generation de. po.3 minority stake preference billion EUR and off-shore wind at 1. rotation or target IRR lev- ing offshore wind due solar value chain secured by PP&E and east grid. selling IRR of 6. recent earnings call 11 November 2016 Renewable Energy Ownership Strategies 29 . Firm wide CAPEX of 5. OPEX reduction plan . cussed on nuclear print. low power price CAPEX. solar R&D. net value future tariff rates are no new solar installed of pledged assets in lower. no clear cap- (1. regulated/quasi-regu. strong credit bles portfolio. coal plants. Company regulatory filings. target IRR of 12- ment life of more than 10 in Europe 14% in Mexico/Peru.1 billion EUR (550 mil- high-value activities lion already signed).ON Ongoing split of 70% of investments Persistent pressure Full-on risk sharing with Increased PV activity.7 billion RMB. rate increases in local tion of energy services billion RMB. capital cline of ~7%. Still predominantly fo. Declining IRR levels Capital rotation.3%. ongoing crease in renewables en- under construction emerging markets ulatory environment. 2 years quality of portfolio. possible areas. Promo. increasing new debt layers in through asset rotation growth over next 5 years.7 billion EUR firm wide ital rotation plan or target over long-term priority in 2018.6 EBITDA up ~45%. ~53% of 17 billon EUR power price environ. capital markets in the ity due to coal tariff penetration.5 million modular maintenance tech mix of solar & off. with LATAM markets 19. onshore + PV = ~90%) ENEL Full integration of ~71% of EBITDA is Significant merchant Increased regulated 6 billion EUR capital rota- Enel green power. target years spread of 200 bps > WACC Source: MAKE. fields featuring low wind by ~19%. gions of operation ergy efficiency efforts of bility of grid infrastruc. share of portfolio. capital structure prioritize 700 MW/year. sector reform in China. some de- GW of new capacity tential entry in due to favourable reg. Due to power els to decline in onshore electricity tariff collec.8 billion HKD for tech- cautious expansion ity power supply in re. capital rotation bps > WACC across all re- focus on Eu. Chinese’ firms’ capacity in 2015 2015 was ~6 billion strategy has been to RMB. 30% clean energy 7. ample carbon emitting coal 3. tar- Uniper from rest of in long-term regu.

gas and renewa. hedged from Brexit due Mexico difficult mar.5-6. nominated capital struc. Key asset owner business model analysis (3/3) Com. explora. Diversified portfolio in Post ITC/PTC Further development of 2017-18 development target ida Light & Power the US with low state phase risk pipeline projects. capi- mains key market. recent earnings call 11 November 2016 Renewable Energy Ownership Strategies 30 . vestment of electric vehi.0 billion GBP CAPEX and transmission capital markets availa. Environmental Ongoing deleveraging . Capital rotation pro- under construction ture of use. Retail business pro. solar genera. renewed emphasis on and renewables invest- MW of wind assets 3-4% depending of na.7 billion EUR (Offshore - portfolio of renewa. folio . growing revenue stream. expansion. gram already in place for . di. onshore .potential issu- tion increasing .8 mainte- nogy. graphic concentra. 1. parent entity level risk asset rotation program wind. 96% of approved wind Electric power Continued focus on No clear CAPEX plan. on traditional power sheet. channels . of 12 billion EUR CAPEX on bon technology share. projects in in Tier IV re. tal rotation or target IRR dis- growth of 34% gion mains weak. Current business Main strength Main Potential move forward Renewables CAPEX plan pany model weakness and return targets ENGIE Transformation to Globally diversified port. baseload prices renewables bles activity ties in the future at at- tractive multiples SSE Primarily a network Good credit quality. 350 million EUR of cludes the grid. 93% ble investments in to mixed currency de. funded with operating cash sively bidding for ture floating rate debt fi. age/IoT/digital space . 23% phasis on low car. 45%. rope transformation to utility of low Co2 activities. off-shore CAPEX in. bles make up biggest power prices in Eu. to geographic con. tion in off-shore wind generation business R&D and DG technology nance. develop and drop instead of acquire and drop RWE Focus on separate Growth of regulated Persistent pressure Deleveraging of balance 2016 CAPEX target of 2-2.Figure 52. identifi. OEM) flows LATAM growth nancing @ 44% of debt Next Era Affiliated with Flor. est rates to grow balance bility sheet Huaneng Inner Mongolia re. increase in of growth investments LATAM. business. dividend growth. Focus on paying in. environment ble assets.2 billion USD in CAPEX tive IPP in the US. for renewable assets ties to manage profita. no wind asset sale pro- gram in place as of 31 Mar 2016 Source: MAKE. investments in billion EUR. target low ROCE busi. 1. focus on home solar (non-capital intensive) business Pattern Globally geograph. significant tensive focus. maintenance payouts quirements cle business. centration opportunities of low inter. future EUR for wind / solar. low venture capital in stor. vides natural hedge in CAPEX is signifi. US solar). no clear of 2. health & safety. stable Currency volatility Further international 2016-2020 CAPEX plan of owner. over 2016-18 period. re. 100% YoY growth target ROFO portfolio of 1.55%). 300 focused on diversi.up tion risk remains ance of additional green 65% YoY high bond Iberdola Diversified asset Strong pipeline.300 US Co. Strong ROFO pipeline: Yieldco vehicle. em. CAPEX is ex- fication of fuel mix pected to be 7-9 billion USD as a utility to reflect 4. kets. creasing amounts of auction in the UK market. ments.5 public listing of In. Focus on next capacity 5. not reinvestment fo. press research. 7. tion of new financing closed YoY. aggres. makes Brazil and growth in LATAM mar. Company regulatory filings. 783 ble for debt financing @ dividend. dif..3GW Energy ically diversified 2019 target of 5 GW ficult capital market in existing markets over 2015-19 timespan portfolio of renewa. ital rotation opportuni. on environmental and mix emission filter re. 2. geo. >70% con. exposure.750 MW (2. market can provide cap. 150 Canada wind. which in. plan.100 MW in re- newable energy investments NRG Largest competi.428 RO qualified set portfolio bles portfolio expansion transmission and retail as- in UK market sets. growth in China re. focus diversified asset low power price era cant in 2016 due to cated to reduce debt.5 billion and divestment of tracted/regulated portfo. lio spreads of 200 bps > WACC ness units Huadian Maintain balance Significant negotiation Regulatory risk due Continued renewables No clear disclosure on between coal and power in terms of pro. USD denominated ISP providers (60% non. leading posi. because of low potential growth CAPEX for tail and renewa. significant capital allo. program @ P/E > 33x. kets. capitalize on CAPEX plan or IRR targets renewables curement of commodi. cussed cation of further renewa. diverse as. Significant merchant Significant amount of 15 billion EUR asset rotation digital at core. with 67% for networks asset owner.

representing a very small pre- 1.10 million USD/MW on average and sold as- IPP sets for 1.0x were on the buy-side. Wind power transaction multiples 2015- owners of power generation assets. accounting for USD 38 billion in activ- Turbine OEM ity.2x 1.6x 2. As more asset owners look to self-finance their growth and future growth capital invest- ment plans.4x 0. The slight increases that were observed were pri- marily due to inflation and currency volatility.6 Transaction multiple analysis Wind transaction premiums Given the ongoing wave of capital rotation programs amongst Figure 53.5x Financial a multiple of 1. 2. bubble size represents transaction size in MW Seller multiple Source: MAKE. followed by financials. an analysis of transac. owner types that have typically held large portfolios of transaction size in MW Source: MAKE. IPPs purchased assets at 1.0x the years. company data 11 November 2016 Renewable Energy Ownership Strategies 31 .5x Financials on the other hand paid roughly 2. span- ning multiple countries and types of asset owners. Buyer multiple = USD 5 billion (EV/MW) The bulk of the divestments came from IPPs and from utili- Note: EV/MW = Enterprise value / MW in USD million. We observe no clear signs of increasing premiums paid over Figure 54. Undisclosed 0. bubble size represents ties.14 million USD/MW.8x there is going to be continued demand for high-quality assets in the future. We analysed more than 850 transactions (2015-2016 YTD). Most of these deals 0. and a significant amount of variability exists in not only the quality of the assets.0x amongst asset owners.0x 2. which accounted for more than USD 25 billion of buy-side activity. Buyer vs. which corroborates our thesis that 0.5x Utility Industrial IPPs were the biggest category of transaction creators 2.0x 0. and narrowed them down to 280 deals that were not can- celled over the past 6 years and that provided disclosures of both the transaction price paid and the size of the asset.26 million Multiple USD/MW for buying assets in the market. Even though all transactions have their nuances.4x 2. company data (EV/MW) 3. we can still draw some thought-provoking trends.8x 1. but also the financing behind the assets. More than USD 60 billion in M&A activity was tracked. 2016 YTD tion multiples provides some guidance as to what existing as- sets are trading for in the market. asset rotations will continue to play a more im- portant role as a preventative mechanism against overlever- aged balance sheets.0x mium. seller wind power transaction multiples Note: EV/MW = Enterprise value / MW in USD million.

assets for physical power generation purposes.318 1. and.26 25.055 2.70 445 0. Conversely.26 3.671 N/A N/A Note: Data range = 2015-2016 YTD.825 2.76 1. company data 11 November 2016 Renewable Energy Ownership Strategies 32 . unsurprisingly. company data A form of transaction strategy that is gaining popularity is the private investment in public vehicle (PIPE) deal structure. Multiples paid in buy-side wind power Figure 56.58 4. Figure 55. A PIPE is essentially a way for private equity firms. and sovereign wealth funds to buy large stakes in publicly-listed vehi- cles.783 Yieldco 1. Since the Yieldco has plummeted. Multiples paid in sell-side wind power transactions transactions Note: EV/MW = Enterprise value / MW in USD million.41 3. bubble size represents transaction size in MW transaction size in MW Source: MAKE. a PIPE investment in existing Yieldcos could be an entry strategy for financials to grow their renewable portfolios.473 Industrial 2. multiple amount multiple (USD mil- (x) (USD (x) lions) millions) Financial 2. rather than cash-generation purposes.295 IPP 1. company data Source: MAKE.10 27. multiple(x) represents EV/MW Source: MAKE. bubble size represents Note: EV/MW = Enterprise value / MW in USD million. we have to use more caution when estimating the market premiums paid Figure 57.15 2.64 697 Utility 0.95 228 1. pension funds. the bulk of asset purchases came from financials. Based on our analysis of 30+ transactions. Yieldcos.150 1. transactions are generally fewer and require more thorough due dili- gence.45 13.32 3.75x. we observe the median EV/MW multiple Buy-side Buy-side Sell-side Sell-side to be ~4.5x to 7.90 308 0. Offshore Due to the complexity and nature of offshore projects.51 350 Turbine 0. with a range that varies from 0. Due to the low number of transactions.805 OEM Undisclosed 0. Deal summary statistics: Wind by financials for stakes in transactions.9x.734 Multiple 0.14 38.

Asset owners sell minority stakes to free cash and deploy the capital into new projects. Several buyers (utilities and IPPs) want full control of the assets and thus don’t compete in minority stake sales.e. Therefore. China continues to be a difficult market given that more than two-thirds of enterprises are state-owned. Another reason buyers chose to partake in minority stake purchases is that they avoid the winner’s curse of paying too much in a bidding war. majority? Many large financial institutions and private equity funds are trying to access opportunities in renewable energy assets because of their steady cash-flow and return profiles (FIT/PPA markets). There are 3 main reasons why sellers choose to sell minority stakes.. foreign investors with no re- gional experience in China tend to not make minority acquisitions in the country because of the lack of governance structure. The first is that competition for minority investments is often less intense than for majority investments because of the capital-only nature of such deals. From a buyer’s perspective. there are several advantages as well. since the new Goods and Service tax bill is supposed to improve the ease of doing business because of its nature of unification. This is an excellent capital allocation strategy. India will be a future battleground for minority investments due to the non-state-owned nature of wind and solar assets. The first and foremost is extraction of capital. 11 November 2016 Renewable Energy Ownership Strategies 33 . The state-owned enterprises are effectively an extension of the state and thus tend to serve the interest of government or the public. Financials.Capital rotation: Minority vs. bad assets). because the original asset owner will continue to have ‘skin in the game. MAKE believes that minority asset acquisitions are less likely to be lemons (i. instead of minority stakeholders.’ In the context of emerging markets. Buy-side investors might have access to important knowledge of specific markets that others might not possess. due to lack of interest in operating the assets. are favoured here. as long as the EV/MW sale multiple is higher than the construction multiple. India is in a favourable position. The second reason owners sell stakes in assets is to gain knowledge about specific markets or expertise to drive fu- ture growth. Asset owners can use this as a potential tool for specific market level expertise.

5 type of new offtakers. Debt pricing and leverage levels European utilities and developers face many challenges from Bond price discount to par a financing standpoint while trying to enter the US market. Public sector financing – which is typi- BB corporate bond spreads cally cheapest – can capitalize on lower IRR deals that do not BBB corporate bond spreads make economic sense for smaller developers. This risk is extremely hard to quantify and hedge in even the most ad- vanced and developed power markets. When it comes to utility con- tracts. (Par value = 100 USD) Debt multiple (x) +6. The nature of tax equity 60 3. the risk between the power price at the bus bar and the actual point of deliv- ery). pitch book cial and industrial (C&I) offtakes.5 ticipate in tax equity deals as easily as US developers. Foreign investors trying to 80 4. Leverage loan market. Another topic that is germane is the tenor of the contract. We have not (%) reached a point where C&I systems are the most dominant 8. 100 5.0 Equity remains at 20-30%.0 seek tax equity financing see this as a hurdle..5 deals (i.5 7. Quandl.0 true for both regulated and unregulated portfolios. the balance being permanent 3. and only large utilities and developers will be High-yield bonds able to enter the US market with tax equity in their capital Average LBO debt multiple structure. The biggest issue when structuring power deals with C&I players is the sharing of the basis risk. This is 6. Re.0x 5.0 50 101 2. 90 4.0 non-US-based asset owners to declare tax equity as a debt 30 1. Financial institutions have yet to come up with a good long-term hedging instrument in this domain. but the overall penetration is increas- 8.5 set owners already have debt-burdened balance sheets.0 gardless of an abundance of tax equity players in the market. because of the 70 3.2x 5. C&I contracts tend to be shorter. 0 0.. Source: MAKE. and this holds especially true in Europe. from a financing standpoint there are some kinks to work through. The life 5.0 cycle of the project remains of key importance.0 MAKE believes that this will not change until full expiration of 2015 2016 the ITC/PTC. Given the level of com- 0.e.5 look for many things when providing debt financing. Source: MAKE. this trend will continue. Lenders 5. at the price of additional leverage.e. This additional 20 1.5 debt. 110 5.5 equity. Corporate debt spreads them very different from a typical utility contract that is 15-20 years with an investment grade regulated utility. Renewable energy projects are now considered invest- ment grade by many rating agencies. Construction 4. debt is always cheaper than 6. However.0 ing. C&I clients want the developer to own that risk. BAML 11 November 2016 Renewable Energy Ownership Strategies 34 . the utilities generally bear the basis risk (i.5 debt is sized at around 15-20% of the total capital structure.5 obligation to apply IFRS standards. Note: LBO = leverage buyout multiple paid by PE firms.6 % One major competitive disadvantage is that they cannot par. making Figure 59. where utilities have some of the lowest cost of capital in the world.0 Speaking to the capital stack. the obligation to document a target yield) forces 95 40 2.0 debt-load makes it difficult to do deals because many key as- 10 0. typically 7-10 years.0 fort with such projects. As data centres continue to exhibit explosive growth.5 instrument.7 Financing and cost of capital New financing trends Figure 58. rather than an equity instrument. 4. 7. the overall trend in terms of cost of 2010 2011 2012 2013 2014 2015 2016 capital is downwards.5 this continues to be a bottleneck. data as of July 2016 One trend is the ongoing increase in the volume of commer.

Convexity in renewable energy projects construct Big upside Small upside Big upside Small upside Big Late stage equity invest. The capital structure. the certainty of auctions/tenders is higher than for an FIT with an uncertain digression (e. Debt. ments (series D. onshore wind ments in a market that is new but meets all due-diligence checkpoints. If asset owners can find debt that is long-dated. press research Optionality: The alchemy of capital structure Although turning lead into gold is not possible in chemistry. outcome down.5% No reductions expected Cash equity (true equity) 9–13% Matches market equity premium levels Note: LIBOR = London Interbank Offering Rate. Ger- many). MAKE’s analysis points to extension of existing debt terms for asset owners rather than issuance of additional short-dated as an optimal strategy.F etc. the capability to make a decision at some other date is extremely powerful. and the return profile will be lower. if priced Trivial case. lower spreads for short-dated debt is a possible strategy to benefit from the current capital markets environment. One of the most under- valued aspects of balance sheet structuring is ‘optionality. Figure 60. Long-dated capital structure is extremely useful.’ Optionality. Nassim Taleb 11 November 2016 Renewable Energy Ownership Strategies 35 . typically you understand the risk side startups that typically have struction stage projects identified to be in profile extremely well made headlines to show EPS accretion to the ‘too hard’ pile investors Small Attractive. equity in a mature technol. even though the market is not pricing in a rate increase in Europe over the next few quarters. High valuation EV/MW Big Too left-tail domi. by definition has negative optionality. unless down. since this is the riskiest phase of the projects Stable Tax equity (US only) 8–8. can be a friend to asset owners. since it has to be paid back at a certain known date. MAKE believes that there exists a steady and robust pipeline of innovative companies in the power and utilities venture capital space. is possible.. that investor appetite will be higher. in terms of the capital stack refers to the capacity for making an investment decision at a different point in time than today. Convexity in capital allocation decision making Convexity in terms of capital allocation refers to investing in projects that can provide non-linear payoffs.) in multiple paid for a con- downside nated. since it provides in- vestment decision making optionality. Longer term debt vs.– From an investor standpoint. positive op. Chadbourne & Parke. where debt can be used to create value for equity holders. although the awarded prices will be lower in the future under tenders. venture capital investments in niche energy related technology Source: MAKE. interviews. EUROBOR = EU borrowing rate as set by the British Bankers Association. Solar rates are typically 50-100 bps lower than onshore wind. The reference rate will vary according to country of domicile of the project. alchemy in the capital structure. In the current low-rates environment. Negative optionality.E. Convexity in new projects – theoretical Figure 62. Cost of capital trends: Onshore wind Type of financing Typical rates (after-tax shield) Outlook Construction debt LIBOR/EUROBOR + 300 – 600 Reduction of 15 bps expected over 2-3 years Permanent debt LIBOR/EUROBOR + 175 – 300 Reduction of 25 bps expected over 2-3 years Development equity 15-20% typically. Since projects Figure 61.g. Thus. ernment debt instru- tionality side ogy like solar. risk-averse Small Early stage development Negative yielding gov- downside right. if set up well. Nassim Taleb Source: MAKE. offshore wind rates are typically 50-100 bps higher than onshore Source: MAKE.

2015 was the first year where solar overtook wind in terms of tax equity volume. and that remains immensely important for the residential market. For instance. 2016 is trending at the same levels. Decision makers should keep this in consideration while taking equity financing decisions and issuing stock for M&A deals Capital allocation Decision makers should carefully evaluate CAPEX plans at the entity level. Asset owner financing strategy roadmap Key challenge Action plan Equity valuation Equity market pessimism is expected to continue over 2-3 years. equity financing environment will continue to be difficult. Tax equity update: Mechanism of mass construction The US remains one of the few countries with very significant federal level tax incentives – namely. industrial and utility scale have different economics. optimal capital structure should be the target. tax equity is starting to account for a larger share of the capital stack than it used to 5 years ago. participants have committed to tax equity in the residential solar segment. Careful evaluation of regulatory power should be performed. establishment of in-house teams that select ven- ture capital investments or outsourcing of such capital allocation to external managers will play an important role for the utility of the future. If asset owners continue to exhibit lower FIT and PPA rates in the future. Tax equity financing was essentially created to provide a mechanism to harness these credits. but IRR levels of 50%+. a significant amount of time and effort needs to be invested in selection. Very fundamentally. Tax equity will continue to play an important role in US financing until 2023 (i. Wind used to make up 60% of the stack. Investment Tax Credits (ITC) for solar and Production Tax Credits (PTC) for wind. Some tax equity investors prefer longer flip dates since it gives them more time to monetize the tax benefits. the number is more varied today. Residential developers are essentially focussed on being cash-flow positive at the system level.8 billion to 2 billion USD in tax equity in 2016. In the case of solar. evaluation and exit of such opportunities. and now that is up to levels of 75%. with the range being 40-60%. different target flip dates (as required by the partnership flip structures) and thus different tax equity levels. the only way to maintain a historical level of returns will be to exploit convex opportunities rather than new market expansion. and that trend is reversing. Yieldco owned asset cash-flows should not be available for use by the parent entity Source: MAKE 11 November 2016 Renewable Energy Ownership Strategies 36 . Typically large financials have participated in such deals – and this trend is expected to continue. Disciplined approach should be applied to sepa- ration and carve out alternatives Importance of tax and Tax concerns are important – strict governance should be applied to such considerations. Although historically less.e. keeping in mind that rates are likely to come up over the long-term. when the ITC/PTC runs out). Nonetheless. Figure 63. the investor exchanges cash for tax losses. as long-term investments are highly sensitive to rate changes Business mix Portfolios should be constantly evaluated for return optimization. The split was rougly 6.. Solarcity – one of the largest residential developers in the US – stated that it needed 1. Decision makers should not target lowest levels of short-term WACC. Many authorities have the constitutional power to ings apply retroactive changes to previously awarded FIT/PPA rates Capital structure Cost of capital optimization should not be the goal. Floating-rate debt should be used with caution Regulatory proceed. Asset owners should not hesitate to divest non-performing assets and should avoid league table achievements Return expectations Careful evaluation of long-term investment opportunities should be performed.4 billion USD for wind.of such types can have failure rates of about 40%. Furthermore. Residential. Yieldco and non-con- governance trolling entities should be independent in their cash sweep collection agreements.8 billion USD for solar and 6. tax equity is where instead of exchaging cash for an equity stake in a business. if the parent goes bankrupt. There was 13 billion USD in tax equity issued in 2015.

0 x 0.0 x Pattern Energy Group Inc -1. All other data is from the year ending 31 December 2015 Source: MAKE.0 x 2. Thus. financial institutions came up with a different structure to cater to yield and tax efficiency seekers. Comparison of Yieldco and peer vehicles MLP Yieldco REIT Term structure 30 years < 2 years (renewables only) ~50 years (real estate only) Corporate legal status Partnership C Corporation Corporation. has seen a slump over the past year.5 x Size = Market cap USD 3b Debt / Equity Yieldco Non-Yieldco Note: *Indicates that data is from the 12-month period ending 30 September 2015.0 x 0.5 x 2.0 x NRG Energy Inc -4.0 x TerraForm Power Inc* SunEdison* -2. The Yieldco essentially came into existence because the US government rejected the proposal to include renewables into the Master Limited Partnership structure (MLP).0 x NRG Yield Inc 1.8 New business models Yield-con? – MAKE doesn’t believe so The Yieldco asset class. equipment and renewables as- ties.0 x 3. portfolio of projects are non-recourse to parent that has ROFO Note: C Corporation= A US corporation that is taxed separately than its owner.5 x 1.0 x 1. Non-taxable entity sets shield taxes Qualifying assets ‘Exhaustible’ resources that Unrestricted Real property per definition of generate qualified income only IRS (excludes energy efficiency (excluding renewables and utili.0 x Brookfield Renewable Energy Partners LP NextEra Energy Partners LP 2.0 x -5. Figure 64. IRS = Internal Revenue Services Source: MAKE. trust.0 x EDP Renovaveis SA Abengoa Yield PLC Northland Power Inc 0. association Tax status Non-taxable entity Taxable. Moody’s Figure 65.0 x TransAlta Renewables Inc 7. ROFO = right of first offer. Yieldco leverage profile EBITDA / Interest expense 8.5 x 6.0 x 4. mostly oil and gas) sets) Dividends Partnership agreement requires Unrestricted IRS requires pay out of 90% pay out of all cash flows to be distributed Other characteristics Ongoing businesses. Company data 11 November 2016 Renewable Energy Ownership Strategies 37 .0 x -3. but depreciation from acquired as.5 x 3. which was exploding in 2013-2015. typically Assets are contracted revenue streams with- unencumbered assets out organic growth.5 x 7.0 x Algonquin Power & Utilities Corp 3.0 x 7.

regulatory filings and legal fees that come with public companies. Interest rates will likely go up over the 5-to-10-year horizon. where instead of publicly listing a vehicle of renewable assets only. 11 November 2016 Renewable Energy Ownership Strategies 38 ..5x coverage Low interest coverage coverage / Interest (CFO pre-WC) / debt 20% <2. The recent bankruptcies of Abengoa’s vehicle and SunEdison Corp. ENEL undertook a private Yieldco sale. Long life of contracts under PPAs. Separating operating as- sets from the development portfolio makes sense as long as it is clear that what is being sold is something close to an annuity. limited addi- tional maintenance CAPEX) Financial policy Clear governance. the growth component doesn’t make sense.5x-4x leverage High leverage. Current Yieldcos offering above average yields will be further squeezed into unfavourable actions of paying all their income out without enough buffer for coverage requirements. 15% Clear agreements on cash sweep Weak governance. profile and 3 countries (outside of US) geographically concentrated in North America Hedging policy 5% PPA’s with credit worthy offtakes. WC = working capital Source: MAKE. Most assets in developed markets where sovereign risk is high there is the presence of counterparty default hedges Capital requirements 5% Minimal maintenance CAPEX Mostly upfront CAPEX (i. Yieldco assessment scorecard Sub criteria Sub factor % Measures Typical position of existing Yieldcos Weight Asset mix Size of the vehicle / 5% Minimum size > 500 million Relatively small vehicles in the market portfolio EUR/USD currently Business Market diversification 10% Minimum spread of 3 states (for US) Typically diversified by technology type. when Typically 10+ year PPAs.Figure 66.e. typically greater than 4x RCF / debt 10% Varies Leveraged Note: CFO = cash flow from operations. which was the original intention of the model. the Yieldco asset class makes ‘economic sense’ since it provides the lowest WACC structure and is tax efficient. An advantage of privately selling a stake in a tranche of projects is that asset owners can avoid the complexities of reporting. have only exacerbated investor pessimism in the market related to such yield growth promising instruments. which makes incentives are a function of power the bulk of the NPV prices there is significant stability in wholesale power prices Market framing 15% Assets where sovereign risk is low. However. and weak situation fi- servative financial policy agreements and reserve accounts nancially. they bundled projects with no further promise of growth in the tranche but a promise of cash yield. and yield expectations will go up with them. In general. due to high dividend pay-outs Leverage and (CFO pre-WC + interest) 10% >2. coun- power hedges where PPA’s are terparty credit worthiness is high short term Cash flow predictability 5% Certainty around cash flows. con. Moody’s Several asset owners are stuck in an impasse as to whether or not to float a public vehicle such as the Yieldco.

10 Continuing issues 0 The issue in offering fixed-term instruments is that power is 01/2015 07/15 01/16 07/16 01/17 07/17 locational in nature. ‘marking to make believe’. Power is the only commodity that can fluctuate from EUR Figure 67. Such instruments typically run for a term of 5-7 years. then these deals won’t make sense. The projects and the cash flows disappeared – first slowly. Banks were highly likely to lend to such projects (EUR) back then. where sometimes there are no investment grade PPAs available. In developed markets.. there is only a risk of 1% on the deal 40 that the project will lose money. instead of to a given offtaker at a fixed rate.e. covenant com- pliance is extremely difficult.0x).Merchant exposure: Finally making a comeback? In the early 2000’s.e. German merchant power price exposure 40/MWh to EUR 40. almost 2 decades later. which were starting to take off then. Yieldco vehicles will not swallow such projects in their mix). In a P99 case. Thus. 70 Hedges in this segment are also making a comeback. coming out of the Enron collapse – post-California power crisis – market participants around the world lost faith in financial institutions’ ability to provide correct power prices and marks on their positions in bilateral power trades. then suddenly. Thus if a developer has a very high cost of capital. The 2-year additional term is essentially the risk the lender is will. merchant projects are making a comeback. EEX at a point at which projects are fully merchant (i. Power is offered in thousands of nodes Floor of EUR 28/Mwh (@40% capacity) across countries.. there is only a 1% chance that a project 50 will underperform. Deals priced in approximately 2013 were LIBOR + 750 bps.000/MWh in one day.. the 80 whole merchant market froze up with it. much lower than traditional projects. thus there was a at 95% confidence interval tremendous amount of irrational exuberance in the market pre-2006. 11 November 2016 Renewable Energy Ownership Strategies 39 . Lenders don’t have the appetite for that yet because it defies the fundamental axioms of lending (i.e. 60 Hedges typically consider the P95 or P99 case for the pro- jects. 20 ing to bear. However. Levered equity IRR levels of 10-11% can be expected in such deals. Therefore. MAKE defines merchant projects as those that are selling the generated MWhs into the wholesale market. Geographically. The energy marketer is usually the one bearing the risk.e. but in emerging markets. and the ones priced in 2014-2015 were around LIBOR + 600 bps. Fully merchant (Lower) The hedging counterparty provides a hedge on a liquid point. the projects are de-facto merchant. Fully merchant (Upper) but the delivery point can be different. As the credit markets imploded soon after. users of capital have to comply with cash flow based covenants such as EBITDA coverage and interest coverage). The debt levels in these deals is typically ~50%. suffered from the manipulation that Enron was conducting (i. Now. What can be said for certain is that the public market will not have an appetite for such deals (i. Failures in such projects around 2000-2006 were primarily due to extremely high levels of leverage (85-90% debt) as well as low-interest coverage requirements (1. given the extremely low levels of PPAs. thus the bank debt that backs 30 merchant projects are 2 years on top of the hedge term. the market is not seeing such quasi-merchant deals outside of the US yet. Merchant can have various meanings. In general. basis risk is usually a problem. lower wholesale power prices and wider availability of hedging instruments. with no power hedges at all). Mer- chant projects. private equity players and alternatives will continue to pile into this segment with development capital. the cost of financing these projects is typically high. MAKE notes that we are not Note: 28 EUR floor price is for illustrative purposes only Source: MAKE. instead of ‘marking to market’).. With the unpredictable nature of cash flow of merchant deals.

Yield (%) ment is required in European infrastructure. including: provide security and predicable cash flows. non-investment grade projects must satisfy Utilities additional criteria in order to be valid. but the restrictive regula.6% investors. In order to investment administration capacity appetite costs qualify. 4 4. The requirements are being phased in be- transmission Equities tween 2015 and 2019. US REITs US 10 year A new solvency II framework came into action starting Janu. Maritime Convertibles tory environment under Basel III has eliminated major banks MLP’s Private Real Estate as a source of capital in infrastructure in Europe. pension funds and in.6% Avg. regardless of their risk profile. Developers Basel II Basel III As renewables offer all of the required features listed above. Under the new framework. Investment class risk vs.Solvency II and Basel III Figure 68. End Users Basel III Basel II Figure 70. from a renewable energy standpoint. regulators have EM = Emerging market. Furthermore. Investors Basel III was launched by the Bank for International Settle. REIT – Real estate investment trust. it’s not easy to es- Brown electricity Risk generation / timate the impact. Renewable en. Thus. US 10-year refers to 10-year government treasuries. the regu- lation was amended to include a term – ‘qualifying invest- ments. Furthermore. At this point.1 jects to deliver on pension obligations.0% 3. Project bonds 8 7.4% ergy infrastructure is a part of this investment. Export and Preferreds EM Equity Listed Infrastructure DM Equity import agencies are usually limited in their scope of invest- Global REITs US Equity ability. Asset class returns The EIB estimates that more than 2 trillion Euros of invest. 5 3. Climate Policy Initiative ments. document due-diligence reports and go through Reduced Increased Reduced lending the regular vetting process of insurance firms.6% 3 2. DM = Developed market. Maritimes refers to shipping vessel debt yields placed the same capital charge requirements on all types of Source: MAKE. which only includes the project as an as- set. 6. As demographics are getting older. which primarily regulates banking activity. 9 8. Project debt is 0 a perfect fit for both counterparties.’ Qualifying infrastructure investments must meet a Figure 69. 2016. This pool of capital can provide a very large opportunity for new project development. JP Morgan – Guide to markets (as of September 30. Fortunately. Note: MLP = Master limited partnership.7% 3. debt or equity investments must be issued as a spe- cial purpose vehicle. Basel III impact number of criteria.5% surance firms are more likely to invest in infrastructure pro. future impacts might affect onshore Source: MAKE. ary 1. but especially pension and insurance firms be- 1 cause of the long-term horizon they possess. 4. Also. Renewable energy 2.2% are supposed to comprise a significant portion of this ongoing 7 investment requirement. The stricter requirements are supposed to impact in- vestment banks more than commercial banks. return profile Source: MAKE. low-cost development bank funding dominates that market Return currently for solar.0% 6 and asset class returns are shrinking.9% 3. Credit Suisse Asset Management 11 November 2016 Renewable Energy Ownership Strategies 40 . 2016) projects. MAKE expects that Basel III will not result in higher debt financing costs in 2016 and 2017. where lend- plants ers are required to keep additional equity per dollar they lend Desalination to the market (usually measured by tier of capital). Basel III it is only a matter of getting the documentation processed and Financial getting the deals done. Basel III Merchant Power was essentially a stricter regulatory requirement.1% project debt is an attractive instrument for many institutional 2 1. the requirements impact diverse types of capital providers dif- Fixed income ferently.7% 2.

GW bulk of the O&M work internally. to Allianz Capital Partners 0. Currently. but has placed immense pricing pressure on the remaining providers. while major correctives are ad- dressed by niche providers. Prokon 0. US onshore is a very competitive O&M market. a hybrid service strategy is significantly less capital intensive. in-house services provide long-term cost savings. Turbine OEM mendous risks present in the offshore O&M segment. whereas others specialize in few.3 0. Multi-contracts are likely to con. Barriers to entry will remain low for the Figure 72. and niche providers will continue to offer highly 2015 (GW) specialized service offerings. it imme. and service margins are trending down- wards. EOY 2015 (GW) risk compared to utilities and independent developers.6 understand their future capital allocation choices. MAKE expects future in-house O&M growth to drive down OPEX-based LCOE improvements. while performing in-house service for routine maintenance is the best of both worlds. The bank’s viewpoint is that if a fleet break downs. Financial asset owners are at a greater Figure 71.3 are unlikely to lend to projects without long-term full service con. so MAKE believes that there is RWE innogy 0. OEMs retain the bulk of this information. reliability and failure modes.2 tracts.2 0. as a means to reduce individual exposure to the tre.5 other parts of the business.2 diately becomes non-cash-flow-generating. There are two strategic advantages to this. Asset Small/community owned 26. EOY foreseeable future. There are some ISPs that engage in high volume. this will create a lasting O&M market boom. by utilizing their own employees to perform planned maintenance and offset the cost of occasional costly unsched- uled repairs. Asset light strategy in the midst of an O&M boom As turbine fleets age. Asset owners have increased their fo- cus on proactive maintenance and advanced analytics. great businesses are those that create high returns on low equity usage. As previously mentioned. from a balance sheet usage standpoint. In-house (established) Mix tinue to exist. A leading strategy amongst the largest owners (utilities) is to de- velop in-house capabilities for services. but 30% EBIT margin contracts. Engie 0.4 0. and is a high ROE business. If owners utilize their own staff for routine maintenance. in countries where debt financing is cheaply available. Top asset owners: US. Scale or profitability should be prioritized.3 Utilities that own offshore wind assets are mostly unlikely to do the Installed base. Furthermore.1 0. in an ef- fort to minimize long-term operating costs. but sub-5% margin contracts.5 KGAL Group 0.2 covenants that the lender has in place for the asset owners. and one of the last strongholds for ISPs. Structuring hybrid contracts with OEMs or Source: MAKE ISPs for spare parts and major capital repairs.5 26. EWE 0. such as in Northern Europe. Secondly. 0. thus is likely to cause Thüga RE 0. Minor correctives are often performed by several O&M providers in the EU. This is also Source: MAKE a function of co-ownership typically associated with highly capital 11 November 2016 Renewable Energy Ownership Strategies 41 . Top asset owners: Germany. Acquisitions of leading ISPs by OEMs and asset owners in the US have left few ‘full service’ ISPs standing.5 some room for cross pollination of ideas from the O&M side. As more asset owners increase their efforts to optimize operations.and offshore wind more.4 From a financing standpoint.2 owners can also leverage the learnings from such service to better Enertrag 0.0 0. commercial banks Juwi 0. In terms of geographical differences. turbine OEMs are hesitant to share infor- mation on turbine reliability and operational data with asset own- ers. The EU market remains highly fragmented. First. one important issue has been the increas- ing importance of service activity related to scheduled and un- scheduled maintenance. they will retain critical knowledge on turbine performance.

Climate Finance Lab 11 November 2016 Renewable Energy Ownership Strategies 42 . It can be used in different countries and sectors and could also contribute to financial market development in developing countries. This can spell dis- aster for a project. Since risk is shared amongst co-owners. Loans in developing countries are often only available with a floating interest rate. However. reduce greenhouse gas emissions and increase climate resilience. Furthermore. so these two risks can compound and the uncertainty can discourage investors from pursuing what would otherwise be profitable and important investments. World Bank hedging instrument (1/2) TCX Inflation linked (provides inflation-linked. swap currency swaps) Source: MAKE. and ability to absorb some of the high 115 costs of a major component failure in the offshore environ- ment. the long timeframes involved with renew. 95 ers to renewable energy and climate investment in develop- ing countries. In nations with underdeveloped capital mar. unlocking additional investment. World Bank rency of 50% or more are not uncommon. the set of tools offered by the Long-Term FX Risk Management instrument can help to make more projects attractive. Long-term FX instrument By enabling companies and investors to lock-in long-term finance in local currencies. due to their unique positioning for technical support 120 and spare parts supply. 110 105 World Bank hedges: Dealing with currency and counterparty risk 100 Currency risk is one of the biggest and most persistent barri. 0 kets. meaning that debt repayments increase if interest rates rise. Source: MAKE. lenders are unlikely to achieve financial close without strong Index (base = 100) O&M agreements in place. An interlinked barrier is interest rate risk. creating a risk that they will not be Brazil South Africa enough to pay back foreign debt if the local currency loses Note: Gross capital formation is used as a proxy for capital investments at the value. Long-term fixed cross-currency and interest rate New Interest rate swaps) Counterparty climate related or SPV related investment IFC Local currency (provides local loan currency loans Cross currency and cross. The offshore service segment will 125 continue to be dominated by turbine OEMs the next 10 to 12 years. Figure 74.intensive offshore projects where private equity firms own Figure 73. the 2004 06 08 10 12 2014 only viable option is to finance projects in a foreign currency European Union China such as the US dollar or euro. country level able energy investments mean changes in the value of a cur. the potential impact of the instrument post-pilot is large. Changes in interest rates also affect the value of a currency. Because it addresses such a major invest- ment barrier. A significant amount of future capital investments will be made in markets with weak credit conditions and volatile foreign exchange. Gross capital formation pieces of projects. project revenues are Sub-Saharan Africa (all income levels) India often in the local currency. unlocking new investment in projects that provide clean energy. like the majority of countries in Sub-Saharan Africa.

World Bank. with just USD 250 million in donor capacity.859 IRX capacity 274. only one investor from Europe (the German Source: MAKE.50 6. IFC capacity 502. World Bank hedging instrument (2/2) Donors first- loss capital First loss Margin/ tranche collateral Public and Equity private equity investors Private Notional investors coverage Cross currency swap Financial intermediaries Source: MAKE. Figure 75. lower savings rates and more (million USD) (million USD) uncertain policy and macroeconomic environments greatly limit the availability of investment capital. Note: IFC = International finance corporation.013 rameters.085.00 1. asset owners could 11 November 2016 Renewable Energy Ownership Strategies 43 . compet- Results Wind onshore Solar PV ing investment needs. Market risk is miti- Portfolio share 65% 35% gated within the facility by pooling risk and diversify- ing overall foreign exchange exposure across a wide Installed cost (Million USD/MW) 2.55 3. Leverage IRX (mid case) 3.211 199. the in. IRX = Interest rate exchange So far.509 USD) than USD 1 billion. Climate finance lab government through its KfW program) has committed to providing USD 30 million in donor capacity.30 range of emerging market currencies and through the Equity share (%) 30% 25% use of long-term economic models in countries with Debt (%) 70% 75% little financial depth and a lack of financial barometers such as yield curves. Climate Finance Lab The direct barrier addressed is exchange rate risk – specifically the risk that one currency will lose value against another. Leverage (mid case) 6. In cases where this is not possible.50 strument uses credit guarantees that will cover a cer. Hedge capacity provided by World Bank in- The proposed structure also provides a solution to struments mitigate market risk and counterparty credit risk. which act as the main barriers to greater issuance of Assumptions Wind onshore Solar PV swaps in developing countries. Donor capacity (million USD) The underlying barrier is the cost and availability of IFC 50 long-term local currency financing in developing coun.55 tain percentage of defaults.154 MAKE expects that given existing technological pa- 776. the facility could provide hedged capacity of more Total hedge capacity (million $1. Capacity factor (%) 35% 16% tablished lending relationships such as development Lifetime (years) 20 25 financial institutions (DFIs) and export-import banks Leverage profile that have a good understanding of credit quality of borrowers. Debt hedge share (%) 90% 90% dressed by working through counterparties with es. Counterparty credit risk is ad.284 109. but once the tranche is fully loaded. This is an important risk for investors when there is a currency mismatch and the revenues of a project are in a different currency than repayment obligations. IRX 200 tries where less developed capital markets.Figure 76.495 309.

000 1. US C&I procurement mix a major headwind. understanding local retail sale restrictions. even when they are spending hun- dreds of millions of dollars on electricity. most C&I agreements thus far have been for 5-10 year terms. REC = renewable energy credit 12-. They want it with respect to energy has a 2.872 energy consumption at data offtaker pays a fixed price in 219 centers” – Google exchange for a floating price for 725 2. tremendous amount of value for Many PPAs are actually contracts a company with a fairly large for differences or hedges. It started with companies showing an interest in promoting greater use of renewable energy by doing some unbundled REC transactions. Therefore. 15.935 1. Further. from customers. have either been procuring electricity on a short-term basis in the spot market Power grid or are buying from the local regulated utility.192 “Corporate offtakers are more 3.000 462 focused on the location of a project “Having long-term price certainty relative to their needs. Data centers Corporate PPAs Just starting with the Fortune 500. The 2. and then making the financial case to the chief financial officer. Entering into a Note: PPA = power purchase agreement.500 at least to be in the same RTO. if asset owners are willing to treat this donor capacity as a venture capital investment (since it possesses a similar convex risk profile). these deals are not easy to price and execute for corporates. there are hundreds of companies that either have a 100% renewable energy goal or a carbon reduction goal. they can capitalize on first-mover ad- vantage in several upcoming key markets.or 20-year power purchase agreement is a com.500 contracted”. Low natural gas prices are Figure 79. but is actually a hedge or effective hedge against electricity price risk.249 the electricity for which it has 1. Virtual PPA more. According to Chadbourne & Parke. Corporate/synthetic PPA perspectives 3. which is a major piece of this. Today companies are trying to capture value and are considering the best way to do that. and explaining to Wall Street how this is not taking on more risk for the business. The manufacturing facilities” – company can defer the deal until 2014 2015 2016 General Motors the price meets its objectives. the board or other ultimate internal decision maker.use this facility to build projects in emerging markets.ENEL 1. Source: MAKE. doing the origination process and making sure they are talking to the right developers with the right projects.500 3. Figure 77. whether it is being an equity investor or the long-term offtaker or participating in some other fashion. Creative commons pletely different decision for them. Longer- term deals require commitments that companies have not made previously and hence require a certain level of comfort in non- standard contract structuring. but they are absolutely where the market is headed. The market has grown aggressively over the past few years due to decrease in offtake pricing. The process drags out” – Recurrent Bundled Product PPA REC Energy Note: REC = Renewable energy credit. These deals also requires focusing on everything from avoiding derivative accounting treatment. One question corporates have to answer (millions KWh) Figure 78. project Most of these companies.000 1. The corporate to serve our far-flung 0 negotiation is price-driven. PPA = Power purchase agreement Source: Press research. structuring the deal properly. Chadbourne & Parke Source: MAKE. EPA 11 November 2016 Renewable Energy Ownership Strategies 44 . The pressure is coming from the Wind/solar board. as well as.339 “It is a completely different 722 negotiation when you have a utility that is compliance-driven 500 “We are looking at a potentially versus a corporation that has a 488 314 481 diverse portfolio of renewables lofty goal. the executive finance committee.

A community solar project is a solar photovol- taic array. Secondly. Norges Bank has been the leader in the ‘negative screening’ domain. ING 1. Source: MAKE. Further standardization of documentation is needed for this asset class to emerge as a large al- Note: EDF = Electricite de France. we expect that this additional pool of capital will find a 2015 good use. 46 % Green Bonds and ESG: No longer a niche 20 % Green bonds have been around for ~10 years. KfW = Kreditanstalt für Wiederaufbau ("Reconstruc. and issuers have to comply with strict requirements. ternative investment class. Norges Bank. Since these debt instruments are long-dated.12 faster in 2016 to 2020 than previously expected. The deals have to make sense eco- nomically before mass adoption. distinct from residential. asset owners in the offshore wind and ultra-large solar space can issue their own green bonds and raise capital for investment grade projects.66 this instrument. as it has eliminated hundreds of companies from its public market investment portfolio for negative attributes associated with hydrocarbon-based energy sources such as coal. industrial and utility-scale projects. and Cic- ero are only some of the companies providing opinions on the ‘green- EDF 1. to which customers buy in or subscribe. Top 5 green bond issuances in the next decade. Policy support has definitely provided some buoyancy to the instrument. A variety of reasons drove this growth. Projects are either ground mounted or 11 November 2016 Renewable Energy Ownership Strategies 45 .30 even though there is no legal obligation. but global is- suance skyrocketed in 2014 and 2015 with USD ~37 billion and USD ~42 billion issued.when they head down this path is: Are they going for sustain. commercial. they can expect an increasing amount of capital availability for investments in renewable energy projects. Moody’s has also launched a Green Bond Assess- Toyota Finance 1. and investment- grade they are likely to offer lower rates as well. to assist investors in decision making related to green bonds. ING = International Nether- lands Group. 2015 green bond issuance by type ability. Barclays. Canada Pension Plan. Renewable energy Waste mand from institutional investors. Sustainalytics. along with credit enhance- 24 % ments provided by development banks.25 ness’ of the bonds. respectively. Another key reason for this rapid growth has been strong de. Since the average size of projects in offshore as well as onshore wind and solar is expected to come up materially over Figure 81. 4% 6% 2% For the market ultimately to reach scale. and Energy efficiency Other KfW have all issued green bonds in order to fund green pro. MAKE estimates that that this asset class will grow Tennet Holding BV 1. Credit Agricole. Figure 80. Ontario Teacher’s Pension Board and Calpers are amongst a few that have set up responsible investing arms to monitor investments due to ongoing demands by shareholders to apply negative screening on brown energy investments. First. It is still early. tion Credit Institute") Source: MAKE. or is it some combina- tion of the 2? The value proposition is still a challenge in some markets. DNV. are they going for economics. Climate bonds initiative Community projects: Stronger together Community solar projects are emerging as a new asset class.25 ment (GB) rating service. Issuer Amount (USD billion) One key element of consideration before issuing a green bond is the capability to provide adequate reporting. Climate bonds initiative Another important theme that has come under the limelight has been an ongoing wave of ESG screening by some of the largest sovereign wealth funds. but lenders and equity investors are beginning to invest. the economics are 9% going to be important. This is a key requirement of KfW 1. Sustainable water jects. typically around 1 megawatt in size. Renewable energy asset owners can exploit this source of funding in 2 ways. Deutsche Bank. Institutional investors such Low carbon transport Climate adaptation as HSBC. oil and gas.

Germany and France have several platforms supporting crowdfunding renewable investments. then the utility will pay for the unsubscribed amount. 11 November 2016 Renewable Energy Ownership Strategies 46 . the customer makes an upfront payment to buy a panel or series of panels. In a ‘subscription model’. Utilities benefit from community solar because they can recover their fixed costs.located on large rooves. where basis risk for the offtaker is high). similar to a net-metering arrangement. Canada. The utility and developer have a separate arrangement for interconnection and electricity offtake. and that are far away from highly liquid power distribution points (i. investor returns are in the range of 4-6% for Germany and 7-10% for France. in the crowdfunding model the underlying credit score of customers is of key importance in de- termining the interest rate. escalating with inflation.e. In the US.) All crowdfunding is typically debt-based lending. and the utility usually is able to continue recovering its costs in the fixed portion of a customer’s bill. and India –have some sort of crowdfunding platform for renewable energy investments. which it can sell to the utility in a separate agreement.g. as customers can secure financing through another a channel for residential rooftop. A key element of the subscription agreement is the accounting and billing arrangement. Crowdfunding platforms: Renewables in a P2P world Crowdfunding is essentially raising money over the internet through a platform to fund a business or a project. Such investments are usually smaller scale and fund energy efficiency projects such as LED installations. while promoting growth of renewable energy to meet state mandates. Returns for such investments are in the range of 6-10%. one additional flavour of crowd funding is working capital funding. Community solar does not necessarily contribute to any utility death spiral by picking off utility customers and leaving utilities with stranded fixed costs to maintain the grid without the customer base to support it. Similar to solar based asset-backed securities. municipal.. as it impacts their risk tolerance. Essentially. then the need for high transmission and distribution costs goes away.. Such projects are well suited for communities located in high wind resource areas. The developer reports each customer’s share of the electricity output to the utility. This is important for institutional lenders. the adminis- trative expense burden tends to be high. the platform (which in many cases is similar to a P2P network) raises capital to fund a project. There are 2 main models. If the minimum size of the community is such that it can support a DG project of ~10MW. CHP technology improvements and also DG solar and wind farms to a certain extent. Several markets across the globe – including all key EU markets and the US. the development equity or initial working capital through such platforms). The utility credits the customer’s bill at a price set out in the state or utility’s commu- nity solar program guidelines. Regulatory environments vary by country when it comes to crowd funding and that essentially is what determines whether the investment will be an ‘equity’ investment or ‘debt’ investment.. The developer also retains the tax benefits. are in the range of USD 2-3 million. Community solar projects are growing as an asset class because customers. usually a fixed price per kilowatt hour per month or a fixed lease payment. donation-based models also exist. The blended size of loans in the US is around USD 10K to 100K for residential systems. commercial or industrial customers. in the US. In a ‘purchase model’. when investments are low capital and outside EU countries or in high-risk countries the capital is assumed to be donated (e. Solar is definitely a winner here. The customer can also prepay the developer for all of the expected output from the cus- tomer’s share of the project. solar boxes in Tanzania. if the developer cannot find enough subscribers to take output from the whole project. In Europe. no such regulation exists across all countries. developers and utilities all benefit from them. For example. Community wind projects can also thrive if the community is large enough. Many programs require the utility to purchase unsubscribed electricity. for systems of about 250KW or for energy efficiency equipment. For example. like a commercial or industrial building. Further to debt and equity type investments. Cus- tomers can be residential. Because there is paperwork and due-diligence required for each individual investor. Young companies can start project development and secure the riskiest portion of funding (i. In the subscription model. The customers remain with the utility. Commercial loans. A customer owns or subscribes to a portion of the project. the all-in administrative burden is limited by regulators in many cases. the all-in administrative costs have to 15% of the full project costs if the project is crowdfunded. the customer pays the developer for its share of the output.e. the developer retains the envi- ronmental attributes. Furthermore. For example.

‘=‘ indicates a neutral outlook Source: MAKE 11 November 2016 Renewable Energy Ownership Strategies 47 . = vantaged due to strict lender require- ments that prevent assets from being idled Solvency II Mixed impact. regulation not clear and = = = not fully implemented Basel III Mixed impact. = is mostly funded through development banks Asset light strategy Wind assets are more expensive to maintain since they need to be shut + . CAPEX = capital investments. Wind at bigger risk of impact. use of + + . Renewables are disad- . . ‘-’ indicates a negative outlook. case for solar due to DG nature of so- lar assets Corporate PPAs Wind is better positioned since data centers are better positioned for growth + + . O&M = Operations and Maintenance. For renewable asset owners. this platform can be used to raise mezzanine level debt or revolving lines of credit. New business model impact: Summary table Catalyst Solar asset Wind asset Brown asset Comments owners owners owners Yieldcos Solar and wind are both favoured due + + na to the steady cash flow generating na- ture of the underlying assets Increasing merchant exposure Brown energy assets are generally fa- voured due to flexible nature of gas/coal plants. Figure 82. which impacts the capacity factors. solar is favoured due to lower working CAPEX requirement. = down for servicing. investors are typically neutral towards wind or solar Community ownership Solar is favoured due to growing com- + = na munity solar projects in rooftop seg- ment Crowdfunding Positive for both wind and solar. Wind crowdfund- + = na ing is possible but only for working cap- ital and mezzanine financing purposes – not the full CAPEX amount Note: DG = distributed generation. stronger business + + . PPA = Power Purchase Agree- ment.MAKE expects the crowd funding market to grow as more retail investors look for direct exposure to alternatives rather than traditional asset classes such as government bonds and mutual funds. but not for the whole project. proceeds is important. brown assets = coal and gas. solar assets are main- tained at night time World Bank hedges Positive for both. regulation not clear. as solar = . ‘. in cold weather and wind assets are more prominent in cold weather Green bonds Positive for both wind and solar.-’ indicates a strong negative outlook. ‘+’ indicates a positive outlook.

/ capita National electrification rate 2% % Mineral rents 2% % of GDP Desalination 2% Capacity (MLD) Note: Policy represents policy horizon index from MAKE policy database.23 Political stability 3% Percentile Rank % Pakistan 4.32 >6. ft.99 Icing 3% Days per year Japan 4.60 Population density 5% persons / sq.35 Wind speed 8% m/s China 3. but it can be easily ad- justed towards solar asset owners. and are not depictive of any specific viewpoint.08 % of land with shear factor 15% % Argentina 3.47 EODB 3% Index Thailand 4. LPI = Logistics perfor- mance index.66 Flight traffic density 5% flight passenger traf- fic/km2 Germany 3. Democratic Republic 3.00 Control of corruption 3% Percentile Rank % India 4.76 Average wind farm size 5% MW Turkey 3. Furthermore.12 % of land with Vavg factor 10% % United States 3. Market assessment metrics Country Weighed rank Metric % Unit weighting Canada 2.86 CRI 2% Index Korea. Figure 83. United Kingdom 3.67 Wind installed base 5% MW Denmark 3. Ranking table Figure 84. the existing wind farm size corrects and balances out this bias to a certain extent.2 Australia 3. It is almost impossible to generalize metrics that would satisfy internal criteria of de- cision-makers amongst asset owners.9 Market screening scorecard The following tables provide an assessment scorecard and ranking table based on various factors that MAKE deems important for evaluation of existing and new markets. this ranking is tilted towards wind asset owners. EODB = Ease of doing business. While recent policy developments more heavily impact the ranking. but surely.0 Mexico 3.91 Earthquake rate 2% Counts of EQ / year Nigeria 3.89 Policy 10% Index Brazil 3.59 Forest land 8% % France 3.57 Wholesale electricity price 2% USD / MWh Indonesia 4. the following metrics can be used to understand market attractiveness related to further growth.64 Grid reliability 2% Index Note: Smaller rank implies higher attractiveness LPI 2% Index Source: MAKE Diesel consumption / capita 2% Kg oil eq. CRI = Corruption risk index.09 >0. MLD = Millions of Litres per Day Source: MAKE 11 November 2016 Renewable Energy Ownership Strategies 48 . Note that the weighting factors used here are for sample purposes only.

2 3.1 34.Figure 85.12 0. Various government sources 11 November 2016 Renewable Energy Ownership Strategies 49 .2 % of land with 5.6% 32.03 0.6 0.5 145.09 0. 100% 100% 96% 100% 100% 100% 100% 100% 99% tion rate Desalination na na na 915 190 na 200 na na Note: Policy represents policy horizon index from MAKE policy database. LPI = Logistics performance index. ERCOT.6 0.6 47.07 4.5 0.0 48.3 74. Market screening scorecard output (1/2) Canada Brazil Argentina Australia United Mexico China France Thailand States Policy 24. Vaisala.3 120.2% 33.13 6. CRI = Corruption risk index.7 0.18 0.809 248 1.760 1.0 68.3% 10. FAA. PJM.6 Flight traffic density 7.2 18. EODB = Ease of doing business. IMF. World Economic Forum.314 7. World Bank.340 392 1 shear >0.06 7.194 5. NYISO.9 64.09 tion / capita National electrifica.337 2. Desalination represents Source: MAKE.1% 21.9 36.7 48. USGS.777 4.777 5.8% 34.0% Population density 3.7 15.04 0. 61.1 21.584 227 4.6 LPI 11 55 63 15 8 48 28 13 35 Diesel consump.2% 59.187 74.08 4.15 0.046 503 4.544 5.2 273.7 na % of land with 8.27 5.06 0.10 5. 94 44 33 95 89 26 47 88 42 tion Political stability 91 45 49 87 67 21 30 59 17 EODB 14 116 121 13 7 38 84 27 49 Wholesale electric.1% 16.201 286 38 Vavg factor >6.9 83.9% 30.1 ity price Grid reliability 0.79 Forest land 38.8 116.9 77.214 646 1.98 6.09 6.8 6.951 129. EEX.9 132.7 45.2 11.170 10.6 8. NORDPool.7 3.0 41.8 0. European Commission.4 56.0 Wind speed (m/s) 6.286 219 Base Average wind farm 31 23 9 91 48 67 50 8 72 size CRI 102 82 88 38 25 40 31 19 9 Earthquake rate 20 2 6 4 322 30 28 na na Control of corrup.12 0.9 24. Climatascope.2 39.6 0.0 115.0 190.3 47. OECD.426 2. 0.7 0.7 Wind installed 11.7 0.

4 % of land with 166 320 24 65 5 196 12 20 0 shear >0.074 309 Base Average wind 8 6 2 19 na na 8 6 50 farm size CRI 58 18 130 116 na 125 96 16 8 Earthquake 3 na na 36 na na 46 12 na rate Control of cor. Various government sources 11 November 2016 Renewable Energy Ownership Strategies 50 .81 6.1 4.9 348.7 40.236 4.Figure 86.89% 8.02 5. 105.1 .47 na 0.33 6.58% 68.8 27.75% 14. ERCOT.0 density Flight traffic 484.7 435.1 132.8 194.2 %Land with 244 233 43 204 59 5 295 345 182 Vavg>6.0 Wind speed 7.923 4.5 284. PJM.02% Population 266.82 5.7 23. Desalination represents Source: MAKE.025 25.3 25.08 0.7 0. EODB = Ease of doing business.47% 23.05 0.27 43.3 64. 0. EEX.9 98.75 4. IMF. World Bank. CRI = Corruption risk index. NYISO.6 0.15 0.7 207.631 0 0 3. 61 79 80 12 11 5 84 14 3 ity EODB 6 15 3 55 na 169 34 130 138 Wholesale 77.3 52.01 0.5 0.00 electricity price Grid reliability 0. FAA.05 (m/s) Forest land 12.45 58.65% 2.8 na na 40.26 7.41 75.85% 32.09 0.00 0. LPI = Logistics performance index. World Economic Forum.22 4. 93 95 100 54 5 7 93 39 22 ruption Political stabil.5 0. Vaisala.01 sumption / capita National elec. 100% 100% 100% 100% 26% 45% 100% 81% 73% trification rate Desalination na na na na na na na 100 na Note: Policy represents policy horizon index from MAKE policy database.7 240.5 294.96% 43. European Commission.7 na 0. USGS.62 26.20 110.6 232.12 0.7 0.0 7.5 density Wind installed 8.01 0. NORDPool.19% 14.34 6.00 76.755 38. OECD. Climatascope.9 3. Market screening scorecard output (2/2) United Kingdom Germany Denmark Turkey South Nigeria Japan India Pakistan Korea Policy -14.5 LPI 6 2 17 27 na 86 10 54 70 Diesel con.8 0.

As anticipated. Target IRR 24 22 Egypt 20 Brazil 18 Onshore IRR (%) 16 Turkey United States 14 India South Africa 12 10 Denmark United Kingdom 8 France Germany 6 4 2 0 0 6 12 13 14 19 20 21 22 PV IRR (%) Source: MAKE. we estimated the cost of capital of countries based on given market lending rates. A more accurate estimate can be developed by finding an intersection between a chosen market. we recommend caution and fur- ther due diligence. if you torture data long enough it will eventually tell you what you want. we gathered information on what typical IRR vs. government tax authorities. there is a significant amount of variability amongst portfolios of asset owners. Figure 87.10 Target IRR table The nature of WACC and IRR modelling requires a certain level of comfort in living with ambiguity. Thus. our focus was on the correct process. tax rates from publicly available sources. FED. Furthermore. but the true story – which is the only way of preventing ‘goal sought’ numbers. Finally. and estimates on risk premiums associated with the markets. as well as asset owner expectations. and vali- dated our model outputs with various asset owners. Good forecasting requires a process that is clear because it is possible to be wrong with the right process. and right with the wrong one. After all. Next. First. our efforts were not focused on telling a coherent story. EUROBOR. ECB. when using the following tables. interviews 11 November 2016 Renewable Energy Ownership Strategies 51 . While formulating the following analysis. and a cho- sen asset owner profile. FRED. EUROBOR. WACC spreads were like for projects across key renewables technologies. NYU – Damodaran. we applied a reasonability check.

5% assumed for solar PV.2% 8.2% 5.7% 10.4% 4.3% 17.4% 7.5% 9.2% 3. 80% for US and Canada.2% 9.2% 11. IRR and WACC Table: EU markets Off-shore On-shore Solar PV Base Country CDS WACC Target IRR WACC Target IRR WACC Target IRR (+/. FED.7% 10.3% 9.2% 3.100 bps) (+/.2% 5.1% Belgium 0.9% 6.7% 1.5% Hungary 3.9% 8. 3% for onshore wind and 4% for offshore wind.0% 6.5% 0.5% 8.7% 10.4% 5.5% 0.5% 3.0% Poland 3.1% 8.4% 7. CDS = credit default swap spread as priced by the market with a recovery rate of 40%.9% 3.3% 5.6% Spain 1.3% 5.5% 9.2% Portugal 3.2% Slovenia 1.8% 11.4% 11.0% 4.8% 0.8% 13.7% 4.5% 10.9% 3.7% 10.3% 0.8% 8.4% na 3.1% 3.7% 8.5% Cyprus 3.8% Finland 0.2% 10.4% 5.4% 7.5% 6.7% 6.3% 4.3% 14.0% 3.0% 1.7% 4.6% 9.0% 7.6% 6.2% 3.8% 6.50 bps) Rate bps) Austria 0.3% 4.4% 3.3% Germany 0.6% 5.100 (+/.8% 8.6% 10.1% 8.1% 12. ECB.4% United Kingdom 0.6% 13.6% 10.6% 8.0% 4.4% 2.6% 5.8% 7.9% 14.5% 0.2% 3.8% 11.9% 11.3% 20.7% 4. 60% for other markets Source: MAKE.8% 7.1% 3.9% 5.3% France 0.7% 6.2% 10.6% 6.4% 1.Figure 88.6% 6.6% 9.3% 2.9% 3. renewable energy spreads of 3.0% 4.7% Sweden 0.0% 4.6% 12.3% 7. FRED.4% 9.3% 7.8% 13.9% 3.1% NA 12.2% Lithuania 1.2% 5.8% 6.7% 8.1% 3. base rate represents baseline debt instrument rate for 10-year government bonds.9% Netherlands 0. government tax authorities 11 November 2016 Renewable Energy Ownership Strategies 52 . NYU – Damodaran.7% 8.7% 3.3% 16.3% 3.4% 1.1% Slovakia 0.6% 1.0% Croatia 3.2% Denmark 0.8% 5.4% 9.6% 5.3% Romania 3.6% 3.5% Czech Republic 0.5% Bulgaria 2.6% Luxembourg 0.0% 4.0% 8.7% 3.5% 3.4% 3.3% 4.1% 4.6% Latvia 0.7% 6.9% 6.4% 0.9% 4.9% 11. EUROBOR.3% 9.9% 0.0% 0.4% 0.5% 1.6% 10.0% 6.5% 8.4% 8.1% Estonia 0.8% 7.9% 8.4% Note: WACC estimate is after-tax.2% 9.4% 9.0% 3.0% na 4.5% 11.2% 0.5% 1.8% 8.5% 0.1% 2.2% Italy 1.8% Greece 9. debt share of 70% used for EU markets. EUROBOR.9% Malta 1.6% 0.3% Ireland 0.1% 6.4% 7.5% 0.6% 4.4% 7.

debt share of 70% used for EU markets.0% 19.6% 6. FED.5% Emerging markets Argentina 30. WACC Target IRR (+/- 100 bps) 50 bps) Canada 0.8% 3.6% 3.4% 16.3% 23.7% 6.9% 31.6% 7.2% Mexico 4.5% 0.0% 0.5% India 6. EUROBOR.5% 5.1% 10. renewable energy spreads of 3.5% 7.2% Chile 3.3% 10.5% assumed for solar PV.5% 1.5% 13. government tax authorities 11 November 2016 Renewable Energy Ownership Strategies 53 .3% 23.0% 14.5% China 4.2% 6. EUROBOR.1% 7.2% 17.3% 8.1% 9.3% 7.0% 8.5% 10. NYU – Damodaran. base rate represents baseline debt instrument rate for 10-year government bonds.5% 0.5% 11.6% 6.5% 10.3% Note: WACC estimate is after-tax.2% 13. 60% for other markets Source: MAKE.7% 22.7% 3.7% 6.2% 25.1% 15.5% 4. 80% for US and Canada.0% 10.6% 3.4% United States 0.2% 13.2% 30. IRR and WACC Table: Non-EU markets On-shore Solar PV Base Rate Country CDS WACC Target IRR (+/.5% Iran 20. FRED.3% 0.1% 12.5% 2.7% 6.8% 9.2% 3.6% 9.9% 9.2% 16.5% 8.4% 1.6% Indonesia 6.3% 14.7% 21.1% 18.Figure 89.5% 3.6% Ethiopia 5.6% 16.7% Egypt 11.5% Japan 0.2% 4.3% 11.8% 6.9% 3.4% 23. ECB.0% 4.9% 18.5% Brazil 14.0% 5.3% 14.3% 10.9% 8.6% 7.6% 5. CDS = credit default swap spread as priced by the market with a recovery rate of 40%.0% 3.8% 11.8% Colombia 7.8% 15.3% 2.4% South Korea 1. 3% for onshore wind and 4% for offshore wind.

Power price forecast for Europe 12 Figure 51. Brexit schematic 18 Figure 63. Value lost due to electrical outages 9 Figure 46. Asset owner financial performance vs. Rates. Key asset owner business model analysis (1/3) 28 Figure 16. ROE 21 Figure 69. Key asset owner business model analysis (2/3) 29 Figure 17. Debt-fuelled lower WACC 22 Figure 3. Wind power transaction multiples 2015-2016 YTD 31 Figure 19. Yieldco leverage profile 37 Figure 30. Long-term vs. Key asset owner financial performance scorecard 25 Figure 8. Asset owner wind power technology mix vs. wind asset age (2/2) 27 Figure 15. Debt pricing and leverage levels 34 Figure 23. Asset owner cash flow performance 21 Figure 70. Multiples paid in sell-side wind power transactions 32 Figure 22. Owner type vs. wind asset age (1/2) 27 Figure 14. German merchant power price exposure at 95% confidence Figure 32. ROIC as a metric 22 Figure 71. Global solar insolation 10 Figure 48. Global commodity prices 6 Figure 39. COP 21 pledges: Scenario analysis 8 Figure 45. Deal summary statistics: Wind 32 table 15 Figure 58.List of figures Figure 1. Corporate debt spreads 34 Figure 24. Projected electric vehicle demand growth 13 Figure 55. Scale of Floating LNG terminals 14 Figure 56. Policy divergence in interest rates 16 Figure 59. 2015 (2/2) 5 Figure 38. Power consumption by decade 8 Figure 44. MSCI index returns 19 Figure 64. Asset owner return on equity vs. Asset owner financing strategy roadmap 36 Figure 28. short-term return 19 Figure 66. Lithium battery prices. leverage 20 Figure 67. Comparison of Yieldco and peer vehicles 37 Figure 29. Commodity price forecast 7 Figure 42. Cross industry ROIC levels 24 Figure 7. The world in 2010 vs. Asset owner cost of capital estimates 24 Figure 6. 2015 (1/2) 5 Figure 37. Natural gas implied injection volume 7 Figure 43. Multiples paid in buy-side wind power transactions 32 Figure 21. Power market reform timeline 12 Figure 52. Renewables intensity vs. Cost of capital trends: Onshore wind 35 Figure 25. Solar system size evolution in Germany 11 Figure 50. Buyer vs. Basel III impact 40 Figure 35. financial Figure 12. EOY 2015 (GW) 41 11 November 2016 Renewable Energy Ownership Strategies 54 . Bonds vs. Key asset owner technology mix 25 Figure 9. Convexity in renewable energy projects 35 Figure 27. Carbon prices 9 Figure 47. Solar module costs 10 performance 27 Figure 13. wind asset fleet age 26 Figure 11. Investment class risk vs. Key asset owner business model analysis (3/3) 30 Figure 18. Top asset owners: US. EV trailing 5-year demand 13 Figure 54. FX and inflation forecast 17 Figure 62. Yieldco assessment scorecard 38 Figure 31. 10-year treasury yield 23 Figure 4. Asset owner return on equity decomposition 20 interval 39 Figure 33. The world in 2010 vs. Asset owner profitability analysis 20 Figure 68. WACC spread 26 Figure 10. Owner type vs. ECB inflation target 17 Figure 61. Carbon emission trends 7 Figure 41. Global refinery output 6 Figure 40. return profile 40 Figure 36. Asset class returns 40 Figure 34. US solar installed capacity 11 Figure 49. utilities performance 19 Figure 65. seller wind power transaction multiples 31 Figure 20. USD/EUR and USD/GBP trends 16 Figure 60. Convexity in new projects – theoretical construct 35 Figure 26. 2010 to 2016 13 Figure 53. Thematic catalyst impact to asset owners – summary Figure 57. Impact of 100 bps increase in interest rates on WACC 23 Figure 5. Global rates 22 Figure 2. ROIC vs. US utility awarded ROE vs.

Top asset owners: Germany. Ranking table 48 Figure 74. Top 5 green bond issuances in 2015 45 11 November 2016 Renewable Energy Ownership Strategies 55 . Virtual PPA 44 Figure 87. IRR and WACC Table: EU markets 52 Figure 79. IRR and WACC Table: Non-EU markets 52 Figure 80. Hedge capacity provided by World Bank instruments 43 Figure 85. Corporate/synthetic PPA perspectives 44 Figure 88. Gross capital formation 42 Figure 83. US C&I procurement mix 44 Figure 89. New business model impact: Summary table 47 Figure 73. 2015 green bond issuance by type 45 Figure 81. Target IRR 51 Figure 78. World Bank hedging instrument (1/2) 42 Figure 84. Market assessment metrics 48 Figure 75.Figure 72. World Bank hedging instrument (2/2) 43 Figure 86. Market screening scorecard output (1/2) 49 Figure 76. Market screening scorecard output (2/2) 50 Figure 77. EOY 2015 (GW) 41 Figure 82.

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