Download Financing the Clean Energy Sector in the GCC with Green Bonds

Financing the Clean Energy Sector in the GCC
with Green Bonds and Green Sukuks:
Is a market being born?
Aaron Bielenberg
Latham & Watkins
Founder and Director of the Clean Energy Business Council
(CEBC) - MENA
Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the
practice in the United Kingdom, France, Italy and Singapore and an affiliated partnership conducting the practice in Hong Kong and Japan. Latham & Watkins practices in Saudi Arabia in
association with the Law Office of Mohammed Al-Sheikh. © Copyright 2011 Latham & Watkins. All Rights Reserved.
Clean Energy Investment, Growing Globally and in
MENA and Looking for New Financing Sources
•
In 2010, global investment in clean energy reached $211
billion (28% year on year increase) FN1
•
Investment in clean power assets alone could reach $2.3
trillion during 2010-20 period if policy priority for clean energy
is well-placed FN2
•
The MENA region is currently seeing an explosion of Clean
Power projects in planning and implementation, along with
significant planned investment in energy efficiency and carbon
reduction projects
•
Governments and sponsors are looking for innovative ways to
finance this emerging clean energy sector
•
Various barriers for large scale low-carbon investments –
small secondary debt market, absence of liquid, investment
grade asset-backed securities
•
Bond financing makes up a small proportion of clean energy
financing currently
•
Estimated 24-40% of institutional investors’ assets under
management dedicated to fixed-income debt, including assetbacked securities FN3
FN1
FN2
FN3
Source: Bloomberg New Energy Finance
Source: The Pew Charitable Trust
Source: Barclays Capital/Accenture
Global new investment in renewable
energy 2004-2010 ($bn):
Source: Bloomberg New Energy Finance
What are Green Bonds?
•
Debt instruments issued to raise capital to
fund specific clean power projects or projects
aimed at reducing climate change risk
•
Total issuance value approximately $3.5
billion globally in 2010 – principally issued by
international financial institutions (e.g. World
Bank)
•
Investors range from pension funds with
environmental mandates to socially
responsible investment-focused retail
investors
•
If investors are offered two investments with
same risk/reward profiles, one “brown”, one
“green”, they will choose green
Example structures:
•
Green gilts
•
Green retail bonds
•
Green investment bank bonds
•
Green corporate bonds
•
Green infrastructure bonds
•
Rainforest bonds
•
Index-linked carbon bonds
•
Water bonds
Why Green Bonds?
•
Investors unlikely to invest capital directly into individual
projects – market driven by investor demand for low-risk
products from respected issuers
•
Direct Investment brings exposure to regulatory
uncertainty, technology risk and there are limited
investment grade opportunities of significant scale
•
Investor demand for ways to invest in the high-growth
clean energy sector other than through equities and
funds
•
Fixed-income structure – relatively easy place to
integrate environmental investing policies into portfolio
strategy
•
Investors attracted to risk/return characteristics of
conventional bonds
•
Similar in design, risk and return to existing products in
investment portfolio
•
Opportunity to integrate environmental, social, and
governance criteria throughout portfolio, and to signal
commitment to stakeholders and policy makers
•
Solid credit ratings – International Financial Institutions
and Governments as principal issuers
Selected investors:
•
New York State Common
Retirement Fund
•
California State Teachers’
Retirement System
•
California State Treasurer’s Office
•
Swedish National Pension Funds
•
UN Joint Staff Pension Fund
•
Trillium Asset Management
•
State Street Global Advisors
Bond structures
Corporate bond
‘linked’ to
qualifying assets
Ring-fence value
of assets to
internal cost
centre
Commercial Bank
Asset-linked to a portfolio of
wind project loans
Utility/ Manufacturer Bonds
linked to facility or wind farms
Project
development
bond
Special purpose
vehicle owns the
asset
Financing construction and
operation of wind farms
Portfolio bond
Securitisation
vehicle of loans
and/or assets
Aggregator - re-financing for
pool of wind farms or wind loans
Key provisions
Money flows

Linked assets matching bond amount

Assurance around use of proceeds, budget allocation

Traceability
Eligible physical assets/projects

Wind farms, Solar Farms, manufacturing, energy efficient infrastructure
Guarantees Necessary

Completion Support, Debt Service, Short Fall,
Terms and Conditions

Match benchmarked conventional bond terms in the market
The Sovereign Green Bond?
History of Green Bonds
•
Green bonds pioneered by the World Bank in 2008 as
part of its “Strategic Framework for Development and
Climate Change”
•
Objective to tap into large global pool of assets allocated
to fixed-income investment held by pension funds and
sovereign wealth funds
•
First green bond issued in 2008 by World Bank for SEK
2.325 billion (approx US$350m), 6-yr maturity, 3.5%
interest
•
World Bank Green Bonds outperformed conventional
bonds on secondary market – investors looking for
differentiation
•
Various bonds have since been issued by the World
Bank in various currencies, and by others, including
European Investment Bank, US Government agencies,
International Finance Corporation and Asian
Development Bank
•
Future proposals for further green bond issuances from
governments including UK, Canada, Ireland and India
World Bank Green Bond Programme
•
Since inaugural bond issue in 2008, the World Bank has
issued over US$2bn in green bonds through 43 transactions
and 16 currencies
•
Proceeds of issue deducted from special “green account”
each quarter and added to the World Bank's lending pool to
support “Eligible Projects”
Eligible Projects:
•
Selected by World Bank environment specialists and meet
specific criteria for low-carbon development
Example Eligible Projects:
Mexico: Rural Renewable
Energy
US$15 million
•
China: Eco-farming
US$120 million
•
•
Promote the transition to low-carbon and climate resilient
growth in the recipient country
•
Include projects that target:
India: Energy Infrastructure
US$600 million
•
•
(a) mitigation of climate change, including investments
in low-carbon and clean technology programs; or
•
(b) adaptation to climate change, including investments
in climate-resilient growth.
Dominican Republic: Disaster
Risk Management
US$80 million
•
Climate-themed
issuance to date
Small retail
Wilton Wind
Alta Wind
Destiny
Shepherd's Flat Wind
Panachaiko Wind
US Clean Energy
Muni/Project
SunPower Solar
IFC Green
$16 billion
Leaders:
-Thematic portfolios: WB, EIB
-Tax preferencing: USA
- ABS: Breeze
KBN
Norway
US CREB & QCEB
NIB
Environment
Alta Liebe
AfDB Clean Energy
Only 5% retail, mostly Japan
EBRD
ADB
WB Green
Clean energy corporate
$30 billion +
Breeze
Rail, etc - $10bn +
EIB Climate
Airtricity
Precedent Issuances
Issuer
Year
Type
Value (USD)
European Bank for Reconstruction and
Development (EBRD)
2011
Environmental Sustainability
Bond
23,000,000
International Finance Corporation (IFC)
2011
Green Bond
135,000,000
Sunpower/Andromeda Finance
2010
Solar Project Bond
260,000,000
Asian Development Bank
2010
Water Bond
640,000,000
Novachem
2010
EE Corporate Bond
1,540,000
Nordic Investment Bank
2010
Environmental Support Bond
200,000,000
African Development Bank
2010
Clean Energy Bond
220,000,000
US municipal governments
2009-10
Property Assessed Clean Energy
Bonds
9,690,000
US Government agencies and utilities
2009-10
Clean Renewable Energy Bond
Programme
2,200,000,000
World Bank
2008-10
Green Bonds
1,896,700,000
World Bank
2008
CER-Linked Uridashi Bond
31,500,000
European Investment Bank
2007-10
Climate Awareness Bonds
1,630,000,000
World Bank
2007-08
Eco 3+ Notes
360,000,000
Green Bond Proposals
•
UK Government – “Green Investment Bank” to issue green bonds
and build framework to provide certainty and incentives to attract
private sector investment in green technologies
•
United Nations Framework Convention on Climate Change
(UNFCC) – green bonds issued by developing countries to investors
from developed countries; future revenue streams to be securitized
•
Comhar (Irish Sustainable Development Council) – “Green New
Deal” for Ireland funded by green bonds, carbon tax, and the
auctioning of carbon permits
•
Canadian Government – “Green Stimulus Package” of Can$41
billion funded by green bonds, to be modelled on existing Canada
Savings Bonds
•
Climate Change Capital – advocating issuance by OECD
governments of ‘environment bonds’ offering secure but modest
returns, and be invested in renewable energy and low-carbon
industrial initiatives
•
Climate Bonds Initiative – launching first set of standards for
verifying the credentials of green bonds
Key Issues and Challenges
•
Liquidity – currently a small number of investors holding green bonds; pension
funds and other institutional investors traditionally require a robust secondary
market
•
Standards – need for standards and verification systems for measuring
performance of green bonds and acceptable use of proceeds. Also need to
establish standard terms and conditions.
•
Policies & Government Support – green infrastructure is dependent on policy
instruments lacking a long term track record and government funding, with
associated political risks which are frequently complex and volatile
•
Transactional Risk – greater technological risks associated with constructing and
operating green technologies
•
Risk and reward – higher yields required to offset the illiquidity of the green bond
market and any preconceptions of higher political or technical risk
•
Government backstop – issue as to whether green bonds will require a
government guarantee
Future Trends (1)
•
Increase in number and scale of green projects – solar and wind projects
dramatically increasing in size and number and require multi-tranche financing
sources
•
Proven Technology – track record established for many clean energy
technologies reducing risk profile of the sector
•
Green Investment Banks – will assist in the creation of a liquid market in green
bonds by insuring bonds and temporarily purchasing sub-tranches of
subordinated debt (EIB Project Bond Programme)
•
Green Indices – index providers will begin to place green bonds into fixedincome green index as number of issuers increases
•
Increased complexity – development of green bonds into a complex product
that appeals to investors with different risk appetites (e.g. high yield green bonds)
•
Expanded universe of issuers – Governments and financial institutions will look
to the Green Bond market for funding their clean energy commitments.
Future Trends (2)
•
Securitization – estimated $1.9 trillion in financing could be created globally by
renewables securitization; renewable energy companies making high profile
moves to prepare solar panel, EV leases and energy bill contracts for
securitization
•
Standardization – recent draft proposal published by Climate Bonds Initiative,
London for an industry-wide compliance standard to allow for more transparency
and consistency in green bond issuances
•
Market reform – electricity market reform could reduce policy risk and improve
revenue certainty of low-carbon assets, in turn improving risk profile of green
bonds
•
New source of financing – conventional market is saturated for some issuers
and green bonds allow issuers to reach a specific investor base
•
Competitive pricing – demand for well-structured green bonds could make
them a lower-cost option for issuers
Clean energy drivers in the Middle East
•
Power demand projected to outstrip supply – Utility demand in the GCC is expected to grow 7 per
cent to 8 per cent every year, with Gulf countries expected to spend $45 billion (Dh165.26 billion)
before 2015 in order to add 32,000 megawatts of capacity
•
Need to diversify feedstock – gas rich nations have contracted-out gas output for near term and oil
is most valuable as an export commodity; coal and biomass generally unavailable; good solar
resources widely available in GCC
•
Projected feedstock shortages and bottlenecks – major infrastructure development to develop
new distribution networks to serve power generation
•
Strong infrastructure spending pipeline – estimated at over $215 billion, significant portion of
which is focused on power generation and related infrastructure
•
Sovereigns pushing ahead – most regional governments have stated intent to devote resources to
local renewable energy programs over the short and medium term
•
Knowledge transfer – very limited local R&D and technology; regional governments and developers
are looking to import expertise and technology
•
Global investment from MENA – Most MENA based investors have allocations and interest in
global and regional clean energy sector investments
Recent Middle East Clean Energy Developments
•
Abu Dhabi – Masdar. 100 MW Shams CSP in construction. 100MW Noor PV plant in procurement.
Also, planning "smart grid" infrastructure with up to 1.2 million smart meters and substation
monitoring and control systems; subsidies for homeowners to install solar panels on their roofs with
target total output capacity of 500 megawatts.
•
Saudi Arabia – planning investment of at least $100 billion into clean energy resources over the
next decade, including a target to achieve 5 GW of solar-generated power. Announced 10 percent
green energy target by 2020.
•
Kuwait – Ministry of Electricity and Water has set target to generate 10 percent of its electricity from
sustainable sources by 2020.
•
Qatar – Qatar Solar Technologies announced plans to build a US$1 billion polysilicon
manufacturing plant in Ras Laffan Industrial City, producing over 3,500 tonnes per annum
•
Tunisia – plans to implement 40 solar energy projects within a public-private partnership over the
2010-2016 period encompassing all fields of energy efficiency and renewable energies
•
Morocco – government pledged US$9 billion towards biggest solar-thermal energy project in a
single country, aiming to produce 2,000 MW by 2020 (nearly 40 per cent of its electricity needs).
World Bank recently committed to funding initial 500MW CSP Project
The Middle East Bond Market
•
Well-established bond market for Middle East
sovereigns (e.g. Abu Dhabi, Dubai, Qatar, Jordan)
and sub-sovereign entities (e.g. DEWA, ADWEA,
SEC) engaged in clean energy development
•
Middle East sovereign bonds backed by large
petroleum and natural gas reserves
•
Sovereign issuance volume set to increase in
2012 following reduced appetite in 2011 (Arab
Spring)
•
Project bonds have been successfully issued in
the middle east (e.g. Dolphin Energy, RasGas)
•
Investors have deployed capital into the Middle
East power sector (ADWEA project financings,
Shams 1 solar power plant, DEWA Thor Asset
Purchase)
Recent Middle East Sovereign
Issuances:
•
December 2011 – Government of
Qatar (US$5bn bonds)
•
June 2011 – Government of Dubai
(US$500m bond)
•
December 2010 – Ras Al Khaimah
(US$400m sukuk)
•
March 2010 – Kingdom of Bahrain
(US$1.25bn bond)
Application of Proceeds in the Middle East
•
Solar power projects
•
Wind projects
•
Polysilicon manufacturing
•
Energy efficiency technologies
•
Smartgrid installation
•
Solar rooftop programs
•
LEED Green Building systems
•
Feed-in tariffs/Green Payments
Standard & Poors/Hawkamah Pan Arab ESG Index
•
Established in February 2011 by Standard & Poors and
Hawkamah; funded by IFC
•
First tradeable index for MENA equity markets relating to
Environmental, Social and Corporate Governance
performance
•
Index ranks and tracks performance, transparency and
disclosure of regional companies on ESG issues
•
Constituents drawn from 150 largest and most liquid
companies listed on 11 national stock exchanges in MENA
region
•
Provides incentive to MENA companies to pursue
sustainable ESG business practices
Green Sukuk
•
Islamic green bond would connect environmentally
focused conventional investors and Shari’ahcompliant investors
•
World Bank is currently exploring potential in a
number of developing countries to issue first ever
Green Sukuk to fund low carbon development or
environmental projects
•
Sukuk market suited to channel glowing global pool
of Shari’ah-compliant capital to fund renewable
energy and climate change projects
•
Islamic finance and Shari’ah-compliant investment
products traditionally backed by assets (e.g. green
infrastructure projects)
•
Renewable energy projects structured in a Shari'ah
compliant manner in order to attract investment
from private equity investors looking to diversify
portfolios
Potential Issuers in the Middle East
•
Governments / Sovereigns
•
Government authorities (e.g. utility providers)
•
The World Bank
•
International Monetary Fund
•
International Finance Corporation
•
Arab Monetary Fund
•
Islamic Development Bank
•
Arab Bank for Economic Development in Africa
•
Arab Fund for Economic and Social
Development
Launch of Middle East Green Bond/Sukuk
Consultative Process
•
The Climate Bonds Initiative, the Clean Energy Business Council and the Gulf
Bond and Sukuk Association have initiated discussions to launch a consultative
process to develop standards, recommendations and best practices to facilitate
the issuance of the first Green Bond/Sukuk in the Middle East by the end of 2012.
•
Stakeholders will be brought in from previous consultative processes run by the
Climate Bonds Initiative globally and the CEBC and GBSA regionally
•
First meeting will be first quarter 2012
The Clean Energy Business
Council (CEBC) is…
•
an association of leading local and international organisations participating in MENA’s
emerging low carbon energy sector.
•
unique in the region as a peak industry body for the clean energy sector and in its
reach across the MENA region.
•
an inclusive forum
As developers, investors, and governments in MENA increasingly focus on low carbon
energy solutions, an inclusive forum will help businesses and the public sector share ideas
to promote effective policies and best practices.
Incorporated in Masdar City, CEBC
is a nonprofit organisation with a
mission to:
•
Establish a leading forum for companies and government entities focused on the
development and deployment of clean energy in the MENA region
•
Promote the clean energy industry beginning to flourish in the region and inform the
wider community of the benefits of the sector
•
Collaborate with government agencies and other stakeholders in policy development
and regulation of this rapidly developing and exciting sector
•
Develop a series of strategic alliances with research institutions, international
associations, media and others to drive the delivery of clean energy solutions for
MENA
•
Coordinate the gathering of data and information on the sector to ensure relevant
benchmarking and transparency in the sectors development
•
Support and assist governments, industry and the community in the region to meet low
carbon targets and sustainability goals
Membership
•
CEBC is a membership based non-profit organisation registered in the Masdar Free
Zone in Abu Dhabi
•
Membership is currently 10, 000 USD for Founding Members
•
Members have access to technology based sub-committees, research and reports,
research and media networks, access to government and ability to influence
government and policy development through a neutral forum
•
Companies can register their interest in becoming a Member of CEBC by visiting our
website at www.cleanenergybusinesscouncil.com
•
For more information email: [email protected]