EBRD lends a hand28 October 2010
There is a great need to improve energy security and reduce the environmental impact of Ukraine’s energy sector. However, project developers in this area are hampered by a lack of long term project finance. Peter Hobson from the European Bank for Reconstruction and Development (EBRD) explains how the launch of the Ukraine Renewable Energy Direct Lending Facility will play a vital role in rectifying this
THE European Bank for Reconstruction and Development (EBRD) is the leading financier of energy projects in the CIS (former Soviet Republics) region, including Ukraine. Up to the end of 2009 the bank had provided around €325M (US$429M) in loans or equity for projects in Ukraine’s power sector with total value of €650M (US$859M). These have focused on improving efficiency of power production and transmission. Yet Ukraine has great renewable energy potential, including a strong track record in the development of small hydro facilities, most of which are now many decades old and have long since stopped operating. However, the situation is now changing. The Government of Ukraine has made the decision to prioritise renewable energy and has now put in place the basic regulatory support framework needed to allow commercial development. Local entrepreneurs are emerging as project developers, particularly in the small hydro sector. However they are still hampered by a chronic lack of long term project finance. The EBRD has responded to this with the launch of the Ukraine Renewable Energy Direct Lending Facility.
Ukraine relies heavily on imported fuel (up to 80% of primary energy needs during peak demand) and its own generating assets are ageing and highly polluting. The need to improve energy security and reduce the environmental impact of its energy sector is acute. Renewable energy can play a key role in addressing both these issues. Ukraine has great potential yet these resources have hardly been utilised so far. The technical potential for the different sectors has been estimated as:
• Wind energy – 40TWh/yr.
• Small hydro – 8.3TWh/yr.
• Biomass – 120TWh/yr.
• Solar energy – 50TWh/yr.
Yet current production is only 0.5 TWh/year. The main reason for this low level of activity is that until now the legislative and regulatory frameworks have not been adequate to allow the implementation of the numerous potentially feasible projects in this area.
During the first part of 2009 the Government of Ukraine issued primary legislation setting a green tariff for renewable energy and recently the National Energy Regulator of Ukraine (NERC) issued the first green tariff approvals to developers. The green tariff sets a minimum inflation indexed price for renewables based on different multiples of the retail tariff (depending on the renewable technology) and fixed in Euro terms as at 1 January 2009 and is applicable until 2030. Table 1 gives the Hyrvna and Euro equivalent green tariffs for the eligible renewable technologies as at January 2009.
Despite the introduction of the green tariff it is clear that developers continue to face significant obstacles compared to similar projects in countries with a more developed framework for renewables. These include permitting and licensing procedures, land rights, environmental assessments as well as managing what is still an emerging tariff methodology under development by NERC. Therefore developers are still hesitant to commit equity to projects where development expenses and outcomes are uncertain.
The Ukraine Renewable Energy Direct Lending Facility is a financing framework dedicated to providing debt finance to smaller renewable energy projects in Ukraine and to provide parallel technical assistance to developers and the regulator to help implement projects. The amount of the facility is initially up to €50M (US$66M) which was board approved by the EBRD at the end of 2009. The technical assistance component is financed by a grant of US$8.45M from the Global Environment Facility (GEF) which was approved in March 2010. The bank is now in the process of contracting the various consultancy teams that will implement the facility and expects the first resources to be on the ground in Kyiv around September 2010. The facility will provide loans to eligible projects with the possibility to finance on a limited recourse basis if required.
The facility will consider all forms of renewable energy generation including hydro, wind, biomass, geothermal and solar. The facility will be available for an initial period of two years but may be extended and increased in amount if this is justified by demand.
The financial viability of each project will be judged on a case-by-case basis, in line with the bank’s normal criteria – essentially the same level of creditworthiness and project quality any commercial bank would expect. The minimum amount of EBRD finance which the facility will consider is €500,000 (US$660,000). There is no upper limit although loans above €10M will have to be submitted to the EBRD board for additional approval.
The bank will seek or require equity and co-financing participation in projects supported by the facility. Availability of commercial financing for renewable energy projects in Ukraine is extremely limited at the current time. Hard currency lending is restricted to larger corporates with export revenues and high levels of collateral. Hyrvna loans are relatively short term (generally not more than five years) and unlikely to be available on a limited recourse basis. This gives developers very few possibilities other than their own equity and short term debt which can be raised against collateral.
Given these restrictions the EBRD is taking a much more flexible approach to financing than it is normally able to. Providing sponsors are able to provide equity of around one third of total investment needs, and of course following satisfactory due diligence, the EBRD is ready to consider providing the full balance of financing on a limited recourse basis. Terms and conditions will be determined on a project by project basis but will essentially be commercially priced. Tenor may be up to 12 years including up to two year’s grace.
The support programme
The facility will be supported by a comprehensive technical assistance programme designed to provide both institutional and project support. This will be implemented through a consultancy team based in Ukraine throughout the duration of the assignment and working directly with government and project developers as well as the EBRD. Funding of US$8.45M has been provided by the Global Environment Facility and the bank is now busy selecting the consultants to run the facility. The components of the technical assistance programme and principle beneficiaries are described below.
Following introduction of the primary legislation for renewables in September 2008 and the green tariff in early 2009 the assignment is focusing on assisting NERC in developing the green tariff methodology, refinements to primary legislation and development of detailed technical and operational procedures for assessment and approval of renewable projects. A dedicated consultancy team will be based with NERC for the duration of the assignment, working closely with the bank and other involved government departments and ministries.
Environmental assessment and procedures
Local environmental procedures in Ukraine have not been prepared to efficiently deal with renewable energy projects and there is no procedure in place for considering the likely cumulative impact of a number of similar projects being built close together. The environmental support component will cover two main aspects:
• Strategic environmental assessments (SEAs) to assess the cumulative impact of renewable energy projects and establish the overall capacity for specified renewable energy projects in a region together with criteria to be met for approval.
• Environmental approval procedures and standards will be assessed and guidance given on how these can be adapted to properly reflect the characteristics of renewable energy projects.
Project development support
On-going project development support will be provided through a permanent project support team (PST) based in Kyiv for the duration of the availability period of the facility. The main purpose of the PST will be to work with the bank in order to screen projects for support under the facility and then to work with developers of selected projects in order to prepare proposals for EBRD financing. Through this approach the bank will be able to provide developers with the support they need to prepare projects in Ukraine, while at the same time ensuring the information required for the bank’s due diligence is prepared in a thorough and consistent way for each project.
The bank’s consultants will conduct initial project screening of proposals to identify strong candidates and weed out weak ones. This analysis will take account of the basic technical and commercial viability of the project, the sponsor’s experience and financial strength, and assess support needs going forward for those projects which are accepted for further work. The output of this phase will be the information which the bank requires in order to make a decision to proceed with the project.
Following a positive decision from the bank to proceed with a project the PST will then work with each developer as required to help prepare their projects for final approval. The areas covered under the project support arrangements will include assistance with:
• Project permitting and licensing.
• Assessment of feasibility studies.
• Assistance with commercial negotiations.
• Legal support in preparation of loan documents.
• Support in undertaking environmental and social impact assessments.
An initial pipeline of projects has already been identified covering several renewable energy sectors. These will be followed up once the support team is on the ground but new projects may be submitted for consideration at any time. Table 2 above gives some details of the projects currently under consideration.
The bank is currently completing the selection of the three consultancy teams that will support the project. This will be finalised soon and it is hoped the teams will be on the ground by September 2010. The facility will be formally launched around that time but the EBRD is happy to receive project proposals and enquiries at any time. These should be directed to either Peter Hobson, Senior Banker in London ([email protected]) or Segiy Maslischenko, Business Development Manager in Kyiv ([email protected]).
TablesTable 1 Table 2