Financing Renewable Energy in Asia by Oliver Massmann

1. GOING GREEN AND FINANCING RENEWABLE ENERGY IN ASIA: THE BASICS Oliver Massmann, Duane Morris Vietnam LLC – Hanoi, 12Nov 2009

2. AGENDA NO FEED-IN TARIFF, NO RENEWABLE ENERGY FISCAL INCENTIVES ARE NECESSARY TO MAKE A PROJECT BANKABLE LIMITED PROJECT FINANCE: CLASSICAL BUT EFFECTIVE CERTIFIED EMISSION REDUCTIONS (“CER”) TRADING SHOULD BE TAKEN INTO CONSIDERATION

3. NO FEED-IN TARIFF, NO RENEWABLE ENERGIES A FEED-IN TARIFF (“FIT”) is a favorable price paid by power companies to purchase all electricity from eligible renewable energy (“RE”) producers in their service area over a long period of time (usually from 15 to 20 years) for each unit of electricity fed into the grid. FIT system has been enacted in numerous Asian countries such as China, Korea, Mongolia, Thailand. VIETNAM is considering the adaption of FIT for wind power. Duane Morris is assisting GTZ in drafting a Decree for FIT in renewable energy expected to come into effect in 2010.

4. HOW DO FEED-IN TARIFFS WORK?

5. ADVANTAGES OF FIT FOR INVESTORS Strengthen the viability of the RE projects which largely depends on the reliability of the cash flow under the offtake agreement(s). Enhancing the competitiveness of RE operator with heavily-subsidized conventional energy operators; Create opportunities for development of the most efficient technology; Feed-in-tariffs can operate in monopoly or oligopoly markets as the combination of tariff payment and purchase obligation established a stable framework for independent power purchaser

6. DIFFICULTY FOR IMPLEMENTATION OF FEED-IN TARIFF LAW IN ASIAN COUNTRIES Electricity consumers are vulnerable to electricity price increase. Meanwhile, in order to implement the feed-in tariff law, the payment is normally financed by distributing costs amongst all consumers; Some additional costs might have to be covered by a national fund for renewable energy development which could undermine the stability of the support mechanism as governmental money or money from international donors will be included; Developing countries might need to limit the installed renewable capacity in order to control costs for final consumer. SOLUTION: RE PROJECT SHOULD BE IMPLEMENTED WHERE THERE EXISTS A CLEAR LEGAL FRAMEWORK FOR FIT!!!

7. FISCAL INCENTIVES ARE NECESSARY FOR BANKABILITY OF RE PROJECTS Asian countries have implemented numerous fiscal incentives to boost the development of renewable energy. Tax reduction and exemption: Example from Vietnam CIT incentive rate of 10% applies for a period of 15 years to newly-established enterprises investing in power plant projects; If the projects are classified as large scale projects, using high or new technology and in special need of investment, the time for application of the preferential tax rate of 10% may be extended to less than 30 years in accordance with a Decision of the Prime Minister; Exemption of import duties for equipments and machinery imported to create fixed assets of the projects is applicable to renewable power project

8. FISCAL INCENTIVES ARE NECESSARY FOR BANKABILITY OF RE PROJECTS Loan softening program: Example from India Indian Ministry of New and Renewable Energy has successfully used the loan softening program (which includes either and interest subsidy or a partial guarantee) to enable commercial banks to make risk assessment-based investment in greentech sectors on concessionary terms. PricesubsidyforCDMproject: ExamplefromVietnam A CDM project which has the production cost greater than the contracting electricity selling price may file an application to the Environmental Protection Fund of Vietnam for price subsidy

9. FISCAL INCENTIVES ARE NECESSARY FOR BANKABILITY OF RE PROJECTS Feasibilitystudygrants Application of fixed assets accelerated depreciation method Investors should: Be aware and take advantage of these fiscal incentives Make sure that the tax incentives are incorporated in the business incorporation certificate and/or the project contract where the project is in the form of a PPP project.

10. LIMITED RECOURSE FINANCING: CLASSICAL BUT EFFECTIVE Hallmarksoflimitedrecoursefinance: The lenders shall recourse only to the earnings of the project as the source from which loan repayments will be made Credit assessment is based on the project rather than the credit worthiness of the borrowing entity The security taken by the lenders is largely confined to project assets Necessity for establishment of a special purpose vehicle

11. LIMITED RECOURSE FINANCE: CLASSICAL BUT EFFECTIVE Advantages of limited recourse finance: Ability to raise large amounts of capital Risk sharing: Ability to legally isolate a high risk project from the parent company and to allow other investors to share risk Leave rooms for innovative financing structures Recommendations: The project should be in the form of a BOT project; Should be used in large-scale financing project rather than small projects; Thorough due diligence must be conducted

12. CERS TRADING SHOULD BE TAKEN INTO CONSIDERATION Asian countries have large potential in generating CERs (e.g. Vietnam: 10 million CERs); Although the CERs prices are decreased due to economic crisis, there is still good demand for CERs from projects with high sustainable development value to the local community; CERs forward contract offers a long term foreign currency revenue stream.

13. DIFFICULTIES FOR CERS TRADING Uncertainties with post 2012 system High validation risks Vietnam: Among 85 projects uploaded for validation in Vietnam, only 8 projects have been validated so far. Among these 8 projects, only one project (Rang Dong oil field associated gas recovery and utilization ) has been granted CERs. CDM project legal framework shortcoming (slow national approval) and the lack of accurate and official statistics to establish a baseline of the project. SOLUTION: Focus on projects with low/medium valuation, verification and delivery risks + thorough knowledge on local laws on CDM projects.

14. DUANE MORRIS VIETNAM LLC HO CHI MINH CITY OFFICEHANOI OFFICE 8th Floor, Suite 809, SaiGon TowerPacific Place 29 Le Duan, District 1 83B Ly Thuong Kiet Ho Chi Minh City Hanoi VIETNAM VIETNAM Contact email: omassmann@duanemorris.com