The facts are stark. Governments across the world need to find an estimated $25,600bn over the next 20 years to finance the infrastructure needed to cope with the global surge in demand for power, according to the International Energy Agency (IEA).
It is not a statistic governments will want to hear, particularly at a time when sovereign debt worries stalk the global economy and talk of the dreaded 'double dip' recession dominates discussion in the world's financial centres.
Most of the anticipated future demand will come from the emerging economies of Asia. In fact, the IEA estimates that more than half the world's energy demand will come from Asia by 2030. It is a sobering statistic that, at present, the US uses up to 25% of the world's energy resources but accounts for just 4% of the world's population. Given that China and India contain 33% of the world's population, if they were to consume power at the rate US residents currently do, then the world faces an energy crisis on a scale hitherto unimagined.
Fortunately, such a crisis is a long way off. Most experts believe that the resources on the planet do indeed exist to keep the lights on. However, the question is: how can they be used effectively and distributed efficiently so that energy costs are kept affordable for all? Add to this the environmental dimension, and a need to shift away from carbon-intensive fuels, and it is a conundrum that would have any government, no matter how progressive, scratching its head.
In Asia, despite huge investment by the governments of China and India, the gap between the supply of energy and the estimated demand is still widening. Outside of China and India, investment in the infrastructure required to keep up with demand has been almost entirely missing over the last 10 to 20 years. Energy generation in countries such as Indonesia, the Philippines and Vietnam is at a fraction of what it needs to be to keep up with demand. In Pakistan, the situation is so bad that the government needs to switch the power off for up to 16 hours a day in some parts of the country.
This problem does not apply only to Asia. Governments across the world are wracking their brains trying to establish how to maintain energy security and avoid a future of blackouts and power cuts. Governments in Africa have neither the requisite power generation nor the distribution networks needed to provide the power to bolster economic growth. In Europe and the US, governments are desperate to upgrade existing infrastructure and diversify sources of power generation, in particular through the use of renewable technology. As The Banker went to press, the EEF, a UK manufacturers' organisation, warned the country's coalition government that it needs to attract £200bn ($307bn) of investment in energy infrastructure to ensure the country's future competitiveness.
Energy deficit
But it is away from developed markets that the real work needs to be done, and where the real opportunities lie for investment. The difficulty does not just lie in building power plants, whether they are coal, gas, renewable or nuclear-powered, but in distribution and transmission. In the Asia-Pacific Economic Cooperation region alone, it is estimated that a further 1 million kilometres of transmission and distribution networks will need to be built by 2030 to meet the region's energy needs. Financing such a grand project cannot be done by individual governments alone, nor even with the help of multilateral organisations. Private money will be critical. But how can private investors and commercial banks, hit hard by the economic downturn and heavily risk-averse, be encouraged to invest in long-term, often high-risk projects that offer in many cases average returns?
Roger Brown, head of Europe, Africa and Middle East for oil, gas and renewables at Standard Bank, says that one of the big difficulties in attracting finance to energy infrastructure is that alternative sectors are often far more attractive. "When it comes to telcos [telecoms companies], you can finance projects on short tenors that are quick to build. This simply isn't possible with an investment in power," he says. "The tenors are longer and the returns are smaller. You don't get 20% returns on power investment, which means the investor base is that much narrower. There is a lot of debt and therefore higher gearing and lower returns."
Bernie Sheahan, director for infrastructure for the World Bank's financing arm, the International Financing Corporation (IFC), agrees. He says there is big competition for investment in other, less risky sectors with potentially larger returns. "If you give 10 bankers the choice between a shorter-term investment in a mobile network or a long-term power project, nine out of 10 will choose the mobile network," he says.
It is a lament echoed by Charlie Tryon, managing partner of Maris Capital, a private equity firm that invests in Africa. He says that proper and sustained investment in power could transform his business. "It is a requirement of every single business... and is far more important to us than ICT [information communication technology] investment," he says. "I think the economics of telecoms infrastructure sell themselves. But there is serious underinvestment in power, particularly in the markets we're in... we could see huge increases in profitability across our investments if we had regular, sufficient power at an affordable price."
Risk-averse: Roger Brown of Standard Bank says governments and multilateral organisations need to work together to reduce the risk to investors in energy infrastructure in emerging markets
Credit enhancement
But bringing about sufficient power investment in emerging markets is easier said than done. Standard Bank has energy investments across Africa but, when it comes to large-scale projects, these are difficult to finance. A liquefied natural gas (LNG) train, for example, costs in excess of $1bn to build and has a long lead-in time. It needs long debt tenors and can take 15 to 20 years before investors get payback. "That's manageable in a country such as Qatar, but in Nigeria and Equatorial Guinea the longer tenors needed are going to be a real challenge," says Mr Brown.
The answer, he adds, lies in who is backing the project. "One of the most important questions for any energy project is: who is the sponsor? Investors need comfort around the sponsor and its ability to deliver," he says. Whether in Africa, Asia or the developing markets of central and eastern Europe, investors want the reassurance of a sponsor that can guarantee reliable off-take agreements.
The role of the development agencies and multilaterals is also critical. Mr Brown believes they are not yet doing enough. "Development funds and multilaterals should spend less time competing with banks and more time getting down the risks of investing in long-term power projects. They need to enhance credit and secure reliable off-takers. Once we know we'll get paid, we'll invest."
Riccardo Puliti, managing director for energy at the European Bank for Reconstruction and Development (EBRD), agrees that commercial banks want to see commitment from multilateral organisations. The EBRD tends to take equity stakes in projects as a way to reassure potential investors. "It's a way to show that we are there and a commitment that we are ready to take all the risk. By putting our money where our mouth is we try to attract other lenders." Most of the EBRD's investments are based in the emerging and EU accession countries of central and eastern Europe. The bank has in the recent past lent €200m to the MOL gas storage project in Hungary through a syndicated loan, €70m to Croatian gas operator Plinacro, €150m to Serbia Gas and €350m to Petrom in Romania for a new gas-fired plant.
"Commercial banks' participation was very important," says Mr Puliti. The EBRD's efforts are part of a plan to diversify Europe's power sources away from a reliance on Russia so that, in his words, "we can have more confident negotiations with Gazprom", the Russian energy giant.
Out of a total of €8bn-worth of EBRD investments in 2009, the development bank invested €1.1bn in energy, up from €700m in 2008. Mr Puliti estimates that the energy investment figure will rise to €1.5bn by the end of 2010.
EU power sources, 2006
Enabling environment
Ultimately, however, support from multilateral organisations will only go so far in attracting investment to long-term energy projects. Mr Brown says: "Often the risks that banks are being asked to take are too great. What we'd like to see is the multilaterals and DFIs [development finance institutions] working with host governments to credit-enhance the risks... this will bring in more banks and in time the local capital markets will develop as a track record is established."
It is up to national governments to create the right regulatory framework and private-public partnerships that will attract and reassure private investors. Sam Tumiwa, a senior energy specialist at the Asian Development Bank (ADB), says it is critical for governments to set up an "enabling environment". "We all have our roles and you can clarify those roles by setting up a clear and transparent regulatory environment," he says. "The government needs to guarantee off-takers for at least 10 years. It's about sharing the commercial risk."
However, Mr Tryon typifies many investors' experiences in emerging markets when he says that governments can lack both the experience and the capacity. "They may be governments who are in place for very short periods, and that sort of long-term perspective is quite often lacking," he says. "I have seen it in a number of countries we work in where... the interplay between the government and the private sector is poorly managed. You get contractors building roads and power or utility producers who are quite frankly irresponsible and they are not up to the task to deliver the infrastructure."
Mr Tumiwa says that Indonesia provides a prime example of a country that is not getting it right, but for different reasons. There is no regulator in the country and, as a result, little transparency, he says. Indonesia has huge potential, in particular due to its geothermal resources, but there is little willingness from the government to develop them. The ADB is working with the World Bank on a $1.25bn project to develop the county's geothermal sector, but it is an uphill battle, he says.
Indonesia's lacklustre approach to guaranteeing its energy security is highlighted by its recent foray into gas, according to Mr Tumiwa. Indonesia, a net importer of oil, brought in a private contractor to build gas facilities, he says, but because there were no negotiations with the company to sell the gas to the Indonesian government, the yield is instead sold to Japan.
Better governance
According to Conor McCoole, head of project finance and export finance at Standard Chartered Bank in Singapore, countries in Asia are "crying out for new investment". Standard Chartered is active in the Philippines, Indonesia and Thailand. All three offer unique challenges, but what they all have in common are hindrances to private sector involvement brought about by bad governance, according to Mr McCoole.
In terms of the Philippines and Indonesia, there has been "massive underinvestment" in power generation over the past decade, he says, and government policy has made it very hard for private investors to get involved. In the Philippines, for example, a wholesale restructuring of the domestic power system and the way it was regulated led to an exodus of private investors. The country's former national utility was completely restructured.
"The [Philippines] government sold its key power assets and left it to the private sector to develop new assets," says Mr McCoole. Without a single, government-owned entity that could guarantee power purchase agreements, no private investor in their right mind would make the kind of long-term investment required to build greenfield energy projects.
In the case of Indonesia, it was simply unwillingness from the government to provide clear and consistent financial support for the country's national power utility, PLN, that has led to a severe energy deficit. The loss of PLN's monopoly on power generation in 2002 did not result in the creation of a more efficient sector. If anything, private money was put off by the loss of a reliable off-taker.
Co-operation is key
There are, however, success stories and plenty of examples where governments have got it right. Mr Brown highlights Standard Bank's recent investment in Botswana Power Corporation (BPC). The $1.6bn coal-fired Morupule B power station project was a major Botswana government initiative, driven by the BPC. Standard Bank teamed up with Chinese state-owned banking giant ICBC to fund its construction. The deal, which has a 20-year tenor, was guaranteed by the Chinese state in the form of Sinosure, the China Export and Credit Insurance Corporation, to the tune of $800m.
"To get 20-year financing in Botswana is a tough ask," says Mr Brown. "Without the support of China, it would have taken the entire club of DFIs and multilaterals and would certainly have taken a long time to close."
Another example where co-operation between governments, the private sector and multilaterals has resulted in success is the Masinloc power plant in the Philippines.
The Masinloc coal-fired power plant was bought from the Philippines government by US energy company AES, backed by the ABD and IFC, for $930m in 2008. Since that time, it has been overhauled and its output has surged by more than 100%. As a result, the plant's gross margin increased by $50m over the course of 2009. "This is an example where good governance worked. In the Philippines all power generation has to be private sector. It is so essential to have the right governance - after that everything else will fall into place," says Mr Tumiwa.
Domestic support
One of the biggest problems in financing energy investments is the fact that the capital markets are almost entirely closed. The only investors likely to take equity stakes in power projects are the large multilaterals and development finance agencies, while raising money through bonds for new projects in emerging markets is unheard of.
Mr McCoole says that Standard Chartered recently succeeded in closing a $350m high-yield bond for a geothermal investment in Indonesia, which attracted an international and regional investor base. However, it was a refinancing of an existing project, rather than a new development. With the capital markets largely closed, projects rely on support from traditional syndicated loans backed by scores of international banks. However, Mr McCoole says that domestic investors are increasingly getting involved.
"Ten years ago, not one bank in Indonesia would lend... but today many are prepared to lend on a medium-term basis," says Mr McCoole. In Malaysia, the Philippines and Thailand, efforts have been made to reach out to domestic banks for the financing of critical energy infrastructure. "Local banks are taking a bigger role, but project sponsors need to work to accommodate their requirements," he adds. "For example, banks in Indonesia don't want to lend for any more than seven years and have very little experience of complex projects."
Riccardo Puliti, managing director for energy at the European Bank for Reconstruction and Development (EBRD)
Renewable revolution?
Looking ahead, a sea change is taking place in the minds of governments across the world. Rather than look at building yet more costly and often environmentally unfriendly power stations, governments are looking instead at creating efficiencies and diversifying towards the use of renewable technologies.
"Governments should tap indigenous renewable resources first and only after that think about building a power plant," says the ADB's Mr Tumiwa.
However, while banks are happy with traditional corporate lending, it is very hard for them to lend for something that is intangible, such as promoting energy efficiency. According to Mr Tumiwa, the ADB has to guarantee 80% of the risk in order for some banks to participate in lending to factories that want to upgrade perfectly serviceable, but inefficient, motors. "Only after two to three years of sharing the risk are the banks happy to go it alone," he says.
In terms of investing in renewable technology, interest has soared, according to Carl Weatherley-White, head of structured energy finance at Barclays Capital. At a recent conference he attended on renewables targeted at debt investors in the US, 70 potential investors showed up, which was "quite remarkable when compared to [the level of] interest a few years ago," he says. "The most important element is that there is a tremendous need for new investment in this space. Everything needs to be improved, expanded and updated. The globe is now acknowledging climate change as a fact... there is a consensus that something needs to be done about it." The recent oil spill in the Gulf of Mexico underscores this consensus.
The EBRD's Mr Puliti is a strong believer in mixing renewable sources of energy with traditional sources, but is sceptical that the EU's aim to generate 20% of Europe's energy from renewable sources by 2020 will be met. "We're getting there... but I have my doubts. The credit crunch has had a material effect on many deals, in particular the smaller ones," he says. "Solar energy in Spain, for example, has been reduced to a point where we'll see no more investment. It was an industry that developed at a time of great liquidity." When the liquidity dried up, so did the funding for renewable energy, in particular those technologies that are as yet unproven.
Mr Puliti emphasises the recent impact of the Greek debt crisis on funding in Europe and the resultant questions over sovereign debt in countries across the region, not just the so-called PIGS economies of Portugal, Ireland, Greece and Spain.
Global new investment in sustainable energy, 2004-2009
Base load priority
Once again, promoting renewables boils down to a commitment from governments to encourage investment. Kirsty Hamilton, an associate fellow on the energy, environment and development programme at the international affairs think-tank Chatham House, says that it is up to governments to make renewables an attractive proposition to investors by creating a strong policy environment. "It is hard for renewables to compete [with other investments] without government support," she says. However, there is "extensive interest" from mainstream investors in this area now.
Ms Hamilton says increased interest from commercial financiers in renewables is being driven by an awareness of the huge potential demand from the BRIC economies (Brazil, Russia, India and China), an increasingly strong track record for the clean-tech sector and the emergence of compliance-related emissions and carbon markets. In fact, the predicted fall-off in investment in clean energy due to the Greek crisis has shown to be exaggerated. According to statistics from Bloomberg New Energy Finance, new investment in clean technology in the second quarter of 2010 totalled a whopping $33.9bn, just 3% down on the figure for the second quarter of 2009.
Renewables, however, are not seen as providing base load power. After all, wind only blows 30% of the time and the sun only shines 12 hours a day. Mr Weatherley-White accepts that renewable energy makes up just a "thin sliver" of the energy pie. Large investments in coal, nuclear and gas will be needed to meet the predicted surge in demand. Standard Bank's Mr Brown is more forthright. "Until renewable energy is cost-effective across the various technologies, it is never going to be a significant part of the national grid. The base load of any grid has to be at a price that is affordable," he says.
Risk mitigation
Mr Tumiwa suggests using a technique called "dispatch priority". This involves creating an intelligent grid that can dispatch power only when the wind blows or the sun shines. Along these lines, Mr Sheahan says that in Thailand the IFC has invested in the first ever private grid tied to solar projects. "Although small, it is revolutionary," he says.
Intelligent grid technology, however, is both expensive and a long way from coming to fruition on a global scale. "The big question for the future is: how do you mitigate the risks for higher-cost technologies such as wind, geothermal, solar and biomass power?" asks Mr Sheahan.
It is more realistic to make better use of old technology. Only 32% of the energy in coal, for example, is converted to electricity when it is burnt. Supposed 'supercritical coal-fired plants' can operate at a much higher pressure and convert up to 50% of coal's energy into electricity.
Ultimately, whether it is investment in old fossil-based technology, renewable technology or a hybrid of the two, the fact remains that, without government support and the critical role of multilateral organisations, the world will be unable to service its future energy needs.
Ade Adeola is head of African project finance for Standard Chartered Bank. His comments to a recent round table hosted by The Banker neatly summarise the critical role that multilaterals will play in encouraging private investment. "When I look at the difficulty in getting a lot of our projects bankable, it is not really money. It is about being able to get a credit enhancement that will enable private banks like ours to deploy capital," he said.
"So even if the AfDB [African Development Bank] stopped today deploying any form of debt in terms of cash, and all it did was to provide country risk mitigation and credit enhancements, it would probably still have as much impact as it does in terms of writing the cheques. When I look at how much [investment] we could deploy if we didn't have to worry about country risk... we would probably be able to double that."
Energy facts
