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Financing Climate and Energy Nicholas Anderson Managing Director and Head of SEK Advisory Services Swedish Export Credit Corporation Stockholm

May 2013

“Individual Nordic governments cannot afford to focus only on their need to secure national investments.” “Decision makers must coordinate policies across the Nordic countries so that resource allocation is systematically optimized.”


Financing Climate and Energy

Contents Smart and sustainable finance is a key factor when faced with the challenges of climate change ....... 2 Executive Summary ................................................................................................................................. 4 Prioritizing investments .................................................................................................................. 4 Securing financing for Nordic Energy and CleanTech Investments ................................................ 5 Main Proposals for Energy and Climate Financial Vehicles ................................................................ 5 a.

Proposal for consolidation into a Nordic Energy Bank ............................................................ 5

b.

Proposal for Pooled Infrastructure Investment Fund ......................................................... 5

c.

Proposal for Public Private Nordic Project Feasibility Review Body ....................................... 6

Huge investments are expected .............................................................................................................. 6 1.

Investments in the Nordic grid and energy production .............................................................. 6

2.

Investments in the Renewable Energy Sector (EUR bn).............................................................. 7

3.

Energy Efficiency (EE) Investment projects for buildings ............................................................ 8

a.

Social housing and public buildings ............................................................................................. 9

b.

Industrial, commercial and other private buildings .................................................................. 10

4.

Investments in Public Transport and CleanTech infrastructure ................................................ 11

5.

Energy Efficiency (EE) Investment projects for SME’s ............................................................... 11

6.

Innovations and continuous product development .................................................................. 11

Existing sources of finance will be challenged ...................................................................................... 13 Proposals to secure financing for Nordic Energy and CleanTech Investments ..................................... 17 Appendix 1 - INFRANODE - Pension Funds and other Institutional investors need cost efficient investment vehicles ............................................................................................................................... 20 Appendix 2 - FRED - Standardized Pre-feasibility and Feasibility studies require grant support.......... 23 References ............................................................................................................................................. 25

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Financing Climate and Energy

Smart and sustainable finance is a key factor when faced with the challenges of climate change Individual Nordic governments cannot afford to focus only on their own countries’ individual needs to secure investments to meet the challenges of climate change because the demand for financing will strain their own economies to the point where finance is no longer sustainable or available for these investments. There is also a substantial gap between the annual potential financing demand for investments and the availability of finance for these projects forecast for the next ten years. Therefore it should be in the interest of each Nordic country to find ways to reduce he absolute level of investments with coordinated action. Decision makers should coordinate policies across the Nordic countries so that resource allocation is systematically optimized. This paper sets out a systematic path for identifying feasible and bankable solutions with diversified sources of long term funding that will be sustainable over the coming decades. An important starting point is to establish best practices and standards for these prefeasibility and feasibility studies. These studies should be commissioned by a new pan-Nordic entity with balanced public and private ownership to ensure the most appropriate solutions for each country and the region as a whole. It is essential that the quality standards of these prefeasibility and feasibility studies are set at the highest level. Financing from the various sources must be optimal and sustainable over the long term from the debt and equity markets in the most cost efficient manner. Existing public sources of finance should be consolidated and developed, and new investment vehicles must created from existing institutional investors (pension funds and insurance companies) in a cost efficient manner for both investors and the investment project owners.

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Financing Climate and Energy

Executive Summary Prioritizing investments The economic challenges brought about by climate change are significant and their sheer size will certainly have a considerable impact on the economies of the Nordic countries. The annual investments in the Nordic grids and non-renewable energy are expected to be between EUR 4 billion to EUR 5 billion over the next ten years. Annual investments in renewable energy plants and for renovating existing plants will require between EUR 10 billion to EUR 20 billion. Annual energy efficiency investments in buildings are estimated to EUR 24 billion to EUR 33 billion. Add to that the annual need, at the very least, of EUR 10 billion in the coming decade for investments in CleanTech infrastructure and for “greening� of public transport, which may well exceed EUR 10 billion annually. Thus, the need for financing is huge, at a time when Europe is not yet out of its deepest crisis for many decades and with the capital markets still not functioning at normal speed. It is a challenge to raise sufficient capital. The Nordic public sector is not in a position take on excessive borrowing because the economic outlook is uncertain. It is extremely cautious in committing to new infrastructure investments. Nordic banks have in many cases reduced their international networks and cut longer term lending, while requiring higher margins on corporate borrowing. This hits SME`s the hardest. Very few Nordic companies have access to the bond markets. On top of that, the export markets that would normally make investments in new technology are in a slump. The sources of financing are probably not able to cover this potential annual demand for investments and thus there is an annual financing gap as set out in the following table: Estimate of Annual Financing Gap (EUR bn) High

Low

Total potential investments

58

82

Total lending resources

37

45

Gap

21

37

Yet another drawback when looking for financing is the fact that Nordic pension funds and other long term investors have not been able to invest substantial amounts in infrastructure assets because of regulatory constraints. Many traditional infrastructure funds have been managed through private equity funds with high fees and short term investment horizons from which returns mainly have come from capital gains; a kind of high risk investment that do not always suit the needs of pension funds and other long term investors.

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Financing Climate and Energy At this time, individual Nordic governments cannot afford to focus only on their need to secure national investments. Decision makers must coordinate policies across the Nordic countries so that resource allocation is systematically optimized. The multitude of parties who are making the investments in question, need to have a standardized approach to assessing the feasibility of each investment not only for their own needs but also in the wider Nordic context. It should also be possible to reduce peak capacity for many energy investments with high level coordination, thus reducing the risk of financial strain across the region. See the final proposals of this paper below.

Securing financing for Nordic Energy and CleanTech Investments Nordic Energy and CleanTech infrastructure already has a solid financial base in its traditional and well functioning business model where Nordic regional governments are mainly responsible for basic infrastructure work in close partnership with private sector suppliers. Long term financing of infrastructure is available to Nordic regional governments on very favorable terms similar to those of their respective governments through their respective Local Government Funding Agencies (LGFA). This working model has created business opportunities, and work for research institutes and universities. However, this will not be sufficient to meet the challenges ahead. New sources of finance need to be activated on a pan-Nordic basis as well as other cost effective sources of funding from international markets. This includes the main IFI’s (EIB, EBRD, CEB, World Bank, etc), Infrastructure Funds (Marguerite Fund, etc), Sovereign Wealth Funds and large internationally orientated pension funds. Many Nordic projects can also utilize favorable export financing when available. The traditional sources, international and domestic banks, are now facing new regulations which are limiting interest to support this activity. The Nordic Export Credit and Guarantee Agencies have capacity to handle most of the financing requirements but there are gaps in the availability of funding for smaller projects as well as for projects with higher levels of risk and for end clients in high risk countries. Main Proposals for Energy and Climate Financial Vehicles a. Proposal for consolidation into a Nordic Energy Bank From a review of the Nordic financial sources available for these investments, it is apparent that consolidation of the Nordic public financial actors into some form of “Nordic Energy Bank� would be important to consider. There are too many small organizations spread across the Nordic countries that could be easily consolidated into a highly efficient Nordic organization with substantial and diverse resources. A review needs to be made to ensure an optimal utilization of scarce professional resources. Such a review is outside the scope of this paper but it is obvious that work needs to be done to better allocate financial resources for Nordic energy and climate related investments. b. Proposal for Pooled Infrastructure Investment Fund A second proposal is to create or establish a cost efficient and long-term orientated pooled investment vehicle for Nordic pension funds. Infrastructure investments have not been able to benefit from the huge pool of liquidity that has accrued in the pension fund markets. Developments in markets over the last five years have increased the need for such a vehicle where cost effective solutions can match the supply and demand for such assets. Long investment horizons, low operating

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Financing Climate and Energy costs and stable cash flows are sought after rather than high short term capital gains accompanied by high management fees. A pooling or sharing of professionally managed resources could provide a sustainable solution which meet the following requirements:      

A diversified portfolio of infrastructure assets with long term maturities, Stable cash-flow based returns over a long horizon, An independent and dedicated Investment Management team, focused on pro-active origination, structuring and monitoring of every investment in the portfolio, A simple and competitive fee structure that provides for a strong alignment of interest with Investors and that is adequate for this type of long term assets, An opportunity for Initial Investors to influence the development of the fund, and A cost-effective and efficient opportunity for Investors to co-invest alongside the fund and increase their access to specific projects and/or specific instruments.

One example of such a fund is “INFRANODE” as set out in Appendix 1 of this paper. This is one example of such a new vehicle that is expected to start investment activity within the next twelve months, making it possible for institutional investors to co-invest with the fund. c. Proposal for Public Private Nordic Project Feasibility Review Body A Nordic public/private “Nordic Project Feasibility Review Body”, with one branch in each country and a single Nordic board, should be established to perform prefeasibility and feasibility studies of all major projects with commissioned assistance from Nordic engineering and financial consultants through open Nordic procurement. These studies should be supported by partial Nordic public/private funding to ensure the most appropriate solutions for each country and the region as a whole. End clients could commission prefeasibility and feasibility studies for such investments to demonstrate that projects are feasible and bankable. Prior, but limited, experience in Sweden with infrastructure export projects has shown that modest outlays for pre-feasibility and feasibility studies can result in procurement contracts worth over 150 times greater than the original donor investment. There can be little doubt of success if the body was implemented as a joint venture between the public and private Nordic sectors. It would ensure a wider resource base and stronger deeper networks. It would also carry more weight as a Nordic institution. A more detailed description is given in Appendix 2 of this paper.

Huge investments are expected 1. Investments in the Nordic grid and energy production Investments in grids are important and costly. They are a natural monopoly and must be rolled out in a timely manner to prevent bottlenecks in energy transmission and ensure efficient balancing of production. Incentives in the form of public support and regulation must ensure that these high level objectives are achieved.

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Financing Climate and Energy Planned Nordic grid investments over next 10 years Norway EUR 5-7 billion Sweden EUR 3-4 billion Finland EUR 1-2 billion Denmark EUR 1-2 billion Total EUR 10-15 billion Source ”Nordic Market Report 2012” NordREG Nordic Energy Regulators (2012) Smart Grids are the most effective way to adapt the power system for the management of more wind, solar, wave power, electric and plug-in hybrid vehicles and heat pumps. Such investments should allow clients to combine metering, control and automation in the power grid for residential, public, commercial real estate as well as for industrial plant. The main grid companies are owned and controlled by the state, state owned companies and regional government. Local government funding agencies, pension funds and the covered bond market should be able to fund these projects efficiently over long periods. Nordic grid connections to the southern and eastern neighbors require enormous investments but these projects take many years to come to fruition. 2. Investments in the Renewable Energy Sector (EUR bn) Production GW SE DK NO FI Total 1 Nuclear 9 3 12 Hydro 16 30 3 49 Thermal 9 9 1 10 29 Wind 2 4 6 Country total 36 13 31 16 96 Renewables - 2010 48% 22% 61% 32% 46% Renewables - 2020 50% 30% 68% 38% 51% Source ”Nordic Market Report 2012” NordREG Nordic Energy Regulators (2012)

Nordic Ownership of Energy Capacity Denmark - Dong Energy 6 131 6% - Vattenfall 2 273 2% Finland - Fortum 4 926 5% - PVO 3 582 4% - Helsingin Energia 1 393 1% 1

Note that nuclear, as a non-fossil fuel, perhaps should not be classified as a renewable. However, the original source uses this classification in this report for convenience.

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Financing Climate and Energy Norway - Statkraft 12 884 13% Sweden - Vattenfall 13 867 14% - E.ON Sweden 6 469 7% - Fortum 5 910 6% Other generators 38 608 40% Total Nordic region 96 043 100% Source �Nordic Market Report 2012� NordREG Nordic Energy Regulators (2012) Investments in renewable sources of energy will be challenging even though there is a relatively high level of ownership by the public sector and by different large entities. The power generation companies are owned and controlled by the state, state owned companies and regional government. Local government funding agencies, pension funds and the covered bond market should be able to fund these projects efficiently over long periods. However, the required size of new investments is substantial because many existing plants and networks have reached the end of the economic life. Technical innovations and developments, the need to adapt to globalization, an aging population, and climate change present substantial challenges. An increase in renewable energy production from biogas, and wind, solar, wave power demand guidance to be optimal rather than wasteful. They also require the fast rollout of smart grids (see above). Investments for new renewable energy plants and for renovating existing plants for 5% to 10% of total capacity will require between EUR 10 to EUR 20 billion of financing depending on the solutions implemented2. This is a considerable burden for central and regional government that must be faced in addition to the costs of new grid investments. The four Nordic Local Government Funding Agencies should have capacity but the borrowers will be stretched in terms of their own limits on borrowing. Kommuninvest, Kommunalbanken, KommunKredit and Municipality Finance together can provide new loans of up to EUR 15 billion each year for all local government investments in basic infrastructure. Energy and CleanTech projects account for some 50% of these investments. Public financial support in various forms is required for SME private sector and large company involvement in supplying and developing innovative solutions. As is stated and repeated elsewhere in this paper, the multitude of parties who are making these investments need to have a standardized approach to assessing the feasibility of each investment not only for their own needs but also in the wider Nordic context. It should be possible to reduce peak capacity for many energy investments with such high level coordination, thus reducing the risk of financial strain across the region. See the final proposals of this paper. 3. Energy Efficiency (EE) Investment projects for buildings This is one of the most important areas where important savings can be achieved continuously over decades with relatively simple and robust arrangements. These savings can reduce the need for new capacity and lead to significant reductions in energy usage and thus operating costs. 2

U.S. Energy Information Administration | 2018 Levelized Costs AEO 2013 – the figure here is a conservative best estimate based on average levelized costs for new plants based in US.

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Financing Climate and Energy

Innovative and unbiased consideration must be given to finding a limited number of optimal solutions for this activity to spread and replicate from its very modest base because EE projects for buildings are rather standard for all types of buildings. However, there are two impediments: a. The initial investment costs are relatively high and the financial results accrue over the long term. b. Banks and other financiers have a poor understanding of this type of activity. It is well known in the engineering consulting community and amongst building owners that long term financing is difficult to attract for such projects. Furthermore, interest rate subsidies and other such support are soon enough swallowed up by the banks. This paper proposes that a standard methodology should be set in place and regulated by a single specialized regulator in identifying acceptable projects which would then be eligible for various public incentives. Incentives could be in the form of the grants, subsidies, partial relief from VAT or other taxes to make them happen over the coming decades. The source of funding for EE projects should be open and competitive both to banks and LGFA’s depending on the creditworthiness of the borrower and the riskiness of the project. a. Social housing and public buildings Much can be done to reduce energy consumption in older buildings especially in social housing, where economies of scale can be achieved when renovation is performed. However, in almost all cases, the internal rate of return3 of the energy efficient investment alone is low when the savings are measured against the investment costs are taken in to account. Important monetary gains are made possible by increased property values due to their upgrading4. A second indirect financial gain is a reduction in crime and social problems associated with badly maintain properties. The third important cost saving is the total reduction in energy for such large projects which can also incorporate smart metering and energy conservation systems thus substantially reducing peak loads, an important cost saving for energy producers. The total gains from these three sources can result in reasonable IRR’s over the long term. Note that renovating social housing normally leads to the need to relocate residents to newer low cost, but energy efficient, buildings because rents will be increased beyond their means for the renovated buildings. EE projects could be financed by a specialized unit for public sector clients when the credit risk is low – this could be within LGFA for local government borrowers and other public sector entities. If this latter group falls outside the remit of a LGFA, then a government guarantee could be made available for such eligible investments to cover the risk of loss for the LGFA. A methodology for estimating the annual demand for finance for this sector can produce a result that gives guidance on the potential demand. A recent study on energy efficiency investments for the Swedish building stock by the Royal Swedish Academy of Engineering Sciences,( IVA)5 it was estimated that the total collective value of building in Sweden in 2012 is EUR 1,7 trillion to 2,3 trillion. If 80% of that mass is to be renovated every 30 years to improve the energy efficiency of the 3

This is one commonly used method of measuring the feasibility of an investment. Energicentrum vid Miljöförvaltningen Stockholm Stad ”Ekonomi vid ombyggnader med energisatsningar – Slutrapport” (2012) 5 “Energieffktivisering av Sveriges Bebyggelse”, IVA (2012), 4

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Financing Climate and Energy buildings, then the annual cost of such large investments would in the region of 20% of the market value of the buildings then we can see that the total annual investment demand would be between EUR 9 and EUR 12 billion.

Source for Building values - Royal Swedish Academy of Engineering Sciences, IVA “Energieffktivisering av Sveriges Bebyggelse (2012). The source for estimates for renovation costs is from Energicentrum vid Miljöförvaltningen Stockholm Stad ”Ekonomi vid ombyggnader med

energisatsningar – Slutrapport” (2012)

Assuming that Sweden is representative of the whole region then, using current population figures, the annual demand for financing such investments has the potential of being EUR 24 billion to EUR 33 billion. b. Industrial, commercial and other private buildings Other entities with eligible EE projects should have access to the same type of grants/subsidies/tax credits as described above but only after the EE investment is authorized by the new regulating entity. In such cases there are two methods of financing that can achieve satisfactory results: a. If the borrower is strong enough, it can borrow from its bank without any further need for public support other than the public incentives. b. An Energy Savings Company (ESCO) can take on the role of managing the building with a long term contract effectively capping the costs to the owners over a long fixed period. In such cases, the ESCO is the beneficiary of the public incentive. An ESCO can only succeed in this activity if they are cost efficient and work effectively alongside their beneficiaries. The YIT ESCO model that is operating in most of the Nordic countries is a good example of economies of scale. The total annual demand for financing is extremely difficult to quantify. The number of investments would be large for smaller investments and there are relatively modest numbers for large investments. For the purposes of this paper a best estimate is probably more than EUR 10 billion annually through the Nordic region.

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Financing Climate and Energy As is stated and repeated elsewhere in this paper, the multitude of parties who are making these investments need to have a standardized approach to assessing the feasibility of each investment not only for their own needs but also in the wider Nordic context. It should be possible to reduce peak capacity for many energy investments with such high level coordination, thus reducing the risk of financial strain across the region. See the final proposals of this paper. 4. Investments in Public Transport and CleanTech infrastructure CleanTech investments are also mainly made by regional governments and normally include energy investments as described above, but also waste management and transport infrastructure. Excluding energy and transport, their total size is also difficult to estimate but it is well in excess of EUR 10 billion in the coming decade. Investments in public transport and in energy efficient solutions for transport will be financed mainly by entities controlled by regional and central government for rail and bus transportation in and between urban areas. The increased use of electric power for cars, biogas for buses and other vehicles require long term guidance through regulation and financial support. Any estimate in the size of these investments is extremely difficult to make with any degree of certainty but it is, without doubt, large and well in excess of EUR 10 billion for the next decade. Public financial support in various forms is required for SME private sector and large company involvement in supplying and developing innovative solutions. Local government funding agencies, pension funds and the covered bond market should be able to fund these projects efficiently over long periods. Public financial support in various forms is required for SME private sector and large company involvement in supplying and developing innovative solutions. 5. Energy Efficiency (EE) Investment projects for SME’s EE investment projects for SME’s are based entirely on the creditworthiness of the SME’s. They suffer from a lack of competition from banks and loans are challenging to secure. If the credit risk of an SME is not accepted by any bank then public SME financiers must come in to the picture. In many Eastern European countries, multilateral financial institutions like the EBRD and EIB and several other funds provide loan facilities to banks for SME’s6. This is a small but important sector whose financial needs must be addressed. Total annual financing demands are small. 6. Innovations and continuous product development Public support in various forms is critical and necessary for all of the above sectors, grids, transport, energy efficiency for buildings, and renewable and CleanTech investments. SME private sector involvement in supplying and developing innovative solutions requires public support together with close cooperation with research bodies and technical universities across the Nordic region. Similarly, large companies that are suppliers of equipment, (ABB, Scania, Volvo, Atlas Copco, Sandvik, etc.) and major engineering consultants should enjoy financial support for R&D for innovations across the Nordic region. In both cases all public support, in whatever form should be open to peer review and 6

One such successful EE program is UKEEP www.ukeep.org. This is an EBRD energy efficiency project in Ukraine which has been operating for 6 years now. Cost free standardized energy audits and financial analysis are performed for private SME’s by engineering and financial consultants. Accepted projects are then eligible for loans from local banks that are funded by EBRD. UKEEP is the first and one of the most successful of 14 other programs initiated with donor funding by EBRD. Over 300 projects have been audited and 60 projects have been funded by UKEEP.

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Financing Climate and Energy benchmarked against best practices to ensure that funds are not being wasted. This is also a small but important sector whose financial needs must be addressed. Total annual financing demands are small.

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Financing Climate and Energy

Existing sources of finance will be challenged The main sources of finance are set out in the table below are reasonable estimates of their current annual capacity for new loans. It must be remembered, however, that this capacity is only partially available for Energy and CleanTech lending. A very generous number could be 50% of annual lending capacity which is then possibly between EUR 37 billion to EUR 45 billion.

The Nordic Local Government Funding Agencies, (Kommuninvest, Kommunalbanken, KommunKredit and Municipality Finance) each have annual lending capacity of some EUR 3 to 5 billion each respectively The Nordic Export Credit and Guarantee Agencies have the following annual lending capacities – Sweden EUR 5 billion, Denmark EUR 2 billion, Norway EUR 2 billion, and Finland EUR 2 billion. The Nordic Investment Bank (NIB) has an annual lending capacity of EUR 2.5 billion. The EIB, COE Development Bank are also reasonably important long term and cost efficient lenders but their total lending volumes to the Nordic countries are modest and probably below the levels of NIB. The banks, institutional investors (pension funds and insurance companies) at home and abroad are important lenders and investors to large companies and the public sector. The absolute annual lending capacity for banks and investors is extremely difficult to calculate but it can be assumed to be somewhat larger than the above sources taken together. SME’s have difficulties finding attractive longterm financing from the banks, but the absolute amounts of current lending are naturally large. They have the potential for being more active but they are currently constrained. This paper sets out proposals to ease these constraints. Public agencies responsible for financing these projects (Energimyndigheten, NEFCO, Nopef, Norden, etc) are also financing these investment projects with long term low cost funding, and grants – especially at the early stages of projects. Although this source of funding is small it does have a positive long term impact because it is focused on innovation. Nordic regional government is mainly responsible for developing and maintaining basic infrastructure. They manage this in partnership with private sector suppliers and research institutes, universities and technical colleges. It is common practice to introduce innovations to improve efficiency of equipment and systems. It is also common practice to have sustainable service and

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Financing Climate and Energy supply partnerships between the private and public sectors on terms that are clearly favorable for the public sector. Nordic regional government has been able to finance this infrastructure with long term debt (loans of 20 to 30 years) that has been available at a cost that is very close to the cost paid by the Nordic governments. This deep and secure funding source is available in all of the Nordic countries from their respective local government funding agencies (LGFA). This is seldom the case in the export markets where few LGFA exist outside of Northern Europe, and this is an important reason why the Nordic model needs to be “sold� as facilitator of infrastructure investments and economic growth in third countries. The Nordic systematic and sustainable approach to financing energy and clean tech infrastructure investments has enabled them to be first movers in renewable energy production, operation and maintenance. This holistic approach has been used in the management of water, waste, energy production, heat, cooling, utility networks and transmission, town planning, construction and building management, and public transport and other vehicle management. Private companies can thus develop cost efficient and reliable equipment from working closely with regional government, consultants, research institutes, universities and technical colleges. The companies and the consultants have been able to commercialize this equipment and plant in the export markets and made a significant contribution to economic growth, the GDP and employment within the Nordic countries. The existence and operation of these local projects has become important reference projects for the export companies and their consultants. Technical universities, technical colleges and other areas of tertiary learning produced skilled engineers and technicians who have the ability to develop, operate and maintain equipment and networks in both the public and private sectors. Research and practical solutions are then commercialized through private sector efforts with the support of funding from various public research and trade support entities. However, this holistic approach of financing requires an overhaul to meet the current challenges imposed by climate change to ensure that the Nordic countries remain competitive. There can be no doubt that the demand for financing new and necessary investments in the coming ten years will represent a major challenge for the Nordic countries. This challenge is exacerbated by the ongoing financial crisis, increased regulation of the financial markets, and the need to change because of climate change and an aging Nordic population. Investments in grids and production capacity alone will require EUR 35 to EUR 50 billion in the next ten years. This does not take into account the investments which are needed for Transport and CleanTech, for Energy Efficiency investments in residential buildings and social housing and for Energy Efficiency investments for commerce and industry. These areas of investment activity are many orders larger than in previous decades. The final potential figure for demand is probably well in excess of EUR 60 to EUR 80 billion for each year within the Nordic market. The most important challenges for the Nordic economies are the following: 1. The main domestic clients, regional governments, are currently cautious in making new infrastructure investments. Although they have relatively easy access now to the debt markets through their own LGFA’s, banks and in some cases directly in the capital markets,

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Financing Climate and Energy they want and must to avoid excessive borrowing, especially when the economic outlook is so poor. They are especially wary of making new investments without higher levels of confidence about the feasibility and riskiness of the investment. This is critical because most entities need to renovate and update many parts of their basic energy infrastructure that are reaching the end of their economic life. New technologies can also increase energy efficiency and reduce greenhouse gas emissions. Regional governments need to be able to prioritize the most important investments by preparing financial feasibility studies that take in to account national and Nordic context. This can only be done if the methodology is systematically applied across the region with standard work processes and methods. 2. Nordic pension funds and other long term institutional investors have not been able to invest substantial amounts in infrastructure assets because of regulatory constraints and because it is challenging to manage these investments in an optimal manner. Another impediment has been that many traditional infrastructure funds have been managed from the private equity funds with high fees and short term investment horizon, from which investment returns have mainly been earned from capital gains. These high costs and short term investment horizons make such investments higher risk and less attractive for pension funds and other similar long term investors who are seeking stable and attractive returns. 3. Banks have reduced their longer term lending has been cut. Banks now require higher margins on corporate lending as well as shorter loan tenors. This has led to a reduction in the availability of funding for SME’s in the renewable energy sector where innovation is developed. SME’s and lower rated issuers have always faced a more limited access both to bank loans and to the capital markets. Only highly rated issuers have secure access to the capital markets at attractive interest rates. Recovery in the financial markets will take many years and this means that substantially less support can be expected from these banks. Nordic banks have retreated from international markets to their own domestic markets thus reducing support for financing of foreign end-clients in the export markets. There is little hope of a reversal of this process in the coming years. International banks are still lending to large Nordic companies but lending limits and loan tenors have been reduced. A small group of large Nordic companies still have access to the bond markets, but they are small in number compared to the total need form the corporate sector. 4. Foreign end-clients of Nordic exporters are under pressure. These are typically central and regional governments. The economic downturn and financial crisis has naturally impacted these end-clients in the same ways as in the Nordic countries, irrespective of whether they located in a low or high income part of the world. Feasibility studies are needed to show that such investments are sustainable and bankable. Thus a vehicle must be sought after that will

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Financing Climate and Energy seek out and discover feasible projects in such a manner so that Nordic exporters are well placed, or at least not excluded, to win new export orders. Projects must also be followed closely to ensure that progress is in line donor policy and end client objectives.

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Financing Climate and Energy Proposals to secure financing for Nordic Energy and CleanTech Investments Further work needs to be performed to ensure that investments take into account both local and national needs, as well as being also optimal in the Nordic context. Current and new sources of finance must be activated and developed to ensure that bottlenecks are addressed in a timely manner. New investments in energy capacity and in the grid require coordination in a more consistent manner across the whole of the Nordic region to avoid unnecessary investments in over-capacity and to ensure a diversified, but balanced, supply of power. Export projects need long term financing. The traditional sources, international and domestic banks, are now facing new regulations which are limiting their interest to support this financing. The Nordic Export Credit and Guarantee Agencies have capacity to handle most of these financing requirements. However, there are gaps in the availability of funding for smaller projects and for projects with higher levels of risk and for end clients in high risk countries. The following proposals attempt to meet these objectives: 1. It is clearly apparent that there is a proliferation of relatively small public financial institutions all involved in financing investment projects related to energy and climate change. Each institution has its own small team of professionals working independently one from the other. This cannot be considered as an efficient use of resources within the public sector for such an important activity of the Nordic economies. It would undoubtedly be an optimal solution to seek out consolidation of these institutions in order to collect together larger teams of specialists. Larger teams cooperating together as a business unit would be more productive than the present situation. This paper therefore sets out a proposal to consolidate the public Nordic financial actors into some form of “Nordic Energy Bank”. It is outside the scope of this paper to have a more detailed analysis, and a study needs to be made to ensure an optimal utilization of scarce professional resources. It is self evident that consolidation into a Nordic Energy Bank will lead to a more optimal allocation of energy resources across the Nordic region instead of the piecemeal approach based on narrow national interests. Such consolidation should also strengthen opportunities to export this infrastructure. A Nordic Energy Bank could also have the a stronger financial position, from which to finance larger energy related export projects together with international banks and investors. Finally a Nordic Energy Bank could also be organized to provide financial support and risk financing for SME’s operating in this sector in both the Nordic and foreign export markets. Nordic financial actors need to be fully aware of all sources of finance. Much needs to be done to educate banks with regard to energy efficiency. This will include a major investment in promoting knowledge about the benefits of EE programs and the related incentives, about why the above feasibility studies are important, what financial solutions are available. This will involve working on such matters with the Nordic banks, institutional investors and with the main IFI’s (EIB, EBRD, CEB, World Bank, etc), Infrastructure Funds (Marguerite Fund, etc).

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Financing Climate and Energy Finally, a Nordic Energy Bank could be influential and instrumental in establishing standardized contracts for investment activities that would simplify and expedite projects that are deemed to be feasible. It could act as a knowledge center for both regional and central governments and their respective entities engaged in energy and climate change related investments. Such a bank could also have a stronger position to support larger export projects of such investments in foreign countries. The present national ECA’s, although highly rated and well regarded in the international capital markets, are relatively small players. 2. A second proposal is to create or establish a cost efficient and long-term orientated pooled investment vehicle for Nordic pension funds. Infrastructure investments have not been able to benefit from the huge pool of liquidity that has accrued in the pension fund markets. Developments in markets over the last five years have increased the need for such a vehicle where present cost effective solutions can match the supply and demand for such assets. Long investment horizons, low operating costs and stable cash flows are sought after rather than high short term capital gains accompanied by high management fees. A pooling or sharing of professionally managed resources could provide a sustainable solution which meet the following requirements: a. A diversified portfolio of infrastructure assets with long term maturities, b. Stable cash-flow based returns over a long horizon, c. An independent and dedicated Investment Management team, focused on proactive origination, structuring and monitoring of every investment in the portfolio, d. A simple and competitive fee structure that provides for a strong alignment of interest with Investors and that is adequate for this type of long term assets, e. An opportunity for Initial Investors to influence the development of the fund, f. A cost-effective and efficient opportunity for Investors to co-invest alongside the fund and increase their access to specific projects and/or specific instruments. One example of such a fund is “INFRANODE” as set out in Appendix 1 of this paper. This is one example of such a new vehicle that is expected to start investment activity within the next twelve months, making it possible for institutional investors to co-invest with the fund. 3. The Nordic public sector and its private infrastructure consultants and exporters should consider establishing a jointly owned and controlled “Nordic Project Feasibility Review Body” (NPFRB), with one branch in each country. It should be established to perform prefeasibility and feasibility studies of all major projects in the Nordic region by procuring Nordic engineering and financial consultants through open Nordic procurement. These studies should be supported by partial funding from the owners to ensure the most appropriate solutions for each country and the region as a whole. The commissioning bodies should naturally pay for part or all of the consulting work. The NPFRB would also procure Nordic consultants for major infrastructure export projects. The purpose of these prefeasibility and feasibility studies is to demonstrate that projects are feasible and bankable. Prior experience in Sweden for infrastructure export projects has

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Financing Climate and Energy shown that modest outlays for pre-feasibility and feasibility studies can result in procurement contracts worth over 150 times greater than the original donor investment. It is for this reason that there can be little doubt of success if the body was implemented. It would ensure a wider resource base and stronger deeper networks. It would also carry more weight as a Nordic institution. A more detailed description is given in Appendix 2 of this paper. The work of this new body should be based on a standard methodology that should be set in place and acceptable projects would then be eligible for various public incentives. Incentives could be in the form of the grants, subsidies, partial relief from VAT or other taxes to make them happen over the coming decades. Public support for financial incentives need to be examined and implemented in a timely manner to ensure that innovation and product development is promoted by SME’s and large companies in a cost effective manner. Experience from energy efficiency projects (EE) with the EBRD has indicated that direct grants for EE energy audits and investments grants for investors who execute eligible EE investments are very effective in stimulating volume activity. The result of this activity leads to lower operating costs which in turn improves the creditworthiness of the client, other things being equal. This is good for the banks and ultimately good for national and Nordic competitiveness.

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Financing Climate and Energy Appendix 1 - INFRANODE - Pension Funds and other Institutional investors need cost efficient investment vehicles As mentioned above, many infrastructure funds have been managed as the private equity funds with high fees and short term investment horizon, from which investment returns have been earned mainly from capital gains. These high costs and short term investment horizons make such investments higher risk and less attractive for pension funds and other similar long term investors who are seeking stable and attractive returns. INFRANODE is a new initiative and rather original fund that is being developed with the support of the major Nordic companies and financiers involved and benefiting from a strong in the export sector and with close cooperation with the Nordic pension funds and other similar large institutional investors. The main objective of INFRANODE is to act as a pooled vehicle for investments in infrastructure by long term institutional investors in the Nordic region who want to match long term liabilities with long term assets that can provide attractive and stable yields with inflation protection.

Up until the present, infrastructure investments have not been able to benefit from the huge pool of liquidity that has accrued in the pension fund markets. There are many reasons for this that relate to the manner in which the funds have been regulated. Infrastructure as an asset class is also a relative newcomer because it has traditionally been finance from public sources. The developments and changes which have been observed in the markets over the last five years mean that cost effective solutions are needed to match supply and demand for such assets with specially designed vehicles. The main requirements are for low operating costs and long investment horizons where stable cash flows are achieved rather than high short term capital gains. This means that there must be a pooling or the sharing of professionally managed resources to provide a sustainable solution which can meet the following requirements:

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Financing Climate and Energy 1. Diversification: A diversified portfolio of infrastructure assets with long term maturities, 2. Stable yields: stable cash-flow based returns over a long horizon, 3. A dedicated team: An independent and dedicated Investment Management team, focused on pro-active origination, structuring and monitoring of every investment in the portfolio, 4. Competitive fees: A simple and competitive fee structure that provides for a strong alignment of interest with Investors and that is adequate for this type of long term assets, 5. Tailor made structuring: An opportunity for Initial Investors to influence the development of the fund, and 6. Co-investment: A cost-effective and efficient opportunity for Investors to co-invest alongside the fund and increase their access to specific projects and/or specific instruments.

It is expected that when it starts investment activity within the next twelve months, it contribution will become over time considerable since these institutional investors will be able to co-invest with the fund.

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Financing Climate and Energy

Typical investments to be made by INFRANODE

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Financing Climate and Energy Appendix 2 - FRED - Standardized Pre-feasibility and Feasibility studies require grant support As described earlier in this paper, it is proposed that a new Nordic non-governmental body (possibly one in each country with a single Nordic board) should be established to perform prefeasibility and feasibility studies of all major projects with assistance from Nordic engineering and financial consultants through open Nordic procurement. These studies should be supported by pan-Nordic public funding and grants to ensure the most appropriate solutions for each country and the region as a whole. It is essential that the quality standards of these prefeasibility and feasibility studies are set at the highest level. See the following note on FRED below. End clients, both Nordic and external end-clients, that commission basic infrastructure investments should prepare independent prefeasibility and feasibility studies before embarking on costly infrastructure projects. Many large countries and companies can and do subsidize such studies for their exporters as part of their trade support programs or through tied international aid. The approach can be open and transparent or it can be hidden and opaque, where such feasibility studies are self serving and tied to supplier or supplier’s country. In order to have a more balanced playing field, we have developed a proposal for a new vehicle, Fund for Regional and Export Development, (FRED) that would seek funding from government donors in the Nordic region for making feasibility studies for end clients for new infrastructure projects at home and abroad. This has been discussed with all the important consulting companies and there appears to be a good chance of this being implemented as a Nordic vehicle. An important planning element is also necessary to put in place a systematic and high quality best practices for assess the viability of each project not only for the investors but also for the Nordic region as a whole.

This proposal is based on past experience in Sweden from a program whereby modest grant outlays for pre-feasibility and feasibility studies resulted in procurement contracts that were in the order of over 150 times the original donor grant. Reasonably accurate data from over 30 assignments from Sweden’s Ministry of Foreign Affairs’ Project Export Secretariat, confirms these results. Naturally not all of the studies have resulted in successful projects. That is to be expected in such activities. However, the results are impressive even

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Financing Climate and Energy when taking into account total outlays when only 40% of the projects were actually implemented. SEK Advisory Services can verify that in 16 of these assignments received grant funding of some SEK 50 million, with matched funding from the end clients in many countries. These assignments resulted in contracts worth over SEK 6 billion producing an impressive leverage ratio of 1:120. This means that part of feasibility studies paid for by the Swedish taxpayer account for 0.8% of final contracts or for every SEK1 million invested in grants by the Swedish government, SEK120 million was secured in export contracts. The FRED proposal is an improved version of this program. The proposal sets out a plan that FRED will be managed by a professional and experienced management group as a nongovernmental organization, thus ensuring an efficient, professional and politically independent organization. This proposal has the potential for doubling the efficiency of this leverage compared to the now defunct program. A relatively small annual investment in grants of SEK 100 million has the potential to create export and reference projects in the region of SEK 15 to 20 billion, which is equivalent to some 30 000 to 60 000 man years jobs annually. These numbers are significant for the Nordic economies in terms of economic impact and employment.

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Financing Climate and Energy References U.S. Energy Information Administration | 2018 Levelized Costs AEO 2013 http://www.eia.gov/forecasts/aeo/electricity_generation.cfm Royal Swedish Academy of Engineering Sciences, IVA “Energieffktivisering av Sveriges Bebyggelse (2012) ”Nordic Market Report 2012” NordREG Nordic Energy Regulators (2012) Energicentrum vid Miljöförvaltningen Stockholm Stad ”Ekonomi vid ombyggnader med energisatsningar – Slutrapport” (2012) ”Capacity for Competition Investing for an Efficient Nordic Electricity Market” Report from the Nordic Competition Authorities (2007). ISBN 978-82-997472-3-3 Nordic Country report: ”Innovative Electricity Markets to Incorporate Variable Production to IEARenewable Energy Technology Deployment”(2008). Renewable Energy Policies in Nordic Countries Are there options for Austria? Thaler Silvia (2006). ”Wind Power in the Nordic Region - Conditions for the expansion of wind power in the Nordic countries”. NordVind (2011). The Nordic Model - Local welfare, global competitiveness in Denmark, Finland and Sweden. Other sources: Annual reports and other financial statements from the following entities: Kommuninvest, Sweden www.kommuninvest.se Kommunalbanken, Norway www.kommunalbanken.no KommunKredit, Denmark www.kommunkredit.dk Municipality Finance, Finland www.munifin.fi Nordic Investment Bank www.nib.int Nefco . The Nordic Environment Finance Corporation www.nefco.org Nopef - Nordiska projektexportfonden www.nopef.com Nordic Council of Ministers www.norden.org Nordic export credit agencies: EKN - Exportkreditnämnden, and SEK Swedish Export Credit Corporation, Sweden Finnvera and Finnish Export Credit, Finland EKF - Eksport Kredit Fonden, Denmark GEIK - Norwegian Guarantee Institute for Export Credits (GIEK) EIB www.eib.org Marguerite Fund www.margueritefund.eu EBRD www.ebrd.org Council of Europe Development Bank www.coebank.org

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Financing Climate and Energy

www.globalutmaning.se info@globalutmaning.se

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