Financing the Clean Energy Sector in the GCC

with Green Bonds and Green Sukuks:

Is a market being born?
Aaron Bielenberg
Latham & Watkins
Founder and Director of the Clean Energy Business Council
(CEBC) - MENA

Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the
practice in the United Kingdom, France, Italy and Singapore and an affiliated partnership conducting the practice in Hong Kong and Japan. Latham & Watkins practices in Saudi Arabia in
association with the Law Office of Mohammed Al-Sheikh. Copyright 2011 Latham & Watkins. All Rights Reserved.
 Clean Energy Investment, Growing Globally and in
MENA and Looking for New Financing Sources
In 2010, global investment in clean energy reached $211
billion (28% year on year increase) FN1

Investment in clean power assets alone could reach $2.3 Global new investment in renewable
trillion during 2010-20 period if policy priority for clean energy energy 2004-2010 ($bn):
is well-placed FN2

The MENA region is currently seeing an explosion of Clean

Power projects in planning and implementation, along with
significant planned investment in energy efficiency and carbon
reduction projects

Governments and sponsors are looking for innovative ways to

finance this emerging clean energy sector

Various barriers for large scale low-carbon investments

small secondary debt market, absence of liquid, investment
grade asset-backed securities

Bond financing makes up a small proportion of clean energy

financing currently

Estimated 24-40% of institutional investors assets under

management dedicated to fixed-income debt, including asset-
backed securities FN3
Source: Bloomberg New Energy Finance
FN1 Source: Bloomberg New Energy Finance
FN2 Source: The Pew Charitable Trust
FN3 Source: Barclays Capital/Accenture
 What are Green Bonds?

Debt instruments issued to raise capital to

fund specific clean power projects or projects
aimed at reducing climate change risk

Total issuance value approximately $3.5

billion globally in 2010 principally issued by
international financial institutions (e.g. World
Bank)

Example structures:
Investors range from pension funds with Green gilts
environmental mandates to socially Green retail bonds
responsible investment-focused retail Green investment bank bonds
investors Green corporate bonds
Green infrastructure bonds
Rainforest bonds
If investors are offered two investments with
Index-linked carbon bonds
same risk/reward profiles, one brown, one
Water bonds
green, they will choose green
 Why Green Bonds?
Investors unlikely to invest capital directly into individual
projects market driven by investor demand for low-risk
products from respected issuers

Direct Investment brings exposure to regulatory

uncertainty, technology risk and there are limited
investment grade opportunities of significant scale

Investor demand for ways to invest in the high-growth

clean energy sector other than through equities and
funds

Fixed-income structure relatively easy place to

integrate environmental investing policies into portfolio
strategy
Selected investors:
Investors attracted to risk/return characteristics of
conventional bonds New York State Common
Retirement Fund
Similar in design, risk and return to existing products in California State Teachers
investment portfolio Retirement System
California State Treasurers Office
Opportunity to integrate environmental, social, and Swedish National Pension Funds
governance criteria throughout portfolio, and to signal
commitment to stakeholders and policy makers UN Joint Staff Pension Fund
Trillium Asset Management
Solid credit ratings International Financial Institutions State Street Global Advisors
and Governments as principal issuers
Bond structures

Corporate bond Ring-fence value Commercial Bank

linked to of assets to Asset-linked to a portfolio of
qualifying assets internal cost wind project loans
centre
Utility/ Manufacturer Bonds
linked to facility or wind farms

Project Special purpose Financing construction and

development vehicle owns the operation of wind farms
bond asset

Portfolio bond Securitisation Aggregator - re-financing for

vehicle of loans pool of wind farms or wind loans
and/or assets
Key provisions

Money flows
Linked assets matching bond amount
Assurance around use of proceeds, budget allocation
Traceability
Eligible physical assets/projects
Wind farms, Solar Farms, manufacturing, energy efficient infrastructure
Guarantees Necessary
Completion Support, Debt Service, Short Fall,
Terms and Conditions
Match benchmarked conventional bond terms in the market
The Sovereign Green Bond?
 History of Green Bonds

Green bonds pioneered by the World Bank in 2008 as

part of its Strategic Framework for Development and
Climate Change

Objective to tap into large global pool of assets allocated

to fixed-income investment held by pension funds and
sovereign wealth funds

First green bond issued in 2008 by World Bank for SEK

2.325 billion (approx US$350m), 6-yr maturity, 3.5%
interest

World Bank Green Bonds outperformed conventional

bonds on secondary market investors looking for
differentiation

Various bonds have since been issued by the World

Bank in various currencies, and by others, including
European Investment Bank, US Government agencies,
International Finance Corporation and Asian
Development Bank

Future proposals for further green bond issuances from

governments including UK, Canada, Ireland and India
 World Bank Green Bond Programme

Since inaugural bond issue in 2008, the World Bank has

issued over US$2bn in green bonds through 43 transactions
and 16 currencies

Proceeds of issue deducted from special green account

each quarter and added to the World Bank's lending pool to
support Eligible Projects Example Eligible Projects:

Eligible Projects: Mexico: Rural Renewable

Energy
Selected by World Bank environment specialists and meet US$15 million
specific criteria for low-carbon development
China: Eco-farming
Promote the transition to low-carbon and climate resilient US$120 million
growth in the recipient country
India: Energy Infrastructure
Include projects that target: US$600 million

(a) mitigation of climate change, including investments Dominican Republic: Disaster

in low-carbon and clean technology programs; or Risk Management
US$80 million
(b) adaptation to climate change, including investments
in climate-resilient growth.
 Climate-themed
issuance to date
Wilton Wind
Small retail

Destiny
Alta Wind
Shepherd's Flat Wind
Panachaiko Wind
US Clean Energy
SunPower Solar
Muni/Project
IFC Green

$16 billion KBN

NIB
Leaders: Norway
Environment
-Thematic portfolios: WB, EIB US CREB & QCEB
Alta Liebe
-Tax preferencing: USA
- ABS: Breeze
AfDB Clean Energy
Only 5% retail, mostly Japan EBRD

WB Green ADB

Clean energy corporate

$30 billion +
Breeze
Rail, etc - $10bn +
EIB Climate

Airtricity
Precedent Issuances

Issuer Year Type Value (USD)

European Bank for Reconstruction and 2011 Environmental Sustainability 23,000,000
Development (EBRD) Bond
International Finance Corporation (IFC) 2011 Green Bond 135,000,000
Sunpower/Andromeda Finance 2010 Solar Project Bond 260,000,000
Asian Development Bank 2010 Water Bond 640,000,000
Novachem 2010 EE Corporate Bond 1,540,000
Nordic Investment Bank 2010 Environmental Support Bond 200,000,000
African Development Bank 2010 Clean Energy Bond 220,000,000
US municipal governments 2009-10 Property Assessed Clean Energy 9,690,000
Bonds
US Government agencies and utilities 2009-10 Clean Renewable Energy Bond 2,200,000,000
Programme
World Bank 2008-10 Green Bonds 1,896,700,000
World Bank 2008 CER-Linked Uridashi Bond 31,500,000
European Investment Bank 2007-10 Climate Awareness Bonds 1,630,000,000
World Bank 2007-08 Eco 3+ Notes 360,000,000
 Green Bond Proposals

UK Government Green Investment Bank to issue green bonds

and build framework to provide certainty and incentives to attract
private sector investment in green technologies

United Nations Framework Convention on Climate Change

(UNFCC) green bonds issued by developing countries to investors
from developed countries; future revenue streams to be securitized

Comhar (Irish Sustainable Development Council) Green New

Deal for Ireland funded by green bonds, carbon tax, and the
auctioning of carbon permits

Canadian Government Green Stimulus Package of Can$41

billion funded by green bonds, to be modelled on existing Canada
Savings Bonds

Climate Change Capital advocating issuance by OECD

governments of environment bonds offering secure but modest
returns, and be invested in renewable energy and low-carbon
industrial initiatives

Climate Bonds Initiative launching first set of standards for

verifying the credentials of green bonds
 Key Issues and Challenges

Liquidity currently a small number of investors holding green bonds; pension

funds and other institutional investors traditionally require a robust secondary
market

Standards need for standards and verification systems for measuring

performance of green bonds and acceptable use of proceeds. Also need to
establish standard terms and conditions.

Policies & Government Support green infrastructure is dependent on policy

instruments lacking a long term track record and government funding, with
associated political risks which are frequently complex and volatile

Transactional Risk greater technological risks associated with constructing and

operating green technologies

Risk and reward higher yields required to offset the illiquidity of the green bond
market and any preconceptions of higher political or technical risk

Government backstop issue as to whether green bonds will require a

government guarantee
Future Trends (1)

Increase in number and scale of green projects solar and wind projects
dramatically increasing in size and number and require multi-tranche financing
sources

Proven Technology track record established for many clean energy

technologies reducing risk profile of the sector

Green Investment Banks will assist in the creation of a liquid market in green
bonds by insuring bonds and temporarily purchasing sub-tranches of
subordinated debt (EIB Project Bond Programme)

Green Indices index providers will begin to place green bonds into fixed-
income green index as number of issuers increases

Increased complexity development of green bonds into a complex product

that appeals to investors with different risk appetites (e.g. high yield green bonds)

Expanded universe of issuers Governments and financial institutions will look

to the Green Bond market for funding their clean energy commitments.
Future Trends (2)

Securitization estimated $1.9 trillion in financing could be created globally by

renewables securitization; renewable energy companies making high profile
moves to prepare solar panel, EV leases and energy bill contracts for
securitization

Standardization recent draft proposal published by Climate Bonds Initiative,

London for an industry-wide compliance standard to allow for more transparency
and consistency in green bond issuances

Market reform electricity market reform could reduce policy risk and improve
revenue certainty of low-carbon assets, in turn improving risk profile of green
bonds

New source of financing conventional market is saturated for some issuers

and green bonds allow issuers to reach a specific investor base

Competitive pricing demand for well-structured green bonds could make

them a lower-cost option for issuers
 Clean energy drivers in the Middle East

Power demand projected to outstrip supply Utility demand in the GCC is expected to grow 7 per
cent to 8 per cent every year, with Gulf countries expected to spend $45 billion (Dh165.26 billion)
before 2015 in order to add 32,000 megawatts of capacity

Need to diversify feedstock gas rich nations have contracted-out gas output for near term and oil
is most valuable as an export commodity; coal and biomass generally unavailable; good solar
resources widely available in GCC

Projected feedstock shortages and bottlenecks major infrastructure development to develop

new distribution networks to serve power generation

Strong infrastructure spending pipeline estimated at over $215 billion, significant portion of
which is focused on power generation and related infrastructure

Sovereigns pushing ahead most regional governments have stated intent to devote resources to
local renewable energy programs over the short and medium term

Knowledge transfer very limited local R&D and technology; regional governments and developers
are looking to import expertise and technology

Global investment from MENA Most MENA based investors have allocations and interest in
global and regional clean energy sector investments
 Recent Middle East Clean Energy Developments

Abu Dhabi Masdar. 100 MW Shams CSP in construction. 100MW Noor PV plant in procurement.
Also, planning "smart grid" infrastructure with up to 1.2 million smart meters and substation
monitoring and control systems; subsidies for homeowners to install solar panels on their roofs with
target total output capacity of 500 megawatts.

Saudi Arabia planning investment of at least $100 billion into clean energy resources over the
next decade, including a target to achieve 5 GW of solar-generated power. Announced 10 percent
green energy target by 2020.

Kuwait Ministry of Electricity and Water has set target to generate 10 percent of its electricity from
sustainable sources by 2020.

Qatar Qatar Solar Technologies announced plans to build a US$1 billion polysilicon
manufacturing plant in Ras Laffan Industrial City, producing over 3,500 tonnes per annum

Tunisia plans to implement 40 solar energy projects within a public-private partnership over the
2010-2016 period encompassing all fields of energy efficiency and renewable energies

Morocco government pledged US$9 billion towards biggest solar-thermal energy project in a
single country, aiming to produce 2,000 MW by 2020 (nearly 40 per cent of its electricity needs).
World Bank recently committed to funding initial 500MW CSP Project
 The Middle East Bond Market

Well-established bond market for Middle East

sovereigns (e.g. Abu Dhabi, Dubai, Qatar, Jordan)
and sub-sovereign entities (e.g. DEWA, ADWEA,
SEC) engaged in clean energy development

Middle East sovereign bonds backed by large

petroleum and natural gas reserves
Recent Middle East Sovereign
Issuances:
Sovereign issuance volume set to increase in
2012 following reduced appetite in 2011 (Arab
Spring) December 2011 Government of
Qatar (US$5bn bonds)
Project bonds have been successfully issued in
the middle east (e.g. Dolphin Energy, RasGas) June 2011 Government of Dubai
(US$500m bond)
Investors have deployed capital into the Middle
East power sector (ADWEA project financings, December 2010 Ras Al Khaimah
Shams 1 solar power plant, DEWA Thor Asset (US$400m sukuk)
Purchase)
March 2010 Kingdom of Bahrain
(US$1.25bn bond)
 Application of Proceeds in the Middle East

Solar power projects

Wind projects

Polysilicon manufacturing

Energy efficiency technologies

Smartgrid installation

Solar rooftop programs

LEED Green Building systems

Feed-in tariffs/Green Payments

 Standard & Poors/Hawkamah Pan Arab ESG Index

Established in February 2011 by Standard & Poors and

Hawkamah; funded by IFC

First tradeable index for MENA equity markets relating to

Environmental, Social and Corporate Governance
performance

Index ranks and tracks performance, transparency and

disclosure of regional companies on ESG issues

Constituents drawn from 150 largest and most liquid

companies listed on 11 national stock exchanges in MENA
region

Provides incentive to MENA companies to pursue

sustainable ESG business practices
 Green Sukuk

Islamic green bond would connect environmentally

focused conventional investors and Shariah-
compliant investors

World Bank is currently exploring potential in a

number of developing countries to issue first ever
Green Sukuk to fund low carbon development or
environmental projects

Sukuk market suited to channel glowing global pool

of Shariah-compliant capital to fund renewable
energy and climate change projects

Islamic finance and Shariah-compliant investment

products traditionally backed by assets (e.g. green
infrastructure projects)

Renewable energy projects structured in a Shari'ah

compliant manner in order to attract investment
from private equity investors looking to diversify
portfolios
 Potential Issuers in the Middle East

Governments / Sovereigns

Government authorities (e.g. utility providers)

The World Bank

International Monetary Fund

International Finance Corporation

Arab Monetary Fund

Islamic Development Bank

Arab Bank for Economic Development in Africa

Arab Fund for Economic and Social

Development
 Launch of Middle East Green Bond/Sukuk
Consultative Process
The Climate Bonds Initiative, the Clean Energy Business Council and the Gulf
Bond and Sukuk Association have initiated discussions to launch a consultative
process to develop standards, recommendations and best practices to facilitate
the issuance of the first Green Bond/Sukuk in the Middle East by the end of 2012.

Stakeholders will be brought in from previous consultative processes run by the

Climate Bonds Initiative globally and the CEBC and GBSA regionally

First meeting will be first quarter 2012

The Clean Energy Business
Council (CEBC) is
an association of leading local and international organisations participating in MENAs
emerging low carbon energy sector.
unique in the region as a peak industry body for the clean energy sector and in its
reach across the MENA region.
an inclusive forum

As developers, investors, and governments in MENA increasingly focus on low carbon

energy solutions, an inclusive forum will help businesses and the public sector share ideas
to promote effective policies and best practices.
Incorporated in Masdar City, CEBC
is a nonprofit organisation with a
mission to:
Establish a leading forum for companies and government entities focused on the
development and deployment of clean energy in the MENA region
Promote the clean energy industry beginning to flourish in the region and inform the
wider community of the benefits of the sector
Collaborate with government agencies and other stakeholders in policy development
and regulation of this rapidly developing and exciting sector
Develop a series of strategic alliances with research institutions, international
associations, media and others to drive the delivery of clean energy solutions for
MENA
Coordinate the gathering of data and information on the sector to ensure relevant
benchmarking and transparency in the sectors development
Support and assist governments, industry and the community in the region to meet low
carbon targets and sustainability goals
Membership

CEBC is a membership based non-profit organisation registered in the Masdar Free

Zone in Abu Dhabi
Membership is currently 10, 000 USD for Founding Members
Members have access to technology based sub-committees, research and reports,
research and media networks, access to government and ability to influence
government and policy development through a neutral forum
Companies can register their interest in becoming a Member of CEBC by visiting our
website at www.cleanenergybusinesscouncil.com
For more information email: info@cleanenergybusinesscouncil.com