Dg1

Business Case DG-1 Project number:

DEVLPL07502

Date of submittal: 02/01/2008

BC Name: Golczewo Author: Radosław Koćwin Location / Region: Golczewo

Country: POLAND BIO-TH SWAC BIO-DIG WOL PV WOS Real Est En Infra Project Size (MW): 24

X

1. Project description Project: Location: project Golczewo is located on the North from Golczewo city in Zachodniopomorskie vovoidship; estimated size of wind park is planned for 24MW from 12, 2MW wind turbines;

Satalite map of Golczewo location with Wind Turbines locations:

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Project: -

-

-

Value drivers in this location are: o One of the best areas for wind power generation in Poland, average wind speed about 6,5-7,5 m/s, o grid application process in progress, o one of the very last areas available for wind development in Northern Poland; General Market situation: o Wind energy production in Poland rapidly grows. In 2004 142,3GWh was produced with wind, in 2006 it was 245,5GWh. Still it was just 0,16% of total energy production in Poland; according to the plans in 2010 there should be 2,3% coming from wind energy of the total consumption (7,5% renewable energy in years 2010-2014); o local energy utilities are obliged to buy all renewable electricity produced on its distribution area (the green certificate which follows the produced energy, depending on the contract between to parties can be sold together or on the Polish Power Exchange to anybody), energy produced by a wind farm has to be bought at the market price which right now is rapidly growing – approx. 185PLN per MW/h plus the amount you can get from green certificates which is always close to 240PLN per MW/h – the so called buy out price which you have to pay to fulfil your obligation regarding the percentage of green energy bought each year; Total income is therefore approx 425 PLN/MWh (=~ 110 euro/MWh) o In 2008 in Poland starts a new EU found programme called The Operational Programme Infrastructure and Environment. For years 2007-2013 the total amount of subsidy will reach 37,6 bilion EUR (27,9 bilion from UE and 9,7 bilion from polish government). The percentage of the subsidy to the total amount of investment, possible to obtain is not known yet but for wind parks subsidy only apply to those in which to total amount of investment exceed 20milion PLN. Development applications should be ready in February 2008. The responsible organization for the implementation of this programme is The Ministry of Regional Development (more information will be available in February 2008. For now is difficult to say if we are already entitled on this stage of our projects to apply for this subsidy so we have not taken this subsidy into account in the feasibility calculations.. Off taker of electricity will be one of the energy operators in this case – Enea. The seller of green energy will have to sign a contract with the Energy Company and energy will be sold on

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at the current market price. Certificates of origin are registered on the Polish Power Exchange which is responsible for their managing and trade.

Map of energy operators in Poland.

2. Position 2.1. Land position / concession Project: -

Project will be based on land lease agreement with the land owners. Land lease agreements have been signed for a total area of 180 ha, sufficient to install approximately 12 turbines in the 2-3 MW range (we will also try to rent the lands in neighbourhood which seems to be feasible for wind park development). the price for this location is 22 000PLN per turbine per year and a lease contract has been signed for 25 years; in this case all land lease agreements are signed with one Landlord land situation in Poland is very specific because usually plots that belong to farmers are very small in general however the price paid for a land lease contract is still relatively small, reaching 50-60k PLN per turbine in the most attractive areas. At this moment we do not find competition from the other wind farm devlopers in mentioned location; Denker and Wulf who was interested in cooperation with our company, and who brought this l ocation to our attention, is no longer active in the project so we can assume they are not interested anymore. Moreover the project they proposed to us proved to be without any value so the do not have a strong legal case to make any claims regarding this project.

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2.2. Political position General: Policy: Position of local and regional political authority is based on polish government plans which state that sustainable energy sources should increase to 7,5% until 2010 and 14% until 2020 and wind energy is one of the most promising sources to fullfill this obligation. The quota obligation is fulfilled by a obligee if the share of RES-E in the overall electricity sales to end-users amounts to not less than: -

3.6% in 2006,

-

5.1% in 2007,

-

7.0% in 2008,

-

8.7% in 2009,

-

10.4% in 2010-2014

-

15% in 2020.

Tarrifs: In Poland the main support system for renewable energy is based on quota obligation applied to all sellers of electricity to end users on the territory of Poland. The support scheme uses green certificates which are originating from the guarantees of origin issued by the President of the Energy Regulatory Office (see official website). The Guarantee of Origin is a document, issued for the whole RES-E production over a certain period. Green certificates are issued on the basis of Guarantees of Origin for every 1 kWh of production . The green certificates become valid at the moment of recording the Guarantees of Origin on the recording account of the entity that is entitled to them. The number of green certificates corresponds to the energy volume specified in a certain Guarantee of Origin. The green certificates have unlimited duration, they expire only when the Guarantee of Origin has been redeemed. The Guarantee of Origin may be redeemed fully or partially. The redemption of the Guarantee of Origin causes the expiry of all or a part of underlying green certificates. The current Polish energy legislation policy foresees the duration of the quota obligation support scheme till 2014. Aspects related to the Guarantees of Origin and green certificates are regulated by the amended Act called the Energy Law (the Act of 10th April 1997, see Polish version), in particular by the parts addressed to renewable energy sources. From 1st October 2005 the Polish Power Exchange (Towarowa Giełda Energii S.A. PolPX) manages the registry of green certificates and their trade. The results from the green certificate market presented by the Polish Power Exchange are not differentiated for sorts of RES-E such as wind energy (onshore or offshore), hydro energy, solar energy, biomass combustion etc. Also the Energy Law has in general no special arrangements for particular sorts of renewable energy and as such also not for offshore wind energy. The redemption of Guarantees of Origin must take place till 31 March each year for the previous st year (e.g. till March 31 2007 for the year 2006) and is obligatory as a proof of fulfilling the obligation. Energy companies can also pay a so-called ‘buy out price’ which amounts to 240 1 PLN/MWh (62.41 Euro/MWh ). Development and permitting procedures: Before one can start the construction works, you have to prepare all necessary permits and documents. One of the key stages on the path towards acquiring the building permit and putting the wind farm into operation is the amendment of the local development plan. Its statements define the purpose of use of the area as well as possibilities for future building. Parcels usually appointed for the project are defined as an agricultural area, which means we have to complete the full amendment procedure for the local plan in order to acquire the building permit in line with our intentions. The procedure to amend the development plan takes about 18 months. As part of the

1

Exchange rate from 23rd August 2007 1€= 0.26 PLN

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amendment procedure of the development plan, in some cases an EIA has to be done. This may increase the time to prepare an application to amend the development plan. In the case of Golczewo the development plan has to be amended as it does not foresee the installation of wind turbines yet. Following the development plan amendment it is necessary to obtain the decision on development conditions(given by the municipality stating the plot borders, it’s development plan and destination and the size of potential construction), which allows to apply for the most crucial document - the building permit. The procedure to obtain the decision takes about 4-6 months. Thereafter the building permit can be obtained and this takes about 1-2 months. Total procedure therefore lasts approximately 2 years. So far wind projects have not been delayed by public protests or appeals. The strong support from the government is one reason and usually there is also quite a good local support for wind projects as both the landowners and the municipalities profit from a wind farm.

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2.3. Available resource Project: The wind data for Poland have been plotted by Anemos (see map hereunder). For individual projects the wind speed can be estimated at this moment – no wind measurements are made yet – with the wind maps of Anemos. For this project the wind speed is estimated by Ecofys to be 6.5-6.7 m/s on hub height

2.4. Grid connection General: In parallel to the permitting procedure the project has to be discussed with the power utilities. The possibility to obtain the technical requirements for connection to the grid is the most vital issue. The Minister of the Economy Ordinance of December 15th, 2000 on the obligation to purchase the electricity from unconventional and renewable sources sets obligatory share indices for the electricity from unconventional and renewable sources in the total volume of electricity turnover. In practice, power utilities have to purchase the amount of renewable electricity corresponding to their annual turnover volume. However, there are too many wind power applications so not all applications can be rewarded. The usual procedure is to ask first for initial grid conditions. For this the developer has to contract a specialised company that makes an initial grid study. This study gives an indication on the changes to get a (affordable) grid connection. If the result is positive, a more extensive study will be performed, indicating in detail how the wind farm should be connected. The total procedure takes about 3 + 9 months for the initial and detailed study respectively. The grid application process for Golczewo can be started (application for the conditions of connecting to the grid has been filed). This is only possible when you can proof that you own or lease the described land and when you submit detailed electrical specifications of the wind turbines. Project: We sent application to Enea Operator sp. z o.o. We should send them additional maps. We are still waiting for maps. We have 70% chance to get grid conditions there. However before a final

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decision can be made on the grid connection, a detailed electrical expertise is required. Hopefully this expertise could start in Q3 2008, when we secure land for this project.

3. Cooperation 3.1. Partnerships Project: -

We do not have partners in this project Denker and Wulf who was interested in cooperation with our company, and who brought this location to our attention, is no longer active in the project so we can assume they are not interested anymore. Moreover the project they proposed to us proved to be without any value so the do not have a strong legal case to make any claims regarding this project.

3.2. Stakeholders Project: -

Major stakeholders and their involvement (goals/ role) in the project (description of partners and clients) – Not applicable

4. Financial project analysis 4.1. Investment estimate -

-

Initial estimate of Capex + basis of estimate: o Turbines 1.25 Meuro/MW (incl foundation and transformer) o Grid connection 100.000 euro per km grid cable (for Golczewo 15 km) o Park cable 100.000 euro per km cable (for Golczewo 5 km) o Roads and crane pads 250.000 euro Devex estimate, referring to budget format in annex 1 o 600.000 euro

4.2. Financial assumptions -

-

Income from energy produced (PPA): wind park owners usually sign contracts for a maximum of 10 years with a grid operator with a fixed price for total amount of electricity and green certificates. Support regime per MWH (present regime + outlook) The price of green certificates grows at the moment because the pay out price grows each year and the number of green certificates is not sufficient. There is a chance that the price of green certificates can drop in case that supply of green certificates will be higher then real demand but it is hard to estimate when green electricity production reaches this point. There is also plan to open from September 2008 our green certificate market, in this case most of them will be sold outside the country with a higher price and the pay out price in this case can rise even more rapidly. Other financial facilities (local / national subsidies, tax facilities): possibly we can obtain subsidy on a wind farm from the EU-funds (see section 2.2). It is not known yet what the possibilities are so we did not include them in the feasibility calculations. Financing (interest rate, ROE, leverage) The bank loans differ of course depending on the amount of investment financed by the investor between 4-7% of interest (has to be checked and negotiated with the banks) Taxes (company tax, depreciation scheme, local taxes) The company tax is a 19%; According to yearly depreciation scheme wind turbines are listed as objects of land and sea engineering with yearly amortisation deduction of 4,5%. Opex assumptions (fuel, other inputs, O&M, insurance): for Opex expenses we assume: o 1.2 ct/kWh for a full service O&M contract o 0.5% of Capex for machine breakdown insurance o 0% of turnover for loss-of-income insurance o 22.000 PLN/turbine for land lease o 100.000 euro/year for management fee o 2% local tax

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4.3. Cash flow analysis -

Cash flow overview for project life span (annex 2) Analysis results: o RoE pre tax 18% o RoE after tax 12% o DSCR average 1.6

4.4. Sensitivity analysis -

Major sensitivity elements o Tariff can be 10% lower o Net yield can be 10% lower or higher Effect on result o 10% lower tariff: RoE after tax= 6% o 10% higher yield: RoE after tax = 16 % o 10% lower yield: RoE after tax = 9%

5. Planning -

-

Preliminary development planning: o DG1 – start development Q1 2008 o DG2 – consent achieved Q3 2009 o DG3 – start construction / FC Q1 2010 o DG4 – start generation Q4 2010 Overview of required human resources (internal / external) o See DEVEX spreadsheet in annex 1 o internal ~ 2000 hours o Ecofys ~ 100.000 euro o external ~ 330.000 euro

6. Feasibility / risk summary -

-

Major risk for Evelop wind development in Poland: many competitors trying to obtain localizations feasible for wind parks together with grid connection available, having strong man power sources they will try to finish most of projects until 2013; Greenfield projects with insufficient staff and tools available can lead to the situation when most of areas feasible will be already in possession of our competitors. Resume Strengths: International company with good reputation Office in Poland People with broad experience – not only in wind energy Opportunities: Chance to develop wind park with relatively small costs of investment Opportunity to build up revenue from green electricity Chance to get a financial support from EU fund

Weakness: Insufficient number of staff Lack of business cars which are necessary for projects developers who should spend most of time out of office Lack of simple tools like for instance gsm device Threats In case the percentage of green electricity reach the mandatory level and above the price of green certificates on the Polish Power Exchange can drop

7. Proposal / recommendation to the board General: We advise to continue the development of wind projects in Poland for the following reasons: • We have a basis in Poland: an office and staff and expertise to develop projects

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• • •

There are opportunities to acquire and develop projects in Poland. There is a substantial potential of at least several hundred MW so a valuable contribution to the overall target of Evelop can be made. The wind climate in Poland is moderate, there are sufficient sites in Poland with a reasonably good wind speed (6-7 m/s) The green electricity prices + income from green certificates (together amounting to 100110 euro/MWh) generate sufficient income to realise feasible projects

If we do not pursue this opportunity we miss the possibility to realise a medium size wind project. Project: We advise to start the development of this project. If we do not pursue this opportunity we miss the possibility to realise a 24 MW wind project. The project has a good chance for success: • The land has been secured, • The wind speed has been estimated at 6.5-7.0 m/s • The grid connection is available Next steps are to start wind speed measurements and a detailed grid analysis to secure the grid capacity.

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Annex 1: Project budget (devex estimate) PROJECT DEVEX / BUDGET EST IMAT ION Project name Request ow ner Project number Area Size (MW) Capex est (M€) Devex TPD / BD Start date End date

Fase 1. Business case

sub-total 1 2. Development

sub-total 2 3. Contracting

sub-total 3 TOTAL DEVEX

€

Example ebe devlfr07545 WOL 12 14,400,000 € 595794 (=4.1%) XXX 01/01/2007 12/31/2010

Deliverables

business developer technical project developer financial project developer contract manager project (construction) manager operations manager project director

OOP=

yes/no planned 140 120 160 160 140 100 applicable year bd tpd fpd cm pm om

Position Resource assessment Feasibility / risk assessment DG1 proposal Mngmnt phase 1 DG1

all all all

Cooperation Location Resources / fuels Basic engineering / prel. design Consents (mod, telecom, airport, etc) Permitting Energy contracts (LOI/MOU level) DG2 proposal Mngmnt phase 2 DG2 Contract strategy Cooperation Resources / fuels Detailed Design elaboration Tendering Energy contracting Financial contracting DG3 (=Investment) proposal Mngmnt phase 3 DG3=FC

all all all all all

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bd= tpd= fdp= cm= pm= om= pd=

all

all all all

2006 2007 2007 2007 2007

2007 2007 2007 2007 2007 2008 2008 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009

32 0 2 8 42

24 2 10 10 16 62

32 72 18 16 8 12 110 52 36 100 20 444

20

pd

8

6

8

0 8 0

26

414 446

Internal Costs €7,360 €240 €1,200 €4,040 €3,040 €15,880 €4,960 €9,920 €2,160 €1,920

20 6

80 48 16 32 0 282 40 100

20 184 82 690

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6

200

8 8 24 36

0

0

166 40 52 0

88 0 0 44

36 0 0 20

318 132 326 132

56 56

8 8 40 40 52 8 60 70 40 318 326

€14,880 €9,440 €6,880 €12,000 €62,160 €5,440 €13,760 €0 €17,600 €58,640 €15,040 €65,440 €45,760 €8,000 €229,680 €307,720

Out of Pocket costs

hrs

Ecofys tariff cr comp

0 6 24

79

30

€82

48 48 48 450

79

594

120 0 60

€99

130

80

260 884

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€119 €105

3rd parties OOP

Budget

€0 €564 €1,896 €0 €0 €2,460

€0 €0 €0 €0 €0 €0

€7,360 €804 €3,096 €4,040 €3,040 €18,340

€0 €0 €4,152 €5,280 €7,040 €42,582 €0 €0 €0 €59,054

€0 €0 €50,000 €0

€4,960 €9,920 €56,312 €7,200

€10,600 €0 €0 €0 €60,600

€0 €0 €15,600 €0 €6,600 €8,800 €0 €0 €31,000 €92,514

€10,000 €12,000 €20,000 €0 €0 €100,000 €0 €0 €142,000 €202,600

€68,062 €9,440 €6,880 €12,000 €174,774 €5,440 €23,760 €12,000 €53,200 €58,640 €21,640 €174,240 €45,760 €8,000 €402,680 €595,794

Annex 2: Cashflow analysis B ase c ase (B C)

SCENARIO: TURBINE TYPE Exam ple -

WI ND Uncertainty f actor corre ct ion in P90 scena rio Win d Scen ario

Example Exa mp le -

1 0.00%

P50 scenario P50 scena rio P90 scenario

P90 scena rio

CAPEX WTGs (CAR include d) Fo unda tion s Civil inf ra stru ctu re Grid conne ction Ele ctrica l infrastructure Project Develo pment % Project De velopment Evelo p % Con ting ency CAPEX REVISION COSTS Revision cost s PPA PPA fro m year 1 PPA fro m year 16 PPA fro m year 21 SUBSIDY Tarif Sta rting date sub sidy p eriod OPEX O&M year 1-5 O&M year 6-10 O&M year 11-2 0 Machine brea kd own insurance Tax profession elle Ele ctricity t ra nsportation costs Mana gement Land lea se Oth er (property tax, etc) % Increased costs over OPEX % Con ting ency OPEX FINANCIALS/TAX % required ROE % Se nio r D ebt Matu rity Senior Deb t Dedu cta ble "notionele" interest over eq uity Corporat e Tax rate

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2 6,400 ,000 1,800 ,000 200 ,000 1,500 ,000 500 ,000 600 ,000 0 0 0 0 5.00% 5.00% 0 4 8.10 4 8.10

6 2.40

RESULTS SCENAR IO: Investme nt pe r MW installed WAC C on t he project IRR (af ter tax) IRR (pre t ax) PV @ cost of equ ity ra te NPV @ cost o f equ ity ra te Average DSCR (sub debt exclude d, af ter tax) Minimum DSC R (afte r t ax) Minimum DSC R (befo re tax) Max de bt capa city Leverage Total Deb t Equ ity other sha re holders Equ ity Evelo p Total in vestm ent Equ ity Evelo p/Assets % shares Evelop

621 ,000 621 ,000 621 ,000 132 ,000 620 ,000 0 100 ,000 36 ,000 20 ,000 2.00% 1 0.00% 1 5.00% 70.0% 1 4.00 0.00% 3 3.33%

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B ase c ase (BC ) 1 ,445 ,067 7.30% 1 1.68% 1 7.50% 8 ,513 ,838 -1 ,890 ,641 1.59 1.52 1.64 29 ,541 ,388 70.0% 24 ,277 ,119 0 10 ,404 ,479 34 ,681 ,598 30.0% 100%

Annex 3: Risk table Risk Development Cooperation

Item

Mitigation

Prob

Imp

•

Possible conflict with Denker & Wulf

•

We have to prepare a file to show that we developed the project ourselves without information received by D&W Get overview of possible competitors. Secure position by obtaining grid connection and (exclusive) agreement with municipality. We will make a first estimate based upon electronic wind maps. Then wind speed measurements on site. However, for Golczewo we know for sure that the wind speed is high enough as it is close to the coast.

10%

L

Location

•

Possible competition from other developers

•

30%

M

Resource (wind/sun/bio)

•

Exact wind data not known yet

•

100 %

L

Consenting / stakeholders Permitting

•

N.a.

•

•

Municipality may not cooperate.

•

Sign agreement with municipality on amendment development plan and permitting procedure. Contract right companies to assist in permitting and grid connection procedures.

10%

F

Delay

•

Procedures may take long

•

50%

M

Contracting Technology

•

Grid

•

Obtain Wind turbines in time against right terms Grid connection

•

Via framework contracts

10%

L

•

See text BC. We will ask for grid connection in steps (initial + detailed grid study) to minimise risks and obtained clarity asap

30%

F

O&M

•

n/a

•

PPA

•

Get PPA signed

•

Start early enough with signing LoI with off taker, specifying contract terms Start early enough with signing LoI with off taker, specifying contract terms

10%

F

Subsidies

•

Get green certificate contract signed

•

10%

F

Insurance

•

n/a

•

Finance – Loan

•

Get loan agreement signed

•

Start early enough with signing LoI with off taker, specifying contract terms

10%

F

Finance – Eq

•

n/a

•

* L = Low; M = Medium; H=High; F=Factual / Fatal

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