Renewable Energy IPO in USA - first of hopefully several during 2012

Greetings from Kiev!

It's a cold winter in Ukraine but a hot market, it seems,  for renewable energy companies tapping into the capital markets.  Two weeks ago, in climate change skeptical USA, an Iowa company named Renewable Energy Group Inc. completed its 72 million dollar IPO on Nasdaq (ticker: REGI).  While the book closed at the low end of the projected raise, the successful placement in January (typically a quiet month for IPOs) shows demonstrably strong continued investor interest in alternative energy as a growth market in America.  The global economic picture is not conducive to bull market placements at this time, with the market weighed down by macroeconomic concerns in the Europe and with other alternative fuel companies trading below their IPO prices last year (such as Gevo Inc. and KiOR Inc. and notably Solazyme Inc.)

Renewable Energy claims to be the largest producer of biodiesel in the U.S., using low cost feedstocks (such as inedible animal fat, used cooking oil, and inedible corn oil) to create fuel. Over the first 3Q of 2011, total revenue nearly quadrupled to $557 million compared to the same period a year earlier, but its loss widened to $27 million from $25 million in the 2010 period. 

This recent IPO underscores the growth potential in the alternative fuels sector, and it will be interesting to see how similarly situated companies in Central and Eastern Europe, with their superior access to feedstock and fuel supply inputs, can take advantage of the global capital markets to undertake their own IPOs and private placements.

Cheers from Kiev,

Jon

UKRAINE: FISCAL INCENTIVES FOR ENERGY EFFICIENCY AND ALTERNATIVE ENERGY

Original article available at: www.usubc.org

Asters law firm, Kyiv, Ukraine, Monday, May 30, 2011
KYIV - Sustainable energy use has a significant place in Ukraine's energy policy. The Energy Strategy to 2030 and the Economic Reform Programme for 2010 to 2014 both identify switching to alternative energy sources and achieving greater energy efficiency as key priorities.
The first incentives for implementing energy efficiency measures were introduced in 2008 by amendments to the Law on Energy Efficiency and the Law on the Unified Customs Tariff, which granted a number of tax privileges to companies involved in the development and use of energy-efficient technology and alternative energy sources. The recently adopted Tax Code provides significant incentives for companies and transactions in these areas.
CORPORATE PROFIT TAX
The code provides that 80% of an eligible company's profit from sales of its own goods within the Ukrainian customs territory is exempt from charged at 23% corporate profit tax, provided that the goods are on a list approved by the government. The code generally identifies the following types of goods as being subject to this exemption:

1. equipment for working on renewable energy sources;
2. raw materials, equipment and components for renewable energy generation;
3. energy-efficient equipment and materials, and goods whose use results in a more efficient and controlled use of fuel and energy resources;
4. devices for measuring, controlling and operating fuel and energy resources; and
5. equipment for producing alternative fuels.

The code also exempts 50% of all profits derived from the implementation of measures and projects relating to energy efficiency. In order to qualify for the exemption, a company that conducts such activities must be registered with the special state registry of companies, agencies and organisations that are involved in the use, development and implementation of energy efficiency measures and projects.
These incentives are effective for five years from the first year in which a profit is made from the manufacturing processes related to energy efficiency.
In addition, a general tax exemption to January 1 2020 will apply to:

1. biofuel producers' profits from sales of such fuel;
2. profits from the generation of electrical and heat energy with the help of biofuels; and
3. manufacturers' profits from sales of machinery and equipment produced in Ukraine for manufacturing and converting vehicles powered by biofuel.

Energy companies are exempt from corporate profit tax on the sale of electricity from renewable energy sources for 10 years from January 1 2011.
VALUE-ADDED TAX
Imports of the following goods are generally exempt from charged at 20% VAT:

1. equipment for work on renewable energy sources;
2. energy-efficient equipment and materials;
3. devices for measuring, monitoring and operating fuel and energy resources;
4. equipment and materials for producing alternative fuels or generating energy from alternative sources; and
5. materials, equipment and components required for the production of:
   1. equipment that runs on renewable energy;
   2. raw materials, equipment and components for producing alternative fuels or generating energy from renewable sources;
   3. energy-efficient equipment and materials;
   4. goods whose use results in a more efficient and controlled use of fuel and energy resources; and
   5. devices for measuring, controlling and operating fuel and energy resources.

The code also provides a temporary VAT exemption, effective until January 1 2019, for:

1. the supply on Ukrainian territory of machinery and equipment specified in the Law on Alternative Fuels;
2. imports of equipment and machinery for the construction and reconstruction of enterprises producing biofuel and biofuel vehicles; and
3. imports of biofuel-powered vehicles.

However, these import exemptions apply only if identical goods are not produced in Ukraine.
LAND TAX
Generators of electricity from renewable sources enjoy a 75% discount on land tax.
COMMENT
It is too early to say whether the incentives will help Ukraine to become more energy efficient and less reliant on conventional fuels in the long term. However, green tariffs, customs and tax incentives should encourage foreign investors to consider Ukraine's investment potential.

INFORMATION: For further information please contact, Yaroslav Petrov, Associate, yaroslav.petrov@asterslaw.com or Kostya Solyar, Associate, kostya.solyar@asterslaw.com .
NOTE: Asters law firm is a member of the U.S.-Ukraine Business Council (USUBC), Washington, D.C., www.USUBC.org.

Who Will Be The New Energy Captains of Industry?

Energy – a word that sums up the foundation of the world as we know it. Every part of the global economy runs off of some form of electricity, gas or fuel. One hundred and fifty years ago the original economic paradigm shifted from manual labor to the industrial revolution… and fortunes were made and lost by the original captains of the fuel industry to supply the world’s power. The world and people’s lives changed forever in a new direction.

Fossil fuels were the big news then. Previously semi-worthless coal and gas made billions of sudden dollars for the original energy captains of industry, and they continue to do so today. But now things are changing in the face of concerns over climate change and a related scientific revolution… fossil fuels are still going strong but are expected to be on the permanent decline with the real energy needs of the future being met by clean and renewable means. The winds of change now blow into a turbine and the new sun rises on a reflective solar farm.

This raises an interesting question: who will be the new energy captains of industry, and how will traditional notions of vertical integration and trading markets be affected by this? Part of the answer seems wide open and large market players recognize this. We see automakers like Toyota, Kawasaki and SAIC in China developing plans for global battery and battery charging station initiatives. The day will come when you drive your Prius into a Toyota-owned filling station to top off your electric car battery which is also made by Toyota. No more independent gas station will be required to break up the money cycle for Toyota’s shareholders. Other car makers will soon follow suit if they see success from Toyota’s forward thinking. Single companies can control every aspect of your personal travel and can monopolize the customer service elements attached to that travel.

Fossil fuel companies are working hard to develop similar clean tech initiatives so they won’t be left in the dark fifty years from now, but they know that they can quickly become extinct in the new market unless they become innovation leaders in some way, and the playing field is fairly level. Exxon, BP and Shell are investing billions into bio-fuel concepts and renewable energy. The Middle Eastern oil producing countries are doing likewise, the largest example being the 400 biillion Euro ‘Desertec’ renewable energy project announced this year. All of these groups stand to lose and be replaced by energy market creative destructionism unless they get moving and stay ahead of the curve.

Commodity traders will also need to switch their business models over time, in a manner that could bring more or less market security. Their staple trading products, oil, coal and gas, probably will not be in very high demand within 30 years. And renewable energy is not as transferable as fossil-fuel generated energy is, at least for the moment, so that changes how it can be traded also on the market in spark spreads et cetera. Solar power is not easily exported over long distances, for instance, even with the best storing battery system. It typically goes into the local grid or is used for local power supply. As the trading markets adjust to the new energy economy, will they create more or less market risk?

The world is finally on the path to energy efficiency and clean energy technology, and this is a wonderful thing. The new direction means all the old rules are changing and a new energy economy is coming soon. It will be interesting to see who is left after this big shake-up, and who gains or loses as a result.

One Person's Chicken Waste Is Another Person's Clean Energy

There is a new technology on the horizon to help meet Ukraine’s energy challenges, and it comes from chickens.

Swiss company Alter Energy Group AG (www.alterenergygroup.com) is working to implement a sophisticated waste to energy process in Ukraine that converts poultry manure into clean, environmentally safe, industrial scale electricity and heat.

This is a highly uncommon type of energy project, and upon completion Alter Energy Group’s Ukrainian projects will join a tiny handful of similar projects worldwide.

The company’s technical approach involves burning chicken manure to create large amounts of electricity and heat. This heat and electricity then is supplied to Ukraine’s wholesale energy market and the surrounding population. It all sounds simple enough, however the process is in fact highly complex due to poultry manure’s tricky ammonia content and ash problems.

Poultry manure contains so much ammonia that it routinely destroys normal project equipment. It also causes toxic pollutants to be released into the air during the incineration process unless handled in a very delicate manner. The ash resulting from burned poultry manure also is uniquely disruptive. For this reason, only about seven commercial scale poultry waste to energy projects have been completed anywhere in the world thus far.

Alter Energy Group claims to have carefully dealt with all these chicken challenges by using a waste to energy methodology with a proven poultry-specific track record. In addition to heat and electricity, their projects will also produce large quantities of nutrient rich bio-fertilizers and animal feed for sale.

Ukraine is a country of large Soviet style poultry farms, and Ukrainian farmers presently have limited commercial use for their livestock waste. An opportunity therefore exists, with the right technology, for Ukrainian farmers to work with companies like Alter Energy Group to create a profitable new renewable energy niche market. Alter Energy Group’s first Ukrainian chicken projects could be completed sometime during early 2010, if all goes well. These types of projects qualify for Ukraine’s Green Tariff as biomass energy and also for carbon credits under the Kyoto Protocol.

Making clean energy from chicken manure is a relatively uncommon thing. Even in the most advanced renewable energy countries these projects are relatively unknown. It will be interesting to observe how things unfold in Ukraine with Alter Energy Group's chicken projects, and to watch whether similar projects are undertaken in neighboring CIS countries.

I will continue to monitor this area and report new developments as they arise.

Answer to the Question "What are Green Tariffs?"

Green Tariffs are an important factor in alternative energy investment decision making. Nations seeking to incentivize alternative energy investment, such as European Union countries and Ukraine also, establish higher electricity sales prices (and therefore revenues) for alternative energy power producers compared to traditional fossil fuel based power producers.

From a project investor's point of view, an alternative energy business plan must be financially attractive and typically must "stand on its own two feet" aside from any carbon credit component. Carbon credits are expected and documented, but an investor does not typically invest into an energy power project to collect carbon credits alone.

Green Tariffs increase the sales revenues from alternative energy power projects; likewise, they reduce the payback period and investment risk for such projects in emerging market economies. Alternative energy projects that otherwise would be regarded as difficult or risky for technology, cost or country risk reasons can experience refreshed interest and activity levels due to corresponding Green Tariff revenues. It is clear, for instance, that Ukraine's new Green Tariff has sustained foreign investors' interest in its clean and renewable energy markets during the present financial downturn.

Countries develop Green Tariffs on an independent basis. In Ukraine, the Green Tariff is set by the National Electricity Regulatory Commission (NERC). It covers alternative energy production facilities such as wind power plants, hydropower, biomass, biogas, and other methane utilization projects (except blast-furnace and coking gases). There is no present capacity cap on Ukraine's Green Tariff except for hydropower plants, where an eligible facility cannot exceed 10 MW in capacity.

Carbon credits and Green Tariffs together create an excellent incentive stew for new alternative energy project finance. In countries like Ukraine, where the Green Tariff roughly doubles historic project revenues and a streamlined Track 1 JI approval process eliminates international bureaucracy, investment conditions have never been better.

Please feel free to contact the Foundation for the Development of Environmental and Energy Markets to discuss specific questions or opportunities with regard to European Green Tariff structures and alternative energy markets. For Ukraine's Green Tariff rate schedule, please see my prior post entitled "Ukraine's New 2009 Green Tariff Rates" and refer to the end table.

Cheers
Jon

Ukraine's New 2009 Green Tariff Rates

Greetings all!

Ukraine’s government has been quite proactive during the first half of 2009 with regard to the renewable energy and carbon sectors. In April, the President approved a "revised" Green Tariff rate calculation methodology... resulting in even higher prices than before for alternative energy producers. Also the government has been working to complete Ukraine’s Green Investment Scheme through the National Agency for Environmental Investments, and has sold 30 million AAUs to Japan. In the coming weeks, Ukraine will most probably complete transactions for over double this amount to additional buyers.

The higher green tariff rate schedule, along with the government’s activity to complete Ukraine’s Green Investment Scheme and to undertake ambitious AAU trades, means that right now we see the most fertile environment for Ukraine’s alternative energy sector growth since the country’s 1991 independence.

New green tariff prices are paid directly by Ukraine's Wholesale Energy Market as the counterparty buyer, which is good. It means that under the present Green Tariff mechanism there is no necessary "purchase price negotiation" (at this moment) between local alternative energy providers and the local oblenergos – distribution companies – that power providers must link into.

I will keep my eye on things as they develop or change. Also I will monitor how individual alternative energy companies fare, in terms of application and payment under this system.

But as you can see from the current price calculations below, alternative energy sales prices make it very attractive to invest. It is important to note that these rates are only available to new projects that are built from 2009 onwards. Click on the chart below and it should increase the viewing size.

Cheers,
Jon

Thoughts on Ukraine's "Green Tariff"

Hello again! 2009 promises to be an interesting year for clean and renewable project investment. On the one hand, the markets are in extreme difficulty and cash is hard to find. On the other hand, certain countries have devised new economic incentives for foreign direct investment into new green energy projects. So while the markets are bad and money is a tight, countries like Ukraine seek to overcome the inertia by adopting new special tariffs and similar laws that promise to double the normal revenues investors can get from green power projects.

Is it for real, will these measures succeed in practice, or will they stumble and work better on paper? It's too early on to say. But regardless of how each individual country's efforts pan out, it is great news that several governments have made clean and renewable energy a priority investment target in 2009 -- especially in countries like Ukraine that have no significant regulatory emissions abatement issues under the Kyoto Protocol.

I wrote a short piece on this topic, specifically on Ukaine's "Green Tariff" in response to investor questions and general buzz on the subject at the end of last year. It shall be interesting to see observe whether that buzz will continue to grow. We can only cross our fingers and see!



Ukraine’s Green Tariff: Great News in 2008 But What Happens in 2009?

Jon Queen, Dallas TX (16 December, 2008)


2009 will be an interesting year for clean and renewable energy investment. On one hand, the global financial downturn plays somber backdrop as funding sources dry up and cash grows hard to find. On the other hand, certain international markets are attacking the credit crunch with heavy new incentive packages that aim to boost investment interest in alternative energy to its highest level ever. So although times are tight, countries like Ukraine seek to overcome investment inertia with new laws purporting to double the revenues from green power projects.


Government efforts to jumpstart alternative energy investment aren’t happening only in the former Soviet Union; numerous legislative incentives are in either force or under review on four continents. The United States may soon join this group under President-elect Barack Obama and his emphasis on forward thinking components to energy policy.


Do these new laws have a decent chance of success, or will they stumble in their transition from paper to practice? It's too early to judge and each case is unique. Energy markets are complex and Adam Smith’s invisible hand sometimes can grasp new variables in an unpredictable manner. But regardless of how each individual country case works out in 2009, the fact that governments are making this type of effort is a strong positive industry signal.


This article highlights Ukraine’s Green Tariff due to the country’s potential foreign direct investment (FDI) draw with regard to clean and renewable energy. Ukraine is a large country, roughly the size of Texas, that could theoretically develop into a major energy exporter based on its abundance of natural materials for alternative energy production. Ukraine is motivated to increase new domestic energy production for sovereignty and national security reasons, and its power grid is largely outdated. On the surface Ukraine offers privatization and new energy investment opportunities that, in light of the country’s strategic geopolitical importance, make it unquestionably attractive for FDI. But Ukraine also has an intermittent difficulty converting opportunities and resources into successful business transactions with foreign parties and investors.


Last September, Ukraine’s Parliament adopted the Law “On Amendments to Certain Laws of Ukraine Concerning the Introduction of a Green Tariff” by an overwhelming 292 vote margin. Nicknamed the “Green Tariff” within the local investment community, the law aims to jumpstart new FDI into Ukraine’s clean and renewable energy space by allowing power suppliers to charge higher electricity tariffs to the wholesale energy market than ever before.


The Green Tariff covers wind power, hydropower, biomass, biogas, and several methane capture power producing activities. With regard to hydropower, only stations with 10 MW or less in capacity may participate. According to the Green Tariff’s language the National Electricity Regulatory Commission of Ukraine (NERC) will roughly double the amount of money that energy producers in these areas could normally charge for the next 10 years. Specific tariff levels can be revised annually by NERC as needed, but essentially the Green Tariff allows eligible Ukrainian energy producers to charge double the previous year’s average wholesale market energy rates, so long as these prices do not more than double current average wholesale market energy rates.


By and large, Ukraine’s Green Tariff can be viewed as a landmark effort to take Ukraine’s energy sector into the advanced twenty first century. The high tariffs should trigger more investment activity and a corresponding new inflow of technology transfers, energy supply, export possibilities, and capital injection into the economy. To actually attain these goals, however, further work is required to take the Green Tariff from a conceptual legislative stage to a practical working stage.


As an initial matter, NERC and the government have yet to determine the exact Green Tariff prices, and they still must articulate how the Green Tariff will operate from a functional point of view. The investment community has present concerns about the likelihood being able to collect full Green Tariff rates in practice. Ukraine is in the middle of a banking and currency crisis, and one of the government’s most stable features is, ironically, political instability. Some regional energy companies are so much in debt that they swap energy production for debt relief. In such an environment, the success and credibility of the Green Tariff as an investment incentive will depend in large part on the safeguards added in to ensure the collectability of new rates once they are applied.


The basic definition of what constitutes renewable energy probably also should be revisited with some minor clarifications. For example, the 10 MW capacity ceiling for hydropower facilities has no apparent relation to the Joint Implementation Mechanism under the Kyoto Protocol, where the market typically does not discriminate between hydropower projects until they exceed 20 MW. These types of counterintuitive discrepancies create continuity gaps that can confuse or deter FDI.


The investment community has responded positively thus far to Ukraine’s Green Tariff despite acknowledging that it needs some further work to become a functional market mechanism. Traditionally overlooked energy sectors in Ukraine, such as wind power, are now enjoying a newfound level of interest and activity. From a more grass roots point of view, it is clear that the Green Tariff buzzword has sustained FDI interest in Ukraine’s clean and renewable energy markets during the financial downturn; that is something many other countries cannot claim at the moment.


The Green Tariff may even place Ukraine in a very strategic investment position compared to neighboring countries if it is finalized and implemented properly. Theoretically the Green Tariff could help create an alternative energy renaissance in heart of the former Soviet Union. Pareto optimality could occur for the Ukrainian government, investors, individual energy consumers, and the environment. But clearly without proper finalization the Green Tariff could fall short of its intended effect and, in the worst case, perhaps even represent a disappointing failure.


Ukraine has had occasional difficulties capitalizing on FDI opportunities in the energy sector. As a case in point, consider Ukraine’s multi-billion dollar unsold national stockpile of Kyoto Protocol carbon allowances. Ukraine got this highly valuable stockpile, at one time worth around 50 billion dollars, as a byproduct of Russia’s hard negotiations with Europe before signing the Kyoto Protocol. By setting Kyoto Protocol carbon targets at 1990 indexes (the year before the Soviet Union’s 1991 collapse), Russia deftly avoided the costly compliance burden now faced by other large European economies.


If Ukraine had sold or pre-sold part of this stockpile last year at competitive prices, it could have satisfied the world’s demand for carbon credits and the Ukrainian government would be a global leader in energy and environmental policy today. The sales revenues would have averted Ukraine’s financial crisis and could have reversed the country’s present fortunes. This is not hyperbole; if it sounds farfetched, ask a carbon market analyst. Despite this historic unique opportunity, Kiev policy makers have been unable to complete a major national carbon allowance deal because they are unhappy with market price levels.


By failing to grasp that decreasing carbon market prices are the terminal result of reduced international demand, limitless supply and an expiring Kyoto Protocol period, Ukraine soon could miss its window to cash a multi-billion dollar free check. This sort of misstep is not specific to Ukraine and the European Union countries made similar mistakes during Phase 1 of the European Union Emissions Trading Scheme when carbon allowance prices dropped from 30 Euros in June 2006 to zero in 2007.


So what will be the Green Tariff’s future in Ukraine, and how will it impact the 2009 energy markets? Will the Green Tariff succeed and create a working blueprint for other countries to emulate, or will it miss the mark? Everything depends on the Green Tariff’s finalization process before this spring; both the degree of domestic political stability and the participation by seasoned energy market experts will be crucial factors.


Regardless of what happens in the coming months, right now the Green Tariff – like the type of energy it covers – represents a bold step in the right direction. Hopefully the Kiev lawmakers will accomplish precisely what they set out to achieve, and the Green Tariff will become a success story that inspires several neighboring countries to follow suit. If Ukraine and other governments create successful stimulus packages this year, 2009 could witness a steady rate of new FDI into alternative energy projects and new clean technologies despite international snags with liquidity.


Given all of the negative economic and market commentary that is floating about, it is nice to see one space where the investment outlook may be looking up, not down.