|
 






Houtan Afkhami
Jeremy Brown
Patrick Bydume
James Walsh
 R

= antroduction
= Large-Scale Roll-Out
= Sources of Capital and Funding
= Financing Alternative Energy Ventures
= Alternative Energy and Equity Markets

Source: Regulatory Research Associates

¦  |
 




x ¦  |
R| 

Clearly, the year was a mess for  he gross figure which includes in
the capital markets, whether mergers, acquisitions and buy-
equity or debt. outs was: $223 billion

But, total new investments in

clean energy reached a
RECORD level: $155 billion,
up 5% from 2007

But this is not nearly enough

apparently«..
  |
   
Stern Review
suggest 1% of
global GDP, or
$500 billion

 his will limit us to

emissions of
550ppm

Available ranges are Even more drastic is

$170 billion to the anternational
$542 billion Energy Agency¶s
estimated need:
$45 trillion
over several decades
r   
  

Energy is At the least, we need to

maintain greenhouse gases to
responsible for 450ppm, thus reducing
emissions by 60% by 2030.
OVER 60% of
carbon emissions

 o achieve this requires changes in

energy infrastructure:
1. What fuels do we use
2. How electricity is generated and
distributed
3. Hoe transportation is powered
4. How we stay warm and cool
5. How we run our factories
2  
  
77% of emission reductions will come from renewable energy
and energy efficiency

Which energy sources will make the largest contribution?

1.Onshore and offshore wind

2.Solar Photovaltaic (PV)
3.Solar  hermal Electricity Generation (S EG)
4.Municipal Solid Waste-to-Energy (MSW)
5.Sugar-based Ethanol
6.Cellulosic and Next Generation Biofuels
7.Geothermal Power
r       

 
 here are other key enablers to empower this ¦
, related
to distribution, storage and consumption of energy.

1.Energy Efficiency: how well do we use energy

2.Smart Grids: how can we better distribute energy

3.Energy Storage: how can we store unused energy

4.CarbonCapture and Sequestration: how can we capture and

impede the carbon we emit
   

 he next section will review where funding Ô
 from.

But we can never know where it 
 Ô
 from, because there are
too many variables to determine this, but it is clear both government
and private companies have a role to play.
¦  




¦  
=  otal new investment in the sector = anvestments started well in 2008 and
reached a new record of $155Bn in 2008 slowed as the credit markets unraveled.
 his figure is up 5% from 2007 ($148Bn).  he first half of the year saw new investment
Gross investment (including money changing reaching $64Bn (up 41% over H1 2007).
hands in M&A and Buyouts) reached $223Bn.  he second half of the year saw new
investment totaling $55Bn (down 14% from H1
= anvestment flows have not only and 18% from H2 2007).
continued to grow, but have broadened
=  otal investment is comprised of the
and diversified, making the overall
following asset class components:
picture one of greater breadth, depth
Venture Capital & Private Equity
and scale in sustainable energy.
Public Markets
Mergers & Acquisitions
=  he mainstream capital markets are now
Project Finance
fully receptive to sustainable energy
Carbon Markets and Funds
companies, supported by a surge in
funds destined for clean energy
investment. echnology
Research
echnology
Development

anufacturing
¦cale-Up
sset inance

= Furthermore, the willingness to look Government and

beyond mature technologies suggests Ôorporate R&D

Venture Ôapital
that investors are taking renewable and Private uity

energy and energy efficiency Public

arkets

increasingly seriously.
ergers &

cuisitions

Project
inance

Ôarbon
arkets
and unds
  


a
  

¦ 

    !

= Venture capital and private equity players saw the largest increase in new investment
($13.5Bn; 37% increase from 2007).
 he sharp fall in share prices made it difficult for companies to raise money on public markets.
Late-stage companies were forced to raise funds through asset capacity investments rather than listing.
VC/PE investors had funds to deploy and were able to pick-up some of the slack.

= anvestors are now being forced to look further down the development pipeline, spurring
an increase in early-stage deals.
VCs had focused on later-stage companies with technologies that were relatively mature.
Such opportunities became harder to find, resulting in slow growth in later stage investment.

= an addition, private equity buy-outs totaled $5.8Bn

Although these investment are not classified as new money by New Energy Finance, this figure represents
an increase of 60% from $3.6Bn in 2007.

= ancluding buy-outs, gross VC/PE investments totaled $19.8Bn in 2008

= Solar was the leading sector attracting $5.6Bn of new VC/PE investment in 2008.
Biofuels accounted for the second largest new investment totals ($2Bn).
 he wind sector tallied $5.6Bn of private equity buy-out investment.  he majority included: large asset
capacity investments, and buy-outs of wind projects and component manufacturing companies.
  "# 
= Stock market valuations for clean energy companies declined significantly in 2008.  he
WilderHill New Energy Global annovation andex (NEX) fell 61% on the year.

=  he Sharp fall in the share prices of clean energy stocks made it difficult for companies
to raise fresh capital by listing new equity.  otal market net investment therefore fell
by 51% (down to $11.4Bn from 23.4Bn in 2007).
 his figure is slightly skewed by the $2.4Bn EDP Renovaveis (the largest deal of 2008).

=  he solar sector represented more than half of the total net market investment in 2008
with its sector accounting for more than $6.4Bn dollars in new investment.
Most of these solar companies were Chinese companies listing in the United States.

= Appetite for clean energy stocks was driven by a number of factors

Mainly driven by heightened awareness of climate change and persistently high oil prices.
 he correlation between the NEX and the AMEX Oil index illustrates the continued strong influence of the
price of oil on clean energy stocks.
"  
R ! 

=  otal M&A activity including private equity buy-outs and projects changing hands was
$67Bn.  his figure is slightly up from 2007 ($61Bn).
Excluding private equity buy-outs (categorized in VC/PE) and asset refinancings (categorized in project
finance), M&A activity equals $49Bn (marginally up from $43.2Bn in 2007).

=  he largest deals of the year include:

 he $2.4Bn acquisition of Airtricity by Scottish and Southern Energy.
 he $1.5Bn takeover of ErSol Solar Energy by Bosch Group.
 $ 


= Despite the obvious turmoil in the credit markets, project finance remained the largest
single portion of total new investment in the clean energy sector.

= Financings for new clean energy projects reached $97Bn (14% increase from 2007).

=  he main explanation for the relatively robust figure is the large number of project
finance deals completed in early 2008.
European Union witnessed a significant increase in new wind and solar developments (Spain primarily).
North America witnessed an increase in newly financed and refinanced wind projects.
China, Eastern Europe, and Latin America witnessed an increase in biofuel and wind developments.

= Wind accounted for approximately half of the total investments in projects $48.9Bn
 he remainder was largely invested in solar ($22Bn) and biofuel projects ($15Bn).
Mini-hydro experienced the highest percentage growth (3.9Bn representing 38% growth).
 




= During 2007, funds with a sustainable energy focus grew in
popularity.
By the end of April 2008, there was a total of $30Bn under
management (as compared to $6.8Bn in Q1 2007) in core clean
energy funds (those that invest more than 50% in renewable
energy or energy efficiency companies).

= anvestor enthusiasm for the sector was illustrated by the

surge in public equity funds launched in 2007.  here were
17 new funds with more than 50% of their investments in
clean energy, up from five launches in 2006, one in 2005
and not one in 2004.

=  he reasons for the surge are clear: investor and public
concern about climate change increased last year around
the world, and clean energy shares performed very
strongly, catching the eye of many investors.

"# 
=  he world¶s carbon markets experienced healthy growth both in terms of
emissions traded and associated value.
 otal volume of carbon emissions traded increased by 42% to $118Bn in
2008.

=  he world is moving towards a paradigm in which every major economy

puts a price on greenhouse gas emissions.
Currently the most liquid markets are the European Union Greenhouse Gas
Emission  rading Scheme (EU-E S) and the global Kyoto compliance markets.
Others are following in their footsteps in Australia, Japan, the US¶s Regional
Greenhouse Gas anitiative (RGGa), California and the Western Climate Alliance.

= We are seeing is the emergence of a system of interlinked policy-led

financial markets, similar to currency markets.
A single world price for carbon is probably not achievable, but neither is it
necessary.
As each of carbon markets grow in liquidity, rules crystallize and become well-
understood.
Arbitrage will reveal a global carbon price range ± and it will be one that drives
significant behavioral change.
Carbon prices alone, however, will not be high enough to prompt a large-scale roll-
out of clean energy investment.



R 
  



 
 â 


  
Authorized Earnings=
Base Rate x Common Equity Ratio x Authorized Return on CE
= Rate base ± Utility allowed to earn specified rate of return on
property value
= Common Equity Ratio ± Common Equity /  otal Capital
= Return on Common ± Regulators determine ROE (& WACC)
using CAPM and DCF
Average U.S. Authorized ROE for Electric Utilities
ear verage R
2002 11.16%
2003 10.97%
2004 10.75%
2005 10.54% Source: Regulatory Research Associates
â 


  


Authorized Earnings (Billions)
Rate Base $ 10.000
Common Equity Ratio 50%
Authorized ROE 10%
Authorized Earnings $ 0.500
Source: Jefferies & Company, anc. Utility
Revenue Requirement (Billions) Primer 2008
Authorized Earnings $ 0.500
ancome  ax Rate 35%
Other  axes $ 0.100
anterest Expense $ 0.400
Depreciation $ 0.350
O&M Expense $ 1.400
Fuel Expense $ 0.450
Revenue Rquirement $ 3.469
Rate Determination (Billions unless noted)
Revenue Requirement $ 3.469
Expected Sales 61.9billion kWh
Rates $ 0.056 billion kWh





 
= Opposing Forces at Play for Energy Costs
= A Quick Look at Comparative Costs
Comparative Costs of Select Energy Sources (cents/kWh)
30

25

20

15

10

0
Wind Subsidy Natural Gas Coal Nuclear Solar Panels CSP Biomass Geothermal

Source:  he Wall Street Journal,  he New Math of Alternative Energy, February 23, 2007
x  %   




Levelized cost of electricity



Ô





(Cents/KWh)








Ô
Ô
 

 Ô



Ô
Ô
 


 Ô
 



Ô
 

 Ô



Ô
 


 Ô

A






































Year

Source: Mark Finn, Daniel Ko, Sachin Purwar, Ben Shum, Rubina Zaidi (aka Nuclear  eam)
   | 

   | 

R 
    ¦  
= Example: a Wind Farm bidding into a
utility sponsored RFP
= andustry uses DCF Model
R 
   

 

= 2 Primary  ax Benefits to Consider
= MACRS
5 year MACRS Applied to 90%-95% of projects
ancreases Depreciation Expense in Early Years
 hereby Lowering Pre-tax ancome and  axes
Available to Solar, Wind and Geothermal
Recover anvestment Over 5 years
R 
   

 

Production  ax Credits (P Cs)
= Available based on placed in service date
= 10-Year period
= Function of the energy produced by the project
= an turn a function of equipment performance and
wind
=  hus incentivizes developers to use reliable
equipment and develop projects in strong wind
resource areas
= Wind, Geothermal, and Closed-loop Bioenergy
= Was 1.9 Cents/kWh ± ancreased Under ARRA
 &
  

= anvestors must evaluate benefits Relative to  ax
Capacity (ability to realize benefits)
= AM  Payers will not realize MACRs benefits
= Companies with no tax base realize no P C
benefits
= Lost/Delayed recognition of benefits reflected in
projected CFs
=  his lowers aRR and increases selling price
needed to achieve hurdle rate
= Decision to increase price balanced against view
of what constitutes a competitive bid
R 
¦ " 
(an Millions $) Ôash low
Market Price 50
Capital 180 Net ancome 0
% Equity 40% Depreciation 7
Assumed Debt 108 Deferred  ax 11.5
Assumed Equity 72 Principal Repayment (11)
CF Ex- P Cs 8
Megawatt 100 P Cs 7
Margin 17  otal Cash Flow 15
O&M Expense (1)
Depreciation (7) Accelerated Depreciation 36
Property  axes (1) Straight-Line 7.2
Operating ancome 7 Difference 28.8
x  ax Rate 11.5
anterest Expense (7)
Pre-tax ancome 0 ssumptions
P C $ 7  ax Rate 40%
Net ancome 7 anterest Rate 6.5%
ROE 10.0% Depreciable Life of Plant 30
EBa DA 15.3 Depreciation in Years 25
Source: FPL Group inc. and Jefferies & Co. research
|  |#
= Congestion charges - lack of transmission capacity
= About 5% ancrease in end-user price
= assues with transmission capacity that results in higher
transmission costs at peak times
=  rigger wind farms to stop producing
=  hus stop producing P Cµs
= For a wind farm with no point-to-point transmission access
incorporate this risk
into CF forecasts
R  
|  


| 
  
R '(R||R
= $38 Billion over 10 years
= Appropriations for Energy-Related Projects
Fossil Energy Research & Development $3.4B
 ransmission Upgrades and Smart Grid $11B
New Borrowing for WAPA and BPA $11.1B
Efficient and Renewable Energy $2.5B
Renewable Loan Guarantee $6B

Source: Dewey & LeBoeuf ARRA 2009 Key Energy Provisions

rR R
) R| 
"
R||R


=  ax ancentives for Energy-Related Projects
Renewable Energy Production  ax Credit $13B
Election of anvestment  ax Credit $285M
 reasury Grants for Specified Property
Repeal of Small-project Credit Limitations
 ax Break on Renewable Energy Bonds $1.6B
 ax Break on Conservation Bonds $2.4B
Refueling Property Credit Expansion $54M
anvestment Credit for Advanced Facilities $1.6B
Depreciation Bonus for Capex in 2009 $5.1B
Operating Loss Period Extended to 5 Years $1B
R 
  



!
"# 
  "# a
  
¦ ¦
' Public Market investment still represents only 22% of total
company investment and less than 7% of total investment in clean
energy

' otal Clean Energy

anvestment in Public
Markets deceased
60% from 2007 to
2008 ($23.4 bn vs.
$9.4 bn)
' ancludes aPOs,
secondaries, and
convertibles
'2007 was notable because
of $6.6bn aPO of aberenova
*+x "
 R




'  otal offerings for top 10

advisors in 2008 - $8.5B over
Œ
 51 listings vs. $17.5B over 74
 listings in 2007

'Demonstrates equity markets

Œ
have capacity for higher deal
 

 











flow

Π'But investor uncertainty

 drives demand for alternative

energy offerings
Œ
Ô





 


 Ô


Ô



x
 
   
    
a
 a
  


'  he number of quoted indirect
investment equity funds has
grown from 10 in 2004 to over
30 in 2008
'Management of funds has moved from
small niche players ( riodos, Sustainable
Asset Management, ampax) to large
institutions (DB, ABN Amro, HSBC,
Barclays)

' Largest growth in Clean Energy

funds has occurred in BRaC
countries with particular
emphasis on China and andia
' Marks shift from Denmark, Germany,
and Spain as dominate markets for clean
energy

'E Fs now manage over

$200mm in assets as well
  "# a
  
  
= andustry Benchmark is the WilderHill New
Energy annovation andex (NEX)
'WilderHill New Energy Global annovation andex is comprised of companies worldwide whose
innovative technologies and services focus on generation and use of cleaner energy, conservation,
efficiency, and advancing renewable energy generally. ancluded are companies whose lower-carbon
approaches are relevant to climate change, as smart µsolutions¶ to avoid greenhouse gases, and
whose new technologies reduce emissions relative to traditional fossil fuel use.

'andex is mainly comprised of companies

in wind, solar, biomass & biofuels, small-
scale hydro, geothermal, marine and
other relevant renewable energy
businesses companies worldwide active
in wind, solar, biofuels, hydro, wave and
tidal, geothermal and other renewable
energy businesses, as well as energy
conversion, storage, conservation,
efficiency, materials, pollution control,
emerging hydrogen and fuel cells.
,a
 & 

, |#
| 
  
,-a  


'anvestor fear has led to a flight to certainty
' Return Opportunities increase as overall valuations decrease
¦ ¦
   r

= Vestas and Gamesa represent the largest
pure-play equity investments in the sector
Combined 39% of installed turbines in 2007

3 ear ¦hare Price Performance

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= Solar investments today have been more resistant to the

economic downturn than wind companies
= Solar has the potential to meet the US economic goals of energy security and
scalability
= Greater equity market visibility and investment opportunities may also be
driving

  "


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