Energy-finance | Venture Capital | Tech Start Ups

Renewable Energy Finance

Houtan Afkhami Jeremy Brown Patrick Bydume James Walsh

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

Source: Regulatory Research Associates

State of Renewable Energy Finance

Large Scale Roll-Out

acquisitions and buyouts was: $223 billion But this is not nearly enough apparently«.. whether equity or debt. up 5% from 2007 The gross figure which includes in mergers. But. total new investments in clean energy reached a RECORD level: $155 billion.A Recap of 2008 Clearly. the year was a mess for the capital markets. .

or $500 billion This will limit us to emissions of 550ppm Available ranges are $170 billion to $542 billion Even more drastic is the International Energy Agency¶s estimated need: $45 trillion over several decades .The Range of Estimates for Need Stern Review suggest 1% of global GDP.

Hoe transportation is powered 4. we need to maintain greenhouse gases to 450ppm. To achieve this requires changes in energy infrastructure: 1. thus reducing emissions by 60% by 2030. How electricity is generated and distributed 3. How we stay warm and cool 5. How we run our factories . What fuels do we use 2.Where do we want to go? Energy is responsible for OVER 60% of carbon emissions At the least.

Solar Photovaltaic (PV) 3.Solar Thermal Electricity Generation (STEG) 4.Municipal Solid Waste-to-Energy (MSW) 5.Onshore and offshore wind 2.How we can get there 77% of emission reductions will come from renewable energy and energy efficiency Which energy sources will make the largest contribution? 1.Geothermal Power .Cellulosic and Next Generation Biofuels 7.Sugar-based Ethanol 6.

Smart Efficiency: how well do we use energy Grids: how can we better distribute energy Storage: how can we store unused energy 3. related to distribution. storage and consumption of energy.Energy 2.Carbon Capture and Sequestration: how can we capture and impede the carbon we emit .Energy 4.What else besides the energy source? There are other key enablers to empower this SHIFT. 1.

Time for Discussion The next section will review where funding CAME from. but it is clear both government and private companies have a role to play. . because there are too many variables to determine this. But we can never know where it WILL COME from.

Sources of Capital and Funding .

The first half of the year saw new investment reaching $64Bn (up 41% over H1 2007). The second half of the year saw new investment totaling $55Bn (down 14% from H1 and 18% from H2 2007).Sources of Capital Total new investment in the sector reached a new record of $155Bn in 2008   Investments started well in 2008 and slowed as the credit markets unraveled. depth and scale in sustainable energy. Gross investment (including money changing hands in M&A and Buyouts) reached $223Bn.   This figure is up 5% from 2007 ($148Bn). making the overall picture one of greater breadth. Furthermore. but have broadened and diversified. The mainstream capital markets are now fully receptive to sustainable energy companies. Investment flows have not only continued to grow. the willingness to look beyond mature technologies suggests that investors are taking renewable energy and energy efficiency increasingly seriously. supported by a surge in funds destined for clean energy investment. Total investment is comprised of the following asset class components:      Venture Capital & Private Equity Public Markets Mergers & Acquisitions Project Finance Carbon Markets and Funds Technology Research Technology Development Manufacturing Scale-Up Asset Finance Government and Corporate R&D Venture Capital and Private Equity Public Markets Mergers & Acquisitions Project Finance Carbon Markets and Funds .

Total Funding .

Investment by Sector .

In addition. this figure represents an increase of 60% from $3. spurring an increase in early-stage deals. resulting in slow growth in later stage investment.    The sharp fall in share prices made it difficult for companies to raise money on public markets.5Bn. The majority included: large asset capacity investments.   Biofuels accounted for the second largest new investment totals ($2Bn).6Bn of new VC/PE investment in 2008. gross VC/PE investments totaled $19. VC/PE investors had funds to deploy and were able to pick-up some of the slack.   VCs had focused on later-stage companies with technologies that were relatively mature. . Including buy-outs. Investors are now being forced to look further down the development pipeline.6Bn in 2007. 37% increase from 2007). and buy-outs of wind projects and component manufacturing companies. The wind sector tallied $5.8Bn in 2008 Solar was the leading sector attracting $5. Such opportunities became harder to find.Venture Capital & Private Equity Venture capital and private equity players saw the largest increase in new investment ($13. Late-stage companies were forced to raise funds through asset capacity investments rather than listing.6Bn of private equity buy-out investment.8Bn  Although these investment are not classified as new money by New Energy Finance. private equity buy-outs totaled $5.

The Sharp fall in the share prices of clean energy stocks made it difficult for companies to raise fresh capital by listing new equity.4Bn in 2007).4Bn dollars in new investment. The WilderHill New Energy Global Innovation Index (NEX) fell 61% on the year.Public Markets Stock market valuations for clean energy companies declined significantly in 2008. The solar sector represented more than half of the total net market investment in 2008 with its sector accounting for more than $6. .4Bn from 23. 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. The correlation between the NEX and the AMEX Oil index illustrates the continued strong influence of the price of oil on clean energy stocks.4Bn EDP Renovaveis (the largest deal of 2008). Total market net investment therefore fell by 51% (down to $11.  Most of these solar companies were Chinese companies listing in the United States.  This figure is slightly skewed by the $2.

M&A activity equals $49Bn (marginally up from $43. The largest deals of the year include:   The $2.5Bn takeover of ErSol Solar Energy by Bosch Group. . This figure is slightly up from 2007 ($61Bn).  Excluding private equity buy-outs (categorized in VC/PE) and asset refinancings (categorized in project finance).Mergers and Acquisitions Total M&A activity including private equity buy-outs and projects changing hands was $67Bn. The $1.4Bn acquisition of Airtricity by Scottish and Southern Energy.2Bn in 2007).

Wind accounted for approximately half of the total investments in projects $48.    European Union witnessed a significant increase in new wind and solar developments (Spain primarily). China. project finance remained the largest single portion of total new investment in the clean energy sector. Mini-hydro experienced the highest percentage growth (3.9Bn representing 38% growth).9Bn   The remainder was largely invested in solar ($22Bn) and biofuel projects ($15Bn). Eastern Europe. The main explanation for the relatively robust figure is the large number of project finance deals completed in early 2008. . and Latin America witnessed an increase in biofuel and wind developments.Project Finance Despite the obvious turmoil in the credit markets. Financings for new clean energy projects reached $97Bn (14% increase from 2007). North America witnessed an increase in newly financed and refinanced wind projects.

Clean Energy Funds During 2007.  By the end of April 2008. one in 2005 and not one in 2004. and clean energy shares performed very strongly.8Bn in Q1 2007) in core clean energy funds (those that invest more than 50% in renewable energy or energy efficiency companies). up from five launches in 2006. The reasons for the surge are clear: investor and public concern about climate change increased last year around the world. funds with a sustainable energy focus grew in popularity. catching the eye of many investors. There were 17 new funds with more than 50% of their investments in clean energy. . Investor enthusiasm for the sector was illustrated by the surge in public equity funds launched in 2007. there was a total of $30Bn under management (as compared to $6.

Others are following in their footsteps in Australia.Carbon Markets The world¶s carbon markets experienced healthy growth both in terms of emissions traded and associated value. The world is moving towards a paradigm in which every major economy puts a price on greenhouse gas emissions. will not be high enough to prompt a large-scale rollout of clean energy investment. rules crystallize and become wellunderstood. however.     A single world price for carbon is probably not achievable. Japan.   Currently the most liquid markets are the European Union Greenhouse Gas Emission Trading Scheme (EU-ETS) and the global Kyoto compliance markets. California and the Western Climate Alliance. We are seeing is the emergence of a system of interlinked policy-led financial markets. the US¶s Regional Greenhouse Gas Initiative (RGGI). Carbon prices alone.  Total volume of carbon emissions traded increased by 42% to $118Bn in 2008. but neither is it necessary. similar to currency markets. . As each of carbon markets grow in liquidity. Arbitrage will reveal a global carbon price range ± and it will be one that drives significant behavioral change.

Financing Alternative Energy Ventures .

75% 10. Authorized ROE for Electric Utilities Year 2002 2003 2004 2005 Average ROE 11.16% 10.97% 10.54% Source: Regulatory Research Associates .S.Utility Finance Primer 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 / Total Capital Return on Common ± Regulators determine ROE (& WACC) using CAPM and DCF Average U.

056 billion kWh .450 3.400 0.400 0.000 50% 10% $ 0.100 0.469 Expected Sales 61. Inc.Utility Finance Primer Cont« Authorized Earnings (Billions) Rate Base Common Equity Ratio Authorized ROE Authorized Earnings $ 10. Utility Primer 2008 Revenue Requirement (Billions) Authorized Earnings $ Income Tax Rate Other Taxes $ Interest Expense $ Depreciation $ O&M Expense $ Fuel Expense $ Revenue Rquirement $ 0.469 Rate Determination (Billions unless noted) Revenue Requirement $ 3.9billion kWh Rates $ 0.350 1.500 35% 0.500 Source: Jefferies & Company.

February 23.Financing Energy Deals 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 5 0 Wind Subsidy Natural Gas Coal Nuclear Solar Panels CSP Biomass Geothermal Source: The Wall Street Journal. 2007 . The New Math of Alternative Energy.

Sachin Purwar.00 10.00 Wind NG Carbon Tax .Levelized Electricity Cost 12.$100/tonC Year Source: Mark Finn.$100/tonC 8.00 Coal Carbon Tax .$50/tonC NG Carbon Tax .$50/tonC 9.00 7. Ben Shum.00 Levelized cost of electricity (Cents/KWh) 11. Daniel Ko. Rubina Zaidi (aka Nuclear Team) 20 25 20 09 20 13 20 17 20 21 20 23 20 11 20 15 20 19 .00 Coal Natural Gas Nuclear Coal Carbon Tax .00 6.

Creative Response .

Creative Response .

Alternative Fuel Deal Structure Example: a Wind Farm bidding into a utility sponsored RFP Industry uses DCF Model .

Wind and Geothermal Recover Investment Over 5 years .Alternative Deals Continued« 2 Primary Tax Benefits to Consider MACRS      5 year MACRS Applied to 90%-95% of projects Increases Depreciation Expense in Early Years Thereby Lowering Pre-tax Income and Taxes Available to Solar.

9 Cents/kWh ± Increased Under ARRA .Alternative Deals Continued«  Production Tax Credits (PTCs) Available based on placed in service date 10-Year period Function of the energy produced by the project In turn a function of equipment performance and wind Thus incentivizes developers to use reliable equipment and develop projects in strong wind resource areas Wind. and Closed-loop Bioenergy Was 1. Geothermal.

Tax Considerations Investors must evaluate benefits Relative to Tax Capacity (ability to realize benefits) AMT Payers will not realize MACRs benefits Companies with no tax base realize no PTC benefits Lost/Delayed recognition of benefits reflected in projected CFs This lowers IRR and increases selling price needed to achieve hurdle rate Decision to increase price balanced against view of what constitutes a competitive bid .

research .PTCs PTCs Total Cash Flow Accelerated Depreciation Straight-Line Difference x Tax Rate Assumptions Tax Rate Interest Rate Depreciable Life of Plant Depreciation in Years 0 7 11. and Jefferies & Co.0% 15.2 28.A Very Simple Model (In Millions $) Market Price Capital % Equity Assumed Debt Assumed Equity Megawatt Margin O&M Expense Depreciation Property Taxes Operating Income Interest Expense Pre-tax Income PTC $ Net Income ROE EBITDA Cash Flow 50 180 40% 108 72 100 17 (1) (7) (1) 7 (7) 0 7 7 10.5 (11) 8 7 15 36 7.3 Net Income Depreciation Deferred Tax Principal Repayment CF Ex.5 40% 6.5% 30 25 Source: FPL Group inc.8 11.

lack of transmission capacity About 5% Increase in end-user price Issues with transmission capacity that results in higher transmission costs at peak times Trigger wind farms to stop producing Thus stop producing PTCµs For a wind farm with no point-to-point transmission access incorporate this risk into CF forecasts .Related Risk Congestion charges .

American Recovery and Reinvestment Act of 2009 (ARRA) $38 Billion over 10 years Appropriations for Energy-Related Projects      Fossil Energy Research & Development $3.1B Efficient and Renewable Energy $2.4B Transmission Upgrades and Smart Grid $11B New Borrowing for WAPA and BPA $11.5B Renewable Loan Guarantee $6B Source: Dewey & LeBoeuf ARRA 2009 Key Energy Provisions .

WAPA and BPA Regional Maps .

6B Depreciation Bonus for Capex in 2009 $5.6B Tax Break on Conservation Bonds $2.ARRA Cont« Tax Incentives for Energy-Related Projects           Renewable Energy Production Tax Credit $13B Election of Investment Tax Credit $285M Treasury Grants for Specified Property Repeal of Small-project Credit Limitations Tax Break on Renewable Energy Bonds $1.1B Operating Loss Period Extended to 5 Years $1B .4B Refueling Property Credit Expansion $54M Investment Credit for Advanced Facilities $1.

Alternative Energy and Equity Markets .

secondaries.Public Market Investment Still Small ‡ Public Market investment still represents only 22% of total company investment and less than 7% of total investment in clean energy ‡Total Clean Energy Investment in Public Markets deceased 60% from 2007 to 2008 ($23. $9.6bn IPO of Iberenova . and convertibles ‡2007 was notable because of $6.4 bn) ‡ Includes IPOs.4 bn vs.

2008 Lead Manager Analysis 16 14 12 10 8 6 4 2 0 Citi Allianz LEH UBS DB MS GS CS ‡ Total offerings for top 10 advisors in 2008 . $17.5B over 51 listings vs.$8.5B over 74 listings in 2007 ‡Demonstrates equity markets have capacity for higher deal flow ‡But investor uncertainty drives demand for alternative energy offerings Cii t Sa and nt er BBV A ML HSBC UBS J P MS CS GS 14 12 10 8 6 4 2 0 Li st i ng s Of f er i ng V al ue ( $b n) .2007 vs.

Germany.Indirect Investment Funds ‡ The 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 (Triodos. and Spain as dominate markets for clean energy ‡ETFs now manage over $200mm in assets as well . HSBC. Sustainable Asset Management. ABN Amro. Barclays) ‡ Largest growth in Clean Energy funds has occurred in BRIC countries with particular emphasis on China and India ‡ Marks shift from Denmark. Impax) to large institutions (DB.

Included are companies whose lower-carbon approaches are relevant to climate change. marine and other relevant renewable energy businesses companies worldwide active in wind. smallscale hydro. and advancing renewable energy generally. pollution control. hydro. conservation. wave and tidal. geothermal.Public Market Investment Overview Industry Benchmark is the WilderHill New Energy Innovation Index (NEX) ‡WilderHill New Energy Global Innovation Index is comprised of companies worldwide whose innovative technologies and services focus on generation and use of cleaner energy. conservation. materials. solar. biofuels. and whose new technologies reduce emissions relative to traditional fossil fuel use. solar. efficiency. as smart µsolutions¶ to avoid greenhouse gases. ‡Index is mainly comprised of companies in wind. geothermal and other renewable energy businesses. as well as energy conversion. biomass & biofuels. storage. emerging hydrogen and fuel cells. . efficiency.

NEX Index Composition .

NEX .Risk and Return Profile .

NEX ²Impact of the Financial Crisis ‡Investor fear has led to a flight to certainty ‡ Return Opportunities increase as overall valuations decrease .

64 1 26.64 326.64 76.64 1 76.Sector Snapshot .Wind Vestas and Gamesa represent the largest pure-play equity investments in the sector  Combined 39% of installed turbines in 2007 3 Year Share Price Performance 426.64 376.64 Vestas Share Pricing Gamesa Share Pricing .64 226.64 26.64 276.

Sector Snapshot ²Solar .

Market Premium for Solar Valuations 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 .

Sha e P i ing             .Comparison to Dot Com Mania 308 258 208 1 58 1 08 58 8 ¡ ¡ ^COMP .Sha e P i ing ¡ ^NEX .Sha e P i ing ^XOI .

Questions? .

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