How do Renewable Energy Carbon and Clean Tech

How do Renewable Energy- Carbon and Clean Tech markets connect in the investment world? Some perspectives on policy driven markets Ashutosh Shastri Ener. Strat Consulting, UK The Claverton Energy Research Conference October 24 th 2009 Bath, UK This report contains information that is propriety to Ener. Strat Consulting. All aspects of intellectual property related to this document where not specifically attributed otherwise rests solely with Ener. Strat Consulting. As a participant to the Wall Street Green Trading Summit, this document is only for your reference and use. If you either copy, reproduce or circulate this document to anyone, you may be in breach of the law. No part of this document may be used, circulated, quoted, or reproduced for distribution outside without permission from Ener. Strat Consulting. If you are not the intended recipient of this report, you are hereby notified that the use, circulation, quoting, or reproducing of this report is strictly prohibited and may be unlawful. This material was used during an oral presentation; it is not a complete record of the discussion. ENERSTRAT CONSULTING

KEY MESSAGES TODAY: Renewable Energy- Clean. Tech is a policy created and energy wholesale price driven space. Energy and Environment policy development needs to be concurrent and consistent; this is difficult to achieve. Understanding the dynamics of conventional gas-power industries is a critical first step into understanding carbon pricing and clean energy development opportunities- The Utility sector offers both- barriers to entry and sometimes exit opportunity too! The emergence of Clean. Tech and Carbon Markets are additional drivers of renewable energies- some of which are indeed old hat technologies enjoying a renaissance. Roles played by Government funding-VC/PE fund involvement and corporate venturing will need to be better coordinated as there are important differences between cleantech and new energy technology industries and other high technology industries where VCs activity is concerned. ENERSTRAT CONSULTING

THE NEXT GENERATION ENERGY- ENVIRONMENT POLICY CONUNDRUM Security and reliability of Supply Market based-Cost reflective pricing of energy How to manage transition from state ownership and what skills are required to compete? Multiple stakeholder relationship management, Complex compliance regime…. uncertainty! Energy Diversity without explicit Government Interventions New types of risks ahead geopolitical, counterparty, fuel mix. . . Need for sophisticated sourcing/ supply contracts, Asset portfolio mix… Environment and Climate regulation compliance ENERSTRAT CONSULTING

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KEY MESSAGES TODAY: Renewable Energy- Clean. Tech is a policy created and energy wholesale price driven space. Energy and Environment policy development needs to be concurrent and consistent; this is difficult to achieve. Understanding the dynamics of conventional gas-power industries is a critical first step into understanding carbon pricing and clean energy development opportunities- The Utility sector offers both- barriers to entry and sometimes exit opportunity too! The emergence of Clean. Tech and Carbon Markets are additional drivers of renewable energies- some of which are indeed old hat technologies enjoying a renaissance. Roles played by Government funding-VC/PE fund involvement and corporate venturing will need to be better coordinated as there are important differences between cleantech and new energy technology industries and other high technology industries where VCs activity is concerned. ENERSTRAT CONSULTING

TRANSACTION VALUE OF CARBON MARKETS Primary CDM Secondary CDM 7 26 EU ETS 92 Size of Carbon Funds- € 16 Bn as of October 2009 4, 811 Mt CO 2 e • Deutsche Bank - Global carbon markets could be $1, 000 bn by 2020 vs current oil market of about $3, 000 bn • New Carbon Finance - $700 bn by 2020 • Stern - $100 bn of carbon flows (ie primary CDM) required by 2030 vs current $6 bn Source: UNEP Report 2008, Deutsche Bank ENERSTRAT CONSULTING

ESTIMATING THE FUEL SWITCHING THRESHOLD BETWEEN COAL AND NEW ENTRY GAS Existing Coal New entry CCGT Plant costs* ~€ 25/ton of CO 2 is a breakeven price of substitution of existing coal capacity with new CCGTs in the long term. Current price of CO 2 credits in the UK €cents/k. Wh • CO 2 price above € 25/ton will increase the substitution of coal with gas • How does the steady state price of € 25/ton square up with: • Current bilateral price New entry CCGT is cheaper • Current NAP regime Existing coal plant is cheaper CO 2 price €/ton *Fuel and O&M costs for existing coal, full costs for new CCGTs. 75% utilization assumed for new CCGT, 70% for existing coal ENERSTRAT CONSULTING Source: Ener. Strat Analysis

GAS-POWER-EMISSION PRICE RELATIONSHIP: GERMANY Exchange quoted prices bear no relationship with fuel prices EUETS Officially launched on 5 th January 2005 Source: Platts Data and Ener. Strat Analysis Power-Gas. Emission corelation Gas-Emission corelation continues but power breaks out, triggering enquiry into player trading conduct. ENERSTRAT CONSULTING

SYNOPSIS OF OUR WORK ON CARBON PRICING DRIVERS Key Drivers Rationale Outlook NAP regime for 2008 -2012 will drive the market tightness influencing the demand-supply NAP regime will be tough and dampening of the market shortness may be impacted by the outcome around the supplementarity debate Coal-Gas Differential Currently the least cost option and growing attractiveness of gas makes gas pricing outlook a critical driver of carbon pricing. Possible emergence of a gascarbon price linkage resulting in a higher Ro. E for new gas fired CCGT projects but Carbon Policy Response Politics of energy sector restructuring and environmental compliance might influence response to specific legislation which could impact pricing e. g. LCPD or nuclear power related state decisions or feed-in tariffs Higher likelihood of state influence on fuel markets e. g. nuclear options, security of supply in gas or tariff benefits to incentivise renewable technologies. Demand-Supply of Emission credits ENERSTRAT CONSULTING

DRIVERS OF FUTURE PRICING OF CO 2 IN EUROPE- ANALYSING THE ROLE OF FUEL MARKETS, ENERGY REGULATION AND POLICY Nuclear Power Policy • National policy on Nuclear Generation • Commercialisation of new nuclear technologies • Market Concentration in European Supply • Wholesale gas market design • Emergence of gas trading hubsliquidity and depth Gas Pricing • Extent of Oil Indexation in gas contracts • Trends in tenor of gas contracts and re-opener clauses • Dynamics of TPA regulation and demand for new infrastructure project investments (e. g. role of TPA v/s Article 22 exemptions) • Developments in gas storage business- capacity trading, operating practices and regulation • Evolution of European LNG-its mix in European gas and interlinkages with global markets e. g. Trans-Atlantic traded market Source: Ener. Strat Analysis Oil Pricing National Level Generation Mix by fuel type Actual Emissions Supply NAP Regime Country emission Targets Coal Pricing Other regulations Renewable Energy Policies • Design of feed in tariffs for • New clean air renewable energy projects regulations on existing • National level targets on coal plants e. g. LCPD wind energy • Climate change levy on • Regulatory guidance large I&C consumers on re-powering of coal • Incentivisation regime for and oil fired plants energy efficiency ENERSTRAT CONSULTING

KEY MESSAGES TODAY: Renewable Energy- Clean. Tech is a policy created and energy wholesale price driven space. Energy and Environment policy development needs to be concurrent and consistent; this is difficult to achieve. Understanding the dynamics of conventional gas-power industries is a critical first step into understanding carbon pricing and clean energy development opportunities- The Utility sector offers both- barriers to entry and sometimes exit opportunity too! The emergence of Clean. Tech and Carbon Markets are additional drivers of renewable energies- some of which are indeed old hat technologies enjoying a renaissance. Roles played by Government funding-VC/PE fund involvement and corporate venturing will need to be better coordinated as there are important differences between cleantech and new energy technology industries and other high technology industries where VCs activity is concerned. ENERSTRAT CONSULTING

SOME TECHNOLOGIES EXPERIENCING REVIVAL OF VC / PE INTEREST Technology Innovation Carbon Market Investment Opportunity is driven primarily by: • Growing demand due to energy policy • Creation of new IP • Transfer of technology through royalties/licence agreements to new markets • Developing Assets using the technology • Opportunities in component and subcomponent technologies • Operating energy companies in the space • Technology leading to direct carbon abatement that is quantifiable and monitor -able • Assisting the technology company to realise the carbon upside by providing management services to secure the carbon credits • Some technologies abate carbon in multiples consistent with their GWP • Wind • Solar • Monitoring and Targeting • Bio-diesel • Data analytics and EE Software • Non food Bio-ethanol Source: Ener. Strat Analysis In some markets the race between technology innovation and carbon market development may well be the determining factor in future renewable energy mix. • Captive/CHP • Biomass • Landfill Gas • Municipal Solid Waste • Energy Efficiency ENERSTRAT CONSULTING

KEY MESSAGES TODAY: Renewable Energy- Clean. Tech is a policy created and energy wholesale price driven space. Energy and Environment policy development needs to be concurrent and consistent; this is difficult to achieve. Understanding the dynamics of conventional gas-power industries is a critical first step into understanding carbon pricing and clean energy development opportunities- The Utility sector offers both- barriers to entry and sometimes exit opportunity too! The emergence of Clean. Tech and Carbon Markets are additional drivers of renewable energies- some of which are indeed old hat technologies enjoying a renaissance. Roles played by Government funding-VC/PE fund involvement and corporate venturing will need to be better coordinated as there are important differences between cleantech and new energy technology industries and other high technology industries where VCs activity is concerned. ENERSTRAT CONSULTING

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ashastri@enerstrat-consulting. com ENERSTRAT CONSULTING