1

Building a Productive, Expanding, Sustainable Energy Economy: Cutting the Cost of Clean Solutions

Coalition for Green CapitalReed Hundt, CEO(202 494 4111, rehundt@yahoo.com)www.coalitionforgreencapital.com

February 2011

2

Who we are and what we want to do

1. The Coalition for Green Capital (CGC) is a non-profit consortium of energy industry leaders including renewable resource developers, original equipment manufacturers, investors, lawyers, financial advisors, and consultants dedicated to a clean energy economy built on low-cost, profitable, sustainable energy generation and consumption

2. The CGC seeks to build a productive, expanding, and sustainable economy by: Creating an Energy Investment Trust (EIT) that provides long-term, low-cost

financing for clean energy solutions Reducing taxes on innovative goods and services in the clean energy sector Removing the regulatory barriers to innovation in clean energy goods and

services Creating state-level Green Banks Creating an International Green Bank, also known as the “Global Investment

Trust for Clean Energy”

3. Contact the CGC at www.coalitionforgreencapital.com, or:-Reed Hundt, CEO (202 777 7700, rehundt@yahoo.com)-Ken Berlin, General Counsel (202 371 7350, kenneth.berlin@skadden.com)-Alex Kragie, Vice President (202 579 2354,

alex@coalitionforgreencapital.com)-Sarah Davidson, Vice President (202 577 1605,

sarah@coalitionforgreencapital.com)

3

Investment in clean energy generation and consumption faces obstacles

Major projects require high capital expenditures with a long amount of time required for even modest returns

Entrepreneurial breakthroughs have created only modest value in this sector

Federally-funded research and development is not fully matched by industry R&D

Business models are jeopardized by volatility in commodity pricing

The playing field isn’t level; renewable energy must compete with incumbent players who have enjoyed decades of greater federal support and thus have benefits of scale economics

4

Profound changes in last three years have raised hurdles for investment in clean energy solutions

Demand for new-build electric generating capacity has dropped and will not rise significantly until excess capacity is absorbed

Demand for energy in China is rising significantly, which attracts investment for research and development, deployment, and deployment at scale

Substitution of clean for non-sustainable energy in the US will occur only if old peak and base-load facilities are replaced by new plants

Creating energy-efficient buildings will occur only if investing firms are rewarded for creating efficient solutions

Unpredictable emissions regulation delays investment decisions

State regulators often do not permit utilities to capture value from cost synergies, research and development, efficiency, or shifts to sustainable electricity

5

The cost and price of clean energy solutions must go down so as to expand addressable market

To cope with lower prices for energy commodities and low electricity prices, lower the cost of capital for clean energy solutions through use of long-term, low-cost financing

To expand investment in clean energy solutions, eliminate capital gains and income tax on future returns from innovative goods and services in the clean energy sector

To increase research, development, and deployment in the energy sector, reform regulations to enhance investment in and returns from research, development, and deployment

666

Electricity power generation in the U.S. between 2008 and 2009 dropped by 4.1 percent, with a projected annual growth rate of only 0.5% between 2010 and 2035. As of October 2010, YTD electricity production is only back at 2008 levels

Energy efficiency reduces consumption

Utilities are adjusting downwards even long-term demand projections

Source: EIA, Annual Energy Outlook and Electric Power Annual Also: http://www.eia.doe.gov/cneaf/electricity/epm/table5_2.html and http://www.eia.doe.gov/oiaf/aeo/electricity.html; AWEA; (http://www.eia.doe.gov/cneaf/electricity/epm/table1_1.html)

Electricity in the USA is not a growth business

7

China uses low-cost finance to expand clean energy solutions

China will spend $765 billion on its clean energy industry by 2020

Many U.S. companies are leaving the U.S., not because of lower Chinese labor costs, but because China is providing low-cost financing and other incentives Evergreen Solar, the nation's third

largest solar manufacturer announced that it was closing its plant in Massachusetts and laying off 800 workers

http://www.nytimes.com/2010/09/09/business/global/09trade.html

“China's real advantage lies in the ability of solar panel companies to form partnerships with local governments and then obtain loans at very low interest rates from state-owned banks.”-Michael El-Hillow, Evergreen Solar CEO, explaining Massachusetts plant closure

“If you change the interest rate half a percent or 1 percent, the difference is amazing, because the cost is all at the beginning.”-Dennis Bracy, CEO of the US-China Clean Energy Forum

8

As stimulus effects have faded, wind deployment has dropped sharply

Wind deployment in the United States dropped from 9,581 MW in 2009 to ~5,115 MW projected in 2010

0

2000

4000

6000

8000

10000

2009 2010

US WindCapacityAdditions

Source: EIA, Annual Energy Outlook and Electric Power Annual Also: http://www.eia.doe.gov/cneaf/electricity/epm/table5_2.html and http://www.eia.doe.gov/oiaf/aeo/electricity.html; AWEA; (http://www.eia.doe.gov/cneaf/electricity/epm/table1_1.html)

9

To persuade utilities and regulators to replace conventional electricity with clean solutions, prices have to vary state by state

1010101010

Lowering cost of debt will reduce delivered price of electricity for clean solutions

Prepared by an energy investment firm using public data sources

Low-cost financing reduces the delivered electricity prices of these actual wind projects by 15-20% to the point of being cost-competitive with new-build conventional coal and gas-fired power plants in each region to meet incremental energy demand growth:

•With low-cost financing provided by the Energy Investment Trust, the internal rate of return can be maintained while keeping the cost to consumers at or below current delivered electricity costs (see highlighted sections above, where the cost of delivered electricity is reduced by $10/MWh or more because of the low-cost financing offered in the right column versus available bank financing in the left column).

Notes:-Assumes that all after-tax

free cashflows from the project are financeable, net of cover ratios

-CAPEX costs do not include significant transmission system upgrades

-The CAPEX here is based on reported project cost data for the ARRA grant program through November 2010, with a 10% discount to account for reductions in equipment costs since 2009 in projects being built in 2011 and 2012 timeframe

-The two cases describe the identical project, but commercial banks will finance a more conservative wind case (requiring the 1.4x cover ratio)

-The two cases assume the sale of identical quantities of electricity

- Note (1): LIBOR rate based on LIBOR swap curve for last 5 years, Treasury based on rates for the same period.

11111111

-- The boxed area of the table shows a cross-section of representative project capacity factors across the country, and how power prices impact potential returns for each different wind regime-- The East coast primarily sees projects at 35% NCF or less, and the West coast is mostly at 30-41% NCF-- Only the Plains are at 44% NCF or above

Prepared by investment firm specializing in wind energy transactions based on data from independent wind development companies and public sources

Note: Net Capacity Factor is a measure of the actual amount of power produced during a year. Calculated by dividing total net energy production by the maximum theoretical possible annual production from the nameplate capacity

2012 Price [$/MWh]

with 2% annual escalation

-- IRR table above for an example wind project using Commercial Bank Financing at $1,963/kW installed cost and current tax policy: financing terms of 6.75% interest rate at 20% leverage

Standard commercial debt limits wind projects to high-priced, high-capacity states

-- 10% Internal Rate of Return (IRR is the percentage contained within the boxes above), is considered the minimum for leveraged project finance

12121212

--The larger scope of the shaded scenarios significantly increases the economically-attractive wind generation that can compete with new build fossil-fuel power plants to provide energy for incremental demand growth by lowering the power prices necessary to hit target rates of return or opening areas with lower wind resources to provide equivalent power prices; by some estimates, approximately 120 GWs of lower-NCF wind resource become competitive with new conventional generation.

Prepared by investment firm specializing in wind energy transactions based on data from independent wind development companies and public sources

Note: Net Capacity Factor is a measure of the actual amount of power produced during a year. Calculated by dividing total net energy production by the maximum theoretical possible annual production from the nameplate capacity

2012 Price [$/MWh] with 2% annual escalation

--IRR table for an sample wind project using EIT Financing at $1,963/kW installed cost and current tax policy: financing terms of 4.50% interest rate at 34% leverage

Low-cost, long-term financing expands the scale of wind projects to the East and West coasts and into the Mid-West

13

Energy Investment Trust can make projects in marginally windy areas economically feasible

Long-term, low-cost loans would expand the geographic market for wind projects to the orange and brown areas above– substantially increasing investment in more than 20 states

14

CA

AK

WA

OR

NV

ID

MT

WY

COUT

AZ NMOK AR

ND

SD

MN

IA

LA

NE

MOKS

WI

FL

SC

IL INOH

WV VA

MS AL GA

NCTN

KY

NH

VT

MA

RICT

NJDEMDDC

HI

MI

TX

NY

PA

ME

EIT will create substantial additional wind investment in at least 15 states without raising their electricity prices

15

With EIT support, equity investors can fund more projects –small changes to capital structure have big impacts

34% NCF, $57/MWh power price (~20% reduction through use of EIT)

10.5% leveraged rate of return When considering returns to both debt (interest) and

equity, the up-front capex and the returns on the required capital are still 85% of the total cost of a wind project, with only 15% of the lifecycle cost being the operating expenses; but with the EIT the debt capex has increased from 9% to 16%, so that the effective power price can be ~20% lower

15

Without EIT Financing – 20:80 Debt/Equity ratio Including EIT Financing – 34:66 Debt/Equity ratio 34% NCF, $70/MWh power price 11% leveraged rate of return When considering the net cashflows to the equity investor, the

present value of equity capex is equal to the sum of the present value equity cashflows and the net tax benefit (26%+9%=35%); this value equals the up-front equity capex at the hurdle discount rate

85% of the total cost of a wind project is related to capital cost and the return on the investment, with only 15% of the lifecycle cost being the operating expenses

16

An Energy Investment Trust should supply long-term, low-cost finance– without a Congressional appropriation In order to achieve these goals, the US needs a private-

sector run patriotic corporation called the Energy Investment Trust The EIT would be capitalized by the government one time, in

return for a security that requires repayment to government by a full lump sum at the end of ten years (like a balloon loan), so there’s no score

At the end of ten years, the projects are re-financed and/or Congress makes another capital investment

EIT debt would not be federally guaranteed (not a GSE) The EIT would be a private corporation, so the government

would not hold any equity Therefore the EIT would not be a government agency and

would not fall under NEPA or Davis-Bacon Act

17

EIT could enable private sector to invest in:

Financing of smaller scale, community-oriented renewable projects that are starved of capital

Financing electric vehicle fleets Financing charging stations for utilities to serve EVs Adding a layer of cheap equity or debt (or both!) to a CEDA project to

spread high Internal Rate of Return CEDA money farther Rolling out energy storage at large scale Replacing retiring coal plants with coal with CCS technology or

natural gas Building transmission lines for a municipal utility that can’t raise

rates Building a new generation unit for a municipal utility that can’t raise

rates Adding to a Rural Utilities Service (RUS) loan for a rural utility that

needs capital to replace defunct coal but can’t raise rates Scaling out distributed nuclear or Combined Heat and Power Continuing Department of Energy research and development and

deployment that lacks new appropriations and doesn’t qualify for CEDA

18

Create a long-term tax holiday for “innovative” energy goods and services

To complement this Energy Investment Trust, Congress should create a ten-year tax holiday (no state or federal taxes of any kind) for “innovative” energy goods and services, stipulating that only CEDA and EIT projects are “innovative” by this definition

Private sector investors can add assumed capital gains and income tax payments to their return expectations

19

Promoting research and development on a long-term basis requires rewards for such expenditures

Regulators should not be permitted to deny utilities cost recovery for reasonable research, development, and deployment

Utilities should voluntarily dedicate 20% of their research and development to add to the capital of the Energy Investment Trust– in order to qualify for EIT loans

202020

Energy Investment

Trust(EIT)

Invest in low-risk solutions

*Some other examples of similar corporations: The American Red Cross, Daughters of the American Revolution, Boy Scouts of America, Girl Scouts of America, Veterans of Foreign Wars of the United States, the American Legion, the Board for Fundamental Education, the Foundation of the Federal Bar Association and the National Fund for Medical Education.

The Energy Investment Trust should have zero appropriations score

Loan guarantees for capital equipment purchases

Loans to State Green Banks (CEFIs)

Direct Loans to Private Sector-led Projects

Deposit from Treasury ($10 billion)

•Ten year payback at a market rate

Voluntary Contributions from Utilities

Private Sector Matching Grant ($500 million) (Covers

default subsidy)

2121

Clean Energy Deployment Administration to invest in higher-risk, initial deployment of

clean energy solutions CEDA is designed to foster initial commercial

deployment of breakthrough technologies

CEDA, within the Department of Energy, extends government research and development closer to market entry

CEDA passed the Senate Energy and Natural Resources Committee in June 2009 on a bi-partisan basis

2222

EIT follows and complements CEDA

CEDA is managed by the Department of Energy

CEDA supports breakthrough technologies

CEDA extends appropriated money and recycles it

CEDA provides indirect and direct support to clean energy

EIT is a privately run financing support entity

EIT supports widespread deployment of proven, commercially-ready clean energy technologies, including energy efficiency and CEDA-backed projects

EIT will provide financing support to complement and encourage, but not replace, private sector financing

COST TO

CONSUMER

CEDA EITARPA-E

VOLU

ME O

F

DEPLOYM

ENT

Year 1

Year 3

(First Valley of Death)

Year 5

(SecondValley ofDeath) CEDA and EIT are needed to combat the trend

illustrated above by the ITIF and Breakthrough Institute’s Energy Innovation Tracker

23

EIT should loan to State Green Banks

State Green Banks and EIT would form a coordinated network to finance clean energy projects

The Coalition for Green Capital has developed a financing model for state-level capital deployment, as either a revolving loan fund under the State Treasury, or as an independent, non-profit corporation

See the proposal at www.coalitionforgreencapital.com/downloads.html

States have numerous potential sources of funding from existing sources (see next slide on a potential California Green Bank)

24

California has at least five ways to create a State Green Bank

The California Alternative Energy and Advanced Transportation Financing Authority (Tax credits, tax-exempt bonds, and tax offsets)

Auction proceeds for certain GHG allowances– appropriations of proceeds from sale of advance auction-designated and AB-32 statutory objectives-directed allowances as deposited into CA Air Pollution Control Fund

California Clean Energy Fund- A $30m non-profit venture capital fund

Utility surcharges California Solar Initiative-- $2.17b over ten years from a

variety of utility and public sources, directed towards installation rebates

25

* ** * * * * *

$000s, 1997-2007

Source: CIBC; SG Cowen; Kagan; CTIA

43,285 48,447

73,569

95,126

71,776

34,59426,260 24,588 26,619 29,363 28,188

13,48414,485

10,722

18,359

25,961

22,880

19,916 22,48226,436 25,977 25,272

6,8105,611

10,624

14,612

16,065

14,532

10,243 9,0439,509

11,368 13,233

Cable

Wireless

Wireline

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

This investment produced high employment and a budget surplus by 2000. It also positioned the United States to be the leading country in the global ICT market, creating American success stories from Cisco to Google to Facebook.

Copy this: In 1995, new Congress reformed telecommunications, causing $850 billion of private capital to drive innovation and job growth

Figures in Millions 1997-2007

26

Appendix

27

The United States should sponsor a Global Investment Trust for Clean Energy (GITCE)

Objective:

Affordable, abundant, sustainable energy Cheap enough for any country Profitable to generate and deliver Sustainable platform Utilizing research and development advances

as they occur

28

GITCE should lower cost of clean energy solutions in developing world

Obstacles: Low purchasing power Inadequate infrastructure High commodity costs

Advantages: High demand Developed country commitments from Copenhagen

Solution: Create GITCE, drawing capital from developed countries

and investing profitably in developing world

29

IFC GITCEPrivate

InvestmentBanks

Foreign Direct

Investment

Low-cost Loans and Loan Guarantees

Clean Energy Focus, including all technologies

ImpactInvesting

Long-term Project Investment

Private sector clients, non-sovereign govts, PPP

GITCE: Relationship to existing financing sources

30

Pillars of GITCE

Focus on electricity as specific sector Specifically target developing nations that have not been

major beneficiaries of CDM Would allocate funds directly to projects in countries where

there is the greatest need for financing and development Financing that complements existing funding sources

Does not replace or displace multilateral development banks or trust funds

Helps overcome existing fragmentation in climate finance channels

Catalyzes private sector financing – does not displace or replace it

Would have governance and operational structure that allows flexible and quick response to demand and market conditions

31

Cutting the Gordian Knot: The case for

GITCE Low-cost sustainable development in developing nations through private sector

investment

Increasing electricity consumption does not have to contribute to global carbon emissions

As private, non-profit institution, GITCE would complement governmental initiatives with single goal of providing clean electricity for the bottom four billion of the global population at very low prices

Institutional independence to focus on this set of investment objectives and the flexibility to work with all parties Leverage analytical work, co-financing opportunities and cooperation with

development strategies of multilateral development banks Complementary investments and information sharing with existing climate

funds Providing incentives and financing for private sector participants Ability to engage and dialogue with all stakeholders, particularly host

countries and international organizations focused on the climate change agenda

Ability to receive funding from wide range of public and private sector sources