Transitioning to a Clean Energy Economy

Coalition for Green CapitalKenneth Berlin, General Counsel(202) 371-7350Kenneth.Berlin@Skadden.com)www.coalitionforgreencapital.com

Presented to: Washington Clean Technology Alliance

Seattle – July 14, 2011

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Introduction• The US will have to transition from a fossil fuel based economy to a clean energy

economy if it is to achieve significant reductions in GHG emissions and remain competitive in clean energy markets that are forecast on a worldwide basis to reach trillions or tens of trillions of dollars in sales between now and 2050.

• In at least the near term, this effort will have to make progress without a cap and trade system or a carbon tax and despite political gridlock in Washington and many states. Success in this effort will depend on the nation’s ability to innovate and lower the cost of clean energy with little direct government financial support. At the same time, barriers to achieving scale in energy efficiency retrofits and renewable technology deployment will have to be overcome.

• Nevertheless. there are two reasons to be optimistic about our ability to transition to a clean energy economy. First, even without climate change legislation, large numbers of coal plants are likely to close between now and 2030, ensuring that there will be major change in the energy industry. Second, we are developing innovative ways to finance this change, such as through a “green bank” that could provide the massive amounts of capital needed to bring clean energy and energy efficiency programs to scale. The green bank itself could be financed using innovative financing methods.

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The Coalition for Green Capital• CGC has been developing mechanisms to provide low-cost finance for clean energy

projects and 100% financing for residential and small business energy efficiency programs

– National level

• American Clean Energy and Security Act: Green Bank (H.R.2454), $7.5 billion

• American Clean Energy Leadership Act: Clean Energy Deployment Administration, $10 billion

– State level

• CT passed

• MI, CA, CO, MD, KY and IL

– International level

• Global Green Banks Conference, NYC, February 2012, will examine rise of “green bank” entities around the world and begin a discussion on how to provide increased funding to these entities through an international financing mechanism

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Outline of Presentation

• The Context – Reducing GHG emissions in the absence of cap and trade

– A four-part approach to reducing GHG emissions from the electric generation Sector

– Reducing GHG emissions in the transportation sector

• The Challenge – understanding the barriers to bringing clean energy and energy efficiency to scale

• The Green Bank – addressing funding barriers in a time of government retrenchment

• Building political support for green bank programs

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The Context – CO2 Emissions by Sector and Source

Sector and Source 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Residential Total 1229 1166 1233 1154 1138 1112 1101 1092 1095 1093 1097 1103 1112

Commercial Total 1074 1018 1042 1034 1022 1016 1018 1023 1034 1044 1058 1071 1088

Industrial Total 1598 1387 1503 1538 1578 1623 1619 1643 1644 1644 1643 1644 1651

Transportation Total 1937 1854 1865 1875 1885 1909 1914 1921 1927 1927 1926 1924 1925

Electric Power    Petroleum 40 34 35 34 34 34 33 33 34 34 33 34 35   Natural Gas 362 373 405 381 370 373 374 379 375 378 381 382 35   Coal 1959 1742 1851 1789 1769 1744 1722 1714 1729 1731 1747 1766 35   Other  12 12 12 12 12 12 12 12 12 12 12 12 35     Total 2374 2160 2303 2217 2185 2164 2141 2138 2149 2155 2173 2193 35

Total by Fuel   Petroleum  2444 2319 2343 2360 2398 2427 2428 2434 2439 2437 2430 2425 2423   Natural Gas 1243 1218 1282 1284 1287 1315 1331 1352 1351 1357 1365 1370 1365   Coal 2139 1877 2006 1945 1925 1905 1881 1882 1898 1901 1917 1935 1977   Other  12 12 12 12 12 12 12 12 12 12 12 12 12     Total 5838 5426 5643 5601 5622 5659 5651 5680 5700 5707 5724 5742 5777

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Step 1 – Reducing Electric Power Sector Emissions - Closing Coal Plants

• Coal fired plants account for approx 33% of all US CO2 emissions

• Even in the absence of cap and trade, a substantial percentage of the 340 GW of coal plants are likely to close between now and 2030

Information from Deutsche Bank report: http://bit.ly/lKCMzK

Step 1 – Reducing Electric Power Sector Emissions - Closing Coal Plants

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Many coal fired plants lack pollution control equipment:

Step 1 – Reducing Electric Power Sector Emissions Forecasts

• Barclays Bank predicts that between 15-20% of all coal plants will close by 2015-2020

• Deutsche Bank predicts that about 60% of all coal plants will close by 2030

• Coal plants will be replaced by natural Gas plants, renewables and reduction of demand through energy efficiency

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Step 2 – Replacing Coal Plants

• Coal plants will either be closed and not replaced because they represent surplus generation or replaced by natural gas plants, in conjunction with renewable energy and possibly nuclear plants

• Deutsche Bank predictions translate into about a 10% reduction from 2005 levels in total US CO2 emissions by 2020 and a 15% from 2005 levels in 2030 (assumes electricity power sector generates about 33% of all CO2 emissions)

• The Energy Information Administration has far more conservative projections based on business as usual scenarios.

• Prediction depends on natural gas being produced at a relatively low price with few fugitive emissions of GHGs.

• The cost of the transition is expected to be about - $858 billion from 2010 – 2030

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Step 3 – Increasing Energy Efficiency

• A 10-15% reduction CO2 emissions in the power sector is not enough to reach CO2 reduction goals

• Reduction in the transportation sector, which emitted 28% of all US GHG emissions in 2007, will also play an important role in reducing CO2 emissions.

– But the turnover in the automobile fleet is slow – the median life of a car is about 15 years

• Energy Efficiency in buildings is thus critical, but can substantial reductions be achieved?

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Set 3 – Increasing Energy Efficiency: Energy Efficiency Predictions

• EIA in its business as usual case predicts a substantial decrease in the residential sector of energy consumption per household and per square foot by 2020

• But EIA predicts only a minor decrease in energy consumption intensity per square foot in commercial buildings

• McKinsey in its “Unlocking Energy Efficiency in the US Economy” predicts that it is possible to reduce end-use energy consumption in the residential, commercial and industrial sectors by 23% of potential demand by 2020, if barriers to energy efficiency can be overcome

• This, McKinsey says, would reduce CO2 emissions by 1.1 billion tons from business as usual (about 700 million tons from 2005 levels) or about the same amount of reductions that would result from closing coal plants by 2030 (a total reduction of up to 30% of CO2 emissions by 2030 from the power sector alone)

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Set 3 – Increasing Energy Efficiency: The High up Front Cost of Energy Efficiency

• McKinsey estimates that it would require investment of $520 billion to achieve the goal of reducing end-use energy consumption by 23% by 2020.

• Other estimates are much higher. Assuming, for example, that it would cost $10,000 a building to achieve a 25-30% reduction in energy use in residential building, the cost would be $1.28 trillion by 2020.

• Retrofitting the 5 million commercial buildings, guessing at a cost of $100,000 per building, would add another $500 billion to the cost.

• Even though these costs would be recovered and a profit eventually made (and thus the argument that energy efficiency is the cheapest way to reduce emissions), massive upfront investments are needed to bring energy efficiency to scale.

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Set 3 – Increasing Energy Efficiency: Consumer and Business Choice Limits

Energy Efficiency Spending

• Energy efficiency spending competes with other uses of funds by residential and commercial building owners

• Even though energy efficiency spending is repaid, even with relatively short repayment periods, many and probably most homeowners choose to spend their funds on other things (e.g. Fannie Mae experience with energy saving mortgages).

• Small business also has limited funds for energy efficiency investments

• Large businesses have to decide between spending money on energy efficiency and product development and sale

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Step 4 – Increasing Deployment of Clean Energy -making alternative energy suitable for marketplace competition, by cutting its costs

__________________________________________________________________

This line represents the cost of coal generation without the effect of a cap or RES

Purpose of low-cost financing =Drive delivered cost down

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Low-cost long-term financing can expand the clean energy market by attracting private investment to lower priced projects

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 Independence 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 because of the low-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 2009, 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.

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Current commercial debt rates limit the size of the clean energy market

--The boxed area of table displays commonly encountered Net Capacity Factors (NCF) across the country and the required pricing ($/MWh) for wind generation. (East region NCF values are closer to 35%, Plains region NCF reach 44% and above, and West region NCF varies from 35-41%

--The shaded scenarios (in green) show the limits of current commercial investment (10% Internal Rate of Return, is considered the minimum for leveraged project finance).

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 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

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Energy Independence Trust long term, low cost debt expands the size of the clean energy market for private investment

--The use of the EIF to provide additional debt financing to wind projects results in a reduction of electricity price of approximately ~15-20% to provide the same investor returns at a given capacity factor; for example, 38% NCF wind projects can sell energy at values of $50/MWh, compared to $60/MWh without the EIF

--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 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 example 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

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3 Ways to Lower the Cost of Clean Energy

• Long-term low-cost debt financing that attracts equity investment without requiring higher off take prices

• Long-term tax policy that effectively reduces need for higher off-take prices by equalizing in many cases the treatment of new clean energy generation with existing generation

• Regulatory reforms that reduce barriers to investments in clean energy

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Tax Policy Possibilities

• Attract private sector investment by extending credits and tax equity treatment

• Take steps to equalize tax treatment for clean energy investment

– Master Limited Partnerships

– Expensing

– Depreciation acceleration

– Grants/deductions/credits

• Likely to be limited government appetite for tax credits and tax equity treatment for an indefinite period of time

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The Role of Green Banks• Green Banks can provide much of the capital needed for

clean energy and energy efficiency investments.

• Green Banks can be established on both the national and state levels.

• Green Banks can raise capital and debt from many sources.

• Green Banks can leverage their funds making scarce dollars go further.

• If Green Bank funding is available, energy tax credits will either not be needed or less credit will be required for each project.

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What is the Green Bank?: A hybrid for-profit, or not-for- profit low-risk institution designed to safely leverage public dollars into massive private investment

The national Green Bank would be funded with either loans or equity from the Treasury Department, equity investments for the private sector (with a cap on the rate of return), bonds and other sources.

State Green Banks would be funded from existing funds (e.g. in Connecticut special purpose mil charges), RGGI or other cap and trade revenues, bonds, capped private sector investments and other sources.

There would be less leverage on energy efficiency loans than on energy project loans

Funding

of $10B

GREEN

BANK

Support up to $100B in loans over 20 years

Combined with equity, can support up to $200B in investment in clean energy

$

$

$

Loan, loan guarantees

Loans, loan guarantees

Supports up to 100 GW of renewable projects-replacing more than 20% of carbon-based capacity

The Connecticut Green Bank - CEFIA

• CEFIA was passed in June 2011 as a keystone measure in a larger energy bill.

• It passed 36-0 in The Connecticut Senate and139-8 in the House.

• It is a quasi independent agency that includes an existing state fund. It’s initial capitalization is $76 million (58 million from one fund and $18 million from another) and will receive $30 million a year from existing energy charges and RGGI funds. We hope to add additional funds into CEFIA in the future.

• It is structured to encourage private equity investments.

• CGC is working to establish state green banks in an increasing number of states.

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Funding a Green Bank With Repatriated Funds

• Create an Infrastructure Bank (IB) without otherwise changing existing tax law and without Congress providing any additional means to repatriate funds

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The Green Bank could create incentives for willing consumers or utilities to pay for retrofits….without up-front capital from the borrower

1. The Green Bank loans 100% of the cost of an energy efficiency project to a utility or other source at a low rate.

2. The utility disperses the funds to install energy efficiency measures in homes and small businesses, creating jobs in the local community.

Residential property/ Small business

Utility/Co-op

Green Bank

Energy Bill

5. After the loan is repaid, the consumer sees the full benefit of the efficiency measures, the utility has saved money and created local jobs, and the taxpayer has been repaid in full.

4. Through on-bill financing, a portion of the savings shows up on the consumer’s bill, and the rest is transferred to the utility, which uses the money to repay the initial loan from the Green Bank over an extended tenor. (For example, if there is a savings of $100/month, the consumer receives a $25 discount on the bill and the utility charges $75 for electricity that is not being provided in order to re-pay the loan). The utility will also have the right to place a lien on the property in order to obtain payment. 3. The owner of the residence/small

business pays no up-front cost to have their building retrofitted, and sees a reduced energy bill.

Innovation Requires Both Research and Demand Pull from Deployment

• Support for the development of innovative new technologies is critical and has to be addressed in two interconnected ways

• First, there is need for support for early stage technology innovation such as thorough the CEDA described below

• Second there is a need for support for deployment of clean energy technologies. Most clean energy technologies are more expensive then existing technologies when they are first introduced. Costs cannot be significantly reduced until the product reaches scale in production and even then lowering cost often takes many years of continued product refinement and innovation. Encouragement of a robust market for a product creates demand pull for the needed further product innovation.

• Without support for deployment of new technologies, new innovations will migrate outside the U.S. to countries that provide ready markets for the product and green bank financing or other programs which lower the cost of the product.

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Establish the Clean Energy Deployment Administration (CEDA) to Support Innovative New Technologies

• CEDA is designed to foster initial commercial deployment of breakthrough technologies

• CEDA, within the Department of Energy, assures breakthrough technologies can reach market

• CEDA should be administered in conjunction with Department of Energy policies, and supervised by Congress in same way

• CEDA passed the Senate Energy and Natural Resources Committee in June 2009

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Other Measures

• EPA Regulation of CO2 Emissions

• State and Federal Renewable Energy Standards (“RES”)

• State and Regional Cap & Trade Systems

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Building Political Support

• Requires no new funding

• Receives close-to zero budget score for loans from Treasury if properly structured

• Leverages scarce public dollars

• Because the banks are independent or quasi governmental entities, they would not lead to a large new governmental bureaucracy

• Banks are not Democratic Party ideas

• Makes the US more competitive in clean energy

• Creates jobs