Power Advisory Renewable Energy Investment Atlantic Canada July 14

John Dalton

[email protected]

Tel: 978 369-2465

Rothesay Energy Dialogue 2009

Impact of the Current Economic Climate on North American Renewable Energy Investment

July 14, 2009

mailto:[email protected]

Current investment in renewable energy How the current economic climate is affecting

renewable energy investment Impact of financial markets

Atlantic Canada markets better insulated Declining fossil fuel prices: increasing relative

costs Declining equipment costs: improving

competitiveness

Presentation Outline

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New private investment in companies developing and scaling-up new technologies increased by 37%

New renewable energy projects accounted for 40% of all capacity additions Dollar value of renewable energy was 27% greater 2008 first year renewable energy investment greater

than fossil fuel investment However, growth in generating capacity 2008 was one-

third of rates experienced in prior two years Reflecting financial market and overall economic

conditions in the second half of the year

Investment in new renewable generation projects worldwide grew by 13% in 2008


Preventing all but lowest risk projects from securing financing

Reduced energy demand is reducing fossil prices against which renewable energy projects must compete Impact on willingness to adopt renewable policies?

Equipment prices are declining with reduced demand In particular, wind and solar

Current economic climate is affecting renewable energy investment in several ways


…given existing credit exposure and overall market sensitivity to risk

Promoting a “flight to quality” Low interest rates for high quality debt, but significant

credit spreads for higher risk Preventing all but lowest risk projects from securing

financing

Lenders and equity investors are risk averse …


Equity available from private equity investors, but at a premium Reluctance to

issue equity given prices

Interest Rate Spreads

Require long-term power purchase agreements with investment grade counter parties Unable to finance merchant risk

Reluctance to accept equipment risks without availability warrantees: Challenge for new suppliers and equipment (e.g.,

Clipper Wind Power) Greater conservatism with respect to resource assessment

Debt service coverages evaluated in terms of P90 for wind

Project risks must be carefully managed


More reliant on utility RFPs Nova Scotia and New Brunswick

PEI likely to have more merchant risk given existing level of renewables Wind project development in PEI more likely for

export Lower Churchill Project significantly affected by

economic climate Lower fossil fuel prices More challenging borrowing environment Reduced power demands

Atlantic Canadian market for renewables better insulated from these conditions


Many utility contracts don’t have a Fx index for the initial contract price Risk borne by developers

Developers unlikely to lock in Fx rates until they are awarded a contract Hedging Fx increases costs for developers Larger developers more likely to have contracts with

wind turbine manufacturers Have development portfolio and deploy turbines

where needed

Canadian renewable development adversely affected by volatility of Canadian dollar


Reduced commodity prices are making it more difficult to finance renewable energy projects Natural gas prices are 50% below where they were

12 months ago Natural gas is the fossil fuel against which many

renewable energy projects have to compete


New England Marginal Fuel during Unconstrained Price Intervals 2008

Note: % of intervals doesn’t equal 100%

Lower natural gas prices effectively increase cost of renewable policies

Potential impact?

Reductions in natural gas prices only partly attributable to decline in demand

US EIA forecasts 2.2% decline in natural gas consumption in 2009

Production forecast to decline by less than this Significant increase in supply attributable to

shale play production Primary contributor to the significant price

declines Likely to continue to depress prices relative

to what they would have been once demand recovers


Equipment prices are declining

Demand for wind turbines out stripped supply leading to significant price increases

Reduced demand is leading to price declines 8,500 MW of wind installed in US in 2008 5,000 MW projected for 2009

Permissive policy regarding eligibility for grants might help offset decline

20% decline in wind turbine prices More significant declines in solar panel

pricing


Difficult climate for renewable energy investment

Project development adversely affected by: More challenging credit market Declining fossil fuel prices

Favorably affected by: Reduced demand leading to price declines Reduced equipment prices In the US more favourable federal policies

Longer term greater focus on climate change and role of renewable energy as a response will support renewable investment


Thank you for your attention

John Dalton

Power Advisory LLC

[email protected]

(978) 369-2465

www.poweradvisoryllc.com



http://www.poweradvisoryllc.com/

Introducing Power Advisory

Power Advisory specializes in electricity market analysis and strategy, power procurement, policy development, regulatory and litigation support, resource planning and project feasibility assessment. We have advised clients on the development of policies for the

promotion of renewable energy and regarding the design of requests for proposals, standard offers and feed-in tariffs for renewable energy.

We have extensive experience with the power markets that serve Atlantic Canada. We have played prominent roles in the design of these markets and assisted numerous investors evaluate the opportunities and risks offered by these markets.

Our consulting services are provided by seasoned electricity sector professionals, offering a wide breadth and significant depth of industry knowledge.

For additional information regarding our services, please contact:John [email protected] 369-2465

Power Advisory LLC 2009All Rights Reserved


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Power Advisory Renewable Energy Investment Atlantic Canada July 14