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A U G U S T 5 , 2 0 0 8 E P R I 2 0 0 8 S U M M E R S E M I N A R S A N F R A N C I S C O , C A. F I N A N C I N G E N E R G Y T E C H N O L O G I E S A N D P O W E R S O U R C E S I N T O D A Y ' S R I S K A D V E R S E E N V I R O N M E N T. Gary Krellenstein, Managing Director - PowerPoint PPT Presentation
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A U G U S T 5 , 2 0 0 8E P R I 2 0 0 8 S U M M E R S E M I N A R
S A N F R A N C I S C O , C A
F I N A N C I N G E N E R G Y T E C H N O L O G I E S A N D P O W E R S O U R C E S I N T O D A Y ' SR I S K A D V E R S E E N V I R O N M E N T
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Gary Krellenstein, Managing DirectorJPMorgan’s Energy and Environmental [email protected]
E P R I
This material is not a product of the Research Departments of J.P. Morgan Securities Inc. ("JPMSI") and is not a research report. Unless otherwise specifically stated, any views or opinions expressed herein are solely those of the authors listed, and may differ from the views and opinions expressed by DPMI's Research Departments or other departments or divisions of JPMSI and its affiliates. Research reports and notes produced by the Firm’s Research Departments are available from your Registered Representative or at the Firm’s website, http://www.morganmarkets.com
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The financial markets are currently experiencing a broad range of problems but Energy remains one of the hottest fields
Last quarter marked the first time in 30 years that not a single company backed by venture capital (e.g., Apple, Google, etc.) went public in the U.S.1
In uncertain times, investments in essential services such as utilities and most energy projects become more attractive to investors as shown by two recently completed deals: AMP Ohio’s $400 million bond deal to fund part of a PC coal plant got over $950 million
in orders PREPA’s $700 million capital improvement bond deal got over $2 billion dollars in orders
1 – Source: WSJ, July 18, page A13, article by James Freeman2 – Both deals came at costs in the 5% range and had some bonds that matured past 2038
However, investors are adverse to financing “Demo” projects or “New” technologies unless they have guarantees from highly rated entities (e.g.,
Fed, BP, JPM, etc.)
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What about media reports that Wall St. and Investors are no longer willing to finance coal plants?
Contrary to many reports and spins put on them by some groups, the investment community is willing to finance coal projects and is funding several right now – several who’s current cost exceed $3,000/kW
In recognition of potential climate issues and associated regulatory and financial risks, many investment firms - including JPMorgan - have signed the “Carbon Principles”
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What are the Carbon Principles?
The Carbon Principles are a common set of beliefs that a balanced portfolio approach is needed in the power industry to meet future needs and an agreement among the signatories to conduct “enhanced due diligence*.”
This balanced portfolio includes:
Energy Efficiency
The best way to limit CO2 emissions is to not produce them
Renewable and low-carbon energy technologies Renewable energy and low-carbon energy technologies help meet electricity needs while also leveraging
American technology and creating jobs
Conventional and advanced generation Conventional or advanced generating facilities will also be needed to meet demand, including power from
natural gas, coal and nuclear technologies
* The Enhanced Diligence Process is meant to supplement the due diligence (reasonable investigation from a fiduciary point of view) an underwriting institution would normally engage in during a financing.
It does not pre-suppose an outcome but does favor low CO2 technologies due to concerns over potential “carbon regulations” and their financial impact on the project’s economic viability
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Should climate change be the primary consideration for policy makers, regulators and investors?
Climate change is an important factor in planning future energy resources and policy, but there are also other important considerations
Need to factor in concerns about the viability of the US economy caused by dramatic increases in prices which could constrain our ability to develop and implement new energy technologies and policies needed to reduce greenhouse gas emissions
Perhaps more importantly in the short-run, need to recognize and factor in the relatively new intense competition (for both energy and commodities) we are facing with rapidly growing LDC countries and make sure we avoid geopolitical situations that could spiral out of control
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The “Chindia” factor (China and India)1
The US has 5% of the world’s population, but uses 27% of the world’s energy2
Global demographics have created a fundamental shift in energy demand Two billion Chinese and Indians are trading in their bicycles for Toyotas Per capita usage in 3rd world countries is currently only one-seventh of the US
average, but increasing rapidly
Developing countries have limited ability to use non-traditional hydrocarbon-based fuel sources in the near term
Prices for conventional energy equipment are rising dramatically (over 20% from 2006 to 2007)
Potential for “intense resource competition” unless new supplies emerge or usage patterns change
1 The term “Chindia” (China and India) was originally coined by Dr Stephen Leeb of Leeb Capital 2 EIA – World Energy and Economic Outlook - 2007
Near-term global demand for energy will be almost insatiable
– it is tied to the growth propelling much of the 3rd world out
of poverty
Increasing Competition for Resources
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There are no “silver bullets” to our electric energy dilemma – we need to use a portfolio approach
Wind
Conservation/Efficiency
Pulverized Coal
Nuclear
Natural Gas
Coal Gasification-Liquification
Would you fund your IRA with a single stock?
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Unfortunately, building a portfolio of new capacity, a smart grid, low carbon technologies and maintenance of the existing system may
be far more expensive then current estimates – possibly in excess of $2 trillion by 2030
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Worse, market based solutions to allocate resources may not be optimal because energy is priced wrong!
Assumption: The “free market mechanism” provides for the optimum allocation of resources and investments based on risks and rewards
“Free market prices” for energy do not reflect unusually large externality costs such as: Environmental & climate concerns
Geopolitical issues & distortions in foreign policy
Trade deficit & impact on the dollar’s valuation
National security & defense expenditures
Inaccurate pricing causes “free market mechanisms” to misallocate and over-use (or under-use) certain types of fuels and energy sources
Oil and natural gas prices could easily increase by another 200% or more over the next 10 years
We will probably need a combination of free market innovations as
well as “rational” government policies to finance the solutions to
our energy problems
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Conclusions
We are facing major energy and environmental issues which could be catastrophic, and we need to consider all available options
Policy makers need to balance global warming concerns with other economic/geopolitical considerations using cost/benefit analysis – not media sensationalism
Energy prices are probably going to remain volatile over the short-term (could even drop significantly) but increase over the long-term
Alternative energy technologies (wind >2,000/kW), new nukes (>$7,000/kW), advanced coal plants (>$3,500/kW), etc., are going to take longer and cost significantly more then the public (and most policy makers) realize
In the current risk-adverse environment, Wall Street is willing to provide funding for utilities and most energy technologies but will need much higher fees or federal/high-quality third-party guarantees (e.g., GE, Shell, JPM, etc.) to fund new technologies and demo projectsEPRI needs to rethink its cost estimates in light of the
dramatic price escalations in commodities, power
equipment, labor, global competition, the weaker
dollar, and higher financing costs
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