Case Study: Distributed Generation through Residential Solar Leasing

Adam SternEVPThe Gemstone Group, Inc.

IPEDFinancing Solar Energy Conference

May 2009

About Gemstone Founded in 1993

Generalist - Investment and merchant banking

Specialization in renewable energy since 2002

Develop and finance commercial projects

SREC Aggregation Develop and operate

residential finance programs Specialize Public/Private

partnerships developing niche programs with

states, utilities, PUCs, non-profit sponsor groups as well as leading manufacturers and contractors

Sample - Relevant Projects:

Bear Creek/Atlantic City Wind projects in PA and NJ

Keystone HELP Program – state sponsored residential energy efficiency loan program (www.keystonehelp.com)

CT Solar Lease Program – state sponsored residential solar finance company for moderate income homeowners

2

CT Solar Lease Program How It Started

Connecticut rebate program successful in implementation of several hundred residential systems- primarily on large homes in affluent neighborhoods- high upfront cost of solar leaves most homeowners out

State desired loan program to help moderate to low income homeowners pay for balance of system cost

After evaluation, lease was deemed to be the preferred financing vehicle

In return for sponsorship and support, State was allowed to write some of the “rules” so that program met their stated objectives (qualifying income limits, etc.)

3

CT Solar Lease Program How it ended up

$47MM program for approximately 1,000 systems over 3 years Homeowner chooses installer and equipment; negotiates price System Cost: typical system costs $47,000 Rebate: same as available to CT homeowners (approx. 50%) Term: Initial lease term is 15 years, optional 5 year extension “No Money Down” required from homeowner Lease payment of approximately $120/month End of 15 years:

Extend lease for another 5 years FMV purchase Return to leasing company

4

CT Solar Lease Program How it Works

State fund provides rebate and support for debt Gemstone manages leasing company and underlying assets for

investor and utilizes AFC First, the third party administrator (TPA), for program administrator/lender/servicing functions

US Bank provides equity

Leasing allows: Immediate use of ITC and effective use of other tax benefits Aggregation and diversification for

Consumer credit quality (portfolio loans) Effective monetization of renewable energy credits Asset management, monitoring and state reporting

5

Choose Your Partners Carefully Third party administration is key

In CT program, Gemstone splits operational and management duties with AFC. Gemstone manages leasing company including asset management and system relocations, REC aggregation and sales, accounting and tax functions

AFC provides installer training, consumer credit underwriting, lease origination, servicing, collections and consumer protection compliance

A good manager and TPA team is vital to create attractive terms and economics for all parties. Poor credit underwriting drives up program costs- collections, potential ITC recapture, system relocations, etc.

Set Sponsor (eg: State) objectives and expectations carefully What is best for the homeowner might not meet IRS requirements

Use professionals (legal, accounting, etc.) with experience in leasing, tax credits and related structures

Need to evaluate many alternatives to meet needs of the public and private sector interests. For example, all leverage vs. no leverage structures and partnership flips vs. master lease structure

6

Credit Quality Will Rule Managing credit quality drives down costs; increases

competiveness; and reduces risk to all parties Credit quality is much more than just a good credit score. An

experienced TPA can achieve far better results from a pool of sub-700 credit scores than a pool of higher scores

Strong initial underwriting with personal contact with each lessee who thoroughly understands details and importance of transaction before a lease is signed

Strong credit profile – Leasing collateral generates its own cash flow to support the lease payment – pay LC and reap energy profit or pay Utility more!

Long term investment vs. short term savings decision Lease allows effective fix of electric rates for 15-20 years but

might not always be lower than offset utility cost in year 1 Avoid investing $50,000 on a roof where the primary

motivation is to save $10-20 on next month’s utility costs7

Credit Quality Will Rule(Cont.) Indicative default and charge-off rates provided by

AFC on unsecured energy efficiency loan portfolio

8

2008 Update

National Avg. : 4.22%

AFC : .83%

Is Third Party Ownership Still Viable?

Lifting ITC cap does little to help typical middle to lower income family

Still need to “write a big check” for balance of system cost and wait for many state rebates and tax refund

Home equity loan and mortgage refinancing market on thin ice Most homeowners not equipped to manage proper

monetization of incentives such as REC’s and perform required reporting and verifications

Sale of home within 5 years could create thorny tax recapture issues

Third party ownership simplifies contractor sales process Simple monthly cost can easily be compared to utility savings Removes key objections and obstacles (“no money down”) Expands market. Moderate income homeowners who were

“lookers” can now be “lessees”

9

What’s the Latest? From true start at end 2008, CT Solar has approved rebates

and signed leases for nearly 15% of the total portfolio and a pipeline (post credit/pre rebate) over 25%.

Installation process in CT is takes nearly 140 days vs. other states like CA

In discussions with other eastern states for both a general product offering and specialized program;

10

Questions and Contact Information Gary Kleiman

610.254.4110 gkleiman@thegemstonegroup.com

Adam Stern610.293.2507 ajstern@thegemstonegroup.com

37 West Avenue – Suite 105Wayne, PA 19087

11