How the New Green Business Model is Emerging

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Peter C. Fusaro, Director - Global Change Associates - United States of America

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How the New Green Business Model is Emerging

  1. 1. How the New Green Business Model is Emerging for Investment Triple Bottom Line Investing Conference Paris, November 9, 2006 Peter C. Fusaro CEO, Energy & Environment Capital Management New York peter@energyhedgefunds.com
  2. 2. Resources <ul><li>Four Websites with Defined Functions & Free Content </li></ul><ul><ul><li>www.global-change.com (Corporate Bill Board) </li></ul></ul><ul><ul><li>www.energyhedgefunds.com (Online Community) </li></ul></ul><ul><ul><li>www.energymediagroup (Internet Bookstore) </li></ul></ul><ul><ul><li>www.eco-commerce.org ( Free Clearinghouse) </li></ul></ul><ul><li>New Books: Energy & Emissions: Collision or Convergence (Wiley, 2006) Green Trading Markets: Developing the Second Wave (Elsevier, 2005), Energy & Environmental Hedge Funds: The New Investment Paradigm (Wiley, 2006) </li></ul><ul><li>Mantra: “Education Breeds Liquidity” </li></ul>
  3. 3. The New Market Drivers <ul><li>Carbon deficit is growing & will take 2 decades to stabilize </li></ul><ul><li>Sustained higher energy prices starting to force major technology shifts </li></ul><ul><li>Globalization leading to demand driven markets for both conventional energy and renewables </li></ul><ul><li>Need to change now to technologies that will be deployed and last decades and are environmentally benign </li></ul><ul><li>New technologies abound such as IGCC, load management programs and renewables taking root now </li></ul><ul><li>Financial products for the environment are a natural evolutionary development of markets </li></ul>
  4. 4. The New Market Drivers <ul><li>State of all emerging markets illiquid and little price discovery </li></ul><ul><li>Rising corporate financial issue </li></ul><ul><li>Financial liabilities growing particularly for catastrophic risk </li></ul><ul><li>Shareholder pressure on energy companies increasing especially pension funds </li></ul><ul><li>Environmental risk management becomes fiduciary responsibility of energy and agricultural companies </li></ul><ul><li>Regulatory regime slowly coming into place globally </li></ul><ul><li>The energy value chain is now overlaid with an environmental value chain </li></ul>
  5. 5. What Some Companies are Doing Now <ul><li>Increasing Competitive Pressures </li></ul><ul><ul><li>Within and upon energy industry </li></ul></ul><ul><ul><li>Institutional investors, pension funds, and banks are getting it (check out Carbon Disclosure Project) </li></ul></ul><ul><ul><li>Most utilities now accept it </li></ul></ul><ul><ul><li>Corporate America must comply with European Emissions Trading Scheme (Called EU ETS) and a Kyoto-compliant world in over 160 countries : there can no dual environmental standards </li></ul></ul><ul><ul><li>Learning curve may be much steeper than thought </li></ul></ul><ul><ul><li>Venture Capital and hedge funds entering the space now due to sustained higher energy prices </li></ul></ul>
  6. 6. GHG: Why Now? <ul><li>2005 was the Breakthrough Year with EU Emissions Trading Scheme (ETS) and Kyoto Ratification </li></ul><ul><ul><li>US market evolving at the state level and through use of CO2 for enhanced oil recovery and carbon sequestration </li></ul></ul><ul><ul><li>Possibility of US legislation passing in 2007 </li></ul></ul><ul><ul><li>Globalization of markets now underway </li></ul></ul><ul><li>Environment overlays the energy complex (as well as agricultural industry) </li></ul><ul><li>Touches all fossil fuel futures contracts: oil, gas, coal and power with cross commodity arbitrage opportunities </li></ul><ul><li>US SO2 trading was the template for trading: cap & trade </li></ul><ul><li>Global carbon footprint is over 25 billion tons & rising </li></ul>
  7. 7. 2006: Year of Renewables <ul><li>Energy Policy Act of 2005: Ethanol & Biofuels </li></ul><ul><li>Technology Shifts accelerating but equipment supplies are short </li></ul><ul><li>Over 600 US Green Power programs underway </li></ul><ul><li>Germany ready to enter the US & global markets with wind, solar, and energy services </li></ul><ul><li>Chinese building out silicon infrastructure for both domestic and export markets </li></ul><ul><li>California $2.9 billion program is next big market push </li></ul><ul><li>All tied to reduction of carbon footprint </li></ul>
  8. 8. Where the Money Will Come From: New Investment Model <ul><li>Venture Capital can have up to 10 year lock up </li></ul><ul><li>Hedge Funds want more immediate returns </li></ul><ul><li>Private Equity starting to invest in billion dollar zone </li></ul><ul><li>The New Hybrid Model : Fund the project with 2 to 4 lock ups and trade the streams of credits: </li></ul><ul><ul><li>Sox and Nox </li></ul></ul><ul><ul><li>Carbon </li></ul></ul><ul><ul><li>Recs (Renewable Energy Credits) </li></ul></ul><ul><ul><li>Impact: Increase return on investment & reduce cost of capital </li></ul></ul>
  9. 9. Our Estimate of Funds <ul><li>Over 520 energy and environmental hedge funds in our universe </li></ul><ul><li>Over 40 hedge funds trade emissions in the US and Europe </li></ul><ul><li>10 pure green hedge funds (& growing) </li></ul><ul><ul><li>Trading emissions credits and recs </li></ul></ul><ul><ul><li>Buying clean energy equities </li></ul></ul><ul><ul><li>Investing in private companies </li></ul></ul><ul><ul><li>Buying whole projects for credit streams </li></ul></ul><ul><ul><li>Source: Energy Hedge Fund Center LLC </li></ul></ul>
  10. 10. New Actors on the Scene: Green Hedge Funds <ul><li>Buying carbon credits on the cheap and selling later: arbitrage </li></ul><ul><li>Shorting recs in some states and going long in others </li></ul><ul><li>Buying energy and environmental equities </li></ul><ul><li>Private equity component of funds </li></ul><ul><li>Trading SO2 and NOX and California RECLAIM Markets (35 markets in US) </li></ul><ul><li>Looking at new technology projects & picking the right one </li></ul><ul><li>Business model is changing into a hybrid vc/hedge fund/equity model </li></ul><ul><li>Bottom Line: Add Liquidity to Markets, also price volatility </li></ul><ul><li>Enter water hedge funds trading long-date water rights in the West, also in Israel: the next financial market </li></ul>
  11. 11. Green Trading Opportunity <ul><li>$9 billion market today for SO 2 , $3 billion annual market in notional value </li></ul><ul><li>$30 billion million market for CO 2 in 2006 </li></ul><ul><li>Market opportunity has been estimated at $3 trillion over 20 year horizon and may be $100 billion by 2010 </li></ul><ul><li>Truly an emerging market in the best sense of the word: little price discovery, poor liquidity </li></ul><ul><li>One US exchange today: Chicago Climate Exchange and 9 in Europe (which will consolidate) </li></ul>
  12. 12. Next Phase of Green Market Development <ul><li>Triple Convergence underway in GHG, Renewables and Negawatts </li></ul><ul><li>Tie between energy efficiency & carbon reductions growing through bundled recs i.e. second wave of green energy efficiency now underway </li></ul><ul><ul><li>Plug & Play Hybrids and IGCC </li></ul></ul><ul><li>Evaluation services underway to deconstruct optionality for both project finance and structured finance ( Green Finance I.e. monetizing credit streams) </li></ul>
  13. 13. Triple Convergence
  14. 14. What’s New In Green Trading Markets <ul><ul><li>Oils & financial houses trade energy & now emissions: Morgan Stanley latest emissions trader and Goldman has 4,000 MW renewable portfolio in 12 states with purchase of Zilkha Energy in March 2005 </li></ul></ul><ul><ul><li>Environment touches all Nymex & ICE Futures fossil fuel contracts in New York and London </li></ul></ul><ul><ul><li>Weather and emissions </li></ul></ul><ul><ul><li>Coal and emissions </li></ul></ul><ul><ul><li>Renewables and GHG to reduce carbon </li></ul></ul><ul><ul><li>GHG and negawatts </li></ul></ul><ul><ul><li>More innovation to come as markets mature </li></ul></ul>
  15. 15. The Green Trading Players <ul><li>The players : </li></ul><ul><ul><li>Brokers and traders </li></ul></ul><ul><ul><li>Oil and gas companies </li></ul></ul><ul><ul><li>Electricity companies </li></ul></ul><ul><ul><li>Industrials </li></ul></ul><ul><ul><li>Agricultural producers </li></ul></ul><ul><ul><li>Insurance and reinsurance providers </li></ul></ul><ul><ul><li>Financial institutions </li></ul></ul><ul><ul><li>Governments </li></ul></ul><ul><ul><li>Aggregators </li></ul></ul><ul><ul><li>Hedge funds & venture capital funds & private equity </li></ul></ul>
  16. 16. The Green Trading Markets: The Next Steps <ul><li>More experimentation in trading i.e. Both exchange traded as well as OTC bilateral markets </li></ul><ul><li>Need for more green market liquidity (probably through project finance mechanism) </li></ul><ul><li>Need for standardization of contracts, indexes and ETFs </li></ul><ul><li>Cross border trading accelerating </li></ul><ul><li>More market making by the big players needed throughout the world by the banks and major energy companies </li></ul><ul><li>Need for engagement by US federal government on mandatory standards for GHG and Renewables </li></ul><ul><li>Green is good! </li></ul>

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