2014 All Energy presentation on alternative business models for Australia's renewable energy sector. How to leverage disruptive innovation in a changing industry

1. All Energy 2014
Alternative business models & funding structures
Engaging with merchant risk in a rapidly changing industry
October 2014
Stuart Anderson
+61 419 135 065 (mob)
+61 2 8264 2483 (tel)
sanderson@sydneycapital.com.au
Level 6, 2 Bulletin Pl
Sydney NSW 2000
Australia
www.sydneycapital.com.au

2. Background
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Situation
Challenges
Opportunities
Significant investment funding is available, seeking quality projects
However, investment levels into Australian grid scale renewable especially grid are falling
–Lack of attractive PPAs (outside ACT) plus regulatory uncertainty (RET review etc)
–Recent poor financial performance of industry
–Falling wholesale demand
Maturing renewables technologies - pricing approaching grid parity, especially behind meter
–Significant market acceptance of rooftop solar PV (Moore’s law in energy!)
–Enables customer choice through small scale generation at point of consumption
Changing Industry dynamics with falling power usage / demand
Continual regulatory uncertainty (RET, Carbon Price, FiT subsidy creation & removal)
Falling grid scale asset values -> Re-pricing risk / reward calculations in light of uncertainty
Embrace change by taking on a proportion of Merchant Risk -> How?
–By shifting business models
–Supporting funding structures
Questions
Is the “YieldCo” model sustainable?
Is there an alternative model based on proactively embracing merchant risk?

3. Agenda
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Changing energy industry
Impact on financing renewable projects
Paradigm Shift: Centralised to Decentralised generation
Alternative business models
Funding structures
Funding available

4. Changing energy industry Falling wholesale demand yet rising end user pricing
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Base Load Price Trend - New South Wales
Based Load Price Trend - Victoria
Wholesale price trends 
Base load prices at all time low!
Excess generation capacity - fossil fuel & renewable gen.
Source: www.asx.com.au, 2014
Source: www.asx.com.au, 2014
Observations from Europe
 demand as manufacturing activity slows
 renewables penetration. e.g. rooftop solar
Led to talk of the “theft of peak demand” (by rooftop solar)
End user price trends 
Almost treble 1990 prices
From Govt. owned to user pays models
Electricity prices in Capital Cities
Observations

5. Changing energy industry Characterised by long term pricing volatility
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Observations
Australia’s wholesale market is characterised by wholesale pricing volatility since mid-2007
-Environmental factors, regulatory, demand
YieldCos require stable PPAs to attract infrastructure style investment characterised by higher debt ratios
-Sustainability?
Source: IES Consulting, 2014
Adapting to merchant risk
Own the integrated solution for the customer’s energy problem
–Deliver c.30% through embedded generation (ie Solar PV)
–Lift to c.50% ++ through storage
–Reduce (efficiency) & shift (demand management)
Diversified portfolio of grid scale renewable assets to supplement embedded generation

6. Changing energy industry Dynamic regulatory environment
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Source: The Guardian, The Age, ABC, Energy Matters, Solar Council Australia, SMH

7. High Demand / Low Regulatory
Increased investment in grid scale generation capacity
Rising wholesale electricity prices
Improved economic activity, weak signals for innovation
Customers drive investment behind meter
Investors agnostic
Low Demand / Low Regulatory
Low wholesale, high retail prices
No extension of existing targets / policies -> No / Low PPA prices
Customer seeks - behind the meter, distributed & embedded generation
Less opportunity for centralised project development
Higher capital costs – higher equity % in financing structures
Consolidation of market participants
Low Demand / High Regulatory
Low demand, low wholesale and higher retail $ includes carbon
Social discontent to higher electricity price
Flood of cheap imports of RE (ie Solar PV), lower asset values
Capital – higher premium (debt + equity) & hybrid instruments
Fragmentation of NEM grid – increased solar PV @ customer site
Demand Low
Regulatory Low
Demand High
High Demand / High Regulatory => Mature & static
Carbon tax / cap and trade / re standards/ stable policy / reg certainty
Price parity vs alternates for customer
Willingness to embrace new models & tech
Privatisation of energy companies
Drive for supply chain efficiency
Improved capital availability -> able to leverage assets & distribute dividends & create “YieldCos”
Changing energy industry Dynamic environment
Regulatory High
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8. Impact on renewables financing Significant fall in activity in light of poor performance
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200
150
240
550
650
900
1,250
1,000
800
1,200
2,490
700
1,000
1,990
240
0
500
1,000
1,500
2,000
2,500
3,000
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014 YTD
A$m
Total annual large-scale renewable energy investment in Australia
-50%
0%
50%
100%
2006
2008
2010
2012
Pacific Hydro - EBITDA margin
Source: Bloomberg New Energy Finance

9. Centralised
Distributed / Decentralised
Integrated
Paradigm Shift: Centralised to decentralised generation Clean Energy Transition
We are here
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10. Paradigm Shift: Centralised to decentralised generation Generation at point of consumption increasing as SolarPV costs fall
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Solar PV + storage technologies
Provides customers with an economic alternative to the Black Energy Companies
Targets Commercial and Small to Medium Enterprises, and certain Residential customers
Provide fit for purpose technical solutions with project / product financing
Solves for improved energy management, all-green power and capital expenditure
Number of households with small solar generation units installed - 2001-2011
Source: Renewable Energy Certificate Generation Data 2001-2011, Clean Energy Regulator
Source: Energy Darwinism in Australian Utilities 2014, Citibank
Solar PV module price declines

11. Alternative business models - evolving over time Solar PPAs for embedded generation – c.30% power demand
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Transmission Grid
Distribution Network
Transmission Grid
Local “smart” grid + distribution network
Local distribution network
Own the integrated solution for the customer’s energy problem
–Deliver c.30% through embedded generation (ie Solar PV)
–Lift to c.50% ++ through storage
–Reduce (efficiency) & shift (demand management)
Supply remainder through portfolio of grid scale renewable assets
–Mixed generation sources (wind / solar / biomass / hydro) to offset weather risk
–Match supply against internal demand volumes
–Active use of energy trading to balance internal customer demand vs grid scale supply
Adapting to merchant risk -> An integrated solution

12. Alternative Business Models - currently in play Look to ‘disruptive’ innovators
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CAT Projects – Bushlight India project
Husk Power
Source: www.catprojects.com.au
Source: www.huskpowersystems.com

13. Alternative business models - future potential Integrated energy solutions - >50% power demand (stage 2)
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Customers
Energy Efficiency & Mgmt
Demand Side Mgmt
Structured Products
Renewable Generation
Distributed Generation / Storage
Opportunity to offer a tailored suite of services to attract & retain customers
Focussed on meeting the needs of Commercial and Small to Medium Enterprises
Five service segments identified – provides customers with an alternative to the BIG Energy Companies (AGL, Origin, Retail etc..)
Provide energy solutions and services to meet the customers medium term needs – low cost certainty
Provide fit for purpose technical solutions with project / product financing – manageable operating cost expense, no CAPEX
Provides for voluntary buyers to support renewable energy
Requires developing retail capability with remote demand management capabilities
Energy Services that provide customers with affordable, sustainable, secure and reliable electricity supply

14. Alternative business models Incumbents can adapt….
Old
New
Revenues for a traditional utility (%)
30-40
15-20
40-50
0-10
0-5
0-2
0-2
Drivers of value shift
Lower plant utilisation
Investment in grid, lower regulated remuneration
Smart-meter, AMI services
IT systems, self- service applications
Distributed- generation equipment installation and leasing
Smart equipment, IT
Direction of shift
Future revenues with DE (%)
20-30
10-15
20-30
5-15
5-10
15-20
0-10
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Services “behind the meter”
Distributed Generation
Retail
Metering
Distribution
Transmission
Generation & Wholesale

15. Alternative funding structures Reflect private equity style structures with higher cost of funds
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Old World (Static)
New World
(Dynamic)
Old thinking: rising demand
Oligopoly
Government reliant
Old/inefficient plants
Traditionally high yield/dividend focused
Little diversification
Government’s increasing reluctance to fund leaves large-scaled projects expensive
In reality : falling demand
Increase in decentralised / local generation
Customer focused
Innovative technologies
High equity %, low dividend payout and high reinvestment
Diversified
Small-scaled projects can be more readily funded through conventional / innovative avenues
Old world
Grid
New world
Factor
Old world
New world
Price risk
PPA secured
No PPA secured / must take some merchant risk
Business model risk
Infrastructure risk
Industrial / operation risk (until achieve scale)
Operation focus
Technical/engineering
Customer solutions
Financial model
Yield play / infrastructure style
Capital growth / private equity style (higher cost of capital until achieve scale)
Asset structure
Single asset/ energy source
Portfolio of assets across energy sources to offset generation risk

16. Australia’s investment fund pool is currently US$1.7 trillion Funds are available…
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Observations
Australia has the 3rd largest investment fund asset pool
An indicative asset allocation (from Australian Super ) averages 33% to Australian shares, 3% to Private Equity and 12$% to infrastructure
Capital is available for scale businesses which aggregate smaller PPA projects
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Source: Standard & Poors, 2013
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2006
2007
2008
2009
2010
2011
2012
2013
Cash
Bonds
Absolute Return
Infrastructure
PrivateEquity
Listed Property
Direct Property
International Equities
Australian Equities