Power Advisory Renewable Energy Investment Atlantic Canada July 14

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Review of Impact of Current Economic Climate on Renewable Energy Investment

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Power Advisory Renewable Energy Investment Atlantic Canada July 14

  1. 1. <ul><li>John Dalton </li></ul><ul><li>[email_address] </li></ul><ul><li>Tel: 978 369-2465 </li></ul>Rothesay Energy Dialogue 2009 Impact of the Current Economic Climate on North American Renewable Energy Investment July 14, 2009
  2. 2. <ul><li>Current investment in renewable energy </li></ul><ul><li>How the current economic climate is affecting renewable energy investment </li></ul><ul><ul><li>Impact of financial markets </li></ul></ul><ul><ul><ul><li>Atlantic Canada markets better insulated </li></ul></ul></ul><ul><ul><li>Declining fossil fuel prices: increasing relative costs </li></ul></ul><ul><ul><li>Declining equipment costs: improving competitiveness </li></ul></ul>Presentation Outline Power Advisory LLC 2009 All Rights Reserved
  3. 3. <ul><li>New private investment in companies developing and scaling-up new technologies increased by 37% </li></ul><ul><li>New renewable energy projects accounted for 40% of all capacity additions </li></ul><ul><ul><li>Dollar value of renewable energy was 27% greater </li></ul></ul><ul><ul><li>2008 first year renewable energy investment greater than fossil fuel investment </li></ul></ul><ul><li>However, growth in generating capacity 2008 was one-third of rates experienced in prior two years </li></ul><ul><ul><li>Reflecting financial market and overall economic conditions in the second half of the year </li></ul></ul>Investment in new renewable generation projects worldwide grew by 13% in 2008 Power Advisory LLC 2009 All Rights Reserved
  4. 4. <ul><li>Preventing all but lowest risk projects from securing financing </li></ul><ul><li>Reduced energy demand is reducing fossil prices against which renewable energy projects must compete </li></ul><ul><ul><li>Impact on willingness to adopt renewable policies? </li></ul></ul><ul><li>Equipment prices are declining with reduced demand </li></ul><ul><ul><li>In particular, wind and solar </li></ul></ul>Current economic climate is affecting renewable energy investment in several ways Power Advisory LLC 2009 All Rights Reserved
  5. 5. <ul><li>… given existing credit exposure and overall market sensitivity to risk </li></ul><ul><li>Promoting a “flight to quality” </li></ul><ul><ul><li>Low interest rates for high quality debt, but significant credit spreads for higher risk </li></ul></ul><ul><ul><li>Preventing all but lowest risk projects from securing financing </li></ul></ul>Lenders and equity investors are risk averse … Power Advisory LLC 2009 All Rights Reserved <ul><li>Equity available from private equity investors, but at a premium </li></ul><ul><ul><li>Reluctance to issue equity given prices </li></ul></ul>Interest Rate Spreads
  6. 6. <ul><li>Require long-term power purchase agreements with investment grade counter parties </li></ul><ul><ul><li>Unable to finance merchant risk </li></ul></ul><ul><li>Reluctance to accept equipment risks without availability warrantees: </li></ul><ul><ul><li>Challenge for new suppliers and equipment (e.g., Clipper Wind Power) </li></ul></ul><ul><li>Greater conservatism with respect to resource assessment </li></ul><ul><ul><li>Debt service coverages evaluated in terms of P90 for wind </li></ul></ul>Project risks must be carefully managed Power Advisory LLC 2009 All Rights Reserved
  7. 7. <ul><li>More reliant on utility RFPs </li></ul><ul><ul><li>Nova Scotia and New Brunswick </li></ul></ul><ul><li>PEI likely to have more merchant risk given existing level of renewables </li></ul><ul><ul><li>Wind project development in PEI more likely for export </li></ul></ul><ul><li>Lower Churchill Project significantly affected by economic climate </li></ul><ul><ul><li>Lower fossil fuel prices </li></ul></ul><ul><ul><li>More challenging borrowing environment </li></ul></ul><ul><ul><li>Reduced power demands </li></ul></ul>Atlantic Canadian market for renewables better insulated from these conditions Power Advisory LLC 2009 All Rights Reserved
  8. 8. <ul><li>Many utility contracts don’t have a Fx index for the initial contract price </li></ul><ul><ul><li>Risk borne by developers </li></ul></ul><ul><li>Developers unlikely to lock in Fx rates until they are awarded a contract </li></ul><ul><ul><li>Hedging Fx increases costs for developers </li></ul></ul><ul><ul><li>Larger developers more likely to have contracts with wind turbine manufacturers </li></ul></ul><ul><ul><ul><li>Have development portfolio and deploy turbines where needed </li></ul></ul></ul>Canadian renewable development adversely affected by volatility of Canadian dollar Power Advisory LLC 2009 All Rights Reserved
  9. 9. Reduced commodity prices are making it more difficult to finance renewable energy projects <ul><li>Natural gas prices are 50% below where they were 12 months ago </li></ul><ul><li>Natural gas is the fossil fuel against which many renewable energy projects have to compete </li></ul>Power Advisory LLC 2009 All Rights Reserved New England Marginal Fuel during Unconstrained Price Intervals 2008 Note: % of intervals doesn’t equal 100% <ul><li>Lower natural gas prices effectively increase cost of renewable policies </li></ul><ul><li>Potential impact? </li></ul>
  10. 10. Reductions in natural gas prices only partly attributable to decline in demand <ul><li>US EIA forecasts 2.2% decline in natural gas consumption in 2009 </li></ul><ul><li>Production forecast to decline by less than this </li></ul><ul><ul><li>Significant increase in supply attributable to shale play production </li></ul></ul><ul><ul><li>Primary contributor to the significant price declines </li></ul></ul><ul><ul><li>Likely to continue to depress prices relative to what they would have been once demand recovers </li></ul></ul>Power Advisory LLC 2009 All Rights Reserved
  11. 11. Equipment prices are declining <ul><li>Demand for wind turbines out stripped supply leading to significant price increases </li></ul><ul><li>Reduced demand is leading to price declines </li></ul><ul><ul><li>8,500 MW of wind installed in US in 2008 </li></ul></ul><ul><ul><li>5,000 MW projected for 2009 </li></ul></ul><ul><ul><ul><li>Permissive policy regarding eligibility for grants might help offset decline </li></ul></ul></ul><ul><ul><li>20% decline in wind turbine prices </li></ul></ul><ul><ul><li>More significant declines in solar panel pricing </li></ul></ul>Power Advisory LLC 2009 All Rights Reserved
  12. 12. Difficult climate for renewable energy investment <ul><li>Project development adversely affected by: </li></ul><ul><ul><li>More challenging credit market </li></ul></ul><ul><ul><li>Declining fossil fuel prices </li></ul></ul><ul><li>Favorably affected by: </li></ul><ul><ul><li>Reduced demand leading to price declines </li></ul></ul><ul><ul><li>Reduced equipment prices </li></ul></ul><ul><ul><li>In the US more favourable federal policies </li></ul></ul><ul><li>Longer term greater focus on climate change and role of renewable energy as a response will support renewable investment </li></ul>Power Advisory LLC 2009 All Rights Reserved
  13. 13. Thank you for your attention <ul><ul><ul><ul><ul><li>John Dalton </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Power Advisory LLC </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>[email_address] </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>(978) 369-2465 </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>www.poweradvisoryllc.com </li></ul></ul></ul></ul></ul>Power Advisory LLC 2009 All Rights Reserved
  14. 14. Introducing Power Advisory <ul><li>Power Advisory specializes in electricity market analysis and strategy, power procurement, policy development, regulatory and litigation support, resource planning and project feasibility assessment. </li></ul><ul><ul><li>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. </li></ul></ul><ul><ul><li>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. </li></ul></ul><ul><ul><li>Our consulting services are provided by seasoned electricity sector professionals, offering a wide breadth and significant depth of industry knowledge. </li></ul></ul><ul><li>For additional information regarding our services, please contact: </li></ul><ul><ul><ul><ul><ul><li>John Dalton </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>[email_address] </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>978 369-2465 </li></ul></ul></ul></ul></ul>Power Advisory LLC 2009 All Rights Reserved

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