Transitioning to a Clean Energy Economy

1. Transitioning to a Clean Energy Economy Presented to: Washington Clean Technology Alliance Seattle – July 14, 2011 Coalition for Green Capital Kenneth Berlin, General Counsel (202) 371-7350 Kenneth.Berlin@Skadden.com) www.coalitionforgreencapital.com

2. Introduction • The US will have to achieve significant reductions in GHG emissions in the foreseeable future without a cap and trade regime. Closing of coal plants, increased mileage standards, increased renewable energy and energy efficiency will all contribute to this effort. • Success in this effort will depend on the nation’s ability to innovate and encourage the deployment of existing clean energy technologies with little direct government financial support. At the same time, barriers to achieving scale in energy efficiency retrofits and renewable technology deployment will have to be overcome. • One key to success will be developing financing mechanisms like a “green bank” that could provide the massive amounts of capital needed to bring clean energy and energy efficiency programs to scale. The green bank could be financed using innovative financing methods.

3. The Coalition for Green Capital • CGC has been developing mechanisms to provide low-cost finance for clean energy projects and 100% financing for residential and small business energy efficiency programs • National level • American Clean Energy and Security Act: Green Bank (H.R.2454), $7.5 billion • American Clean Energy Leadership Act: Clean Energy Deployment Administration, $10 billion • State level • CT passed • MI, CA, CO, MD, KY and IL • International level • Global Green Banks Conference, NYC, February 2012, will examine rise of “green bank” entities around the world and begin a discussion on how to provide increased funding to these entities through an international financing mechanism

4. Outline of Presentation • The Context – Reducing GHG emissions in the absence of cap and trade • A four-part approach to reducing GHG emissions from the electric generation Sector • Reducing GHG emissions in the transportation sector • The Challenge – understanding the barriers to bringing clean energy and energy efficiency to scale • The Green Bank – addressing funding barriers in a time of government retrenchment • Building political support for green bank programs

5. The Context – CO2 Emissions by Sector and Source

6. Step 1 – Reducing Electric Power Sector Emissions - Closing Coal Plants • Coal fired plants account for approx 33% of all US CO2 emissions • Even in the absence of cap and trade, a substantial percentage of the 340 GW of coal plants are likely to close between now and 2030 Information from Deutsche Bank report: http://bit.ly/lKCMzK

7. Step 1 – Reducing Electric Power Sector Emissions - Closing Coal Plants • Many coal fired plants lack pollution control equipment:

8. Step 1 – Reducing Electric Power Sector Emissions Forecasts • Barclays Bank predicts that between 15-20% of all coal plants will close by 2015-2020 • Deutsche Bank predicts that about 60% of all coal plants will close by 2030 • Coal plants will be replaced by natural Gas plants, renewables and reduction of demand through energy efficiency

9. Step 2 – Replacing Coal Plants • Coal plants will either be closed and not replaced because they represent surplus generation or replaced by natural gas plants, in conjunction with renewable energy and possibly nuclear plants • Deutsche Bank predictions translate into about a 10% reduction from 2005 levels in total US CO2 emissions by 2020 and a 15% from 2005 levels in 2030 (assumes electricity power sector generates about 33% of all CO2 emissions) • The Energy Information Administration has far more conservative projections based on business as usual scenarios. • Prediction depends on natural gas being produced at a relatively low price with few fugitive emissions of GHGs. • The cost of the transition is expected to be about - $858 billion from 2010 – 2030

10. Step 3 – Increasing Energy Efficiency • A 10-15% reduction CO2 emissions in the power sector is not enough to reach CO2 reduction goals • Reduction in the transportation sector, which emitted 28% of all US GHG emissions in 2007, will also play an important role in reducing CO2 emissions. • But the turnover in the automobile fleet is slow – the median life of a car is about 15 years • Energy Efficiency in buildings is thus critical, but can substantial reductions be achieved?

11. Set 3 – Increasing Energy Efficiency: Energy Efficiency Predictions • EIA in its business as usual case predicts a substantial decrease in the residential sector of energy consumption per household and per square foot by 2020 • But EIA predicts only a minor decrease in energy consumption intensity per square foot in commercial buildings • McKinsey in its “Unlocking Energy Efficiency in the US Economy” predicts that it is possible to reduce end-use energy consumption in the residential, commercial and industrial sectors by 23% of potential demand by 2020, if barriers to energy efficiency can be overcome • This, McKinsey says, would reduce CO2 emissions by 1.1 billion tons from business as usual (about 700 million tons from 2005 levels) or about the same amount of reductions that would result from closing coal plants by 2030 (a total reduction of up to 30% of CO2 emissions by 2030 from the power sector alone)

12. Set 3 – Increasing Energy Efficiency: The High up Front Cost of Energy Efficiency • McKinsey estimates that it would require investment of $520 billion to achieve the goal of reducing end-use energy consumption by 23% by 2020. • Other estimates are much higher. Assuming, for example, that it would cost $10,000 a building to achieve a 25-30% reduction in energy use in residential building, the cost would be $1.28 trillion by 2020. • Retrofitting the 5 million commercial buildings, guessing at a cost of $100,000 per building, would add another $500 billion to the cost. • Even though these costs would be recovered and a profit eventually made (and thus the argument that energy efficiency is the cheapest way to reduce emissions), massive upfront investments are needed to bring energy efficiency to scale.

13. Set 3 – Increasing Energy Efficiency: Consumer and Business Choice Limits Energy Efficiency Spending • Energy efficiency spending competes with other uses of funds by residential and commercial building owners • Even though energy efficiency spending is repaid, even with relatively short repayment periods, many and probably most homeowners choose to spend their funds on other things (e.g. Fannie Mae experience with energy saving mortgages). • Small business also has limited funds for energy efficiency investments • Large businesses have to decide between spending money on energy efficiency and product development and sale

14. Step 4 – Increasing Deployment of Clean Energy -making alternative energy suitable for marketplace competition, by cutting its costs Purpose of low-cost financing = Drive delivered cost down This line represents the cost of coal generation without the effect of a cap or RES __________________________________________________________________ 15

15. Low-cost long-term financing can expand the clean energy market by attracting private investment to lower priced projects Prepared by an energy investment firm using public data sources Notes: -Assumes that all after-tax free cashflows from the project are financeable, net of cover ratios -CAPEX costs do not include significant transmission system upgrades -The CAPEX here is based on reported project cost data for the ARRA grant program through November 2009, with a 10% discount to account for reductions in equipment costs since 2009 in projects being built in 2011 and 2012 timeframe -The two cases describe the identical project, but commercial banks will finance a more conservative wind case (requiring the 1.4x cover ratio) -The two cases assume the sale of identical quantities of electricity - Note (1): LIBOR rate based on LIBOR swap curve for last 5 years, Treasury based on rates for the same period. • Low-cost financing reduces the delivered electricity prices of these actual wind projects by 15-20%; to the point of being cost-competitive with new-build conventional coal and gas-fired power plants in each region to meet incremental energy demand growth: • With low-cost financing provided by the Energy Independence Trust, the internal rate of return can be maintained while keeping the cost to consumers at or below current delivered electricity costs (see highlighted sections above, where the cost of delivered electricity is reduced by $10/MWh because of the low-financing offered in the right column versus available bank financing in the left column). 16 16 16 16

16. Current commercial debt rates limit the size of the clean energy market IRR table for an example wind project using Commercial Bank Financing at $1,963/kW installed cost and current tax policy: financing terms of 6.75% interest rate at 20% leverage 2012 Price [$/MWh] with 2% annual escalation --The boxed area of table displays commonly encountered Net Capacity Factors (NCF) across the country and the required pricing ($/MWh) for wind generation. (East region NCF values are closer to 35%, Plains region NCF reach 44% and above, and West region NCF varies from 35-41% --The shaded scenarios (in green) show the limits of current commercial investment (10% Internal Rate of Return, is considered the minimum for leveraged project finance). Prepared by investment firm specializing in wind energy transactions based on data from independent wind development companies and public sources Note: Net Capacity Factor is a measure of the actual amount of power produced during a year. Calculated by dividing total net energy production by the maximum theoretical possible annual production from the nameplate capacity 17 17 17

17. Energy Independence Trust long term, low cost debt expands the size of the clean energy market for private investment IRR table for an example wind project using EIT Financing at $1,963/kW installed cost and current tax policy: financing terms of 4.50% interest rate at 34% leverage 2012 Price [$/MWh] with 2% annual escalation --The use of the EIF to provide additional debt financing to wind projects results in a reduction of electricity price of approximately ~15-20% to provide the same investor returns at a given capacity factor; for example, 38% NCF wind projects can sell energy at values of $50/MWh, compared to $60/MWh without the EIF --The larger scope of the shaded scenarios significantly increases the economically-attractive wind generation that can compete with new build fossil-fuel power plants to provide energy for incremental demand growth; by some estimates, approximately 120 GWs of lower-NCF wind resource become competitive with new conventional generation. Prepared by investment firm specializing in wind energy transactions based on data from independent wind development companies and public sources Note: Net Capacity Factor is a measure of the actual amount of power produced during a year. Calculated by dividing total net energy production by the maximum theoretical possible annual production from the nameplate capacity 18 18 18

18. 3 Ways to Lower the Cost of Clean Energy • Long-term low-cost debt financing that attracts equity investment without requiring higher off take prices • Long-term tax policy that effectively reduces need for higher off-take prices by equalizing in many cases the treatment of new clean energy generation with existing generation • Regulatory reforms that reduce barriers to investments in clean energy

19. Tax Policy Possibilities • Attract private sector investment by extending credits and tax equity treatment • Take steps to equalize tax treatment for clean energy investment • Master Limited Partnerships • Expensing • Depreciation acceleration • Grants/deductions/credits • Likely to be limited government appetite for tax credits and tax equity treatment for an indefinite period of time

20. The Role of Green Banks • Green Banks can provide much of the capital needed for clean energy and energy efficiency investments. • Green Banks can be established on both the national and state levels. • Green Banks can raise capital and debt from many sources. • Green Banks can leverage their funds making scarce dollars go further. • If Green Bank funding is available, energy tax credits will either not be needed or less credit will be required for each project.

21. The national Green Bank would be funded with either loans or equity from the Treasury Department, equity investments for the private sector (with a cap on the rate of return), bonds and other sources. State Green Banks would be funded from existing funds (e.g. in Connecticut special purpose mil charges), RGGI or other cap and trade revenues, bonds, capped private sector investments and other sources. There would be less leverage on energy efficiency loans than on energy project loans What is the Green Bank?: A hybrid for-profit, or not-for- profit low-risk institution designed to safely leverage public dollars into massive private investment $ Fundingof $10B Supports up to 100 GW of renewable projects-replacing more than 20% of carbon-based capacity $ Loan, loan guarantees Combined with equity, can support up to $200B in investment in clean energy Support up to $100B in loans over 20 years GREEN BANK Loans, loan guarantees $

22. The Connecticut Green Bank - CEFIA • CEFIA was passed in June 2011 as a keystone measure in a larger energy bill. • It passed 36-0 in The Connecticut House and139-8 in the Senate. • It is a quasi independent agency that includes an existing state fund. It’s initial capitalization is $76 million (58 million from one fund and $18 million from another) and will receive $30 million a year from existing energy charges and RGGI funds. We hope to add additional funds into CEFIA in the future. • It is structured to encourage private equity investments. • CGC is working to establish state green banks in an increasing number of states. 23

23. Funding a Green Bank With Repatriated Funds • Create an Infrastructure Bank (IB) without otherwise changing existing tax law and without Congress providing any additional means to repatriate funds

24. The Green Bank could create incentives for willing consumers or utilities to pay for retrofits….without up-front capital from the borrower Green Bank 5. After the loan is repaid, the consumer sees the full benefit of the efficiency measures, the utility has saved money and created local jobs, and the taxpayer has been repaid in full. 1. The Green Bank loans 100% of the cost of an energy efficiency project to a utility or other source at a low rate. Utility/Co-op 2. The utility disperses the funds to install energy efficiency measures in homes and small businesses, creating jobs in the local community. 4. Through on-bill financing, a portion of the savings shows up on the consumer’s bill, and the rest is transferred to the utility, which uses the money to repay the initial loan from the Green Bank over an extended tenor. (For example, if there is a savings of $100/month, the consumer receives a $25 discount on the bill and the utility charges $75 for electricity that is not being provided in order to re-pay the loan). The utility will also have the right to place a lien on the property in order to obtain payment. Residential property/ Small business Energy Bill 3. The owner of the residence/small business pays no up-front cost to have their building retrofitted, and sees a reduced energy bill. 25

25. Establish the Clean Energy Deployment Administration (CEDA) to Support Innovative New Technologies • CEDA is designed to foster initial commercial deployment of breakthrough technologies • CEDA, within the Department of Energy, assures breakthrough technologies can reach market • CEDA should be administered in conjunction with Department of Energy policies, and supervised by Congress in same way • CEDA passed the SenateEnergy and Natural Resources Committee in June 2009

26. Other Measures • EPA Regulation of CO2 Emissions • State and Federal Renewable Energy Standards (“RES”) • State and Regional Cap & Trade Systems

27. Building Political Support • Requires no new funding • Receives close-to zero budget score for loans from Treasury if properly structured • Leverages scarce public dollars • Because the banks are independent or quasi governmental entities, they would not lead to a large new governmental bureaucracy • Banks are not Democratic Party ideas • Makes the US more competitive in clean energy • Creates jobs