Alternative Energy Bouleversement

August 20, 2008 

Four Seasons Hotel Miami

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Summary

Alternative Energy Bouleversement 

Wednesday, August 20, 2008

Carlos E. Castellanos, Portfolio Manager & Head of Trading

Green Ventures International, Ltd.

Presentation to

August 20^th, 2008

DEFINITION OF A “CARBON CREDIT”

The right to emit one metric ton of greenhouse gases – Carbon dioxide is the most prevalent; sulphur dioxide, nitrous oxide, methane are others

ORIGIN OF THE MARKET FOR TRADING CARBON CREDITS

Carbon credits and the global market in which they trade were created by political directive.  Carbon credits may gradually trade like commodities, but are not naturally occurring – hence, they can disappear

An intermediate solution to the global warming/climate change issue:  Since the earth has a single atmosphere, reductions in emissions of greenhouse gases anywhere on the planet represent a net benefit for the planet.  Assumption:  For financial and political reasons, forcing power companies and other heavy industries (e.g. aluminum) in industrialized nations to spend CAPEX to reduce emissions is not as easy in the short term (or ever?) as it might generally be in less developed countries.  Solution:  Cap-and-Trade system. 

Agreement to reduce emissions of greenhouse gases by 2012 to average levels 5-6% below actual levels in 1990.  More than 150 countries have signed, US being a notable exception.  Phase I was the European Emissions Trading System (EU ETS), launched on 1/1/05 and running through 12/31/2007.  In phase I, utilities were the target.  Phase II launched on 1/1/08 and going through 12/31/2012, with more industries made to comply. 

BASIC CHOICES TO MEET COMPLIANCE TARGETS

Example:  A coal-burning power plant in England, which has signed the Kyoto Protocol, has three basic choices:  1) Invest in an overhaul of its physical plant, 2) Pay a €40 fine per metric ton of emissions that exceeds the power plant’s permissible emissions or 3) Offset its excess emissions by purchasing sufficient carbon credits from a project in a developing country, e.g. India

MAJOR TYPES OF CARBON CREDITS

CERs – Certified Emission Reductions created under Clean Development Mechanism of Kyoto Protocol

• CERs and future CERs

VERs – Voluntary Emission Reductions created under various non-Kyoto certification mechanisms, e.g. Voluntary Carbon Standard and Gold Standard

CFIs – Carbon Financial Instruments created by the Chicago Climate Exchange under a structurally parallel system to the CER creation system

EUAs – European Union Allowances created under Phase I of Kyoto Protocol

EUETS still main driver of global carbon market – most compliance buyers are in the EU

Most CER and EUA transactions involving physical CERs are OTC. 

PRINCIPAL MARKET PARTICIPANTS

-There are 11 established exchanges globally that trade some form of carbon credit derivatives.  ECX accounts for 60-75% of global derivatives trading, offering futures and options involving EUAs and CERs.

- Any industry in a

- Financial buyers – investment bank carbon trading desks (MS, Deutsche, Dresdner Kleinwort, Merrill, Goldman, Standard Bank, Barclays Capital)

- Voluntary Buyers – Google, Yahoo!, Amtrak, other US companies anticipating the US becoming compliant; many rumors that certain voluntary credits now being issued and purchased will be grandfathered; uncertainty whether the US will ratify Kyoto or develop its own parallel system to avoid having the UN and the international community tell it what to do regarding climate policy

EVOLUTION OF THE MARKET FOR TRADING CARBON CREDITS

Approximate cash value of transactions: 2005, €10 billion; 2006, 30 billion; 2007, 70 billion; 2008 (E) 100 billion; approximately 75% involve OTC transactions

PRINCIPAL MARKET DRIVERS

-Supply and Demand forces:  It is estimated that currently demand outstrips supply by a factor of 3 to 1

-The fine for excess emissions, at € 40 per metric ton, comfortably exceeds average CER and EUA price of €20 – 25

-It is generally expected (although not guaranteed) that there will be a phase III of the Kyoto Protocol beyond 2012; there are CER trades being done now with maturities to 2020

PRINCIPAL MARKET RISKS

-Carbon credits, the cap-and-trade system and the Kyoto Protocol were all the result of political decisions, which are unpredictable

-Delivery risk represented by the possibility that a given project will not deliver the CERs purchased

-Insufficient trading history to establish degree of correlation between carbon credit prices and other asset prices
 

INFORMATION SOURCES CONCERNING CARBON MARKET

European Climate Exchange – CCX

Nordpool (Oslo ) Exchange

Chicaco Climate Exchange – CCX

Point Carbon (DC news service)

UNFCCC (United Nations Framework Convention on Climate Change)

Oliver Breidt

Founder and Director

Biossence Asset Management

Biossence – Biomass Investment Opportunities in Europe

Biossence is focused on sourcing and delivering projects across Europe with a specific focus on the UK

□Biossence is engaged in the European Biomass, focused on gasification of biomass and has screened

various opportunities to invest seed capital into different opportunities

□The team has a track record of joint entrepreneurship over the last ten years - successfully built-up,

grew and exited +10 ventures investments, valued at more than € 200m with an IRR > 100%

□Focus on a comprehensive industrial biomass and waste to energy solution based on gasification

technology (addressing planning, EA, Funding, Insurance)

□Biossence, will building of a 400,000 tonnes pa merchant waste to energy plant in the

. Several other projects have been secured (including Greater London) and several investment opportunities have been secured

□Biossence is seeking investors and strategic funders for the opportunities

Definition of Non-Controversial Biomass Projects (With specific focus on the UK)

□“non-controversial” biomass means using various sources of waste and non-crop biomass to convert them to energy or biofuels.

□Specifically in the UK, biomass by definition includes waste streams (Municipal Solid Waste, Commercial and Industrial Waste, Special Waste) which have been pre-treated to assure the bio-degradable fraction does exceed 50% (legal limit) but 90% purity is targeted to maximize returns for companies and investors

□Projects with feedstock which do maximize the current regulatory and commercial pressure in certain legislation and have a green footprint

□Focus on processes and technologies which provide closed loop solutions and are eligible for Renewable Obligation Certificates or Carbon Credits

Regulatory and Business Drivers for Biomass Projects

𐁷 The European Landfill directive seeks to progressively limit landfill of biodegradable waste, to reduce generation of the greenhouse gas methane – fines for EC countries breaking those targets (£ 150/t)

𐁷 New “Green” Technologies do provide higher efficiencies, lower planning restrictions (incineration of valuable resources) and attract subsidies through e.g. Renewable Obligation Certificates (ROC’s)

𐁷 Significant challenges facing the

and European electricity market in the coming years. Nuclear retirements and requirement to close coal and oil will lead to the loss of > 15 GW of capacity by 2016 in the

𐁷 A typical large scale Biossence project will reduce the carbon footprint for 1.0 million residents in a specific area by over 400kg per resident per annum

𐁷 The current strategy of Local Authorities to solve the above through PFI’s (Private Finance Initiative) is too slow

Regulatory Drivers for opportunities in the biomass area

𐁷 The European Landfill directive seeks to progressively limit landfill of biodegradable waste, to reduce generation of the greenhouse gas methane – fines for EC countries breaking those targets (£ 150/t)

The UK and the EC is supporting new technologies for solving shortfalls of treatment capacity

𐁷 UK Energy Bill 2008 & Renewables order 2008/9 for waste based projects:

𐁷 2.0 ROC’s/MWh to allow a wider range of biomass concentrations

𐁷 The waste by which it is fuelled has been converted to a liquid or gas using an Advanced Conversion

Technology or it is a CHP generating station with CHPQA accreditation

𐁷 Biomass projects taking waste as an input can call for Gate Fees comparable to current landfill prices

Example: Economic Impact of the Legal Framework

𐁷 Technology: Combination of Autoclaving, Gasification and Pyroysis using gas engines

𐁷 Risk Mitigation through EPC Contracts, Performance Bonds and Maintained Availability Insurance

𐁷 Feedstock: Unsorted Municipal Solid Waste (55% biodegradable)

𐁷 Gate Fee: up to US$ 160 per tonne of unsorted municipal waste

𐁷 Recyclates Income: up to US$ 40 per tonne

𐁷 Energy Generation: up to US$ 120 per tonne

𐁷 Feedstock Biomass (100% biodegradable)

𐁷 Positive or negative Gate Fee dependent on the specific material

𐁷 Energy Generation: up to US$ 230 per tonne

Winners of the short term challenge in the UK Companies to watch

𐁷 Large Players in the Waste business with existing waste streams and ability to execute a non PFI concept

– Shanks, Sita UK (Suez ), Veolia, Virridor (Pennon Group), WRG (FCC), Cory Environmental (Montagu), Biffa Montagu, GIP)

𐁷 Smaller operators with planning permission, funding and technology expertise

– Novera Energy Europe, New Earth Solutions including Acquisitions (IMPAX and Founders)

– Energos (Ener-G)

𐁷 Operators for facilities with ability to take over EPC and O&M risks VT Group

𐁷 Developers/ Investors with bankable technology and planning permissions

Case Study

Hooton Park

- the first in a series of innovative EfW facilities

□The Biossence solution is the only plant design in the market providing an integrated waste management and energy recovery facility

Jim Lane
Editor, Biofuels Digest
Editor, Clean Energy Markets

A Framework for Clean Energy Investment

Sir Richard Branson recently said that “By 2030 all businesses, that are still in business, will be clean businesses.” What does that mean? Aside from reminding us that Branson is heavily invested in clean energy and wants everyone to come along?

It means that over the next 20-25 years we will be internalizing the cost of carbon. It means that business will be evaluated in brand and financial terms based on how successfully they manage carbon risk, and carbon opportunity.

Some will adapt, some will not, and in a market of winners and losers in a massive shift to green business practice, our role as investors and evaluators of investment, is to accurately measure carbon risk and opportunity as an imperative in forecasting the forward looking values of companies.

The most common question I hear from financial institutions and advisers is: “there are 10 new technologies, 10 new companies, 10 new models coming across my desk every day. How do I build a framework to evaluate the renewable energy space?”

I would ask you to picture clean energy as if it were a ladder with five steps. Each step represents a material, sustainable competitive advantage for those who successfully make the ascent. The higher we climb, the higher the risk, the higher the return.

The top step, the most lucrative, is energy efficiency. As is said in the power business, the cleanest watt is the one you never use. Energy efficiency eliminates cost and drops straight to the bottom line and offers the most powerful leverage in clean energy for those who pursue it successfully.

The most effective program for achieving large-scale energy efficiency is LEED certification, used in commercial real estate. LEED looks at building materials and design factors that reduce overall carbon impact and energy cost. A recent KEMA study, published in Clean Energy Markets, found that LEED certification offers payback within 11 months, based on the average change in energy usage.

But not all levels of LEED are alike. The KEMA study found that payback on LEED Silver was 27 months, 31 months for LEED Gold, and 67 months for LEED Platinum. Overall energy savings was determined to be $0.68-$1.18 per square foot per year. Every public RFEIT that has not undertaken LED certification for its portfolio is a target-rich environment filled with value-add opportunities.

The second step in our value ladder is load shifting. In the US, we have overcapacity in off-peak periods. Our target opportunity: the 60%+ price reductions available for shifting power consumption to off-peak periods. The critical issue is storage, and power storage is expensive and complex, where is can be achieved at all.

A disruptive technology that will debut in 2010 is not usually associated with load-shifting, and that is the plug-in hybrid, such as the Chevrolet Volt.  Unlike the Toyota Prius, which features a battery tied to a gasoline engine, and is an example of energy efficiency, the Volt features a battery tied to the grid, and can download and store power in off-peak periods, using it in peak hours either in the form of power for driving, or to reverse the flow of electrons and supply power back to the home, or grid, during peak hour

IBM just released a report projecting that hybrids will have 100% market penetration by 2020, demonstrating the vast potential scale for residential storage via plug-in hybrids.

The third step on the ladder is self-generation. Every business has a roof that can be used for solar; many enterprises have unused space suitable for wind microturbines, or production of fuel or power from waste biomass or other residues. The key is to convert large-scale process to be economical at the enterprise or residential level. And, when grid parity is reached, installers with financing packages will be king. Look for strong balance sheets like FPL Group or Vectren.

The fourth step on the ladder is green power. This is the area we are usually most familiar with: biofuels, wind or solar purchased from a third party. Whether this is done to hedge against fossil fuel cost volatility, to save money, or to fulfill a corporate obligation or corporate mandate, this is the area of renewable energy we are most familiar with, because they are opportunities associated with home heating, auto fueling and other day to day-activities.

If we can’t go green by any other means, or have maximized our opportunity in other areas, we can offset. These are indirect transactions, where we consume brown power but buy certificates offered by generators of green power (or their agents). They are not usually undertaken for cost control or hedging purposes, because they are straight adds to the cost of power, but rather to fulfill a mandate set by government or purchased voluntarily by consumers or enterprise. It’s a complex world that for many companies will be the basis of their carbon strategy in the near-term because of trapped investment in brown power or fuel infrastructure. Because treaties and government mandates are apt to change with little input from the private sector, investment in these instruments is to be undertaken with caution by experienced players and deep pockets.

There you have it. Five Steps. Energy efficiency, load shifting, clean energy self-generation, green energy from third parties, and carbon offsets.

Sean O’Hanlon, Executive Director

American Biofuels Council

Biofuel presentation to South Florida Hedge Fund Managers Association

August 20^th, 2008

Short term and long term outlook for biofuels

• Demand will outpace supply

• Biofuels will take on ever greater significance and market share in the coming years due to increasing demands on petroleum in the emerging economies of China, India, and Latin America.

• Anticipate “Multi-Fuel Stations” in the next 10-15 years that carry everything from ethanol and biodiesel to biobutanol and hydrogen.

• Number one concern to consumer is price. Biofuels must be cost competitive with gas and diesel.

Keep in mind the concept of “biorefineries” where more than product is produced.

• Biofuels are only one part of the equation in terms revenue streams. Other products include fertilizers and biobased polymers that can replace petroleum based products. (Non-toxic and biodegradable)

• Biofuel producers/biorefineries should be using solar, wind, and cogeneration as part of the business model to keep costs low and increase efficiencies. (ROI in less than 10 years)

Technologies to look for

• Biofuels from algae should be starting commercial scale within the next 24-36 months. (biodiesel, oxygen, hydrogen, and ethanol)

• Cellulosic ethanol should be commercially scalable within 5 years.

• Biocrude- similar to light sweet crude but without the harmful contaminants and can be produced from almost any biomass

• Glycerin to ethanol

• Next generation fuel supplies coming from agricultural and forestry waste streams and well as municipal waste water.

Successful companies

Those companies that vertically integrate as much as possible; diversify the types of feedstocks used in production, and are willing to form partnerships and joint ventures are those that will succeed in the long term.

Companies to watch:

• Petrobras

• BP

• Royal Dutch Shell

• Verenium

• Amyris

• Solazyme

• Sapphire Energy

Unless ExxonMobil starts investing heavily in biofuel technologies they will get left behind.

Government mandates can help move biofuels forward but will not do the entire job. Biofuels will not dominate transportation fuels unless greater education and marketing efforts are done.

PRINCIPAL MARKET DRIVERS

-National Security

-Energy Security

- Economic Stability

-Environmental Concerns

Biofuels will be bigger than the internet, by an order of magnitude, within 20 years

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