Title: Pitchbook US template
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S U M M E R S E M I N A R S A N
F R A N C I S C O , C A
F I N A N C I N G E N E R G Y
T E C H N O L O G I E S A N D P O W E R
S O U R C E S I N T O D A Y ' S R I S K
A D V E R S E E N V I R O N M E N T
Gary Krellenstein, Managing Director JPMorgans
Energy and Environmental Group Gary.krellenstein_at_j
pmorgan.com 212.270.7828
S T R I C T L Y P R I V A T E A N D
C O N F I D E N T I A L
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3The financial markets are currently experiencing
a broad range of problems but Energy remains one
of the hottest fields
- Last quarter marked the first time in 30 years
that not a single company backed by venture
capital (e.g., Apple, Google, etc.) went public
in the U.S.1 - In uncertain times, investments in essential
services such as utilities and most energy
projects become more attractive to investors as
shown by two recently completed deals - AMP Ohios 400 million bond deal to fund part of
a PC coal plant got over 950 million in orders - PREPAs 700 million capital improvement bond
deal got over 2 billion dollars in orders
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However, investors are adverse to financing
Demo projects or New technologies unless they
have guarantees from highly rated entities (e.g.,
Fed, BP, JPM, etc.)
1 Source WSJ, July 18, page A13, article by
James Freeman 2 Both deals came at costs in the
5 range and had some bonds that matured past 2038
2
4What about media reports that Wall St. and
Investors are no longer willing to finance coal
plants?
- Contrary to many reports and spins put on them by
some groups, the investment community is willing
to finance coal projects and is funding several
right now several whos current cost exceed
3,000/kW - In recognition of potential climate issues and
associated regulatory and financial risks, many
investment firms - including JPMorgan - have
signed the Carbon Principles
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COEXIST
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5What are the Carbon Principles?
- The Carbon Principles are a common set of beliefs
that a balanced portfolio approach is needed in
the power industry to meet future needs and an
agreement among the signatories to conduct
enhanced due diligence. - This balanced portfolio includes
- Energy Efficiency
- The best way to limit CO2 emissions is to not
produce them - Renewable and low-carbon energy technologies
- Renewable energy and low-carbon energy
technologies help meet electricity needs while
also leveraging American technology and creating
jobs - Conventional and advanced generation
- Conventional or advanced generating facilities
will also be needed to meet demand, including
power from natural gas, coal and nuclear
technologies - The Enhanced Diligence Process is meant to
supplement the due diligence (reasonable
investigation from a fiduciary point of view) an
underwriting institution would normally engage in
during a financing. It does not pre-suppose an
outcome but does favor low CO2 technologies due
to concerns over potential carbon regulations
and their financial impact on the projects
economic viability
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6Should climate change be the primary
consideration for policy makers, regulators and
investors?
- Climate change is an important factor in planning
future energy resources and policy, but there are
also other important considerations - Need to factor in concerns about the viability of
the US economy caused by dramatic increases in
prices which could constrain our ability to
develop and implement new energy technologies and
policies needed to reduce greenhouse gas
emissions - Perhaps more importantly in the short-run, need
to recognize and factor in the relatively new
intense competition (for both energy and
commodities) we are facing with rapidly growing
LDC countries and make sure we avoid geopolitical
situations that could spiral out of control
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7 The Chindia factor (China and India)1
Near-term global demand for energy will be almost
insatiable it is tied to the growth propelling
much of the 3rd world out of poverty
- The US has 5 of the worlds population, but uses
27 of the worlds energy2 - Global demographics have created a fundamental
shift in energy demand - Two billion Chinese and Indians are trading in
their bicycles for Toyotas - Per capita usage in 3rd world countries is
currently only one-seventh of the US average, but
increasing rapidly
- Developing countries have limited ability to use
non-traditional hydrocarbon-based fuel sources in
the near term - Prices for conventional energy equipment are
rising dramatically (over 20 from 2006 to 2007) - Potential for intense resource competition
unless new supplies emerge or usage patterns
change
Increasing Competition for Resources
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1 The term Chindia (China and India) was
originally coined by Dr Stephen Leeb of Leeb
Capital 2 EIA World Energy and Economic
Outlook - 2007
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8There are no silver bullets to our electric
energy dilemma we need to use a portfolio
approach
- Would you fund your IRA with a single stock?
Conservation/Efficiency
Coal Gasification-Liquification
Nuclear
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Natural Gas
Pulverized Coal
Wind
Unfortunately, building a portfolio of new
capacity, a smart grid, low carbon technologies
and maintenance of the existing system may be
far more expensive then current estimates
possibly in excess of 2 trillion by 2030
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9Worse, market based solutions to allocate
resources may not be optimal because energy is
priced wrong!
- Assumption The free market mechanism provides
for the optimum allocation of resources and
investments based on risks and rewards
- Free market prices for energy do not reflect
unusually large externality costs such as - Environmental climate concerns
- Geopolitical issues distortions in foreign
policy - Trade deficit impact on the dollars valuation
- National security defense expenditures
- Inaccurate pricing causes free market
mechanisms to misallocate and over-use (or
under-use) certain types of fuels and energy
sources - Oil and natural gas prices could easily increase
by another 200 or more over the next 10 years
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We will probably need a combination of free
market innovations as well as rational
government policies to finance the solutions to
our energy problems
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10Conclusions
- We are facing major energy and environmental
issues which could be
catastrophic, and we need to consider all
available options - Policy makers need to balance global warming
concerns with other
economic/geopolitical considerations using
cost/benefit analysis not media sensationalism - Energy prices are probably going to remain
volatile over the short-term (could even drop
significantly) but increase over the long-term - Alternative energy technologies (wind gt2,000/kW),
new nukes (gt7,000/kW), advanced coal plants
(gt3,500/kW), etc., are going to take longer and
cost significantly more then the public (and most
policy makers) realize - In the current risk-adverse environment, Wall
Street is willing to provide funding for
utilities and most energy technologies but will
need much higher fees or federal/high-quality
third-party guarantees (e.g., GE, Shell, JPM,
etc.) to fund new technologies and demo projects
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EPRI needs to rethink its cost estimates in light
of the dramatic price escalations in commodities,
power equipment, labor, global competition, the
weaker dollar, and higher financing costs
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