Emerging Trends in Clean Energy Finance Ray Wood, Global Head of Power, Bank of America Merrill Lynch October 13, 2015

The World at Night Top 10 Countries Electricity Access Deficit (mm) India

306

Nigeria

82

Bangladesh

67

Ethiopia

64

DR Congo

56

Tanzania

38

Sudan

31

Kenya

31

Uganda

29

Myanmar

25 0

Over one billion people do not have sufficient access to electricity 1

Source: World Bank.

175

350

Factors Encouraging Transition to Clean Energy

Security of Energy Supply

Environmental Stewardship

Cost Competitiveness

Individual Preference for Clean Power

Utility and Distributed-Scale Applications 2

Several Challenges Remain

Energy Demand




Numerous approaches taken across the world




Finding opportunities when incentives are removed




Low demand growth in developed markets where capital is available,




High demand growth where capital is not

Government Policy

Technology Innovation

Recognizing and overcoming the challenge of change to the existing utility model




Capital Investment

3

Source: World Bank.




Lowering the levelized cost




Increased competition in low commodity price environment




Applying disruptive technologies (batteries, smart grids, fuel cells)




Expanding financial tools to meet market demand for renewable investment




De-risking emerging market infrastructure investment

Investment has Accelerated

Outlook 2015 – 2035 ($Bn)

Growth Historically ($Bn) $300

AMER EMEA APAC

$8,000

254

247

$6,900

235 215

208

144

$150

$6,800

151 $4,000

107 $2,700

69 53 33

$0

$0 2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Renewables & Transmission & Nuclear Distribution Generation

2014 saw a new high of $254bn+ in Global Renewable Power Investment 4

Source: Bloomberg New Energy Finance (“BNEF”) ‘Global Trends in Clean Energy Investment’ January, 2015.

Thermal Generation

Innovation and Scale Efficiencies have Driven Down Costs Declining Renewable LCOE, Excluding Subsidies ($/MWh)


Wind:$/MW turbine prices have stabilized as developers opt for higher-priced, longerrotor diameter turbines, while the price per MWh continues to decline on better turbine performance

2009-2015 (29%)

2009-2015 (36%)

2009-2015 (52%) $291

300

2015 2014 2013

$225

2012




Solar: Continued declines in capex assumptions. $1.57/W all-in capex is now possible in most of the world, although tariffs have temporarily slowed module costs decline

2011 2010 2009

150

$143

$139

$96 $68

0 Onshore Wind

PV - Thin Film

PV - c-Si tracking

Levelised Cost of Energy (“LCOE”) for Renewables continues to decline driven by technology improvements, competitive equipment supply dynamics and lower financing costs 5

Source: BNEF ‘H1 2015 Global LCOE OUTLOOK’ March, 2015.

Leading a Steady Increase of Renewable Generation’s Contribution to the Electricity Mix 25%

Renewable Generation (% of Global Electricity Consumption)

25%

Renewable Generation (% of US Electricity Consumption)

22% 23% 21% 21% 20%

20% 19%

19% 19%

20% 19% 19% 19%

20%

22%

20%

15%

15%

13% 13% 13% 11% 11%

10%

10%

10%

9%

10%

10% 10%

10%

10% 9%

8%

5%

5%

6

____________________

Source: National Renewable Energy Laboratory “2013 Renewable Energy Data Book” October 2014 and Enerdata Consulting.

Wind and Solar Technology Innovation Should Continue Residential Solar Average Cost per Watt, 2014-17 ($) $3.00

Other

$2.90

Sales

0.20

$2.66

Installation

0.18

Other BoS

0.50 $2.15 0.16 0.65

$68 $65 $59

Panel

0.30

$1.50

0.45

0.30 0.25

0.20

$50 $1.77 0.12 0.20 0.45

0.23 0.23

$55

Inverter

0.60

0.25

$75

Racking

0.47

0.25

Onshore Wind LCOE, 2014-17 ($ / MWh)

0.19

0.17

0.20

0.16

$25

0.17 0.75

0.70

0.65

0.50

$0

$0.00 2014

2015

2016

Solar system costs could decline 40% in the next 2-3 years based on forecasts 7

2017

Current

2015

2016

2017

Increasing Capacity Factors driven by improving turbine and gearbox technology will support a further decline

Source: BNEF ‘Global Market Outlook: 2030’ June, 2014, Wall Street Research Notes: Onshore Wind - 50% Capacity Factor based on linear relationship with 40% Capacity Factor

Accelerating the Transition to Renewable Power Generation Annual New Build Generation (GW)

Global Generation Capacity (GW)

Renewables

400

11,000

Nuclear

10,569

360

Fossil Fuels 315 304 288 273

276

5,312

5,579

200

5,500 1,634

0

0

2013

2014

2015

2020

2025

2030

2012

Renewable Generation will Capture a Significant Majority of Future Generation Additions 8

Source: BNEF ‘2030 Market Outlook Overview’ June, 2014.

2030

225% Increase

Disruptive Technologies Support This Evolution: Smarter Grid Networks Connecting the Policy & Technology Elements of the Power Chain

Global Smart Grid Spending, 2012-20e ($mm) $30,000

Rest of Asia

Central Generation

Japan

26,869

27,609

25,965

China EMEA

23,736

North and South America

Demand Response

Utilities

Regulators

19,369

Transmission Networks

19,925

17,213 15,707 15,536 $15,000

Individuals

Distributed Generation

Businesses

Smart Meters $0 2012

9

Source: BNEF Potential Cost Reductions in EV lithium-ion Battery Packs, Sept 2015.

2013

2014

2015

2016

2017

2018

2019

2020

Disruptive Technologies Support This Evolution: Batteries Cost of Lithium Ion Technology

Global Production Capacity

$/kw-hour of capacity

GWh per year

1,200

240

1,000

200

800

160

600

120

H2 2014: $540/kWh H1 2015: $400/kWh

400

80 Estimated Level to Achieve Cost Savings for Utility Installation (1)

Powerpack $250/kWh

200

40

0

0 2010

2012

2014

Annual battery production (GWh)

2016

2018

2020

Battery pack price ($/kWh)

2022

2024

2026

2028

2030

Observed electric vehicle battery price ($/kWh)

____________________

Source: BNEF Potential Cost Reductions in EV lithium-ion Battery Packs, Sept 2015, 2H2014 Battery Cost Update. Note: The battery pack price line forecast in chart is projected cost based on the learning curve of EV lithium-ion batteries based on Bloomberg New Energy Finance. 10 (1) Brattle Group, “The Value of Distributed Electricity Storage in Texas” November 2014

Battery Cost Declines are Driven by Significant Improvements in Component Costs Observed 2015 Battery Cost by Components $/kw-hour of capacity

$500 $400

$52

$400

Total

$120

$28

Pack Costs

Fixed Expenses

Warranty & Profit Margin

(-) Depreciation cost of capital investment

(+) Lower profit margin & warranty per unit

$300 $200 $200 $100 $0 Cell

2020E

(+) Improved Technology (+) Global production (-) Cost of Compounds scale efficiency

$500 $400

(30%)

$300 $200

(70%)

35%

$37

$37

Pack Costs

Fixed Expenses

(80%)

(45%)

$11

$226

Warranty & Profit Margin

Total

$139

$100 $0 Cell ____________________

11 Source: BNEF Potential Cost Reductions in EV lithium-ion Battery Packs, Sept 2015. $ in 2015$

Creating a New Model for Utility Operations Traditional Utility Model

Old

12

Utilities in the Future

New

Generation by Coal/Oil/Gas/Nuclear/Hydro

Growing Renewable Mix w/ Thermal Support

Large central units

Increasing mix of smaller capacity units

One Way Grid

Smart Two-way Grid

Limited demand flexibility

Increasing demand response capabilities

Limited retail price transparency

Real-time prices

Graphic Credit to Hawaiian Electric Industries

Energy infrastructure requires an environment that enables long-term investment built on stability

Micro

Infrastructure Projects

Regulatory Framework

Macro

Economic Stability Political and Institutional Stability

An enabling investment environment is characterised by: peace and stability, the rule of law, good governance with accountability and transparency, the absence of corruption, adequate infrastructure, an educated workforce, clear property rights and enforceable contracts. 13

Source: World Bank.

UN Estimates that $650bn/year of additional capital needs to be invested to meet its Energy Goals 250

1 Universal access to

modern energy technology (today: 85%)

150

57 36

50

50

9

2

1

17

energy efficiency gains (today: 1.3%)

49

3 Doubling rate of annual

65

66

100

98

114

supply from renewables (today: 18%)

200 USD Billion

2 30% of world’s energy

232

2030E Global Power Investment Needs ($ Bn)

95

Goals

0 North America

Europe

Developed Developing Middle Asia & Asia East Oceania

Investment 2012

14

Source: IRENA REMap 2014; World Bank, IEA GTF 2015

REmap 2030 2030

Africa

Latin America

The Equity Market Opportunity Remains Large Compared to Traditional Energy Companies Global Market Capitalization of Renewable & Efficiency-Driven Public Companies Compared to the Oil & Gas Industry ($bn)

$4,650

$414

Public Renewable Energy/Efficiency Companies

$310

Exxon Mobil

Global Oil & Gas

The Global Market Cap of the Renewable Energy/Energy Efficiency Sector is only 30% Larger than ExxonMobil 15

Source: Factset and BNEF as of September 17, 2015.

Public Equity Valuations Demonstrate Volatile Market Psychology Solar Index Returns (10-yr Return) 400

Financial Crisis

Solar Index Returns (Since Summer 2013) 300

Recent Decline

350 250 300 200 250

200

150

150 100 100

(26.5%) 50

50

0

0

Viewed as a growth-oriented sector, Renewable Energy Stocks are sensitive to investor sentiment regarding economic growth outlook, commodity markets, and changes in capital market inflows/outflows 16 Source: NYSE Bloomberg Global Solar Energy Index as of 10/07/15

46.5%

Incentives to Support Renewables can take Many Forms

South Africa Ghana Kenya Nigeria Vietnam Turkey Colombia Mozambique 17

● ● ●

Source: Global Status Report, REN21 2013

● ● ● ● ● ●

○ ● ● ●

●

●

●

● ● ●

● ●

●

● ● ● ● ● ● ● ● ●

○ ● ●

● ●

●

● ● ● ● ● ● ●

Energy production payment

Tradable REC

Biofuels obligation/ Mandate

Heat Obligation/ mandate

●

● ● ● ● ●

Public competitive bidding/tendering

Mexico

● ●

○

○ ● ●

Public Financing Public investment, loans, or grants

Brazil

●

● ● ● ● ● ●

Reductions in sales, energy, CO2, VAT, or other taxes

Indonesia

● ●

Investment or production tax credits

Germany

○ ●

Fiscal Incentives Capital Subsidy, grant, or rebate

France

● ● ● ●

Net Metering

India

○ ● ● ● ● ● ● ● ● ● ● ● ● ● ●

Electric Utility quota obligation/ RPS

United States

Feed-In Tariff/premium Payment

Country Name

Regulatory Policies & Targets Renewable Energy Targets

indicates national level policy indicates state/ provincial level policy

● ● ●

● ● ● ● ●

● ● ● ●

The Experience of the EU Shows the Importance of this Stability Even in OECD Countries Retroactive policy changes across the EU


The EU has seen a drop in clean energy investment from a peak of $114bn in 2011 to $53bn in 2014

Major Minor None N/A

Clean energy investment in selective countries ($bn) 50 40 30 20 10 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Czech Republic

18

Source: BNEF

Greece

Italy

Romania

Spain

Capital Can Come from Many Sources

Governments Institutional & Retail Investors

Banks

Utilities

Sovereign Wealth Funds

Private Equity

19

Venture Capital

Insurance Companies

Other Strategics

Pension Funds

Multi National Develop. Banks

Finance has Many Roles to Play in Delivering This Capital to Meet Investment Needs Other

Equity Venture Capital Private Equity

M&A

Commodities

Public Equity

Debt Project Finance

Derivatives

Debt Green Bonds

Bank Loans Bonds

20

Financial Institutions are Critical to the Development of Renewable Generation

IPO Markets Follow this Volatility $1,500

Renewable Energy Initial Public Offerings ($ mm) Developer / YieldCo $1,091

EPC / Installer / Financier Manufacturer

$1,000

$926

$924

$555 $505

$485

$500

$159

$143

$123

$0 2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015 1H

2015 2H

Initial Public Offerings Source: BofAML Global Corporate and Investment Banking (“BofAML GCIB”), Factset and BNEF, ‘The YieldCo phenomenon, the U.S. solar pipeline, and the 21 bigger picture’ November 2014. Note: Excludes European Utility spin-outs of renewable segments.

The YieldCo Model Emerges ■ Public YieldCos have created a new investment class

Number of YieldCos Increasing

■ A YieldCo is a dividend growth oriented vehicle created to hold and acquire assets with a predictable revenue stream and long-term tax shields to fund a regular and increasing dividend to public shareholders

5-10 6

1

3 1

■ Following a robust initial reaction to the model, in the Summer of 2015 these companies have been impacted by macro conditions that have investors taking a more riskoff investment stance including:

1

■ Relatively limited public float of their shares ■ Continued deterioration in commodity markets ■ Concern over emerging market slow down for those with non-OECD exposure ■ Share price reaction in a future rising interest rate environment 22

Source: BofAML GCIB.

2012

2013

2014

2015E

YieldCo’s Raised Over $9bn Since 2013, but Market Volatility has Created a Pause Equity Issued by Public YieldCos ($mm)

$5,000

$4,000

$3,000

$4,135

$2,000

$1,000

$1,882 $900

$1,081

$652

$577

2014 Q3

2014 Q4

$0 2013 Q3

____________________

2013 Q4

2014 Q1

2014 Q2

Source: BofAML GCIB. 23 Note: Includes initial public offerings, follow-on equity offerings and equity-linked convertibles.

2015 1H

2015 2H

Green Bonds Allowing a Wide Range of Companies to Support Renewable Investments Coupon (%) 7.0 6.0 US investment grade corporate bond trend line

5.0 4.0 3.0 2.0 1.0

European investment grade corporate bond trend line 0.0 0

24

2

Source: BNEF, BofAML GCIB.

4

6 Tenor (yrs) Scale: $50m

8

10

12

The Green Bond Market has Matured into a Significant Source of Funding Annual Green Bond Issuance ($ Bn) 38.8

$40

36.6

ABS Project

Extrapolated

US Municipal Corporates Supranational, Sovereign & Agency

18.3

$20 15.0

4.8

4.3 3.2

0.9

0.4

0.5

2007

2008

2009

$0 2010

2011

2012

Issuance has Grown to ~$40BN/yr 25

Source: BNEF ‘Green Bonds Market Outlook - Q1 2015’ January 2015.

2013

2014

1H2015

Securitizing Distributed Solar Lease Payments Renewable Loan Securitizations

System Securitization

■ Securitizing cash flow streams is a tested method of lowering the cost of capital for projects too small to attract debt capital market investment on their own ■ Aggregation of energy projects lease payments improves investability by achieving sufficient scale

Loan

Payments

Payments

Customer

■ Supports distributed generation growth through lowering cost of capital

Examples

Payments

Developer

Customer

Home Solar System

Home Solar System

4/3/14

7/25/14

7/1/15

8/7/15

9/25/15

B

C

D

E

F

11/13/13

A

A

B

C

D

E

F

11/13/2013

4/3/2014

7/25/2014

7/1/2015

8/7/2015

9/25/2015

Amount ($mm)

$54.4

$70.2

$201.5

$111.0

$123.5

$100.0

Yield

4.8%

4.6%

4.3%

4.5%

4.4%

TBD

Rating

BBB+

BBB+

BBB+

A

BBB

BBB

Date

____________________

Source: BofAML GCIB, Company Press Releases. (1) PPA Price per kWh with respect to lease agreements are calculated by dividing the sum of the first year's fixed monthly payments by the estimated first year production. (2) Weighted Average Annual Customer Agreement Price per kWh. Fee Escalator calculation excludes fully prepaid contracts. 26 (3) Aggregate Discounted Solar Asset Balance.

Financially Warehousing Assets for Future Purchase Development Warehouses Debt Investor

Equity Investor

HoldCo

■ Construction finance is a well-established mechanism for infrastructure investment ■ Banks & Other Investors provide developers flexibility by creating warehouse financing facilities

Special Purpose Vehicle

Warehouse Debt Facilities

■ Streamlines financing process and allows for more efficient development Renewable Project #1

Examples 3/24/14

1/9/15

A

B

Date Total Size ($mm) Use of Proceeds

5/4/15 5/6/15

C

Renewable Project #N

Renewable Project #2

D

6/26/15

8/17/15

E

F

A

B

C

D

E

F

3/20/2014

1/9/2015

5/4/2015

5/6/2015

6/26/2015

8/17/2015

$250

$200

$500

$1,516

$525

$1,000

Acquire First Wind Projects After COD

Atlantic Power Acquisition

U.S. Invenergy Assets

First Reserve

John Hancock, Macquarie

Finance Residential & Funding for MyPower Paydown Term Loan & Commercial Customer Loan Finance New Projects Installations Program

Equity Partner(s) ____________________

27 Source: BofAML GCIB, Company Press Releases. (1) An infrastructure investment fund .

-

-

-

West Street Infrastructure (1)

Partners

Notice to Recipient Confidential

“Bank of America Merrill Lynch” is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., member FDIC. Securities, strategic advisory, and other investment banking activities are performed globally by investment banking affiliates of Bank of America Corporation (“Investment Banking Affiliates”), including, in the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp., which are both registered broker dealers and members of FINRA and SIPC, and, in other jurisdictions, by locally registered entities. Investment products offered by Investment Banking Affiliates: Are Not FDIC Insured * May Lose Value * Are Not Bank Guaranteed. These materials have been prepared by one or more subsidiaries of Bank of America Corporation for the client or potential client to whom such materials are directly addressed and delivered (the “Company”) in connection with an actual or potential mandate or engagement and may not be used or relied upon for any purpose other than as specifically contemplated by a written agreement with us. These materials are based on information provided by or on behalf of the Company and/or other potential transaction participants, from public sources or otherwise reviewed by us. We assume no responsibility for independent investigation or verification of such information (including, without limitation, data from third party suppliers) and have relied on such information being complete and accurate in all material respects. To the extent such information includes estimates and forecasts of future financial performance prepared by or reviewed with the managements of the Company and/or other potential transaction participants or obtained from public sources, we have assumed that such estimates and forecasts have been reasonably prepared on bases reflecting the best currently available estimates and judgments of such managements (or, with respect to estimates and forecasts obtained from public sources, represent reasonable estimates). No representation or warranty, express or implied, is made as to the accuracy or completeness of such information and nothing contained herein is, or shall be relied upon as, a representation, whether as to the past, the present or the future. These materials were designed for use by specific persons familiar with the business and affairs of the Company and are being furnished and should be considered only in connection with other information, oral or written, being provided by us in connection herewith. These materials are not intended to provide the sole basis for evaluating, and should not be considered a recommendation with respect to, any transaction or other matter. These materials do not constitute an offer or solicitation to sell or purchase any securities and are not a commitment by Bank of America Corporation or any of its affiliates to provide or arrange any financing for any transaction or to purchase any security in connection therewith. These materials are for discussion purposes only and are subject to our review and assessment from a legal, compliance, accounting policy and risk perspective, as appropriate, following our discussion with the Company. We assume no obligation to update or otherwise revise these materials. These materials have not been prepared with a view toward public disclosure under applicable securities laws or otherwise, are intended for the benefit and use of the Company, and may not be reproduced, disseminated, quoted or referred to, in whole or in part, without our prior written consent. These materials may not reflect information known to other professionals in other business areas of Bank of America Corporation and its affiliates. Bank of America Corporation and its affiliates (collectively, the “BAC Group”) comprise a full service securities firm and commercial bank engaged in securities, commodities and derivatives trading, foreign exchange and other brokerage activities, and principal investing as well as providing investment, corporate and private banking, asset and investment management, financing and strategic advisory services and other commercial services and products to a wide range of corporations, governments and individuals, domestically and offshore, from which conflicting interests or duties, or a perception thereof, may arise. In the ordinary course of these activities, parts of the BAC Group at any time may invest on a principal basis or manage funds that invest, make or hold long or short positions, finance positions or trade or otherwise effect transactions, for their own accounts or the accounts of customers, in debt, equity or other securities or financial instruments (including derivatives, bank loans or other obligations) of the Company, potential counterparties or any other company that may be involved in a transaction. Products and services that may be referenced in the accompanying materials may be provided through one or more affiliates of Bank of America Corporation. We have adopted policies and guidelines designed to preserve the independence of our research analysts. The BAC Group prohibits employees from, directly or indirectly, offering a favorable research rating or specific price target, or offering to change a rating or price target to a subject company as consideration or inducement for the receipt of business or for compensation and the BAC Group prohibits research analysts from being directly compensated for involvement in investment banking transactions. The views expressed herein are the views solely of Global Corporate and Investment Banking, and no inference should be made that the views expressed represent the view of the firm’s research department. We are required to obtain, verify and record certain information that identifies the Company, which information includes the name and address of the Company and other information that will allow us to identify the Company in accordance, as applicable, with the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) and such other laws, rules and regulations as applicable within and outside the United States. We do not provide legal, compliance, tax or accounting advice. Accordingly, any statements contained herein as to tax matters were neither written nor intended by us to be used and cannot be used by any taxpayer for the purpose of avoiding tax penalties that may be imposed on such taxpayer. If any person uses or refers to any such tax statement in promoting, marketing or recommending a partnership or other entity, investment plan or arrangement to any taxpayer, then the statement expressed herein is being delivered to support the promotion or marketing of the transaction or matter addressed and the recipient should seek advice based on its particular circumstances from an independent tax advisor. Notwithstanding anything that may appear herein or in other materials to the contrary, the Company shall be permitted to disclose the tax treatment and tax structure of a transaction (including any materials, opinions or analyses relating to such tax treatment or tax structure, but without disclosure of identifying information or, except to the extent relating to such tax structure or tax treatment, any nonpublic commercial or financial information) on and after the earliest to occur of the date of (i) public announcement of discussions relating to such transaction, (ii) public announcement of such transaction or (iii) execution of a definitive agreement (with or without conditions) to enter into such transaction; provided, however, that if such transaction is not consummated for any reason, the provisions of this sentence shall cease to apply. Copyright 2015 Bank of America Corporation.