CBI Energy ConferenceExploring UK Energy Investment – Insights from a Senior Lender

15th September 2010Ed Wilson Head of Renewable Energy

Lloyds Banking Group aims to the be the UK’s Leading Renewable Energy Bank

Renewable Energy – Lloyds’ Sector Specialism

A team with an excellent track record of

c.£2.4bn of arranging / underwriting to date - current LBG portfolio £1bn Arranger / Underwriter in over 40 projects Lender to c.6GW of renewable generation

Market leading Intellectual Capital

Selective approach to new business in the various sub sectors

Focused on core relationship clients and leading industry sponsors

Sole focus on securing “top table ” Lead Arranging and Advisory Mandates

Pro-active roles with EIB, Government and key industry bodies

Dominant in the UK - Established in the US - Well known in Europe

Successfully Delivering

OnshoreWind

OffshoreWind

SolarPV

Solar Thermal

Bioenergy, LFG &EfW

Hydro &Geothermal

Today will are Touching On

• thoughts for Areas where Reforms may assist

• the UK Investment Requirements to effect the Low Carbon Transition

• the Funding Challenges we face

Energy Market Trends – A Senior Lenders Consideration of

Low Carbon Transition is Driving Policy

The UK needs to demonstrate a 34% reduction in carbon emission by 2020 from power

generation, transport and residential energy policies

Source: KPMG 2010

The UK’s Changing Energy Mix

Renewable Energy is expected to account for a significant proportion of electricity supply by 2020

Source: KPMG 2010

6

UK Investment for Low Carbon Power Generation

Onshore and Offshore Wind Primary source with c.£80bn capex to 2020

Nuclear A key component to maintaining supply

Securing sufficient debt & equity pools of liquidity to fund this level of investment is challenging

Source: Green Investment Bank, July 2010

Significant Additional Investment Required to Finance Supply Chain Infrastructure to support New Build Generation

Offshore Wind

Nuclear

Biomass

• Manufacturing Infrastructure

• New Vessels - 17-33 Vessels

• Radar Upgrade for MOD

• Cable Manufacturing - 5 Plants

• Port Infrastructure

• Supply Chain Production eg Large Forgings

• Key Manufacturing Facilities

• Port Infrastructure

• Harvesting, Conversion Facilities and Fuel Supply

•£1.2 - £1.7bn

•£0.9 – 1.7bn

•£0.1bn

•£0.2 – 0.8bn

•£0.2 – 0.4bn

•£0.4 - £0.6bn

•£0.2 - £0.4bn

• Limited

Investment - £3.2bn to £5.7bn

Supply Chain Investment underpinned by Policy

Energy Savings in Transport and Residential Housing and Incremental Effect

Residential

Corporate

Transport

• Government Energy Efficiency - Greener Homes Strategy - Carbon Emissions Reduction Target (CERT)

• Smart Metering

• Smart Grid

• RE “Cashback” Schemes for small generation

• CRC Scheme – Behavioural Change

• Electric Cars - £250m Govt Funding

• Biofuels – Fuel Mixing Plants

•£18.6bn - 2020•£3.2bn - 2012

•£10bn - 2020

•£4.7bn – 2020

• Small

• Small

• Small

• Unknown

Investment - £36.5bn

Policy Effects Not Limited to Generation

Retaining a Sense of Perspective

Implied Annual Investment to Low Carbon is Greater than Historic Annual Investment in Electricity, Gas and Water Combined ….. Significant Challenge

Source: KPMG 2010

10

Significant downturn evident in the UK in H1 2009 following very positive growth period historically

The impact can be seen very clearly in the both deal value and transaction numbers across both the UK and the EU in the most established renewable energy market – onshore wind

Which is being seen in historic PF Activity

UK Onshore Wind Finance

0

100

200

300

400

500

600

700

2008 2009 2010 (Q1)

£m eqv

0

2

4

6

8

10

12

Nu

mb

er o

f T

ran

sact

ion

s

UK deal values UK Transactions (RHS)

EU (exc UK) Onshore Wind Finance

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

2008 2009 2010 (Q1)

£m eqv

0

10

20

30

40

50

60

70

80

Nu

mb

er o

f T

ran

sact

ion

s

EU deal values EU Transactions (RHS)

Source: IJ Online, Bloomberg New Energy Finance

Barriers to Investment are Real

Planning Planning Delays substantially increase costs – additional interest and slow returns

Regulation Market relying on Government Intervention. Need Policy Stability

Market Technology Risks, Lack of Policy Transparency and High Capital Requirements

Financing Current Financial Market Conditions delaying Investment

People Shortage of Engineers and Financial Investors with Market Experience

Others Long Build times lead to potential overspend and “small” market too small for investors

Risk Profile Carbon Pricing Providing No Stable Price signal for higher risk low carbon projects

Investment being constrained by uncertainties in planning and regulation, construction risk and level of anticipated returns

Legislation

WholesaleFunding Costs

Portfolio Performance

Key Issues in Financing

Size and certainty of legislated revenues is essential

Austerity Measures affecting downside analysis - retrospective changes possible ?

Investment decisions on any uncertainty is very challenging (e.g. UK Biomass)

From a peak in early 2009, costs had decreased…but have now risen again

Challenging to take long term debt positions due to volatility of funding costs

We believe this could be a structural change and may last a long time

Low wind yields across Europe over last 18-24 months

Some wind farms are not performing anywhere near base case

Capturing the lessons to use a revised approach to structuring transactions

SelectiveCapital

Allocation

Capital will flow to the best risk adjusted return

Each Bank will have preferences for Legislative Regimes / Sponsors / Sectors

Countries with the strongest legislative regimes and best margin pricing will attract the most capital from senior lenders

Banks need to recycle capital and need to distribute to a wide range of investors

13

Indicative UK “All-in” Cost of Debt for Projects

Wind Farm Finance - Indicative All- in LIBOR Cost of Debt (including Credit Interest Margin)

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%10yr LIBOR swap rate Credit margin All In Cost of Debt

Lehman

TREND ALMOST FLAT

Northern Rock

ITRAXX vs Margin Pricing

Wholesale funding costs are dynamic and respond rapidly to market shocks

Trends are higher and be different for individual banks – cheap long term funding is Unsustainable

Margin pricing will ultimately account for increases but “volatility” is difficult when planning investment

Lehman Greece/Eurozone

Margin Pricing Differs Across Geography

Clearly legislative regimes differ across geography and this includes both the Wind and Solar asset classes

However, this pricing is higher that what we see in the UK for broadly similar risk profile deals

Lower pricing lower in the UK is due to recent thin deal flow levels

Project Country FC Term loan Tenor Price*

192MW Waubra Wind Australia 18 Feb US$273m 5 yrs +340bps

150MW Alta Wind I US 3 Mar US$254m 7 yrs +275-325bps

150MW Cedro Hill US 10 Mar US$135m 15 yrs +300-375bps

Eolia Wind Portfolio Spain 24 Mar US$114m 18 yrs Euribor+270-300bps

Cellino 43MW PV Italy 26 Mar US$120m 18 yrs Euribor+310bps-335bps

NextEra Central States US 15 Apr US$255m 17 yrs +250bps-375bps

Fuente Alamo PV Spain 23 Apr US$39m 18 yrs Euribor+300bps

Hudson Ranch Power US 13 May US$205m 7 yrs +325bps

Duke Energy Wind US 24 May US$325m 15 yrs +250-350bps

Beech Ridge wind US 9 June US$46m 10 yrs +300-425bps

Source IJ, July 2010.

Provide Regulatory Stability Provide Regulatory Stability

Establish Framework for Flexible Generation Establish Framework for Flexible Generation

Transmission Investment and Charging to foster remote Renewable Growth Transmission Investment and Charging to foster remote Renewable Growth

Provide a Robust Carbon Price Provide a Robust Carbon Price

Smart Demand and Metering Smart Demand and Metering

What Would Help

Key Areas that should be addressed to positively help entice Investors

17

Looking Ahead

Significant funding challenge to meet c.£.200bn investment needed for the UK’s Low Carbon Transition

Utilities and Banks cannot meet the cost alone - Need Greater Liquidity

Emergence of different legislative regimes and/or greater Government involvement will be required

Government likely to become more interventionist rather than relying on the market to deliver required infrastructure

The UK has a real opportunity to play a major role in the ‘Energy Revolution’ but needs to clear the obstacles, for which Reform is required

Our Energy future does really depend on what we do today

Our Energy future does really depend on what we do today

Many thanks ed_wilson@bankofscotland.co.uk

Tel: +44 207 012 9262

Sustainable Resources creating a Sustainable Business