Investing in Green EnergyGlitnir Investment Management Mikko Linnanvuori

This area is for placement of client logo

2Document NameDate

Government policies drive the market

Rising CO2 concentration and subsequent climate change have not been part of the market mechanism

“Internalizing the externalities”.

Implications on equity markets are primarily coming from government policies, not from climate change itself

Short-term consequences are hard to identify except melting glaciers and snowcaps, flood risk on lowlands and the growing probability of severe storms.

A wide selection of carbon abatement policies are in use – the “all measures have to be taken” approach

Huge differences exist in the implicit cost per ton of carbon abatement.

Government agendas will be putting more emphasis on the economics of carbon abatement – “preference for the most efficient methods” approach emerging?

A global carbon pricing mechanism would lead to this.

3Document NameDate

The money is flowing in…

European green funds received 15.2% of the total equity fund inflow in Jan-Jul 2007 (€4.6bn), up from 2.6% in 2006 and 0.6% in 2005.

Global VC+PE investment has grown 15-fold in five years.

The IPO pipelines are feeding the listed market

China and the US are the leading IPO markets.

Source: New Energy Finance

0 2 4 6 8 10

China

United States

United Kingdom

Germany

India

Australia

Canada

Taiwan

0 2 4 6 8 10

Solar

Wind

Biofuels

Efficiency: demand side

Biomass & Waste

Fuel Cells

Marine

Mini-Hydro

Power Storage

Smart Distribution

4Document NameDate

…and this shows in the market

0.0

50.0

100.0

150.0

200.0

250.0

300.0

4.1.2002 4.1.2003 4.1.2004 4.1.2005 4.1.2006 4.1.2007

ML Renewable Energy

MSCI World

S&P 500

DJ Stoxx 600

5Document NameDate

Marginal role in global energy production

66 %

16 %

16 %

2 %

Thermal

Hydroelectric

Nuclear

Geothermal, Solar, Wind, Wood, Waste

Total electricity capacity 4 200 000 MW, growing 2-3% p.a.

Wind 74 000 MW ~0.2%

Geothermal 11 000 MW ~0.03%

Photovoltaic 7 000 MW ~0.02%

6Document NameDate

Wind: the most mature market

Wind power is the most mature sub-sector.

Global installed capacity is expected to more than double by 2010.

Subsidized, but has reached the cost level of conventional energy in the best locations.

Leading countries are Germany, USA, Spain and India.

The turbine market is well consolidated – the six largest players have a combined market share of 85%

Large power equipment companies have bought access to the market - most recently Alstom acquired Ecotecnia.

Wind turbines are developing and growing, but no technology revolution is emerging.

Offshore wind is the next growth area.

7Document NameDate

Wind capacity is growing fast

9.713.7

18.024.3

31.2

39.3

47.7

59.0

73.9

90.0

109.0

132.0

160.0

2.2 4.0 4.3 6.3 6.8 8.1 8.4 11.314.9 16.1 19.0

23.028.0

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007e 2008e 2009e 2010e

Total capacity

Addition

2006-2010e CAGR: 21.3%

2006-2010e CAGR: 17.1%

Source: World Wind Energy Association

8Document NameDate

Wind multiples are high, but not extreme

Source: World Wind Energy Association

P/E P/Sales 2007 2008 2009 2007 2008 2009

Vestas 43.6 26.8 21.6 2.3 1.9 1.7Gamesa 29.1 23.8 19.3 2.3 1.9 1.7EDF Energies Nouvelles 86.5 52.2 37.3 7.5 6.3 5.3Suzlon 34.8 24.7 18.0 3.4 2.3 1.9FPL Group 18.5 16.4 14.9 1.6 1.5 1.4

0

50

100

150

200

250

300

Vestas

Gamesa

EDF Energies Nouvelles

Suzlon

FPL Group

Source: Bloomberg

9Document NameDate

Solar power: a long-term play, the near term market relies on subsidies

Solar power is heavily dependent on government support

Germany was the first to introduce a favorable feed-in tariff - Spain, Italy, California (USA) and Korea have followed suit.

The German scheme offers a 20-year tariff guarantee, Spain offers 25 years.

The German tariff is currently 33.19 eurocent/kWh.

Grid price parity expected between 2020-2030, which will lead to explosion in market growth.

Solar is already competitive with Californian intra-day peak prices.

Germany is the leading solar power market with 56% of new installations in 2006.

Market is polysilicon capacity constrained

The market is expected to remain tight in 2008.

Current high profitability is not sustainable in the long run.

Market growth at 28% CAGR through 2012 (Goldman Sachs).

Some of the thin film technologies bypass silicon shortage.

10Document NameDate

Solar multiples are, well, solar

Source: Bloomberg

P/E P/Sales 2007 2008 2009 2007 2008 2009

Solarworld 46.8 32.4 23.1 6.7 4.9 3.5Motech 24.1 17.8 13.2 4.6 3.3 2.5First Solar 214.2 94.2 51.7 20.8 12.4 7.7Q-Cells 55.7 40.5 26.0 10.6 7.5 5.1REC 58.7 39.3 22.3 18.8 12.1 8.0

0

100

200

300

400

500

600

700

Solarworld

Motech

First solar

Q-Cells

REC

11Document NameDate

Biofuels: a tricky market

Biodiesel in Europe and ethanol in the US and Brazil

Demand is mainly government-driven

The Brazilian market is based on lowest cost production.

Energy independence is the main driver in the US.

Trade barriers restrain global trade.

Ethanol comprises 2% of global gasoline consumption.

Three sets of players: oil majors, agriculture companies and specialized refiners.

Biofuels are under pressure in most of the markets

The global ethanol price is low, weighing on Brazilian producers.

US ethanol is cheap and corn expensive.

European production struggles with high input costs.

Ethical issues and concerns

Questionable energy and carbon balances.

Food prices, deforestation and work conditions.

2nd generation biofuels emerging

12Document NameDate

Biofuels

Source: Bloomberg

P/E P/Sales 2007 2008 2009 2007 2008 2009

Cosan 33.6 48.7 16.3 1.5 1.5 1.2Verasun 24.5 10.5 12.4 1.1 0.5 0.4Verbio 126.0 10.9 5.6 0.6 0.5 0.3CropEnergies 24.7 15.4 8.7 2.2 1.1 0.8

0

20

40

60

80

100

120

140

160

180

Cosan

Verasun

Verbio

CropEnergies

13Document NameDate

Energy efficiency

Improving energy efficiency provides negative cost option to cutting emissions.

There are still quick wins available for politicians e.g. replacing conventional light bulbs.

Investing in energy efficiency solutions is rather complicated

Though a growing theme across industries, in most cases not the primary driver of business.

Valuations are at a more reasonable level (in some cases).

The prime energy efficiency themes for investment are building insulation, vehicle fuel efficiency and energy-efficient products/solutions.

A wide spectrum of target industries enables risk diversification, but opens up industry-specific volatility.