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Investigating Energy AuctionsDecember 5, 2012

By: John Paul MoscarellaEmerging Energy & Environment, LLC

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WHO WE ARE

• Fund Management Company that manages two specialized and regional Private Equity Funds.

• Region: Latin America mainly Mexico, Peru and Brazil, in the future, Chile, Colombia and Central America

• Focused on Renewable Energy and Energy Efficiency infrastructure

EMERGING ENERGY & ENVIRONMENT

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WHO WE ARE: FUNDS UNDER MANAGEMENT

• Emerging Energy Latin America Fund II, L.P.

Primarily Renewable Energy and Energy Efficiency Infrastructure.

Recent first closing

• CleanTech Fund, L.P.

Primarily energy efficiency, renewable energy, clean technologies, sustainable transportation

Totally invested. Now divesting:- 3 Mini hydros- Efficient CNG- Efficient Corn processing - Hybrid Vehicles- Biogas

EMERGING ENERGY & ENVIRONMENT

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MARKET SUMMARY

EMERGING ENERGY LATIN AMERICA FUND II

Market Growth Potential

CONFIDENTIAL – FOR PROFESSIONAL INVESTORS ONLY

HydropowerMost countries in the region already use a good portion of their hydropower potential to generate electricity. Traditionally these projects have been developed with larger dam operations, seeking the economies of scale characteristic of large hydroelectric technologies. This practice has left a large portion of the small hydroelectric potential yet to be exploited. Given the high rainfall indices and the topography of many countries, small hydropower offers an attractive alternative to supply electricity, especially in remote sites.

Solar EnergySolar energy is more evenly distributed, as good portions of the region lie within the Sun Belt Region of highest solar radiation. Thus solar energy is a predictable and reliable resource, capable of being transformed to heat and electricity by means of several commercially viable technologies in different stages of development.

Wind PowerThe force of winds can be used to produce mechanical power and electricity by means of commercially available and cost-competitive technologies. Southeast Mexico, most Central American and Caribbean countries, as well as Northeast Brazil are attractive wind regimes due to the prevailing Trade Winds. Wind regimes can also be found in the southern hemisphere. When properly located and sized, wind has proven to be a reliable energy resource. The region’s governments are highly aware of this clean and efficient power source and will continue to stimulate its rapid expansion.

5EMERGING ENERGY LATIN AMERICA FUND II CONFIDENTIAL – FOR PROFESSIONAL INVESTORS ONLY

INVESTMENT SECTORS

Renewable Energy Energy Services

Small Scale Hydro (up to 30 MW) Wind Solar

Energy Services Companies Industrial Co-Generation Renewable Energy Distribution Renewable Energy Logistical Infrastructure

PRIMARY COUNTRY/REGIONAL FOCUS INVESTMENT TYPE

Brazil Colombia Mexico Peru Chile Central America

Infrastructure-orientation Asset-centric Expansion and growth

INVESTMENT STRATEGY AND SECTOR FOCUS

6EMERGING ENERGY LATIN AMERICA FUND II CONFIDENTIAL – FOR PROFESSIONAL INVESTORS ONLY

INVESTMENT STRATEGY AND SECTOR FOCUS

Strategies:

- Portfolio Companies with

- Scalable and proven business and technology models

- Stable cash flow and resistance to macroeconomic fluctuations

- Long term off take contracts with anchor end-users

- Partnership with local management teams with proven development expertise and operational track records

- Clustering companies into attractive portfolio acquisition targets

- Lead investor role with extensive control over and influence on the operational management of portfolio companies

Portfolio Breakdown by Sector

- Renewable Energy Infrastructure 80%

- Energy Services Companies 20%

Portfolio Diversification

- Geography: <40% of the fund’s assets will be invested in one single country

- Assets: <15% of the fund’s assets in a single investment

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INVESTMENT STRATEGY AND SECTOR FOCUS - TYPE OF ASSETS

EMERGING ENERGY LATIN AMERICA FUND II CONFIDENTIAL – FOR PROFESSIONAL INVESTORS ONLY

Fund II will principally invest in three types of assets: "Late stage" investments, with no early stage development risk, with construction risk, subject to completion of

one or more of the following:

Resource identification and measurement Basic engineering and design, construction budget reviewed and approved by third party Site control and access to transmission Key environmental permits and approvals, and execution contracts Anchor revenue contracts Project financing "highly likely" or in place

Operating or brownfield assets:

Assets with established operating profiles with potential for expansion ("low cost or free growth option") Early stage assets:

Strong pre-feasibility analysis Attractive resource, favorable regulation, and strong economic outlook Key contracts or permits still need to be obtained

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INVESTMENT STRATEGY AND SECTOR FOCUS - AGGREGATION

EMERGING ENERGY LATIN AMERICA FUND II CONFIDENTIAL – FOR PROFESSIONAL INVESTORS ONLY

EEE believes that there is an outstanding opportunity to aggregate smaller renewable energy

projects, which benefit from portfolio efficiencies in financing, implementation and operation

Improvements in technology and economics, combined with the existence of strong resource base (hydro, solar, wind) have made smaller projects economic and attractive

The smaller projects, individually with enterprise value between $5-50 mm, is an overlooked and

capital-constrained niche in the market EEE will pursue a country-specific or a regional approach in the implementation of its roll-up

strategy

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INVESTMENT STRATEGY AND SECTOR FOCUS - AGGREGATION

EMERGING ENERGY LATIN AMERICA FUND II CONFIDENTIAL – FOR PROFESSIONAL INVESTORS ONLY

Country-specific portfolios - key issues

Lack of asset and geographic diversification Country risk concentration Resource risk diversity Asset financing - single asset vs. portfolio - lender appetite may vary Sector and electricity price outlook Regulatory and institutional issues Exit prospects

Regional portfolios - key issues

Portfolio diversification based on country, regulatory regime, hydrology variation, asset-type, asset-stage Geographic composition of the portfolio - initial focus will be on countries with well-mitigated country

and regulatory profiles favorable to small hydro, as well as investment grade sovereign ratings Regional approach to financing is new but lender feedback is encouraging Target focus - Peru, Mexico, Brazil, Chile, Central America, Colombia

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PIPELINE - TARGETED SECTORS AND DRIVERS FOR FUND II DEALFLOW

EMERGING ENERGY LATIN AMERICA FUND II CONFIDENTIAL – FOR PROFESSIONAL INVESTORS ONLY

SMALL HYDRO POWER (SHP)

KEY DRIVERS Untapped existing river flows with established hydrological patterns Modest capital cost due to lack of reservoirs Low environmental impacts compared to large hydros Relatively high capacity factors (>70% vs. 25% solar vs. 35% wind) Supportive regulation that subsidizes O&M cost and taxes

KEY MARKETS Peru, Brazil, Chile, Mexico, Colombia and Central America are strong markets based on current EEE deal

flow Total installed small and mini hydro capacity is still much lower compared to potential capacity based on

untapped areas – current estimated resource is 2.8x total generating capacity, higher in some other markets

SHP & SHP + Large Hydro: Peru – 3 GW (installed) vs. 58 GW (currently estimated feasible potential) Brazil – 3 GW vs. 15 GW Mexico – 210 MW vs. 3.3 GW Chile – 200 MW vs. 10 GW Central America - 4 GW vs. 11 GW (SHP + large hydro) Colombia –8.5 GW vs. x 48 (SHP + large hydro)

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EELAF II, L.P. PIPELINE OVERVIEW

Current Fund II active pipeline: Over 35 deals representing over US$2.7 billion of investment potential. Over US$2.2 billion of the pipeline represents wind, solar, and small hydro renewable energy

infrastructure.

BIOMASS, 8%

SMALL HYDRO,

26%

BIOGAS, 3%

WIND, 32%

COGEN, 5%

CT INFRA, 8%

RECYCLING; 3%

SOLAR, 14% Uruguay; 4%

Brazil; 21%

Chile; 9%

Mexico; 43%

Peru; 11%

Central Amer-ica; 13%

EMERGING ENERGY & ENVIRONMENT

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Auctions: here to stay?

Source: Energy contracting in Brazil and electricity prices, Hermes de Arauju (Dir. General, CEPEL) et al, Brazil, 2007

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Brazil: Auctions as a policy response to 1990s privatization and energy reforms

Brazil Auctions Structure After 1990s privatization and energy reforms, generation was mainly owned

by public utilities (mostly government owned), while distribution was mostly owned by private utilities: Issue was how to encourage investment and signal pricing which would compensate sellers and not adversely affect consumers

Original wholesale market (“MAE” in Portuguese) design showed significant flaws, including ownership thus new wholesale market operator (“CCEE” in Portuguese) was created as a non-profit owned by market players

CCEE became the clearing house for all contracts, and auctions law was passed in 2004 TRANSPARENCY

Auctions for “Existing” energy started in 2005, and for “New” energy in 2006 (typically large hydro, A-5 auctions, and thermal, A-3 auctions) gave the market pricing for new generation

To stimulate renewable energy, government passed law in 2008 for Small Hydro (< 30 MW), wind, solar and biomas First auction in 2009

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Brazil: (cont.)

ACR and ACL markets created ACR is the regulated market for contracts wherein all the PPAs are

effectively signed with all the distribution companies via the CCEE, typically tend to be more competitive leading to lower prices but strong “offtaker” enhances creditworthiness and PPA is more “bankable”

ACL are freely negotiated bilateral contracts between a generator and a free customer

Since 2008 law, Energia Incentivada auctions have been held in 2009: 1.8 GW of Wind projects awarded 2010: over 2 GW of Wind projects awarded 2011: 1.9 GW of wind projects awarded Pricing has come down every year from R$140/MWh to just over

R$100/MWh Reflects the fact that most sellers are either large public utilities or new

renewable energy players looking to “get into” the market Reserve auctions are also employed to contract renewable only Since 2005, over 31 GW have been awarded, US$300 billion in contracts About 40% is large hydro, and 20% is renewables

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Auction features

Technical requirements Long list of requirements, i.e.

Prior environmental license Financing capability

Specific offers: In the case of wind for example, prices tend to converge to PROINFA (“feed-

in tariff” like) Complex mechanisms to compensate for non-delivery

Auction committee: Several government agencies Define the process Set caps (if any) Coordination with transmission planning

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Brazil: Small hydro recent developments

1998 2008 2009 2011E0

500

1,000

1,500

2,000

2,500

3,000

3,500

450

2236.7

2700

3065.7

CAC: 17,4%

20,7%13,6%

SHP: Installed Capacity

Source: CCEE Annual reports

• 2010: 7 projects awarded (131 MW)

• 2011: 41 projects registered (725 MW), but less than that awarded

• 2011: 4 projects totaling 318 MW received awards

• 2012: Few SHP projects are expected to be bid in the auctions going forward (Dec. 2012), some are same as 2011 projects

• Have the Brazil auctions have become “too competitive” for acceptable rates of return to SHP projects?

• Is there competition with wind that hampers SHP development?

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Peru: A market that is growing

2009: Similar to Brazil, Peru enacted the “Ley de Recursos Energeticos Renovables” RER auctions

SHP is defined as < 20 MW 2010 – First 2 auctions held yielding the following results:

First round 17 Projects = 161 MW Price range US$55-74/MWh

Second Round 1 project = 19 MW Price = US$64/MWh

2011 – Second auction 7 projects = 102 MW Price range = US$ 47- 55 MWh

2012 – No auction yet, RER expected in 2013 Likely pricing range ~ US$55/MWh

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Comp: Brazil wind auctions

Fuente: Impsa

Source: IMPSA, Argentina, 2012

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Comps: Wind price Latin AmericaFuente Impsa, Mendoza, Argentina

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Other markets: Uruguay, Chile, Mexico

Uruguay: Started with wind auctions in 2010 and has had three rounds so far, up 450

MW awarded in feb 2012, at US$63.50/Mwh Unclear whether SHP will be included in new rules

Mexico Self-generation market has proven slow to deploy SHP (circa 200-300 MW)

over last 10 years for SHP Widely expected Small Producer (< 30 MW) auctions to the federal utility to

start in 2013, marginal cost pricing for utility Chile

ERNC law since 2010 has led to few SHP projects, < 10 MW is dispatched first

Ministry is reviewing auction models, expect to launch, but unclear about the timing

Auctions are becoming increasingly used as a policy tool to encourage investment and keep prices for SHP and other renewables competitive.

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PPAs: Peru RER Example

Main Features of Peru RER Counterparty = Ministry of Mines and Energy Payment terms – via the COES, wholesale market operator, for wholesale

market prices and OSINERGMIN pays the differences to the generator (“contract for differences”)

Term = 20 years Indexation = US CPI index Bidders:

Firm energy amount – calculated as a % of the installed capacity Correction factor – one time correction of firm energy factor, if 4 periods

are < 85% of the firm energy Price = US$/MWh (blended cap + energy payment)

Penalties for non delivery based on firm energy start to accrue unless force majeure applies

Contract allows bidder to pledge revenues based on PPA to secure project financing, highly bankable

Overage energy delivered paid premium based on “prima”

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Some conclusions

Not all auctions are created equal Overall, success of auctions in Brazil has led to billions of investment into new

SHP projects Similarly, Peru has achieved circa 300 MW of new SHP investment in past few

years But, prices are tending to become less and less attractive for investors Conditions for developers are increasingly onerous Overall, as a policy mechanism to encourage investment in renewables and

SHP in particular it shows it can work but continual monitoring and different market conditions may hamper the future

If a significant share of wind capacity awarded in recent auctions fails to be commissioned for example RETHINKING