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2016 Deloitte Alternative Energy Seminar Setting new sights November 14-16, 2016

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2016 Deloitte Alternative Energy SeminarSetting new sightsNovember 14-16, 2016

Global perspectives

Teresa Thomas, PartnerBrian Murrell, PartnerDeloitte & Touche LLP

Copyright © 2016 Deloitte Development LLC. All rights reserved. 3

Agenda

Introductions

• Global Energy Landscape

• Intermittent Energy Sources and their Potential Disruption

• Emerging Regulation and Corporate Commitment

• Accounting Implications

• Q&A

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Global Energy Landscape

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While the International Energy Agency reports that renewables account for only a small portion of total global electricity generation (i.e., 22% in 2013), it is unlikely this will be the case for long

Global Trends – Electric Generation and Capacity OPTION 1

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While the International Energy Agency reports that renewables account for only a small portion of total global electricity generation (i.e., 22% in 2013), it is unlikely this will be the case for long

Global Trends – Electric Generation and Capacity OPTION 2

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While some countries are looking for ways to leverage alternative energy, there is a large amount of the world that needs to simply get on the grid in the first place

What Does The Energy Map look Like for Developing Countries

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“Renewables are poised to seize the crucial top spot in global power supply growth, but this is hardly time for complacency”

–IEA Executive Director Fatih Birol

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Intermittent Energy Sources and their Potential Disruption

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Community Solar Programs

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Growing solar investments pave the way for increases in alternative energy demand

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Community solar programs allow customers to invest in solar power by sharing the resource with others in their vicinity – it broadens the market for solar power

What are Community Solar Programs?

Benefits to project participants:

• Reduced investment cost when compared with individual installations

• Reduced solar generation cost when compared to same source generation from standard utilities

• Increased opportunity for individuals to support carbon reduction through renewable energy source

Community solar programs have been increasing in popularity and will continue to do so

As published by Solar Power Europe

• Almost 60 % of consumers globally – especially those between 18 and 34 years – show interest in investments that increase their self-sufficiency

• 55% of customers interested in purchasing or signing up for solar products within a period of 5 years and this trend has increased over the last two years

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Community solar programs allow utilities to

• Grow solar generation portfolios through direct sales

• Enhance grid optimization and technologies offered to consumers for efficient energy consumption

• Diversify product portfolio through bundled sale arrangements of renewable energy supply

Grid considerations include

• Planning for changes in the mix of energy sources and its impact on grid reliability

• Devising innovative capacity and stability plans for grid stability

• Developing a dedicated policy framework for consumers-level renewable generation and its interaction with the grid to enhance resiliency

Community Solar Opportunities and Challenges

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Grid Integration

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Growing supply of renewable energy sources make Grid integration a priority

Reliability

• Challenges in the availability of energy for the grid

Was widely believed that intermittent sources of electricitygeneration would threaten grid reliability once they surpassed 10% penetration

Several countries, states and provinces have now far exceeded that threshold.

Stability

• Challenges in balancing energy through the grid

A host of new technologies are making existing electricity grids more flexible, which is key to integrating intermittent power sources.

Renewables currently deliver 28% of Germany’s total gridpower (and up to 40% in some regions).

Resiliency

• Challenges in recovering from grid outages

While resiliency efforts used to focus on preventing outages, states and utilities are realizing that alternative energy sources can speed recovery times after an outage occurs.

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Enhancing forecasting and planning

• Advanced analytics, which enhance forecasting accuracy (e.g., predicting load on the grid as well as the output of solar and wind installations on a given day).

• Demand response programs, which involve paying commercial, industrial, and even residential customers to reduce electricity demand given advanced notice

Adopting new technologies

• Grid-control gear and interconnections that link national systems, allowing power from wind and solar farms to be spread over wider

• Smart technologies, which allow two-way communication across the grid, between generators, storage providers, and electricity users, thus enabling more efficient transmission, distribution and load balancing

Utilizing alternative sources to speed up recovery times

• Distributed generation

• Batteries, flywheels, molten salt, pumped hydro and other energy storage mechanisms for time-shifting renewable generation and enhancing frequency response

Once the nemesis for utilities, a host of new techniques and technologies are quickly making integration of intermittent power sources into the grid a problem of the past

What is Being Done to Address Grid Connectivity in the Future

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Energy Storage

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Electricity Supply – grid scale to add

reliability during peak periods

Renewables Integration –allows for time

shifting and management of

intermittent capacity

Ancillary Services – such

as surge capacity, load-balancing and

voltage support

End-User –primarily

associated with distributed generation

Grid Support –relieves

congestion on grid and provides on-site power for

sub-stations

Energy storage is not a new concept – it has been has been around since the inception of the power and utilities industry

Electricity storage includes five broad families of applications

Across these diverse applications companies are able to capture excess energy produced at one time for use at a later time

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Past misconceptions about energy storage

• Not viable

• Not affordable

• Particularly for utility-scale, large commercial applications

Key advantages of energy storage

• Tool to manages intermittent energy sources

• Reduces costs

• Connects isolated areas

• Decreases reliance and stress on the grid

• Aids in disaster recovery plans

• Enhances corporate citizenship

Energy storage technology is advancing and making renewable energy more viable by eliminating the issue of intermittency

Recent Corporate Projects

Announced a pilot project in

the UK that will

plug 100 of its Leaf cars into theelectricity grid, using their batteries as extrastorage French oil

giant, Total, recently announced aUSD 1.1 billion scheme to buy battery groupSaft

Created the Tesla Powerwall, a home batterydesigned to charge using electricity generatedfrom solar panels, or when utility rates arelow

TOTAL

TESLANISSAN

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Emerging Regulation and Corporate Commitment

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Far-reaching regulations at global, national and local levels are driving increased adoption of renewable energy

US Environmental Protection Agency’s Clean Power Plan

• Calls for reducing greenhouse gas emissions in the US electricity sector from their 2005 level by 32% by 2030

• Expanding renewables is one of the Plan’s three key pillars

• The US Energy Information Administration estimates that under the Plan renewables will account for as much as 400 GW of generation by 2040

• The Plan requires states to develop their own plans to curb carbon pollution

• Ultimate impact will be in the hand of the States and the Courts

UN Paris Climate Change Agreement

• More than 175 countries endorsed the Agreement at the climate change conference, formally known as COP 21, held in 2015

• All-time high for signing an international treaty on climate change; a historic “meeting of the minds”

• Collective goal: “Keeping global warming below 2*C compared to pre-industrial time, and to pursue efforts to limit the temperature rise to 1.5*C”

• Requires participating countries to submit plans and update every 5 years

• Positive momentum for renewables

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Canada

− Provincial leaders have agreed to a framework for clean growth and climate change.

− The framework addresses clean technology, innovation and jobs, carbon pricing and mitigation, and it encompasses all Canadian provinces.

− Actions, such as working to supplant usage of diesel generation with renewable, clean energy in indigenous and remote communities, and doubling its investments in clean energy, research and development over five years.

Rooftop requirements

− March 2015, France decreed all new rooftops in commercial zones must be covered in plants or solar panels.

− Green roofs are already popular in Germany and Australia, and Toronto

− Canada, mandated them in new industrial and commercial buildings larger than 2000 sq. meters

What Else Is Being Done Globally to Mandate the Use of Alternative Energy?

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The business case grows

− can lead to cost savings and improved resiliency to major weather events

− can be appealing for operators in remote locales

− Are consumer demanded! As Millennials increasingly become an economic force to be reckoned with, they could drive exponential growth in alternative energy

RE100 Sustainability Program

− RE100 is a collaborative, global initiative of influential businesses committed to 100% renewable electricity, working to increase corporate demand for renewable energy

− As of 2015, 58 multinational corporations, which hail from all over the world, made the commitment to go 100% renewable through the Program

Companies are embracing alternative energy options

− 39% reported installing solar panels or other electricity-generating assets at their facilities

− 26% said they had installed batteries to store electricity as a hedge against peak demand times, when electricity prices are higher

− As of 2015, corporations had signed power purchase agreements for large-scale, off-site renewables covering 2 GW of power, up from 1.2 GW for all of 2014.

What Are Corporations Doing Outside of the Regulations?

As the business case grows, global companies are launching voluntary movements to generate all of their energy from renewables in the next two decades. US market over the last 5.

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YieldCos

− Introduced into sector in 2013

− Publicly traded companies formed to own operating assets that produce cash flows, which are then distributed to investors as dividends

− Offer public equity investors an attractive total return proposition of growth plus yield

Green Bonds

− Corporate bonds with proceeds ring-fenced for clean energy investments

− International Finance Corporation was one of the earliest issuers of green bonds; as of 2015 it has issued USD 4.3 billion in green bonds

Other

− Extension to US Investment Tax Credit

− Crowd sourcing

Innovative financing vehicles for renewable energy consumptions have lowered the cost of capital and improved access to it

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Accounting Implications

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What are the potential impacts of these trends?

Asset Impairment and Useful Life

• Uncertainty of future costs associated with coal-fired units due to pending regulation and continued depression in low natural gas prices may impact assert value of convention generating assets

• Future capital expenditure requirements may lead to expedited decisions for conventional generating asset retirements and mothballing

Industry Transactions

• Long-term Contracts: accounting implications of unique structures

−Lease

−Revenue

−Derivative

• YieldCos: proper SEC and GAAP considerations during the development of and changes in Yield Co organizational structures and asset portfolio

• Development Activities: start-up v. development costs and timing of capitalization

Revenue and Lease Considerations

• Innovative sales structures of emerging alternative energy technologies, such as solar panels and energy storage units may blur the line between a sale or a lease

− Is there continuing involvement with the sold good?

− Is there a buy-back option included in the contract

−Does the seller assume certain risks or costs due to external factors (such a weather)?

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Teresa ThomasDeloitte & Touche [email protected]

Brian MurrellDeloitte & Touche [email protected]

Contact

This publication contains general information only and is based on the experiences and research of Deloitte practitioners. Deloitte is not, by means of this publication, rendering

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