1. How Financial Markets Shape TheEnergy Economy Tom Konrad,Ph.D. CFA PortfolioManager FinancialWriter

2. DisclosureThis presentation is intendedfor informational purposesonly and its contents shouldnot be considered asinvestment advice or arecommendation of anyparticular security, strategy orinvestment product.Information contained hereinhas been obtained fromsources believed to bereliable, but not guaranteed. I and/or my clients ownstock in the followingcompanies mentioned: Hannon Armstrong(HASI) We have no positions inother securitiesmentioned, but mayinitiate one at any time. 3. Outline Interest rraatteess,, aanndd tthhee ccoosstt ooffeelleeccttrriicciittyy.. The the market and the solar boom. The market and the shale gasboom. The paradox of energy efficiency Q&A 4. Two Of These People Shape TheEnergy Economy Not the black guy, theother two. Ben Bernanke has beenpromoting renewableenergy for the last sixyears. Janet Yellen seemslikely to follow in hisfootsteps. 5. What Does Power Cost?Wind NuclearCoal Efficiency SolarGas 6. Interest Rate Determines Cost 7. Interest rates affect differenttechnologies differently High up-front costtechnologies (Wind,Solar, Nuclear,Geothermal) aresensitive to interest rate High fuel costtechnology depend lesson interest rate, more onfuel/ operating cost. 8. Back to the Federal Reserve Low interest rates have beenhelping Solar, Wind, andNuclear. Gas generation has done wellbecause of extreme lownatural gas prices. Coal and Nuclear havesuffered mostly because of acheap competitor: gasgeneration. 9. Fed Boosts Renewables, Gas PriceBoosts GasSource: Clean Energy Trends 2014, FERC data 10. New Vehicles For Investing inRenewable Energy Issued in 2013Source: Hannon Armstrong annual results presentation 11. Record Green Bond Issuance in Q12014 $9 billion green bondsissued Many issuesoversubscribed Green bond indexlaunched. Move to asset-backedbonds (i.e. Hybridvehicle loans.) 12. Finance is Shaping Residential SolarSolar leasing companiesAcquired by solar lease co SunRunDeveloping its own leasing armSource: GTM Research U.S. PV Leaderboard, Q1 2014 13. Bonds Backed By Solar Leases 11/2013: SolarCity$54.4M at 4.8%. 71%residential. 3/2014: Mosaic & RGSlaunch crowdfunded homesolar loan program. 4/2014: SolarCity $70M,at 4.59%. 6,596 PVsystems. 87% residential. 4/2014: HannonArmstrong provides$42M debt to SunPowerlease program. 14. The Power of Low Interest Ratesworks everywhere Incentives needed tomake projects attractiveto renewable energyproject developers indeveloping worldeconomies could cost30% less if deliveredthrough subsidizeddebt--Finance Mechanisms forLowering the Cost ofRenewable Energy in RapidlyDeveloping Countries,Climate Policy Initiative,January 2014 15. Outline Interest rates, and the cost of electricity. The the market and the solar boom. The market aanndd tthhee sshhaallee ggaass bboooomm. The paradox of energy efficiency Effective and ineffective energy policy 16. Natural Gas: Follow th Money Some [shale gas] wellsare profitable at $2.65per thousand cubic feet,others need $8.10themedian is $4.85-Ken Medlock, SeniorDirector, Rice UniversityBaker Institute Center forEnergy StudiesData source: BP1MCF = 1.02 mmBtu 17. Shale Gas Production Cost BelowPriceSource: Ruud Weijermars, Economic appraisal of shale gas plays in Continental Europe, Applied Energy 106 (2013) 100115 18. Less Drilling Means DecliningProduction 19. When companies can't make money,they stop drilling. Shell hopes to exit shaleplays in TX, CO, KS &OK. Focus on liquids,not gas. 3/2014 BP carves off shaleoperations as seperateunit, may sell. 3/2014 20. Chesapeake: Selling Leases, not Gas I can assure you thatbuying leases for x andselling them for 5x or10x is a lot moreprofitable than trying toproduce gas at $5 or $6mcf.--Aubrey McClendon,CEO of ChesapeakeEnergy, 2008 21. Conspiracy? 'It is highly unlikelythat market-savvybankers did notrecognize a naturalgas glut would occur' Wall St banks mademuch money fromselling distressed shaleassets. 22. Why Would Investors Pay ForUnprofitable Drilling? The same reasons theyfunded loans tosubprime buyers duringthe housing boom. Valuation models forshale gas were flawed,but not more flawedthan paying for eyeballswith internet firms in1999. Not Enough DueDiligence Drinking the Kool-Aid When the music isplaying, you have todance. Because they thoughtthey could sell assets togreater fools. 23. Cheap or Abundant Cheap gas = Asset Sales, lessdrilling Wall Street has been financingthe drilling boom, but will notfinance loss making companiesforever. Abundant gas requires moredrilling, and higher prices to payfor it. 24. Cheap Gas and Environmental LawsLead to Coal Plant RetirementsAnnual Energy Outlook 2014- Early ReleaseCoal plant retirements announcedNov 2013-Mar 2014 25. Outline Interest rates, and the cost of electricity. The the market and the solar boom. The market and the shale gas boom. The paradox ooff eenneerrggyy eeffffiicciieennccyy Q&A 26. The Paradox of Energy Efficiency Examples: Weather sealing Efficient appliances Lighting Quick installation Low up-front cost No operating cost Few disposal costsEfficiency(i.e. Appliance Replacement) 27. The Paradox of Energy Efficiency Examples: Weather sealing Efficient appliances Lighting Quick installation Low up-front cost No operating cost Few disposal costsEfficiency(i.e. Appliance Replacement) 28. Answer: Energy Efficiency is 'Hard' Lack of knowledge Hard to measure benefits Agency problems/splitincentives Advance planning New Methods Small scale Not 'Sexy' 29. In an efficient market, there would beno ''low hanging fruit'' Energy efficiencyopportunities are usuallymarket failures. In a textbook 'efficientmarket', such missedopportunities would not exist. Price is not the only cost ofmost energy efficiencyimprovements 30. The Best Energy Policies Depend onThe Type of Energy Market When markets work,interest rates and pricesaffect the choice ofenergy investments. In these markets, pricebased policies are themost effective way toinfluence the outcome. Cap & Trade, PTC When markets fail,opportunities are missed. Price based strategiesineffective and costly. Mandates moreeffective, often lesscostly. Appliance efficiency ,building codes, CAFE. 31. When high-return opportunities exist,the market must not be working Few car buyers calculatetheir expected fuel costswhen buying a car. Price signals do not workif buyers don't know theprice.Vehicle fuel costs: A market failure. CAFE standards are ablunt tool, but they work. After the Vehicle Ownership and AlternativesSurvey (Allcott 2011) 32. Q&A Tom Konrad, Ph.D. CFA tom@AltEnergyStocks.com www.AltEnergyStocks.com Forbes.com/sites/tomkonrad (406) 686-6067 33. Source: Matching Utility Loads with So lar and Wind Power in North CarolinaJohn Blackburn, Duke University 2010. 34. A Portfolio Approach to PowerSource: Spatial and Temporal Interactions of Solar and Wind Resourcesin the Next Generation Utility, Palmintier, Hansen & Levine, 2008 35. It's Not All About FinanceWind PTC expires & is renewedSource: American Wind Energy Association 36. A Better Way to Value Solar Austin Energy's Valueof Solar Tariffrecognized both thecosts and benefits ofadding solar to thesystem. Minnesota is in theprocess of introducing asimilar tariff.