1. The New Green Investment Model Environmental Finance Workshop #3: Emerging Environmental Risks, Strategies & Opportunities April 20, 2006 University of Toronto Peter C. Fusaro Chairman, Global Change Associates New York peterfusaro@global-change.competerfusaro@global-change.com or www.energyhedgefunds.com

2. © Copyright 2005 Energy Hedge Funds Center. All rights reserved. Confidential and Proprietary 2 GCA Resources Four Websites with Defined Functions & Free Content  www.global-change.com (Corporate Bill Board) www.global-change.com  www.energyhedgefunds.com (Online Community) www.energyhedgefunds.com  www.energymediagroup (Internet Bookstore) www.energymediagroup  www.hedgeconnection.com/wsgts ( Conferences) New Books: Green Trading Markets: Developing the Second Wave (Elsevier, 2005), Emissions as a Financial Market (Bloomberg 2006), & Energy & Environmental Hedge Funds (Wiley, 2006) Mantra: “Education Breeds Liquidity”

3. © Copyright 2005 Energy Hedge Funds Center. All rights reserved. Confidential and Proprietary 3 The New Market Drivers Carbon deficit is growing & will take 2 decades to stabilize Higher energy prices starting to force technology shifts Need to change now to technologies that will be deployed and last decades and are environmentally benign New technologies abound such as IGCC, load management and renewables taking root now Financial products for the environment are a natural evolutionary development of markets The effort will be global and is now underway The energy value chain is now overlaid with an environmental value chain

4. © Copyright 2005 Energy Hedge Funds Center. All rights reserved. Confidential and Proprietary 4 The New Market Drivers State of all emerging markets illiquid and little price discovery Rising corporate financial issue Financial liabilities growing Shareholder pressure on energy companies increasing especially pension funds Environmental risk management becomes fiduciary responsibility of energy and agricultural companies Litigation cases moving forward Regulatory regime slowly coming into place

5. © Copyright 2005 Energy Hedge Funds Center. All rights reserved. Confidential and Proprietary 5 What Some Companies are Doing Now Increasing Competitive Pressures  Within and upon energy industry  Institutional investors, pension funds, and banks are getting it (check out Carbon Disclosure Project)  Most utilities now accept it  Corporate America must comply with European Emissions Trading Scheme (Called EU ETS) and a Kyoto-compliant world in over 160 countries : there can no dual environmental standards  Learning curve may be steeper than thought  Venture Capital and hedge funds entering the space now due to sustained higher energy prices

6. © Copyright 2005 Energy Hedge Funds Center. All rights reserved. Confidential and Proprietary 6 GHG: Why Now? 2005 was the Breakthrough Year with EU Emissions Trading Scheme (ETS) and Kyoto Ratification  US market evolving at the state level and through use of CO2 for enhanced oil recovery and carbon sequestration  Globalization of markets now underway Environment overlays the energy complex (as well as agricultural industry) Touches all fossil fuel futures contracts: oil, gas, coal and power with cross commodity arbitrage opportunities US SO2 trading was the template for trading: cap & trade Global carbon footprint is over 25 billion tons & growing

7. © Copyright 2005 Energy Hedge Funds Center. All rights reserved. Confidential and Proprietary 7 2006: Year of Renewables Energy Policy Act of 2005: Ethanol & Biofuels Technology Shifts Global Demand for turbines, silicon & geothermal parts Over 600 US Green Power Programs Underway Germany ready to enter the US markets with wind, solar, and energy services Tied to reduction of carbon footprint

8. © Copyright 2005 Energy Hedge Funds Center. All rights reserved. Confidential and Proprietary 8 New Investment Model Venture Capital can have up to 10 year lock up Hedge Fund want more immediate returns Private Equity starting to invest The New Model : Fund the project with 2 to 4 lock ups and trade the streams of credits:  Sox and Nox  Carbon credits  Recs

9. © Copyright 2005 Energy Hedge Funds Center. All rights reserved. Confidential and Proprietary 9 New Actors on the Scene: Green Hedge Funds Buying carbon credits on the cheap and selling later: arbitrage Shorting recs in some states and going long in others Buying energy and environmental equities Trading SO2 and NOX and California RECLAIM Markets Looking at new technology projects & picking the right one Business model is changing into a hybrid vc/hedge fund/equity model Bottom Line: Add Liquidity to Markets, also price volatility Enter water hedge funds trading long-date water rights in the West, also in Israel: the next financial market

10. © Copyright 2005 Energy Hedge Funds Center. All rights reserved. Confidential and Proprietary 10 Green Trading Opportunity $9 billion market today for SO2, $3 billion annual market in notional value $10 billion market for CO2 Market opportunity has been estimated at $3 trillion over 20 year horizon and may be $100 billion by 2010 Truly an emerging market in the best sense of the word: little price discovery, poor liquidity One US exchange today: Chicago Climate Exchange One Canadian exchange: Montreal Climate Exchange

11. © Copyright 2005 Energy Hedge Funds Center. All rights reserved. Confidential and Proprietary 11 Next Phase of Market Development Triple Convergence underway in GHG, Renewables and Negawatts Tie between energy efficiency & carbon reductions growing through bundled recs i.e. second wave of green energy efficiency now underway Evaluation services underway to deconstruct optionality for both project finance and structured finance ( Green Finance I.e. monetizing credit streams)

12. © Copyright 2005 Energy Hedge Funds Center. All rights reserved. Confidential and Proprietary 12 Triple Convergence

13. © Copyright 2005 Energy Hedge Funds Center. All rights reserved. Confidential and Proprietary 13 What’s New In Green Trading Markets  Oils & financial houses trade energy & now emissions: Morgan Stanley latest emissions trader and Goldman has 4,000 MW renewable portfolio in 12 states with purchase of Zilkha Energy in March 2005  Environment touches all Nymex & IPE fossil fuel contracts  Weather and emissions  Coal and emissions  Renewables and GHG to reduce carbon  GHG and negawatts  More innovation to come as markets mature  No shortage of Capital

14. © Copyright 2005 Energy Hedge Funds Center. All rights reserved. Confidential and Proprietary 14 The Green Trading Players The players :  Brokers and traders  Oil and gas companies  Electricity companies  Industrials  Agricultural producers  Insurance and reinsurance providers  Financial institutions  Governments  Aggregators  Hedge funds & venture capital funds

15. © Copyright 2005 Energy Hedge Funds Center. All rights reserved. Confidential and Proprietary 15 The Green Trading Markets: The Next Steps More experimentation in trading i.e. Exchanges as well as OTC Need for more liquidity (probably through project finance mechanism) Need for standardization of contracts Cross border trading accelerating More market making by the big players needed US issue needs federal action only to follow once many states have acted for both GHG and RECs: same issue Most importantly need engagement of financial community and multinational energy companies to be the market makers: currently not very visible