1. Project Financing Emerging Energy Technologies Presentation to University of Houston-GEMI Conference on Emerging Energy Technologies Stephen V. Arbogast November 18, 2004

2. Why Project Financing for Emerging Energy Technologies? Technology risk generally more appropriate for Venture Capital However, project financing enters the picture when: –Technology developed by ‘capital poor’ sponsors And ‘threatens’ established franchises –Full exploitation of technology requires scale and is capital intensive Could strain finances of even investment-grade sponsors –Technology’s development involves multiple risks to be shared among multiple parties Project Finance is excellent at ‘deconstructing’ & distributing risk Project Finance will play more of a role as technologies advance from prospective to proven –Geothermal and Tar-Sands provide case studies

3. First Principle: PF Lenders won’t accept Technology Risk Seen as equity risk, not bankable in its pure form –Jeopardizes the ‘project’, without which project financing can’t be repaid Technology risk is one component of ‘completion risk’ –Normally handled by strong sponsor completion guarantees Venture capital normally doesn’t meet ‘strong sponsor’ test Second technology-related risk is end-market –Is technology also changing the ultimate offering in the marketplace? CNG vehicles, fuel cell/hybrid cars – no assurance consumers will respond Market Risk must be assumed by off-take contract or government support –New technologies that produce established products from new inputs allow financing to concentrate on ‘completion risk’ –Geothermal electricity, Tar sands synthetic crude oil, NG to Liquids

4. How can PF handle Technology Completion Risk? Traditional approach is to have strong sponsor guarantee completion – absorbs overruns and delays –sponsor repays debt if technology never works at all – killer variable Possible PF approaches for ‘weak’ sponsor with technology making conventional end-product –JV or license technology for first project to demonstrate technical viability at full-scale Once technology ‘proven’, risk becomes more conventional completion –Completion risk ‘deconstructed’ and distributed among stake-holders  Technology provider  Construction contractor  Insurance  Product off-takers  Sponsors

5. An Example – Imagine ‘Clean Coal’ Technology for Electricity/Chemicals R&D Company develops technology whereby: –Coal is transformed into ‘syngas’, which then feeds steam generators for electricity and a chemical plant co-producing methanol Technology works at pilot plant scale Using Project Financing to Commercialize Technology –Approach A: R&D company contributes technology into JV with utility & chemical company, in return for equity and rights to license to others –Utility and Chemical firms provide completion support and ‘carry’ for R&D firm –Approach B: R&D company forms SPE, raises venture equity Completed contracts for construction, electricity/chemical ‘off-take’ Technology risk layered and distributed: –First layer of funds needed to ‘get it working’ from equity fund ‘set-aside’ –Second layer from insurance –Third layer from Utility/Chemical firms, with right of ‘step-in’ and assumption of SPE’s stake Contractor provides ‘liquidated damages’ for construction overrun/delays

6. Conclusion – PF can support Emerging Energy Technologies Can support rapid ‘scale-up’ of new technologies demonstrated to be technically and commercially viable –Effective means to foster competition with established technologies employed by well-capitalized energy firms Project Financing also an effective tool to segregate and distribute new technology’s risks among stakeholders –An economic tool for pricing risk/reward of commercializing technology Will off-takers take technology risk in return for: –Equity –Avoided license fees –Rights to use technology in 100% ventures Will technology developers surrender rights in return for: –Opportunity to ‘prove’ technology, technically and commercially –Mitigation or avoidance of bankruptcy risk if technology fails