An attractive investment case for European Union renewables NO CARBON EMISSIONS, NO FUEL COSTS AND STRONG DRIVERS FOR CONTINUED GROWTH

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1 An attractive investment case for European Union renewables NO CARBON EMISSIONS, NO FUEL COSTS AND STRONG DRIVERS FOR CONTINUED GROWTH By Peter Rossbach and David Richardson For professional investors only - November Introduction 2 Future growth of the EU renewables market 3 The cost of renewable technologies continues to decline 4 Other renewable energy sources and enablers 5 Conclusion

2 1 November INTRODUCTION This paper provides a primer for investors who may be considering investment in the renewables sector in Europe. This overview describes how proven renewable energy technologies are transforming the energy sector of the EU power market and what opportunities lie ahead in the time frame. Impax sees a particular investment opportunity for both onshore Wind and Solar as the most interesting and accessible investment opportunities in Europe. We also review some of the other technologies in order to give investors a broader overview of the sector. Electricity markets across Europe are undergoing fundamental and rapid change towards a greater reliance on renewable energy. Three imperatives drive this change: Based on the three imperatives for change and the supporting market context described above, renewables have made up the majority of new capacity investment in Europe in most years since Renewables accounted for 79% and 72% of new capacity additions in the EU in 2014 and 2013 respectively 1. The International Energy Agency expects that the combination of EU climate change policies, renewable energy targets at both EU and member state levels, energy security imperatives and declining technology costs will continue to drive the strong growth in renewables across EU member states. Most of this growth will come from Wind and Solar and these sources are projected to account for 24% of total power generation in the EU by 2030 (see Figure 1 below). Securing independence from Russian and North African gas imports Mitigating climate change, as evidenced by the decisions announced by the EU Commission in March 2015 and at the Paris Climate Agreement in December 2015 Post-Fukushima, reducing nuclear power operations in the time frame, while avoiding a gap in electricity supplies. Figure 1: Renewables gradually replacing coal and nuclear; EU net capacity additions (GW) and share of generation from wind and solar (% of total TWh) Source: Wind in Power, 2014 European Statistics, European Wind Energy Association (2015). This is a forward looking statement. There may be important factors that could cause actual outcomes to differ from those indicated here. Impax undertakes no obligation to update any forward looking statement. 1 Wind in Power, 2014 European Statistics, European Wind Energy Association, February 2015.

3 2 November 2016 The EU renewable energy market offers a compelling opportunity for investors seeking diversified exposure to infrastructure. In particular, the EU market offers: Large stable economic region: dominated by single currency Supportive regulation: based on consistent climate change policies and the aim to shift the generation mix away from fossil fuels and nuclear A diverse mix of resource: wind, solar, hydro Strong market: a declining cost structure in Wind and solar markets. Of particular importance is the difference in terms of commitment to new build between the EU renewables market and the markets in the US, and Japan. In Europe there is a strong commitment to construction to 2025 and beyond. This forward-looking construction policy agenda is not so clear in the US and Japan where visibility on new build support schemes does not currently extend beyond 2016 and 2018 respectively. Furthermore, global investment vehicles can fall foul of emerging market volatility and currency issues. 2. FUTURE GROWTH OF THE EU RENEWABLES MARKET The EU has imposed a binding target to produce 20% of its electricity from renewable energy sources by This will require over 130 GW of renewable electricity installations (of which 52 GW is planned from onshore Wind). The National Energy Plans of 9 key EU countries set targets that require over 200 billion of investment in renewables by In the Wind sector alone, these countries will need to install 87GW of Wind generation representing an investment of 148 billion, by This volume of investment creates an attractive investment opportunity for private capital. Most developers are undercapitalized, and many utility power generators suffer from capital constraints to fund the construction costs. Many financial investors are neither able to, nor willing, to take on the complex development and construction obligations of these investments 3. In contrast to emerging markets, Europe represents a more stable investment region, with strong and growing demand for operating projects from experienced developers and operators such as Impax. Europe s electricity demand matches the seasonal supply profile of its mix of wind and solar resources. EU electricity demand peaks in winter in most countries with strong wind resources. This is in part due to the dominance of the winter heating market in non-mediterranean Europe. Air conditioning is not broadly installed in EU homes, but there is some increased summer demand for electricity in southern Europe which matches solar production peaks in these countries. 2Platts, Power in Europe, June Wind in Power, 2014 European Statistics, European Wind Energy Association, February 2015

4 3 November 2016 On-shore Wind Generation In 2014, almost 12,000 MW of wind power capacity, costing roughly 15bn, was installed in the EU, accounting for 44% of total new power capacity. This equates to a financial commitment of some 15bn. The growth of wind energy is predicted to continue until at least until 2030, with GW of wind power being added to the EU grid each year. This is estimated to require investment in the region of bn and is broadly in line with the pace of installation during Industry sources estimate new wind energy installations during the period to occur predominantly in western and central Europe, with significant activity also in the Iberian Peninsula and northern Europe (See Figure 2). Solar Photovoltaic (PV) In the period , new solar projects are estimated to average 5-6 GW per year. In the longer term, the EU solar PV market is projected to experience increasing growth, reaching 15 GW per year by The Spanish Government introduced a number of adverse, retroactive taxes on solar power generations between 2009 and Many investors (including Impax) are pursuing multiple complex arbitration claims against the Spanish Government. This retroactive action has been harmful for the country s reputation, but it should be noted that wind and solar PV tariffs in excess of 100/MWH are not part of the present EU market. Germany currently has the largest installed capacity. The German government recently confirmed its support for an expansion of ground mounted PV by setting a new target for future installations at an average of 400 MW per annum over the coming years under the latest renewable energy regulation (EEG 2014). Prospective builders of new capacity will receive, according to the vintage year of construction, a 20 year fixed power sales price, set by market offers for that vintage, and have 24 months from the granting of the tariff to connect to the grid. Figure 2: Installed wind energy capacity scenarios for 2030, by region Source: Wind Energy Scenarios for 2030, a report by the European Wind Energy Association, August Wind in Power, 2014 European Statistics, European Wind Energy Association, February 2015 and own analysis based on National Renewable Energy Plans. 5 IEA World Energy Outlook 2014.

5 4 November THE COST OF RENEWABLE TECHNOLOGIES CONTINUES TO DECLINE Solar PV Over the last five years 6, the price of producing electricity from Solar has fallen by around 80% as the cost of the technology continues to decline, driven by industry growth and manufacturing efficiencies. The fall in technology costs has allowed government support levels to reduce rapidly 7 encouraging further expansion of renewable energy generation. Declining steel and copper prices have further reduced input costs, allowing solar generation to approach grid parity in a number of locations. Through the combination of lower equipment costs and increased performance efficiency, the production costs from PV will shortly be below coal or gas in Europe 8. Wind Technology evolution and lower installation costs continue to improve the prospects for the sector. The cost of electricity produced from wind has dropped by more than 50% in just five years 9. This is primarily due to the installation of larger and taller turbines combined with falling operating and maintenance costs. The cost per MWh of both Wind and Solar PV energy is expected to decline further as both technologies continue to evolve. Wind is now at "grid parity" in as much as it is below retail prices, and solar is close to grid parity in many southern climes. Importantly, both are materially cheaper in long term marginal generation cost than new nuclear power plants now in construction. Figure 3: The increase in efficiency and production from bigger turbines Source: Nordex Marketing Material, Pöyry Point of View: Is the end in sight for renewable subsidies, Pöyry Management Consulting October http://

6 5 November 2016 Figure 4: The Falling Unit Cost of Generation from Wind and Solar Source: Impax Internal Analysis, 2016 Impax expects the falling unit cost of Wind and Solar PV generation to march in step with the gradual reduction in long-term power sales pricing incentives offered in the EU, whether set by auction tender or by tariff, allowing investors in new projects to sustain attractive profit margins. Figure 5: Feed-in tariff revenues and production cost of electricity for wind energy (German example) Source: BNEF, Impax analysis

7 6 November OTHER RENEWABLE ENERGY SOURCES AND ENABLERS Here we outline other renewable generating sources for background. This also supports our view that the most attractive and accessible investment opportunities are currently in the proven technologies of onshore Wind and Solar PV. Biomass and bioenergy Energy from biomass fuels is derived from processing organic matter such as wood, specially produced agricultural crops and agricultural food or industrial waste. Bioenergy refers to the technical systems through which biomass is produced or collected, converted and used as an energy source. Bioenergy already provides a significant amount of renewable energy worldwide and this is expected to rise. Within the EU, consumption of biofuels has seen an overall 28% growth between 2008 and For a number of reasons, this is not an area that Impax is pursuing. The capital investment requirement can be vast for large scale projects, and smaller projects are very labour intensive. Additionally, the cost of feedstocks is typically poorly correlated with the value of the fuel or electricity produced, providing significant margin risk, unlike Wind and Solar PV. Hydropower Hydropower is a proven and cost-competitive technology. It is the largest non-fossil fuel energy source for power generation in the EU. In addition to being a baseload source of renewable energy, it can deliver storage capacity and stabilizing services for power systems through pumped storage. Hydropower generation is expected to increase significantly in Europe over the coming decade, and has the potential to more than double its output by optimizing existing and developing new sites. 12 Research sponsored by the EU Commission suggests that more than 60 new pumped-storage plants with a total capacity of about 27GW will be built in Europe by 2020, requiring investment of around 26bn. 13 Large capex, long permitting and development times are the rule for most new build dam hydro projects. Impax is potentially interested in attractive smaller scale, faster dam retrofit developments and pumped storage or existing sites. Renewables enablers : energy storage, grid investment and demand response The rapid expansion of renewables has created demand for commercial arrangements that enable the transmission grid to respond and adapt to intermittent energy production. Investment in the electricity grid to enable it to support renewable generation more effectively, such as flexible generation, energy storage and peak shaving or other demand response solutions is projected to reach 200 GW by , representing a market of bn. At present, using proven technology, this renewable energy enablers sector comprises energy storage and reserves/capacity plants as well as demand response business models. 15 The cash flows of these infrastructure assets are likely to resemble those of conventional renewable energy, so Impax believes this market has attractive investment potential. Pumped-storage hydroelectricity is a type of energy storage used by electric power systems for load balancing. It stores energy by pumping water from a lower elevation reservoir to a higher elevation using low-cost off-peak electric power to run the pumps. During periods of high electricity demand, the stored water is run back downhill through turbines to generate electricity for the grid. At the end of 2014 there was 166 GW of conventional hydro installed in Europe, and a further 50 GW of pumped storage, generating roughly 10% of the region s electricity European Biomass Industry Association, Hydropower Status report, international Hydropower Association. 12 Hydropower- Supporting a Power System in Transition, Eurelectric, June 2015 and 2015 Hydropower Status Report, International Hydropower Association. 13Power Storage European Commission SETIS Magazine, December. 14 New Energy Outlook, Bloomberg New Energy Finance, June Commercial examples include Energy Pool ( a French demand response business, and pumped air, battery or flywheel systems installed to provide immediate power to the grid each of which is typically incentivised through capacity payments and through the marginal difference in the price per MWh stored and sold. As of 2015, new electricity storage plants are being rolled out in leading markets such as France, Netherlands, Ireland, Germany and the UK.

8 7 November THE IMPAX INVESTMENT MODEL Impax s value-added strategy focuses on purchasing preconstruction assets (individually or in portfolios) for construction and eventual sale to the growing pool of long term, yield-seeking investors. Our investment strategy targets buying projects from the fragmented market of under-capitalized developers. We typically seek to own 100% (or at least controlling majority interest) so we can manage key governance, construction, funding and exit decisions. Impax seeks to optimize the permitting, equipment selection and operational elements of projects to have an entry IRR in the range of 12-15%. The construction of projects typically takes 6-12 months. Following construction, we typically aggregate individual operating projects into larger operating portfolios and sell them competitively to the large number of financial and utility investors or brownfield infrastructure buyers seeking sizeable operating portfolios. In the past decade, the influx of new infrastructure investors remains focused on the long term but lower return, income-oriented brownfield segment of the market. In contrast, there are few EU-wide specialist managers buying pre-operation projects and executing a roll-up of portfolios for resale. This fast-rotation strategy matches the decentralized asset nature of renewable energy assets in Europe and the favorable regulatory backdrop. At the asset level, it entails executing a buy-build-sell or, occasionally, a buy-fix-sell asset conversion plan, within an expected overall hold period of 3-5 years. Impax is able to do this effectively through exceptionally high levels of asset due diligence which are undertaken with our own specialist, experienced team. Impax has developed a risk management framework to guide its asset selection and portfolio construction. We seek to invest only in economically robust EU countries with strong credit ratings and so we target countries and asset types where there is significant destination investor demand for brownfield operating assets. This excludes countries like Bulgaria and Greece, as well as much of Eastern and Southern Europe. Management of development and construction risks The construction risks faced by renewable energy plants are similar to those of other construction projects and are best managed by a team with strong project management skills and a successful track record in constructing renewable energy projects on time and within budget. Project risk is highest at the early pre-permitted stage, when government permitting can take time or fail entirely. Impax generally avoids this stage and instead prefer to purchase projects from specialist local project developers. As the project progresses, development and construction risks decrease alongside the incremental investment returns. With short construction periods and turnkey construction contracts in place with credible corporate contractors (eg companies such as Siemens, GE, etc) construction is derisked, but requires our project management skill set. As the Figure 4 below highlights, risk mitigation is a core feature of Impax s process for realizing value from building permitted projects. Figure 4. Impax s value creation model

9 8 November 2016 Operational risk Wind and sunshine are variable and dictate how much electricity and revenues a project generates. To manage this risk, sites are chosen based on extensive historical wind or solar data, and conservative assumptions are made prior to construction. However, year-on-year variability can occur, affecting the financial performance of projects. Typically, any variance in the wind or solar resource can be expected to average out over time, and our exit market buyers price purchase accordingly. Investment portfolios that combine wind and solar projects across geographies improve portfolio resilience. 6. IN CONCLUSION: AN ATTRACTIVE INVESTMENT OPPORTUNITY The EU renewable energy market is undergoing rapid growth. However, the industry remains fragmented at many levels, creating a compelling opportunity for experienced developers. It is a market is ripe for investment as large financial investors and utility power generation companies look to buy scaled renewable energy portfolios with operating histories. Outside of the infrastructure sector, investors face challenges in finding low-risk, long-term assets that offer a good match for their liabilities. This is especially true in the current interest rate environment, where high and even mediocre quality debt instruments offer even lower yields. We believe that investment in renewable energy assets offer a solution to these challenges. If chosen carefully, diversified portfolios of wind and solar assets can offer predictable, low-risk returns, sometimes with a degree of government guarantee or linkage to inflation. Targeting mid-teens net IRR returns using the infrastructurerisk asset class would therefore appear attractive, particularly with a specialized manager with a regional focus (Europe) and a strong team and track record. The exit markets for the Impax business model are well established and Institutional investors are committing capital to the infrastructure sector, but mostly in the downstream or destination buyer brownfield markets. PGGM in the Netherlands is an active investor in on- and offshore wind farms. Pension Danmark has made six renewable energy investments since Insurance giant Munich Re is investing 2.5 billion in wind farms and solar parks in Europe. Warren Buffet s Berkshire Hathaway has also emerged as a major investor in US renewables assets particularly in solar. Investors and their advisors should become better acquainted with the opportunity presented by these markets, and consider how best to allocate capital to the sector. Institutional investors will then recognize the potential of renewable energy assets in helping match their longer-term liabilities.

10 9 November 2016 CONTACT INFORMATION Peter Rossbach David Richardson Molly Ono Managing Director Managing Director Director Impax Asset Management Norfolk House 31 St James s Square London, SW1Y4JR Impax Asset Management 641 Lexington Avenue Suite 1400 New York, NY Impax Asset Management 5 Centerpointe Drive Suite 400 Lake Oswego, OR (0) p.rossbach@ d.richardson@ m.ono@ Disclaimer The information and any opinions contained in this document have been compiled in good faith, but no representation or warranty, express or implied, is made to their accuracy, completeness or correctness. Impax, its officers, employees, representatives and agents expressly advise that they shall not be liable in any respect whatsoever for any loss or damage, whether direct, indirect, consequential or otherwise however arising (whether in negligence or otherwise) out of or in connection with the contents of or any omissions from this document. This document does not constitute an offer to sell, purchase, subscribe for or otherwise invest in units or shares of any fund managed by Impax.