1. Copyright 2013 by Baringa Partners LLP. All rights reserved. Confidential and proprietary. Route to market for independents Overview of the evidence to date CLIENT: DECC DATE: 11.04.13

2. Copyright 2013 by Baringa Partners LLP. All rights reserved. Confidential and proprietary. Contents 2 Overall objectives and evidence base Key definitions State of the long term PPA market Evolution under CfDs Agenda Drivers for PPA market change Emerging conclusions

3. Copyright 2013 by Baringa Partners LLP. All rights reserved. Confidential and proprietary. Approach Key objectives and evidence base 3 ► Assess the state of the market and establish whether there is evidence to support the assertion that PPA terms are deteriorating for independents ► To the extent that a PPA terms are deteriorating, appraise the evidence presented by stakeholders as to drivers of this market change ► Assess how the identified drivers will manifest and evolve in a future market with Contracts for Difference (CfDs) Key objectives PPA Market Assessment Drivers of PPA market change Evolution under CfDs Evidence Base Call for evidence responses Targeted interviews with stakeholders

4. Copyright 2013 by Baringa Partners LLP. All rights reserved. Confidential and proprietary.4 Key definitions Meaning of “independents” “…..those renewable projects that are not owned by the six large vertically integrated utilities (VIU) or projects in which those large companies do not have a significant stake.” Rely on limited-recourse finance to fund the capital costs associated the construction of renewable energy plants Utility scale projects that fall under the RO projects and therefore do not have a institutionally enshrined route to market (i.e. small scale FIT) Focus on wind, solar and biomass

5. Copyright 2013 by Baringa Partners LLP. All rights reserved. Confidential and proprietary.5 Key definitions Meaning of “Bankable PPA” RequirementDescription Counterparty Strong balance sheet and a minimum credit rating of BBB- Tenor Between 12 and 15 years following commissioning Price Floor Price floor of sufficient value to support target debt ROC offtake Guarantee an offtake of 100% of the ROCs produced by the generator No imbalance risk Full transfer of responsibility for forecasting output and taking all risks associated with energy imbalance costs as a result of forecast errors Change in law Degree of protection from the impact of a future legislative change or change to market rules or industry codes that reduces the value of the plant’s output Material shift in banking requirements following financial crisis, however evidence suggest that there has not been a material change in these requirements over the last 3 years

6. Copyright 2013 by Baringa Partners LLP. All rights reserved. Confidential and proprietary.6 State of the long term PPA market Key observations and conclusions General consensus amongst all stakeholders that PPA terms available to independents have materially deteriorated over the last 3 years: ► Power – average increase of 5% ► LECs – average increase of 4% ► ROCs – average increase of 12% ► Power – average increase of 5% ► LECs – average increase of 4% ► ROCs – average increase of 12% ► Limited offtakers willing and able ► “Flawed” floors with limited tenor, no indexation, re-openers, stepped ► Limited offtakers willing and able ► “Flawed” floors with limited tenor, no indexation, re-openers, stepped ► Move from a month ahead to day ahead index ► Material loss of value – estimated at [6]% in 2020 ► Move from a month ahead to day ahead index ► Material loss of value – estimated at [6]% in 2020 Discounts Floors Profile Risk ► More onerous reporting ► Discount re-openers / indexing ► Indemnities for imbalance charges ► More onerous reporting ► Discount re-openers / indexing ► Indemnities for imbalance charges ► Widened definitional scope ► Limited carve outs i.e. the floor ► Bespoke clauses dealing with specific envisaged circumstances ► Widened definitional scope ► Limited carve outs i.e. the floor ► Bespoke clauses dealing with specific envisaged circumstances ► Reducing tenor available ► Increasing focus on short term market ► Reducing tenor available ► Increasing focus on short term market Imbalance Risk Change in Law Risk Tenor

7. Copyright 2013 by Baringa Partners LLP. All rights reserved. Confidential and proprietary. Has there been a reduction or limitation in the number of potential offtakers willing to enter into long term PPAs? Is there a greater number of independent renewable project developers looking to secure long term PPAs? Drivers for market change Framework of investigation Availability of Bankable PPAs PPA SupplyPPA Demand What is driving this observed deterioration in the terms on which offtakers are willing to contract for long term renewable power?

8. Copyright 2013 by Baringa Partners LLP. All rights reserved. Confidential and proprietary. Drivers for market change Evidence for increase in demand There does not seem to be evidence to support the premise that a significant increase in demand for PPAs is driving a deterioration in terms However, nature of demand for both long and short term PPAs has changed: –Potentially a more lumpy pipeline caused by RO banding uncertainty –There is anecdotal evidence of earlier tendering of PPAs given enhanced development risk owing to route-to-market concerns –An increasingly active short term PPA market driven by: Old assets rolling off long term contracts Balance sheet financiers building utility scale projects but looking for short term route to market Small scale FIT projects opting out of the export tariff for short term PPA positions

9. Copyright 2013 by Baringa Partners LLP. All rights reserved. Confidential and proprietary. Drivers for market change Potential drivers of reduced supply 9 A number of issues highlighted in industry responses that could be causing a deterioration in PPA terms Reduced appetite for renewable power Balance sheet impact of long term PPAs Reluctance to take long term price risk Increased regulatory uncertainty Uncertain long term imbalance costs Barriers to entry preventing effective competition Key drivers Contributory factors

10. Copyright 2013 by Baringa Partners LLP. All rights reserved. Confidential and proprietary. Drivers for market change Reduced supply – key drivers 10 Driver Description ► Increasing imbalance in the ROC market leaving a number of suppliers potentially long on ROCs against their obligation - reducing the number of offtakers in the market ► Of those still with a shortfall, increasingly reliant on the short term market which has emerged in the last 3 years given older plant rolling off long term PPAs and emergence of European utilities using balance sheet finance ► Rational contracting strategy that allows supplier to manage the volatility in their obligation owing to changes in the supply base (i.e. sticky vs. non-sticky customers) ► Increasing imbalance in the ROC market leaving a number of suppliers potentially long on ROCs against their obligation - reducing the number of offtakers in the market ► Of those still with a shortfall, increasingly reliant on the short term market which has emerged in the last 3 years given older plant rolling off long term PPAs and emergence of European utilities using balance sheet finance ► Rational contracting strategy that allows supplier to manage the volatility in their obligation owing to changes in the supply base (i.e. sticky vs. non-sticky customers) Reduced appetite for renewable power ► Issue of imputed debt, where by the financial risk inherent in a long term PPA is measured by credit rating agencies and consolidated onto a supplier balance sheet ► This process is more acute where the supplier is providing a long term price floor ► With supplier balance sheets increasingly constrained, the cost and ability of PPA providers to enter into these arrangements has deteriorated [given revised approach by credit rating agencies.] ► Issue of imputed debt, where by the financial risk inherent in a long term PPA is measured by credit rating agencies and consolidated onto a supplier balance sheet ► This process is more acute where the supplier is providing a long term price floor ► With supplier balance sheets increasingly constrained, the cost and ability of PPA providers to enter into these arrangements has deteriorated [given revised approach by credit rating agencies.] Balance sheet impact of long term PPAs

11. Copyright 2013 by Baringa Partners LLP. All rights reserved. Confidential and proprietary. Drivers for market change Reduced supply – key drivers 11 Driver Description ► Reluctance by supplier to offer a floor price that allows equity to achieve target leverage due to long term uncertainty in to wholesale electricity prices ► This seems to be driven by:  Uncertainty as to long term generation mix and, in particular, the impact that a large penetrations of intermittents and greater integration with the EU might have on the underlying level and volatile of pricing  The unknown impact of the capacity mechanism on energy prices ► Reluctance by supplier to offer a floor price that allows equity to achieve target leverage due to long term uncertainty in to wholesale electricity prices ► This seems to be driven by:  Uncertainty as to long term generation mix and, in particular, the impact that a large penetrations of intermittents and greater integration with the EU might have on the underlying level and volatile of pricing  The unknown impact of the capacity mechanism on energy prices Reluctance to take long term price risk ► PPA providers pushing back on the requirement to absorb significant change in law risk. ► Progressive process that started with the removal of brown / green bundles, however is now a significant battle ground in negotiations ► Caused by significant market change in the GB with the on-going EMR reforms, the launch by Ofgem of the Significant Code Review and the impact of target model compliance (e.g. market splitting) ► PPA providers pushing back on the requirement to absorb significant change in law risk. ► Progressive process that started with the removal of brown / green bundles, however is now a significant battle ground in negotiations ► Caused by significant market change in the GB with the on-going EMR reforms, the launch by Ofgem of the Significant Code Review and the impact of target model compliance (e.g. market splitting) Increased regulatory uncertainty

12. Copyright 2013 by Baringa Partners LLP. All rights reserved. Confidential and proprietary. Drivers for market change Reduced supply – contributory factors 12 Driver Description ► Widening discounts and limiting the number of PPA providers willing and unable to price this cost at a viable level for 15 years ► Driven by an increased perceived imbalance risk given uncertainty in the nature of the generation mix and how these intermittent volumes will be integrated on the system ► Widening discounts and limiting the number of PPA providers willing and unable to price this cost at a viable level for 15 years ► Driven by an increased perceived imbalance risk given uncertainty in the nature of the generation mix and how these intermittent volumes will be integrated on the system Uncertain long term imbalance costs ► Stringent banking requirements in relation to an acceptable counterparty capable of supporting long term debt has restricted the number of new entrants that can move in to fill gap left by utilities ► Lack of wholesale liquidity risk, especially up the forward curve, restricts ability of new entrants to manage price risk ► Concerns over long term ROC liquidity and market power discouraging new entrant aggregators taking a long position on ROCs. ► Stringent banking requirements in relation to an acceptable counterparty capable of supporting long term debt has restricted the number of new entrants that can move in to fill gap left by utilities ► Lack of wholesale liquidity risk, especially up the forward curve, restricts ability of new entrants to manage price risk ► Concerns over long term ROC liquidity and market power discouraging new entrant aggregators taking a long position on ROCs. Barriers to entry preventing effective competition

13. Copyright 2013 by Baringa Partners LLP. All rights reserved. Confidential and proprietary. Evolution under CfDs What risks are the generators left with? 13 Risk - RO Risk - CfD Description ► Price risk removed with a guaranteed top up payment to fixed strike price against the market reference price Price Risk - Power Removed ► With the move away from the RO, no exposure to ROC price volatility (although largely addressed with headroom) ► The CfD still requires the generator to sell its power into the market at the market reference price (or better) ► Access to subsidy is no longer tied to the ability to find an offtaker for the ROCs Price Risk - ROC Liquidity Risk - Power Liquidity Risk - ROC Removed Retained Removed ► Exposed to the imbalance cost associated with different between notified contracted position and delivered output. Imbalance Risk Retained ► Protection in relation to specific / discriminatory CiL and general CiL that reduce electricity price, however arguably more exposed to general CiL affecting cost base Change in law Retained

14. Copyright 2013 by Baringa Partners LLP. All rights reserved. Confidential and proprietary. Evolution under CfDs Why will a generator still require a PPA? 14 Issue ► Independent generators do not have the energy trading assets, systems or personnel to allow them to trade their generated electricity and interact with SO ► For base load CfDs which have to access the forward price this cost increases as the collateral requirements increase ► Independent generators do not have the energy trading assets, systems or personnel to allow them to trade their generated electricity and interact with SO ► For base load CfDs which have to access the forward price this cost increases as the collateral requirements increase Cost of accessing the market ► “In the absence of a move to an institutionalised guaranteed access to the power market for all generators through, for example, an underlying reform to the electricity market, bankable PPAs will continue to be an absolute requirement of third party finance providers.” Low Carbon Finance Group ► Uncertain long term cost of imbalance and as such, notwithstanding the fact that the lenders are no longer exposed to long term price risk, they will require the generator to fix this uncertain cost for at least the tenor of the debt. ► Banks will still probably look for a third party offtaker to provide a level of protection on pricing (i.e. trading / market access costs, imbalance discount) in the event of a general change in law (e.g. imbalance change in law) Risk of continuing access to the market Ability to manage imbalance risk Change in law exposure Description

15. Copyright 2013 by Baringa Partners LLP. All rights reserved. Confidential and proprietary. Evolution under CfDs What does this PPA look like? 15 ComponentDescription Counterparty PPA provider has balance sheet and credibility to get banks comfortable that it is an insolvency remote counterparty (i.e. will be there for 15 years) Tenor This will still need to be 15 years given the perception that a generators imbalance costs are perceived to be highly uncertain and its ability and cost of accessing the market Reference price Guarantees the generator access to the market price for every MWh produced (less fees and discounts) Trading fee Charges the generator a fixed cost for trading / collateral / administrative costs of providing a route to market - this might be variable or fixed or a combination of both Price in the risk to the offtaker of accepting liquidity risk Include a profit margin for providing the services Imbalance Fee Includes a charge for taking imbalance risk away from the generator. This might be priced on a £/MWh basis, or on a fixed discount against the electricity price Might be a combination of both with fixed charge in the short to medium term flipping to a fixed discount on year 7-10. Change in law Pass through in relation to adjustments to the strike price which relate the changes that affect the PPA providers position in relation to the provision of services In relation to all other change in law passed through under the CfD, risk sharing provision that akin to the change in law provisions already in the existing PPAs (i.e. preserving risk and reward)

16. Copyright 2013 by Baringa Partners LLP. All rights reserved. Confidential and proprietary. Evolution under CfDs Effect of CfD on key drivers 16 Driver Description ► No longer need a supplier who wants the ROCs, however an economic incentive on VIUs to buy renewable power has nevertheless been removed ► Theoretical incentive to enter into PPAs with intermittents to hedge a suppliers exposure to the levy however you could do this more easily in DA market ► Therefore participation in the long term PPA market will very whether it makes economic sense to do so? ► No longer need a supplier who wants the ROCs, however an economic incentive on VIUs to buy renewable power has nevertheless been removed ► Theoretical incentive to enter into PPAs with intermittents to hedge a suppliers exposure to the levy however you could do this more easily in DA market ► Therefore participation in the long term PPA market will very whether it makes economic sense to do so? Reduced appetite for renewable power ► No longer required to provide a long term price guarantee, this should pave the way for a more benign balance sheet treatment. ► However treatment by credit rating agencies to be confirmed ► Seems that key issue will be the extent of risk transfer - i.e. long term whole sale liquidity risk and scale of imbalance risk ► No longer required to provide a long term price guarantee, this should pave the way for a more benign balance sheet treatment. ► However treatment by credit rating agencies to be confirmed ► Seems that key issue will be the extent of risk transfer - i.e. long term whole sale liquidity risk and scale of imbalance risk Balance sheet impact of long term PPAs Mitigated Potentially Removed Impact

17. Copyright 2013 by Baringa Partners LLP. All rights reserved. Confidential and proprietary. Evolution under CfDs Effect of CfD on key drivers 17 Driver Description ► Offtakers will not be required to offer any price guarantee as this is transferred to consumers in the CfD ► As such this issue should fall away as a reason for not offering PPAs ► Offtakers will not be required to offer any price guarantee as this is transferred to consumers in the CfD ► As such this issue should fall away as a reason for not offering PPAs Reluctance to take long term price risk ► Change in law risk that depresses whole sale electricity price is no longer an issue. ► However, imbalance change in law risk in light of uncertain outcome of SCR likely to remain a potential issue in short term ► [Unclear how the potential greater exposure of generators to general change of law (as no pass through in the electricity price) will feed through into PPA negotiations] ► Change in law risk that depresses whole sale electricity price is no longer an issue. ► However, imbalance change in law risk in light of uncertain outcome of SCR likely to remain a potential issue in short term ► [Unclear how the potential greater exposure of generators to general change of law (as no pass through in the electricity price) will feed through into PPA negotiations] Increased regulatory uncertainty Removed Mitigated Impact

18. Copyright 2013 by Baringa Partners LLP. All rights reserved. Confidential and proprietary. Evolution under CfDs Reduced supply – key drivers 18 Driver Description ► Offtakers will still be required price long term imbalance risk over 15 years. ► New entrant aggregators no longer required to take a view on their ability to realise fair value for a long ROC position ► For an intermittent CfD, liquidity risk is less of an issue for new entrants as not required to manage price risk by hedging along the forward curve ► However, there is still the open question as to whether sufficiently creditworthy counterparties will emerge that meet lender requirements. ► New entrant aggregators no longer required to take a view on their ability to realise fair value for a long ROC position ► For an intermittent CfD, liquidity risk is less of an issue for new entrants as not required to manage price risk by hedging along the forward curve ► However, there is still the open question as to whether sufficiently creditworthy counterparties will emerge that meet lender requirements. Unchanged Mitigated Impact Uncertain long term imbalance costs Barriers to entry preventing effective competition

19. Copyright 2013 by Baringa Partners LLP. All rights reserved. Confidential and proprietary. Evolution under CfDs Emerging conclusions 19 Key barriers potentially removed by CfDs –Potentially more benign balance sheet treatment (although will need to be confirmed) –Requirement to take wholesale electricity price removed –No longer reliant on large supplier to realise value of subsidy potentially opening up market to new entrants However: –Still require a PPA to manage imbalance risk and provide guaranteed offtake at a fixed discount to the Market Reference Price for 15 years; –Uncertain incentives on VIUs to offer such PPAs without visibility on strike prices –Extent of new entrant aggregators may be limited (at least initially) by: number of players willing / able to take 15 year imbalance risk at competitive prices; need to satisfy banks that you are sufficiently insolvency remote to stand behind a 15 year commitment