1. 18 April 2002 Financing the Grid Jonathan Johns, Partner Ernst & Young Renewable Energy Group Broadwalk House, Southernhay West, Exeter, Devon, EX1 1LF Tel: +44 1392 284300 Fax: +44 1392 284301 E-mail: jjohns@uk.ey.com Jonathan Johns, Partner Ernst & Young Renewable Energy Group Broadwalk House, Southernhay West, Exeter, Devon, EX1 1LF Tel: +44 1392 284300 Fax: +44 1392 284301 E-mail: jjohns@uk.ey.com

2. The opportunity Imagine  10,000 mw in the North Sea  2,000 mw in the Irish Sea  4,000 mw in the Scottish Western Seaboard And more that needs to bypass the onshore Midlands bottleneck Imagine  10,000 mw in the North Sea  2,000 mw in the Irish Sea  4,000 mw in the Scottish Western Seaboard And more that needs to bypass the onshore Midlands bottleneck

3. The opportunity Imagine  Physical trading of green power from the best natural resources to and from the key consumers of Northern Europe by way of multiple inter- connectors Imagine  Large capacity GW from wave and marine current turbines  Co-generation derived from marginal gas fields (offshore wind and wave)  Electrolysis injecting hydrogen into gas grids Imagine  Physical trading of green power from the best natural resources to and from the key consumers of Northern Europe by way of multiple inter- connectors Imagine  Large capacity GW from wave and marine current turbines  Co-generation derived from marginal gas fields (offshore wind and wave)  Electrolysis injecting hydrogen into gas grids

4. Current State  Individual schemes where grid connection and electrical infrastructure costs (say 20-30%) have a significant impact on the financing of projects  50 year assets are judged on a 15 to 20 year payback. The IRR of projects suffers as a result. In the UK, size of projects tends to lead DNOC connections that are less visible to the grid.  Is HVDC being introduced to the extent it should be given the wider strategic implications? Could there be widescale short term redundancy and lack of economies of scale?  Will the private sector lead in infrastructure financing given the telecoms experience?  Individual schemes where grid connection and electrical infrastructure costs (say 20-30%) have a significant impact on the financing of projects  50 year assets are judged on a 15 to 20 year payback. The IRR of projects suffers as a result. In the UK, size of projects tends to lead DNOC connections that are less visible to the grid.  Is HVDC being introduced to the extent it should be given the wider strategic implications? Could there be widescale short term redundancy and lack of economies of scale?  Will the private sector lead in infrastructure financing given the telecoms experience?

5. The Solution: Seagrid© A European grid infrastructure both offshore and onshore with appropriate grant infrastructure financing to establish transitional electrical highways (but take care of the telecoms precedents): providing HVDC offshore and underground on land.

6. Offshore Wind Projects and Grid “Sea Grid” Existing Interconnectors Proposed Interconnectors Island of Lewis

7. Seagrid© – A series of public private partnerships Mutual not for profit Company (1) Custodian of assets on behalf of stakeholders Government/EU (TENS) support Private Sector Private Sector Consortium PPP DBFO PLUG AND PLAY Availability and usage charges to individual projects and entry fee for new tenants Construction Finance Financing instruments  Securitisation  Tax based leases  Long term utility grade cost Seagrid Offshore Electrical Infrastructure and Onshore Re-enforcement 1 a) b) c)…….Existing schemes 2)New large schemes 3)Interconnectors 4)Ring main EIB loans, EIF guarantee support Additionality Environmental Market failure Transcontinetnal highway

8. Summary  Seagrid structure is flexible. It can be tailor made for individual project clusters  Will accelerate development of grid infrastructure and reduce costs on a lead tenant principle, providing for market access to plug and play  Allows private sector and public sector (where additionality justifies) participation  Allows competitors to cooperate, facilitates new investor entry  It can be adapted for private sector outsourcing  Long history of use in infrastructure projects, maximises financing advantages and grant capture  Seagrid structure is flexible. It can be tailor made for individual project clusters  Will accelerate development of grid infrastructure and reduce costs on a lead tenant principle, providing for market access to plug and play  Allows private sector and public sector (where additionality justifies) participation  Allows competitors to cooperate, facilitates new investor entry  It can be adapted for private sector outsourcing  Long history of use in infrastructure projects, maximises financing advantages and grant capture

9. Precedents  Road financing PPP’s (real tolls, shadow tolls, availability fees active management payment system)  Airport infrastructure financing (Nats, Oil Tanking structure, Highlands and Islands PPP)  Other infrastructure – Railtrack successor, Glas Cymru.  Moyle Interconnector  Road financing PPP’s (real tolls, shadow tolls, availability fees active management payment system)  Airport infrastructure financing (Nats, Oil Tanking structure, Highlands and Islands PPP)  Other infrastructure – Railtrack successor, Glas Cymru.  Moyle Interconnector

10. Commercial Structure Asset Company Equity Funding Debt Funding Grant Funding Operation and Maintenance Construction Contracted Revenue 3 rd Party Revenue NATS and Oil Tanking Structure (Ports/Airports) – CLG’s Asset Co shareholders linked to supply and revenue parties NATS and Oil Tanking Structure (Ports/Airports) – CLG’s Asset Co shareholders linked to supply and revenue parties Contracted Supply 3 rd Party Supply

11. Ernst & Young’s Project Finance Group is ranked as the leading advisers in the Europe, Middle East and Africa (EMEA) project finance market and ranked second in the global market for advisory mandates won in 2001, by Project Finance International