unfulfilled promise of Italian renewable power generation investments: secondary market opportunity?

February, 2017

1

Italy has an old, strong tradition of renewables

100% = 110TWh/yr

Solar (PV)

Hydro

Bio/MSW

Wind 15

Producibility(Netplan est

based on 2015 hydro)

55,200MW

9100

Capacity installed

(incl 4GW pumping)

22500

23 18600

47

4200800

Geo

Domestic production about 280TWh in 2015 Renewables cover 39% of production Only 2000 hrs/yr average utilization (2015

hydro -22% vs 2014) Import 46 TWh in 2016, forced maintenance

of french nuclear may reduce it significantly in 2017, forcing more domestic production

120,000 MW active power gen capacity, 65,000 MW thermoelectric, 55,000 renewable (46%), no nuke

Peak load about 60,000 MW Even with no nuclear, relatively low carbon

footprint: 0.36 kg CO2/ kWh produced (about 1/3 less than UK)

19

6

2

€9B wind

Hydro3

€80B renewable power gen capex last 6 years in Italy

100% = 35.7TWh

Solar (PV)

5

Capital expenditure

GeoBio/MSW

0.1

6.8

5.6

Producibility added

23,800MW €80B

43001300

power added2010-2015

800

€63B21.4 17400

301.40.2

€10-20B low performing

assetts

Compliance issues (incomplete permitting)

Reduced incentives (- 8% on PV) Wrong resource assesments drived

excessive leverage (wind) Poor cost O&M management

3

Today, over 600,000 grid connected solar PV installations

Large ground mounted PV plants

3900

3400

11,300

588,000 Rooftop and <20kWmostly family owned rooftops

voters force gov’t to stay honest

20-200kW, 4900 plants, on sitegeneration, business owned

very dispersed

100% = 18,600 MW

about 12,000 investor owned large (>200kW) mostly ground mounted

plants, 1MW average size

active secondary market,5-30MW portfolios, €1.5 -10M EBITDA

4

PV positively contributing to grid management

2009 2010 2011 2012 2013 2014 2015

18.620

30

40

50

60

70 GW

2007 2008

import

thermoelectric

renewable

photovoltaic

Solar making baseload more manageablePeak demand shifting to summer

60 GW

Fonte: GSE Solare Fotovoltaico 2014Fonte: Terna, analisi sintetica dati 2015

5

Aggregators take advantage of disillusioned investors

aggregators

terra firma

Exiting

Patient equity investors Confident on positive outcome of

current litigations with regulator Very effective management of

operations

Passive operation management Nearing 10 years maturity High cost, time consuming asset

management Abusive, unpredictable regulator Concerned lenders

6

PVs are not financial investments: must be managed

Bank models may not represent the maximum achievable Actual resources may differ from predictions Technology evolves, creating new opportunities Costs must adapt to learning curves and competitive markets Rules change Power prices change Connected sites are more valuable than just PV Lenders may have different interests Panel deterioration may not resemble OEM guarantees Original equipment manufacturers evolve, merge or disappear Thefts and natural atmospheric events can be managed Insurance must be managed

The best possible is not the investor prospectus

7

Bank model is the wrong metric for PV (and for wind)

Improve performance

Reduce downtime

Maximize solar power generation

Leverage grid connections to add miniwind

8

PV production + 12% since turnaround

1288 kWh/kW/a

13671456

Actual performance

2013 2014 2015 2016

1285 kWh/kW/aBank model

1457€750,000 additional revenues for a 1MW plant over its bank model time

Netplan turnaround

9

Proper operations: enhancing revenues and cutting cost

11% revenue enancement

after turnaround

original budget

111€450k/yr =100

admin insurancegovernance

O&M

property tax

land rightsauxiliary energy

2

31

138

24

23

€110k/yr = 100

47% cost reduction

3

47

after turnaround

original budget

13

10

23

+12% volume

-1% price of electricity sold

15 power sold

85 incentive 20 years tenure

10

Low hanging fruits on PV: 9 months average pay back

Payback (months)

O&M contractOperating procedures

Grid fee exemptionAuxiliary power contract

Power sale agreementLand lease renegotiation

Stolen panel replacementFaulty panel replacement

New scada/ctrlUPS replacement

Inverter cooling

0 (no investment needed)0000

677

1015

17

EBITDA impact

€16k/yr per MW€ 10k/yr

€ 3000/yr€ 1000/yr€ 1400/yr€ 3000/yr€ 7600/yr€ 4500/yr€ 4600/yr€ 1000/yr€ 1000/yr

EBITDA improvements turn the project cash positive again7 initiatives still on going

other 9 upgrade initiatives with payback between 18 and 48 months not considered for turnaround

11

Own or lease land?

Rent for PV installations highly over priced (3-10x) vs alternative uses Rent is up to 25% of operating costs Initial agricultural land value would have been 5-7% of original capex PV land rent from €12 to €20,000/yr per MW, 25 years, inflation indexed Commercial value of nearby farm rent €1-3,000/yr, 3 years, ¼ of PV or

less Prevailing real estate value €30-50,000/MW Ownership paid in 2-3 years of plant operation

Power generating from connected sites can be upgraded once incentives are gone Current revenue 85% from incentives, yet 15% may represent

€70,000/yr per MW installed on fix tilt, €100,000/yr on tracker based plants

Restructured operating costs, excluding rent, 50-60% of current grid parity

Installed equipment life expectancy 1.5x incentive period Connected site could be upgraded for 10-30% more kWh output Generation prices expected to raise mid term due to planned German

nuclear shutdown and unexpected French nuclear turnaround

12

complete project development SPV merger, tax restructuring, and debt restructuring

revenues costs corporate structure

Split the problem into manageable initiatives

redefine op procedure new scada panel chk/ replacement stolen panel replacement

renegotiate O&M auxiliary power exemption grid fee renegotiate land lease

compliance

231 & adopt modelestablish OdVL81/08 safety complianceestablish DUVRI (safety)PoA reviewL421 remote grid safety

power sale agreementUPS optimization (3kVA)spare parts management

renegotiate insurance safety complianceformalize split of operating and governance responsibility

settle litigationsnegotiate debt restructuring Enel property transfer

UPS optimization 10kVAagricultural tarpInverter cabin cooling

New string box monitoring system

renegotiate property tax (IMU)

Inverter new service contract

remote prod monitoringNew alarm systemsUpgrade anti-theft, 5sites

Insulated dc boxAnti-theft measure 6sites

1H2015

2H2015

completed

ongoing

35 initiatives, €70k/MW total spent, multidisciplinary team: technical, legal, admin

Corporate fixingEBITDA driven

13

Must micromanage every initiative

• New O&M management (make rather than buy)• Renegotiated land rent contracts, purchase?• New SCADA, improved features• New UPS with remote monitoring• Inverter cooling systems• Infra-red modules inspection and replacement• Spare parts management for plant availability• Improved & enforced safety compliance• New panels anti-theft bolts on panels• New alarm and LED light systems• Advanced infra red cameras and DVR for betterremote night vision on all plants• Improved perimetral road and cable ducts• Sting re-wiring to improve performance• Agricultural tarp to avoid shadows by grass growth• Improved grounding• 421/595 Law upgrade

14

a Business not affected by evolving technology

b

c

d

e

f

No real incentive for cost reduction

Upsides opportunities left unattended

Chances considered as “problems”

Little management attention on operation excellence

Management focused into managing downsides such as regulatory changes

Italian PV investors lost grip & entrepreneurial spirit

6kW capacity, rather than MW grid access, it makes less efficient use of sites

Regulatory constrains

7

8

10

Permitting for tracker and miniwindupgrade very complicated

Panel upgrade practically impossible

Punitive regulator, focusing on formal aspects, ignoring merits

1Any plant improvement needs lengthy approval, adding costs

Project finance

Imposed constrains

2

3

4

5

Projected life coincides with incentives, actual equipment life exceeds bank model

Residual value of connected site and equipment not considered

O&M contract clauses do not reflect competitive market conditions

Risks evaluated on a stand alone basis, while project portfolio has a reduced risk

9 No incentive of load optimization, DC/AC step-up, battery storage or trackers

15

The most evident result: unfinished projects

Administrative errors cadastral mistakes ignored prescriptions never ending construction phase

(switchgear title transfer to grid operator, as-built documentation…)

Unsettled minor claims Expired warranties Faulty equipment registration

Unattended prescriptions

Unfinished contractor’s work

Unprecise panel label

Cadastral issues

16

1

Shortage of components made availability, rather than performance, the key driver

2

Lenders focusing on wrong metrics (such as panel financial credibility) rather than quality of design

4

Incompetent technical advisors, certification focus on useless details, no focus on performance

5

Time pressured (non supervised) construction ended with uncompleted permitting and left over administrative issues

7

6

Low quality components and poor construction

Wrong cabling, missing string monitoring

Unreasonable incentives, unclear permitting

Time pressure did allow neither proper functional design nor resource measurements

No system optimization, no mature supplier performance qualification ($/W rather than $/Wh)

3 Grid demand considerations excluded from development of individual facilities, grid operator perceived developers as pain rather than opportunities: fix tilt preferred over trackers

10

9Time pressured detail design resulted in poor plant performances, such as shadows, overheated inverters and undersized cables

Shadows between panels rows

Unreasonable land right costs, missing the option to buy land with valuable grid connection infrastructure

8

Wrong start: PV attracted mostly speculators, not industry

17

Lots of efforts to complete project development

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1. Analisi documentazione immobiliare 1.1 Atti preliminari per la costituzione dei diritti immobiliari (verifica intestazione, volture, ecc.)1.2 - Atti di provenienza (contratto di compravendita, di locazione, diritto di superficie, ecc.)1.2.1 - Eventuale Convenzione stipulata con il Comune (se richiesta)1.2.2 - Evidenza che l’area non sia interessata dalla presenza di sottoservizi 1.3 - Dati catastali (verifica aggiornamenti catastali, accatastamenti, categorie ecc.)

2. Analisi documentazione autorizzativa2.1 - Regolarità urbanistica2.1.1 Certificato di Destinazione Urbanistica (verifica presenza vincoli e destinazione urb.)

2.1.2 Accesso all'area interessata (Verifica servitù di passaggio, ecc.)2.1.3. Verifica rispetto distanze minime da confini e strade indicate sul PRG

2.2 - Autorizzazioni alla realizzazione dell’impianto (Verifica DIA con tutti gli allegati)2.2.1 Verifica Relazione Tecnica Generale2.2.2 Verifica Relazione Tecnica di Asseverazione2.2.3 Verifica Relazione Tecnica su inserimento nel PUTT2.2.4 Verifica Atti di Assenzo e Nulla Osta necesari per vincoli o limitazioni presenti2.2.5 Verifica eventuale voltura del procedimento autorizzativo

2.3 - Difformità progetto autorizzato/realizzato2.3.1 Verifica posizionamento cabine rispetto al progetto presentato2.3.2 Verifica layout impianto rispetto al progetto presentato2.3.3 Verifica presenza problematica "DIA a grappolo"

2.4 - Connessione alla rete2.4.1 Verifica istanza DIL alla Provincia2.4.2 Verifica Nulla Osta/pareri2.4.3 Verifica voltue necessarie2.4.4 Verifica servitù di elettrodotto2.4.5 Verifica Verbale di Allaccio o Allegato Q2.4.6 Verifica progetto esecutivo elettrodotto vidimato da Enel2.4.7 Verifica Nulla Osta MSE all'Esercizio (stato sopralluoghi MSE, richieste ecc.)2.4.8 Verifica atto di cessione o della documentazione richiesta da Enel

3. Analisi pratica GSE3.1 - Conto Energia

3.1.1 Schema di incentivazione richiesto (numero conto energia)3.1.2 Accettazione tariffa incentivante GSE (verifica documentazione inviata e congruità)3.1.3 Eventuale maggiorazione richiesta (verifica documentazione inviata e congruità)

3.2 – Stato pratica3.2.1 Verifica Soggetto Responsabile e necessità voltura3.2.2 Verifica congruità comunicazione fine lavori (GSE ENEL Comune)3.2.2 Verifica congruenza scheda tecnica GSE con autorizzazione e varianti 3.2.3 Verifica riconoscimento incentivo e Convenzione

4. Analisi pratica Genio Civile4.1 - Fondazioni e strutture di sostegno

4.1.1 Verifica Istanza di deposito Genio Civile5. Analisi pratica Agenzia delle Dogane

5.1 - Denuncia di Officina Elettrica5.2 Verifica aggiornamento Registri delle Letture settimanali

6. Analisi Documentazione Impianto6.1 Progetto as built, (layout, unifilare ecc)6.2 Dichiarazioni di conformità6.3 Elenco matricole moduli fv6.4 Certificati di taratura contatori6.5 Documentazione sicurezza secondo D.Lgs. 81/086.6 Documentazione impianto di terra (as built, verifiche DPR 462/01)

ESI I ESI IIESI I ESI II2015 2016

• Plant documents to be collected and recovered from MiSe, GSE, Terna, Municipalities, Enel, GenioCivile, …• Documents must be checked for consistency, administrative and legal validity • After the authorization process is complete, property title of power lines and switchgears must be transferred to grid operators• Civil work over public roads must be completed, original status restored

18

Abusive regulator demands require firm response

Regulator is administering €6B/yr of 25 years termrenewable energy incentives to 600,000+ generators

Retroactive Spalmaincentivi decree (-8%) confirmed byhighest Court, investors appeals rejected

GSE (regulator) is searching for even minor administrativeirregularities to revoke incentives

Irregularities include immaterial errors on permitting bylocal authorities, such as typos, wording,…

GSE is asking owners documents that belong tocontractors, suppliers or authorities, and are not accessible

GSE should focus on fundamentals included in theincentive regulation

GSE removing incentives without awaiting for the results ofcourt cases, producing bankruptcy of leveraged SPVs

Netplan estimates €60-70B project financing underchallenge for wind and PV projects

Due to legal battles, uncertainties heavily influencedsecondary market: exit from investments is at loss, even iflong term prospects are excellent

19

Renegotiate all contracts

Turnaround is possible, it requires structured approach

1 Segment issues

Rank initiatives, set priorities

Get alternate suppliers first, get intelligence on counterparts, competitors

Challenge every line of P&L and B/S

All means all, challenge every clause in contracts

Know the business from the root, from blue collar upHave the right people to replace any supplier, if needed

Netplan assisted the teenager on the right to fly: it toke well structured approach: scientific calculations, systematic assembly, very rigorous quality control and 18 staff to let 187 balloons to lift him with proper safety and media coverage...

2

3

4

5

6

7

8

9 In house legal/contractual/commercial expertise as well as engineering

20

Italian wind assets with a slightly different scenario

Large operators with strong industrial tradition already consolidated the market:ERG, EdF, Enel, E.On, Alerion, IVPC, Friel, Falck, …

Plants with incentives developed early 2000s, already nearing end of incentives New plants competing with public renewable energy tenders, last price €66/MWh Best sites (2500 hrs/yr) already taken, marginal sites are either too small, or too

far from HV connections Very strong tradition of high quality asset management and of competitive,

independent, OEM-approved operation and maintenance service providers Active mini-wind industry, yet individual 30-60kW WTG sites, excessively

dispersed…

yet: Plenty of poorly managed small size sites Local small owners with generational change, no desire to stay in business (it

applies also to some of the small hydro concessions) Raising complexity of bidding process

21

Wind case: widely long term underperformance

1643hrs/yr

1726

Site 1

1878hrs/yr

2183

Site 2

1534hrs/yr

1650

Site 3

Actual2010-2015

P75 (bank model)

P50

1624hrs/yr

1659

Site 4

19862388 17991869

22

Power curve WTG 15

Actual 2015

0.841

24%

9%67%

Grid constrains

Availability74 MWh/yr(€11k/yr)

Recoverable, 560 MWh/yr (€80k/yr)

2413hrs/yr

1984 hrs/yr

0500

1000150020002500

0 10 20 30 40

Pow

er [k

W]

v [m/s]

Power Curve PMC WTG 15

Real data 2015

4.827 GWh/yr

3.968 GWh/yr

0,0

500,0

1000,0

1500,0

2000,0

2500,0

1 3 5 7 9 11 13 15 17 19 21

Pow

er (k

W)

Wind speed (m/s)

Guaranteed Electrical Power Curve and Actual Production

Production WTG 34 Power Curve

grid restrictionrecoverable

Proper individual WTG monitoring Well planned maintenance Readily available spare parts Inefficient third party O&M contracts

Performance improvement on individual WTG equipment

23

Vision, competence and passion for details are critical

Continuous production supervision is crucial toreach challenge budget

Effective operating procedures work better thantech advisors’ check lists

Competent, rather than qualified operators andlocal presence key

Health & Safety rules must be monitored again Monitoring systems (0,2% plant value)

fundamental for careful operations Revamping to be always considered Local community engagement protects assets Stay local, stay small to capture upsides of

renewable energy

24

Netplan PV enhancement team

PhD Engineering, Insead & Caltech;Formerly CEO, Enel Green Power, 9REN/ Gamesa Solar (Spain), Solopower(California), Chairman Element Power Solar (Oregon), exec at GE, Bain, KTI; BoD Iren, formerly BoD Pirelli, Ryanair, Ducati, Camco

PhD engineering, MBA Bologna Business School; Formerly Operations manager GSF, senior project manager 9REN, engineering office Aeroporti di Puglia

PhD Engineering, Gov’t Commissioner for cultural institutions, formerly CEO ERG Petroli, ERG Power & Gas, Chairman TotalERG, manager Bain&co, developer AE, engineer ISMES

PhD Law, CMBA BBS/9RENFormerly OdV Element Power, CEO 9REN asset, head of legal affairs 9REN, corporate governance at Enel, junior lawyer EnelGreenPower

Giacomo DachillePaolo Pietrogrande Pier Francesco Pinelli

Angela Pirro Caterina Semola Nicoletta PanebiancoPhD Business Administration Managing Director, Netplan Italia, former CPA for privately owned solar projects

PhD Business Administration, CPA, External payroll, FMC, and tax specialist for 9REN Group, Element Power Italy, Suncity 25

Clean tech, energy and utilities references

Partners

Netplan

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