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Corporate Renewable PPAsGreen Financing Forum

April 26, 2019 NPI.TO

Executing on Growth

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Gemini600 MW

Nordsee One332 MW

COD: Dec 201785% Interest

As of December 2017, Northland Power was the world’s fifth largest operator of offshore wind assets.

Gemini NordseeOne

60 kilometers apart

DeBu

Project Capital Costs: Over €5 BillionDeutsche Bucht (DeBu)252 MW

COD: End of 2019100% Interest

Intro to Northland Power Inc.

COD: April 201760% Interest

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Hai Long 2 & 3 – Project Details

Project Characteristics Hai Long 2(A) Hai Long 2(B) Hai Long 3

Rated Capacity 額定容量

300 MW 232 MW 512 MW

Distance to shore離岸距離

50 km 50 km 60 km

Water depth水深

35 - 50 m 35 - 50 m 35 - 50 m

Wind speed風速

10 - 12 m/s 10 - 12 m/s 10 - 12 m/s

Foundation type基座類型

Jacket Jacket Jacket

Grid Connection Date併聯日期

Q4, 2024 Q4, 2025 Q4, 2025

PPA Rate (TWD / kWh)購售電合約費率

5.516 2.2245 2.5025

0 25 50 km

• The average weighted PPA Rate of Hai Long 2 and Hai Long 3 is: 3.307 TWD / kWh.

• Hai Long is held 60% by Northland Power Inc. and 40% by Yushan Energy Co. Ltd.

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Overview

• A Corporate Power Purchase Agreement (“PPA”) is a power purchase contract between a power generator and a dedicated corporate end-user. Corporate PPAs have become popular in Europe and the United States as a means for high-energy load users - particularly in consumer-facing markets - to meet corporate social responsibility commitments around renewable energy use.

• Gov’ts are generally supportive of renewable energy Corporate PPAs as it shifts investments into renewable generation towards private enterprise, reducing taxpayer cost. This investment also helps meet national renewable energy targets.

• On April 12, 2019, Taiwan made amendments to the Renewable Energy Development Act (“REDA”) that increased renewable energy targets from 10 GW to 27 GW by 2025, a massive increase in renewable energy generation. In support of this new target, the REDA amendments also provided for additional changes that may allow for the growth of a robust Corporate PPA market.

• In Taiwan, Corporate PPAs are being driven by two parallel processes: (i) policy commitments; and (ii) international corporate social responsibility commitments. These processes are separate but reinforcing.

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Renewable Energy Development Act (I)

• In January 2017, Taiwan’s Electricity Act was amended to allow for the liberalization of Taiwan’s electricity market. In particular, changes were made to allow for the introduction of Corporate PPAs for renewable energy (“RE”). The amendments to the Electricity Act provided the legal framework to allow changes to be made to the REDA.

• The REDA was introduced in 2009 to promote RE use in Taiwan. In recent years, draft amendments have been circulated that would allow greater support for RE generation, with emphasis on (i) imposing obligations to purchase renewable energy for large-scale users; and (ii) allowing corporate end users to purchase renewable energy directly from renewable energy generators.

• On April 12, 2019, significant changes were made to the REDA in support of creating a TREC market, and thereby supporting Corporate PPAs.

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Renewable Energy Development Act (II)

The key amendments of interest to renewable energy developers are as follows:

1. It has enlarged the goal for the nation’s renewable energy sources from 10 gigawatts (“GW”) to a total of capacity of 27GW by 2025. According to the MOEA, 27GW includes solar photovoltaic at 20GW, offshore wind power at 5.5GW, hydropower at 2.08GW and biogas.

2. The REDA now confirms that if a renewable generation enterprise has signed a corporate power purchase agreement with a private entity, it can subsequently switch to selling the electricity to Taiwan Power Company. The renewable generation enterprise will still be able to enjoy the feed-in-tariff (“FIT”) rate based on the date of its initial grid connection.

3. Renewable energy generation enterprises and renewable energy self-use equipment installations which are smaller than 2,000 kilowatts (“kW”) can jointly apply with another party to install the substation and/or power lines to establish a connection to the grid.

Source: Baker & McKenzie Taiwan Client Alert, April 2019

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Renewable Energy Development Act (III)

The key amendments of interest to renewable energy developers are as follows:

4. To simplify the process, local governments have the ability to certify power generation facilities with an installed capacity of up to 2,000kW as a Recorded Renewable Energy Generation Facility, and projects below 2,000kW will be exempt from certain requirements.

5. If the premises of government agencies, public schools or state-run enterprises undergo expansion or renovation, or if new structures are built, it should be a priority that they are equipped with renewable energy generation facilities. Furthermore, entities that consume a considerable amount of electricity will need to install renewable energy power generation and energy storage equipment, or purchase renewable energy certificates or pay a specific deposit as an alternative.

Source: Baker & McKenzie Taiwan Client Alert, April 2019

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Renewable Energy Development Act (IV)

• The REDA amendments are very significant, and supportive of RE generation. Nonetheless, there remain a few key issues that have yet to be fully addressed:

1. Percentage of Renewable Energy to be Purchased– it is not clear what the quantity of RE / TRECs to be purchased is, and who sets this. National gov’t may let local gov’t set targets, which could range from 5 – 15% of energy use.

2. Penalty for Failure to Comply – the value of TRECs will fall if failure to comply results in a small penalty. Penalties should be set high for a robust market.

3. Expansion of Purchasers – other jurisdictions require aviation, transportation and shipping industries to purchase RECs, in addition to industry. Taiwan?

4. TREC Price Floor– some REC markets have experimented with price floors – often aligned with the penalty for failure to meet renewable energy targets – to ensure. The EU ETS has introduced a floor mechanism, with strong results.

• Some of the additional detail Is expected to be provided later in 2019. This detail will ensure that the TREC market is robust, rather than aiding corporate “green-washing”.

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TRECs (I) - Overview

• A Renewable Energy Certificate / Credit (“REC”) is tradable instrument that provides proof that energy has been generation from a renewable energy source. Unlike commodities, RECs are a synthetic accounting instrument, and are usually not fungible across different jurisdictions.

• Taiwan is establishing its own system of RECs, referred to as Taiwan RECs (“TRECS”).

• BSMI has been designated to be in charge of implementing the TREC program. BSMI has formed the “Taiwan Renewable Energy Certification Center” to prepare a TREC mechanism, including a registry for certification, generation, trading and retirement of TRECs.

• In Taiwan, eligible project categories include onshore wind, offshore wind, solar, biomass, hydro (steam) and geothermal. These projects may all apply to receive TREC certification, and thereafter generate TRECs for sale and retirement by the ultimate user.

• Once certified, verified renewable energy generators will be eligible to generate one (1) TREC for every megawatt-hour of renewable energy produced.

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TRECS (II) - Mechanism

Corporate PPA sold with TRECs

RE and TRECs sold separately

Likely to be pursued by large-scale energy users and generators (ie., wind, hydro)

Pricing info not public, and PPAs will be individually negotiated

More attractive to small businesses and users

Utility as general electricity while RECs enter into trading market.

Price info on trading platform and available for trading or booking (by aggregators / users)

RE Developer (Generation Side)

RECs +Electricity(RE)

Utility Business (Retailer)

RE Users

+RECs

Revenue

RE Developer (Generation Side)

Utility Business (Retailer)

Utility Users

RECs

Electricity

RECs Trading Platform

Voluntary RECs Users

Compulsory RECs Users

Source: Bureau of Standards, Metrology and Inspection, M.O.E.A. (2018), KPMG

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TRECS (III) – Project Demand

Source: Taiwan Renewable Energy Certification Center, Oct 24, 2017

• For more information on TRECs, visit TREC Renewable Energy Certificate Center at:www.trec.org.tw

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UN CDM Pricing

Source: The Economist, “Complete Disaster in the Making”, Sep 15, 2012

• The United Nations Clean Development Mechanism (“CDM”) was introduced in 2008 to strong demand, but collapsed shortly after, largely because of falling industrial emissions that resulted from the global financial crisis.

• Certified Emissions Reductions (“CERs”) were available for use in the EU ETS.

• By the time the world economy recovered, the number of CERs had grown so significantly that the price was unable to recover.

• CER Certification thresholds were low, and an oversupply of CERs – coupled with low demand – crashed the market.

• As of April 2019, the price of a CER was €0.23, an almost 99% decline from 2008 pricing.

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Chicago Climate Exchange (CCX) Pricing

• The Chicago Climate Exchange (“CCX”) was launched in the United States in 2003 as part of an effort to introduce a voluntary carbon trading system in the United States. It included several large emitters, including Ford, Dupont and Motorola, among others.

• The CCX traded Voluntary Emissions Reductions (“VERs”) from 2003 until 2011, when a decision was made to cease operation following several months of no trading activity. The CCX also traded CERs. Pricing fell for both.

Source: www. researchgate.net

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RGGI Pricing

• Following the failure of US Congress to pass comprehensive climate change legislation in 2009, several US states came together to create CO2 price; this led to the Regional Greenhouse Gas Initiative (“RGGI”).

• RGGI includes Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont.

• Pricing has been relatively stable, but has not actively increased over time. Nonetheless, it is an example of stable carbon market.

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California Air Resource Board

Source: http://calcarbondash.org/, CARB and Cleantenica

• Generally viewed as among the most successful emissions-trading regimes, prices have remained stable, with increasing price floor.

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EU ETS Pricing

• EU ETS pricing fell significantly after the global financial crisis and stayed low for several years.

• Eventually, EU intervened with introduction of Market Stability Reserve (“MSR”) which was designed to reduce the supply of EUAs, in support of pricing. The MSR commenced in January, 2019.

• Results have been dramatic, and pricing increased significantly thereafter, and has remain at elevated levels.

• From pricing perspective, the MSR is viewed as a successful intervention.

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Corporate PPAs - Demand (I)

• In addition to changes to the REDA, there are strong private sector incentives to purchase renewable energy through a Corporate PPA mechanism. In fact, the REDA amendments should strengthen the Corporate PPA market.

• At present, the private sector incentive is likely the stronger influence for the growth of Corporate PPAs, although it is supported by the regulatory reforms.

• Some of the world’s largest technology companies – including Apple, Facebook and Google, among others - have made significant commitments to power their businesses using 100% renewable energy. Much as they once did with labour and environmental conditions, consumer-facing multinationals are increasingly extending these commitments to their global supply chains.

• Many large Taiwanese companies are active parts of the global supply chain for these companies. In order to remain qualified as suppliers, they are making public commitments to purchase renewable energy.

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Corporate PPAs - Demand (II)

• The TRECs provided by renewable energy producers can be delivered to and retired by the Corporate PPA end-user as evidence that they have purchased renewable energy. To that end, the regulatory mechanisms introduced by the REDA amendments support the private market for Corporate PPAs.

• Most notably, in January, 2019, Google announced that it had entered into its first PPA in Asia with a 10 MW PPA to purchase solar power, to support a data center located in Changhua County. This is a significant milestone for the growth of Corporate PPAs in Taiwan.

• The Corporate PPA market will be determined by the number of “large-scale” energy users exploring the renewable energy market. This market should emerge in the coming 12 – 18 months, as “large-scale” energy users aim to secure early supply of renewable energy generation, with more announcements to be made.

• Solar PV will probably lead the early announcements.

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Corporate PPA (III) - Concerns

• Renewable energy generators have the opportunity to sign a Taipower (“TPC”) PPA in parallel to Corporate PPA. Individual generators need to determine whether this option is viable for them.

• Some of the major concerns with the TPC PPA remain true for corporate PPA, namely: (i) TPC curtailment (if using TPC transmission lines); (ii) grid connection (if using TPC transmission lines); (iii) force majeure; and (iv) change of law, among others.

• If generator is intending to engage project finance, credit-worthiness of off-taker will be a significant lender concern. For all the flaws of the TPC PPA, TPC is a strong counterpart with firm credit rating; companies in the global technology supply chain, by contract, are higher risk over a 20-year period.

• Across the world – including, recently, Ontario, Canada – new gov’ts have ended cap-and-trade schemes. What happens if new gov’t dismantles TREC system? Or CSR requirements up the supply chain (Apple, Google, etc … ) change? This needs to be considered in Corporate PPAs.

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Conclusions

• There are two parallel processes supporting Corporate PPA growth: (i) TW gov’t policy commitments; and (ii) international corporate social responsibility commitments. These processes are separate but reinforcing.

• Uncertainty remains as to (i) the minimum threshold for the purchase of renewable energy by “large-scale” industrial users (demand-side); (ii) the penalty for failure to meet green energy commitments (demand-side); and (iii) the size of TREC market (supply-side), among other risks.

• In other markets, loose standards for qualifying for RECs had led to market collapse. If TREC market is not closely regulated, “large-scale” users will simply purchase cheap TRECs to meet regulatory obligations, undermining investment into renewable energy in Taiwan.

• The Corporate PPA market in Taiwan is new, but has significant potential. The execution of a Corporate PPA by Google is evidence that a market can exist.

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Sean McDermottGeneral Manager, TaiwanNorthland Power Inc.

sean.mcdermott@northlandpower.com

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