1. These Young MindsHarnessing the Opportunitiesof the Governments Green Deal8 February 2011 2011 Deloitte LLP Private and confidential

2. Harnessing the Opportunities of the Governments Green DealAgenda Mark Williams mawilliams@deloitte.co.uk Mark leads a dedicated team of managers who specialise in theThe Public Sector landscape for the Green Agenda financial implications (accounting, budgeting and classification) for Central Government, Local Government and NHS Bodies of complex projects. Over the last 10 years he has worked on moreMeasurement and Driversthan 300 Public Sector projects, including many Public Private Partnership (PPP) arrangements. Given Marks experience around financial reporting, budgetingStrategy, Implementation and Improvement and project structuring he is increasingly involved in advising clients with respect to the CRC energy efficiency scheme, sustainability reporting requirements and the broader GreenFinancing Solutions spend to saveAgenda in the Public Sector. He has already worked on a number of green infrastructure projects and sees direct parallels with the PPP arrangements used for the development of socialGreen Deal Operating Model infrastructure.Green Deal Fundamentals and FinancingCaroline McGill - camcgill@deloitte.co.uk Caroline was formerly corporate finance adviser to thePrecedent Funding of Waste InfrastructureDepartment for Business, Innovation & Skills advising Lord Mandelson, and more recently Vince Cable. She was responsible for close collaboration with HM Treasury and Cabinet Office colleagues in the provision of advice to Ministers on the financial markets and the financial services industry, with a particular focus on availability of finance for UK corporates. She has several years experience in fund structuring, working with banks, institutional and private investors on multi-target, multi- jurisdiction investments and debt security structures.2These Young Minds Harnessing the Opportunities of the Governments Green Deal 2011 Deloitte LLP. All rights reserved. 3. Public sector landscape for the green agendaSustainability and the wider green agenda continues to be a focus for governmentdepartments and other public bodies in transitioning the UK to a low carbon economy.The government have: Implemented policies to which public sector bodies must adhere:Sustainability reporting (FReM) regulationCRC Energy Efficiency Scheme introduced in April 2010Committed to10% cut in emissions for central governments in FY11Carbon neutral ICT by 2015/2020Life time costing Pledged to support green initiativesGreen investment bank (to address market failures and investment barriers for financingof low carbon infrastructure)Green deal finance (to address retrofit of low carbon measures in property)New sources of funding for climate change adaption and mitigation Highlighted sustainability as a necessity in order to meet the needs of the public sectoron a tightened budget. The Green Agenda should, if considered strategically lead to costreduction. The counterfactual may not true.3 These Young Minds Harnessing the Opportunities of the Governments Green Deal 2011 Deloitte LLP. All rights reserved. 4. MeasurementAssurance ReadinessworkshopAnnual Reportingreporting andCarbondisclosure managementrequirementsSystems implementation Source: Deloitte CRC flyer4 These Young Minds Harnessing the Opportunities of the Governments Green Deal 2011 Deloitte LLP. All rights reserved. 5. Driver Policy, Carbon Reduction TargetsThe UK Low Carbon Transition Plan: projected emission reduction across sector Source: Department of Energy and Climate ChangeCarbon budget 1 (2008-12)Carbon budget 2 (2013-17) Carbon budget 3 (2018-2022) 5 These Young Minds Harnessing the Opportunities of the Governments Green Deal 2011 Deloitte LLP. All rights reserved. 6. Driver - Regulatory requirement Power generationLarge industrySmall industry/ResidentialTransportand grids commercial UK ETSCRC Energy Efficiency Scheme SD relief on zero(ended 2006) (from 2010) carbon homesEU ETS R&D Tax creditsR&D Tax creditsExcise duties and scaleRenewables ObligationExcise dutieschargesClimate Change Levy/ Climate Change Agreements Lower rate of VAT Renewable Transport Fuel Obligation (fromBuilding standards 2008) Contaminated land Contaminated land relief Carbon Emissions Reduction Targets (CERTS) relief Grid loss incentiveEnvironmental Transformation Fund Warm Front Grant(Apr 08)Scheme Reduced duty forbiofuels (abolished) CHP targetMicro-generation strategyCarbon TrustEnergy Savings TrustCarbon Trust Climate Change Project Office Air passenger dutyEnhanced Capital AllowancesEnhanced Capital Allowances IM carbon trading exemptionLandfill Tax/Aggregates Levy Climate Change Act 2008 6These Young Minds Harnessing the Opportunities of the Governments Green Deal2011 Deloitte LLP. All rights reserved. 7. Driver - the impact of increasing energy rates and a shrinking budget Energy Rates / Spend2011 20122013 201420152016 20172018 20192020 YearsEnergy rates* Budgeted energy spend ***CRC and Fines**Cost reduction required 7 These Young Minds Harnessing the Opportunities of the Governments Green Deal 2011 Deloitte LLP. All rights reserved. 8. Strategy CarbonReadinessSystems ReportingAssurance managementDo minimumRegistrationContinue as isCurrent systems CRC deadlines Internal processReporting EvidenceassuranceAllowancesmaintenance Audit certificated(minimise GovernanceAccounting(required)risk)Proactive Opportunity Proactive strategyAdapt systems Align reporting ExternalassessmentWider than CRCConsiderwith otherassurance pre-- Early actionboundary (e.g.alternativesrequirementsEA(maximise - Trading transport)Forecasting Clear andopportunity)- Reputationconsistent- Wider impacts comms- Energyreductionsapproach 8 These Young Minds Harnessing the Opportunities of the Governments Green Deal2011 Deloitte LLP. All rights reserved. 9. Implementation and improvement Whole economy i.e. theCarbon Public Sector setting policy Green energy management People Propertybehaviour investment Public Sector business Improvement i.e. PS bodies strategy, investment and Implementation ICT Procurement investment management 9 These Young Minds Harnessing the Opportunities of the Governments Green Deal2011 Deloitte LLP. All rights reserved. 10. Financing Solutions Need to Spend to SaveGrants new Energy Efficiency Fund?Capital Funding?Prudential Borrowing?Green Investment BankGreen Deal FinanceFeed in tariffsESCOsPartnership with Local AuthoritiesLocal Asset Backed Vehicles (LABVs)Local Enterprise PartnershipsPublic Private partnershipAccess tax benefits10 These Young Minds Harnessing the Opportunities of the Governments Green Deal 2011 Deloitte LLP. All rights reserved. 11. Green Deal Operating Model Energy Green Deal SupplierProviderGreen Deal Energy Supplier Provider PropertyInstaller Debt collector? Data Manager?Owner-occupierProperty InstallerLandlord Tenant11 These Young Minds Harnessing the Opportunities of the Governments Green Deal 2011 Deloitte LLP. All rights reserved. 12. Green Deal Fundamentals and Finance Unlocking Finance atAccredited Accredited CustomerNo UpRepayment Moving On AssessmentInstallation DemandFront CostChangingReliableNo Delivery ofStructuredcustomerPortfoliopredictionapplication incomecreditand effectof incomefees?flowshierarchy property flows? profile12These Young Minds Harnessing the Opportunities of the Governments Green Deal 2011 Deloitte LLP. All rights reserved. 13. Precedent - Funding of Waste Infrastructure High RiskHigh LiquidityMoney In GovtPrivateGovtPrivateGrants FinancGrants Financee PotentiallyPotentially Underwriting/ Guarantees?Entity Corporate/SPVPublic Sector (Private Sector)Money Out Waste InfrastructureWaste InfrastructureDe-risk De-riskPPP PPPMerchantReturn fromService CommercialCharge Income Guarantees Secondary Market?Portfolio recycling? Stream13 These Young Minds Harnessing the Opportunities of the Governments Green Deal 2011 Deloitte LLP. All rights reserved. 14. Precedent - Funding of Waste InfrastructureWaste infrastructure is an interesting precedent because, akin to new green technologies, there is significant construction and technology risk. Also, many waste infrastructure deals have encountered issues with respect to planning control.With waste infrastructure projects once the construction has been successfully completed and the technology has been proved, because the demand and available risks are more certain, the overall risk is significantly reduced.The diagram shows the money in, nature of the entity, money out and where the return is gained from.Split between high risk waste infrastructure projects (i.e. unproven construction and/or technology) and high liquidity waste infrastructure projects where significant amounts of private finance are required.The money in for high risk projects is principally government grants, whereas for high liquidity projects is private finance.For the high risk projects there is a significantly great need for government underwriting and/or guarantees or to provide finance through a public sector entity. However, for the high liquidity projects it is private sector entities, both corporate and SPVs.The money out is spent on waste infrastructure investment under a PPP structure.14 These Young Minds Harnessing the Opportunities of the Governments Green Deal 2011 Deloitte LLP. All rights reserved. 15. Precedent - Funding of Waste InfrastructureThe return paid on the infrastructure investment is based on a service concession guarantee. This service concession guarantee means a fee will be paid by a public sector body provided that the infrastructure is available, performing and subject to certain volume adjustments.We have also seen the development of merchant schemes where there is no guaranteed fee paid by a public sector body, the return paid on the infrastructure investment is based purely on volume related payments.As with other PPP investments we have seen the development of a secondary market, where investors are able to recycle their finance in the manner described above as projects are de-risked.We believe that the funding of waste infrastructure over the last decade through different forms of PPP and Merchant structures provides a direct parallel with the funding of new green technologies.Circa 2billion of PFI credits has been awarded to local government waste projects at various stages of maturity to date. The level of PFI credits generally aligns to the capital value, hence the models described in the diagram have leveraged at least 2billion of private finance into this sector.15 These Young Minds Harnessing the Opportunities of the Governments Green Deal 2011 Deloitte LLP. All rights reserved. 16. This document is confidential and prepared solely forDeloitte LLP is a limited liability partnershipyour information. Therefore you should not, withoutregistered in England and Wales with registeredour prior written consent, refer to or use our name or number OC303675 and its registered office at 2 Newthis document for any other purpose, disclose them Street Square, London EC4A 3BZ, United Kingdom.or refer to them in any prospectus or otherDeloitte LLP is the United Kingdom member firm ofdocument, or make them available or communicateDeloitte Touche Tohmatsu (DTT), a Swiss Verein,them to any other party. No other party is entitled to whose member firms are legally separate andrely on our document for any purpose whatsoeverindependent entities. Please seeand thus we accept no liability to any other party www.deloitte.co.ukabout for a detailed description ofwho is shown or gains access to this document. the legal structure of DTT and its member firms. 2011 Deloitte LLP. All rights reserved.