Opportunities for natural gas growth in US distributed generation

2017 Electric/Gas PartnershipFebruary 8, 2017

The “Other” DER

enovationpartners.com

ENOVATION PARTNERS - PRIVILEGED AND CONFIDENTIAL 1

Enovation Partners and Cleantech Group

Launched in July 2013. Investors including Gas Technology Institute and West River Group (LPs include Kaiser Foundation, Tudor Investments, 2σ)

Focused on driving innovation to resources and infrastructure sectors

Advisory services delivery model • Differentiated market insight, strategy, deal

origination• Experienced team, senior industry relationships• Deep sector knowledge• Rapid value capture• Fees aligned with value creation

Acquired Cleantech Group in Jan. ’16 to serve corporate, investor communities • Cleantech Forum, Roundtables• I3 – online cleantech networking platform• Proprietary, in-depth market insight and analysis

EP’s capabilities and innovative model featured in Aug ’15 cover story

EP named one of “7 to Watch” in Feb ‘16 issue

ENOVATION PARTNERS - PRIVILEGED AND CONFIDENTIAL 2

We’re very active in natural gas and DER

Natural Gas

Distributed Generation

Other Green Energy

Growth Strategy

• DER “heatmap” for utilities and energy retailers

• Post-DER business model for wires utility –multiple efforts

• DR – growth strategy under new regs

• DER – growth strategy for gas LDCs

• Storage/PV development plan for IPP portfolio

• LNG value chain market entry strategy and investment support

• LDC corporate strategy – M&A, virtual pipeline, DER

• Midstream – building a growth platform to benefit from price dislocation

• LNG for transport and electric generation –project development and M&A

• Risk-based analytics for gas pipeline inspection

• Energy storage project assessments –multiple efforts

• Energy storage – Lazard LCOS cost survey

• Energy technology commercialization, turnaround, refinancing

• EV – turnaround for leading player, V2G strategy, growth strategy

• EV charging & battery storage market assessment and business plan

• Energy services and retail growth strategies – multiple efforts

• Utility M&A – multiple efforts

• Non-reg growth IOU – standing up a new venture equity group

• Energy technology/service venture investing at the utility holding company level

ENOVATION PARTNERS - PRIVILEGED AND CONFIDENTIAL 3

DER is playing a growing role in US electricity supply…

Demand erosion for central station generation over time…• DER gains share of additions over next

decade (~50% to ~90%)• Absolute growth in DER over 9%• Diesel and gas reciprocating engines are

dominant forms; Solar PV grows from 5% to 20%

Increasing dis-intermediation of customers from utilities• Reduced demand• Aggressive non-utility players offering an

array of behind the meter products and services

• …but opportunity for utility investmentand creating stickier customers by bundling a new array of products andservices that address reliability, power quality, environmental footprint and cyber security

• New business models to drive growth

Observations

0%

20%

40%

60%

80%

100%

2010 2012 2014 2016 2018Energy Efficiency

CAGR % (2015-19)

10.6

10.4

3.6

3.0

Distributed Generation includes: Boiler / steam turbines, Combined cycle, Combustion turbines, fuel cells, NG gensets, microturbines, solar PV, storage and NG reciprocating enginesSource: EIA, KEMA, SEIA, Lawrence Berkeley National Lab, NETL, Lazard, ICF, EGSA, EP analysis

Share of “customer wallet” – one client’s view

ENOVATION PARTNERS - PRIVILEGED AND CONFIDENTIAL 4

… and is not just – or even primarily – about PV

Note: 2014 – 2023 are projected (P) values Source: Power Systems Research, SEIA, EGSA, Navigant, Enovation Partners

0

5,000

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35,000

40,000

US

DG

Inst

alla

tio

ns

(MW

)

Diesel Gensets NG Gensets Solar PV Fuel Cells Small Wind

US Distributed Generation Capacity Additions2009 - 2023

ENOVATION PARTNERS - PRIVILEGED AND CONFIDENTIAL 5

It’s not surprising; gas rates have remained stable, while electric rates have increased 30-60%

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Avg. Commercial Rate HH Nat Gas Price

Monthly US Avg. Commercial Gas Rate & Henry Hub Spot Price ($/mcf)

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Coop IOU Muni

Commercial Electric Rates by Utility type (cents/kwh)

These macro trends are having a significant impact across the US and are driving penetration of gas-fired DER

PRIVILEGED AND CONFIDENTIAL

And gas-fired technology cost and performance continues to improve steadily

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0 1000 2000 3000 4000 5000 6000 7000 8000

Effi

cien

cy (

%)

Installed Cost ($/kW)

Gas Engine - DG

Gas Engine - CG

Gas Turbine - DG

Gas Turbine - CG Microturbine - CG

Microturbine - DG

PAFC

MCFC

Assumed capacity: Gas engines 3 -5 MW; Gas turbines 5 – 20 MW; Micro turbines 65 – 200 WW; Phosphoric Acid Fuel Cell 400 kW; Molten Carbonate Fuel Cell 300 kWSource: GTI, Enovation Partners

Expected Evolution in Selected DG Technology Economics2010 to 2020

ENOVATION PARTNERS - PRIVILEGED AND CONFIDENTIAL 7

Consequently gas-fired DER has become highly competitive with electricity in many regions

$0

$50

$100

$150

$200

$250

$2.00 $4.00 $6.00 $8.00 $10.00 $12.00

Elec

tric

ity

LCO

E $

/MW

h

Natural Gas $/MMBtu

LCOE vs Gas Price

Recip Fuel Cell - CHP CT - CHP

Commercial Gas DG Heat Map - 2016

12.5+ Years

10.0 – 12.5 Years

7.5 – 10.0 Years

5.0 – 7.5 Years

< 5.0 Years

Not Assessed

Source: NREL, SNL Energy, Enovation DER Heatmap Analysis

Avg. Commercial Rate

Sustained low natural gas prices is creating a large market for behind the meter gas-fired DG at the commercial level

ENOVATION PARTNERS - PRIVILEGED AND CONFIDENTIAL 8

However, opportunities for gas-fired DER are sensitive to difference in load, and tariff design

IRR for Demand Management Using Natural Gas Recip. Engines – Minnesota Examples

New Ulm, MN 2026 Willmar, MN 2026 Virginia (city of), MN 2026

Building Type Load FactorSmall Comm.

ServiceLarge Comm.

ServiceSmall Comm.

ServiceLarge Comm.

ServiceSmall Comm.

ServiceLarge Comm.

Service

S School/L Office 36% 9% 4% 10% 0% 6% 6%

QSR/FSR 52% 12% 5% 13% 0% 6% 6%

Supermarket/L Hotel 60% 12% 4% 12% 0% 5% 5%

M Office/P School 36% 10% 5% 10% 0% 7% 7%

Strip Mall/Warehouse 32% 10% 6% 10% 2% 9% 9%

S Office/Midrise Apt 40% 12% 4% 12% 0% 5% 5%

Standalone Retail 33% 11% 6% 11% 0% 8% 8%

Small Hotel 50% 12% 4% 12% 0% 5% 5%

Out Patient 47% 11% 5% 11% 0% 6% 6%

Hospital 67% 13% 5% 13% 0% 6% 6%

< 6% 6-8% 8-10% 10-12% 12%+

Assumptions: Power price escalation: 3.7%, NG price escalation: 2.2%, 2026 gas price: $6.77/MMBtu, Dispatch case: super peak trimming, O&M inflation: 2.0%

ENOVATION PARTNERS - PRIVILEGED AND CONFIDENTIAL 9

Longer term, while batteries will increasingly challenge the role of natural gas in providing flexibility and reliability…

Demand Management for Storage*Frequency Regulation for Storage

*Available market for demand management BTM offerings are dependent on tariff-specific demand charges and terms. Volume (GW) in horizontal axis of graph is based on assumed C&I contribution to peak ISO capacity, NOT likely BTM storage market sizeSee Appendix pages for assumptions behind regional revenues and storage costs by use caseSource: Enovation Partners analysis

‘000 $/MW - Yr ‘000 $/MW - Yr

Available Market (MW)

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0 500 1000 1500 2000

20162020

PJM

ISO NE

ERCOTNY ISO

CAISO0

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- 50 100 150 200 250

2016

2020PJM

ISO NE

ERCOT

CAISONYCA

Legend

Available Market (GW)

Non CA

Non CA

CA-only

CA-only

2016 Required Revenue for

Storage

2020 Required Revenue Storage

Non-CA

Non-CA

CA-only

CA-only

ENOVATION PARTNERS - PRIVILEGED AND CONFIDENTIAL 10

…the role for gas (or hydrogen?) in longer duration applications remains more assured

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Hourly Load and Renewable Generation in CAISO Daily Load and Renewable Generation in CAISO

Source: CA ISO

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Wind Production Solar Production Wind+Solar Production System Load

Pro

du

ctio

n G

Wh

/h

Wind and Solar Hourly Production (December 2016)

Wind+Solar Hourly Production vs. System Load (December 2016)

Wind and Solar Daily Production (Year 2016)

Wind+Solar Daily Production vs. System Load (Year 2016)

Pro

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n G

Wh

/day

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Wh

/h

Pro

du

ctio

n G

Wh

/day

Load

GW

h/h

Load

GW

h/d

ay

Wind/Solar Wind/Load Solar/Load Wind+Solar/Load

Correlation (0.15) 0.14 0.34 0.38

Wind Solar Wind+Solar Load

Volatility 0.76 1.25 0.78 0.18

Wind/Solar Wind/Load Solar/Load Wind+Solar/Load

Correlation 0.39 0.24 0.52 0.43

Wind Solar Wind+Solar Load

Volatility 0.64 0.31 0.37 0.13