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EQUITIES FIXED INCOME REAL ESTATE LIQUIDITY ALTERNATIVES BLACKROCK SOLUTIONS

BlackRock New Energy


Investment Trust plc
FEBRUARY 2009

US-built hybrid cars on US roads by 2015. He wants to introduce a


national renewable portfolio standard (RPS) ensuring 10% of
electricity comes from renewable sources by 2012 (25% by 2025)
and implement an economy-wide cap and trade program to
reduce greenhouse gas emissions by around 80% by 2050.

Credit Suisse estimates that the capex obligations just to provide


generating capacity would be anywhere from $345bn to $758bn
depending on the RPS target. To put this in context, the entire
powergen industry’s capex is around $70bn per year. Originally
Sweet Home Obama we expected that these measures would form the basis of the
We enter the New Year feeling slightly the worse for wear. We Cleaner, Greener and Smarter America Act which is due to
wish we could put this down to a few too many glasses of wine addressed by Congress some time in the next two years.
and a good party, but the truth is, like many investors, we are However, it now looks as though a variety of energy and
feeling bruised after months of market pain. environmental issues will be included in the economic stimulus
package. The good news for energy technology investors is that
It would have been hard to imagine twelve months ago that most the fiscal stimulus package is the President’s and Congress’
Western economies would be plunged into recession and that number one priority at the moment and approval looks possible
financial markets would have endured such turmoil. It is now within a matter of weeks. So the impact on the industry could be
clear that the credit crunch has well and truly spread from ‘Wall far more immediate than first imagined.
Street’ to ‘Main Street’, leaving numerous corporate failures and
high and rising unemployment in its wake. Almost every asset
class has plunged in value; unfortunately the New Energy sector
What could this mean for the industry and
is no exception. our investments?
At present, the following measures have been proposed as part
Despite all this gloom, there is cause to be optimistic. This year of an economic stimulus bill in the US. These provisions are still
may well be a turning point for the sector, given that the world’s subject to modification and approval by the House and Senate.
largest energy consumer has just elected as President a vocal
supporter of New Energy. Initial policy proposals and new 1. Around $20 billion to transform the nation’s electric
executive appointments suggest that we are seeing a infrastructure, or power grid, by allowing for a smarter
fundamental shift in the direction of White House energy policy. grid and focusing investments in renewable energy.
This should be reassuring for investors in our New Energy The US power grid needs investment, not only to meet
Investment Trust, which has more than 50% exposure to the US, increased demand for electricity, but also to connect new
its largest country weighting. sources of generation (like wind) to the existing grid. It also
needs to accommodate requirements for demand
management and, in the future, plug-in hybrid electric
vehicles. According to the Edison Electric Institute, the US
utility industry normally spends around $6 billion each year on
transmission investments so $20 billion of government
funding would go a long way.

Direct beneficiaries of these spending plans include


companies that build the transmission grid or provide
necessary components such as General Cable, Quanta
Services and potentially American Superconductor.
Companies involved in demand management and metering
such as Itron and Esco also stand to profit.

More generally, investment in the grid should facilitate the


growth of wind and solar generation by connecting areas with
President Obama has talked of investing $150 billion in clean attractive renewable resources to population centres where
energy over the next ten years*. His plans include creating five the electricity is consumed.
million new jobs in the New Energy sector and putting one million
2. Multi-year extension and improvement of the stimulus proposals. However, their planned revisions to the
Production Tax Credit (PTC). incentive structure for wind should help the industry meet the
The PTC is worth about US$20 for each megawatt hour of President’s ambitious goal. This will benefit developers like FPL,
electricity produced in the first ten years of a wind farm’s turbine manufacturers like Vestas and Gamesa and US solar
operation and is the primary financial incentive for wind power manufacturers like First Solar.
generation in the US.
For the past few months, we have been asking ourselves whether
However, two problems with the current scheme have become governments will continue to promote New Energy in an
clear. First, the PTC expires after one year. (The current PTC is economic downturn. While there is fierce competition for
due to expire in December 2009.) Since there is no guarantee government attention and cash, the US’s economic stimulus plan
that the PTC will be extended at the end of each year, long- is a clear sign that governments remain focused on climate
term investment planning involves significant risk. A change and energy security.
multiyear extension to the PTC, currently being considered by
the US government, would eliminate this problem. Indeed the US is not alone. In November, the UK passed The
Climate Change Act, making a 26% reduction in CO2 emissions by
The second problem is that wind farm developers often aren’t 2020 and 80% by 2050 legally binding (using 1990 as a reference
paying enough tax to take full advantage of the credit. The year). Similarly, the EU Heads of State agreed the 2020 renewable
current work-around is a complicated system, known as ‘tax energy and carbon reduction targets. More recently, a row
equity’ financing, involving investment banks securitising the between the Ukraine and Russia over gas and transit pricing has
credit and selling it to third parties. The credit crisis has reminded European leaders that they rely on Russia for roughly a
reduced the number of banks and third parties willing to take quarter of their gas needs. As a result of the disagreement, the
part in this scheme, adding more delays and costs to an EU had reduced volumes of gas for almost two weeks and some
already cumbersome process. The government is therefore countries were almost entirely without gas in the depths of winter.
proposing direct refunds or grants for unused tax credits. This event will no doubt re-focus minds on diversifying energy
supplies, finding alternative gas supply routes and increasing the
3. Improved funding for renewable energy projects. use of renewables and nuclear power generation.
Solar and wind farms are capital intensive developments and
therefore rely on debt-like structures for a large part of their
The New Energy sector is certainly not immune from recent
financing (80% debt financing is common). These projects are
financial events. Wind and solar projects are finding it harder
generally very credit-worthy as they are backed by a
and more expensive to secure project finance, which is
government-mandated revenue stream. However, given the
resulting in reduced volume and margin expectations.
severity of this credit crisis, developers are finding that it is
Another impact is the reduction in the market’s risk appetite.
much more difficult to secure credit, a lengthier due diligence
This has put particular pressure on growth stocks as future
process is causing delays, and the rates being offered are
earnings are being heavily discounted in favour of existing
more punitive than before. The government is considering
assets. Consequently, many new energy companies are now
various proposals, including an $8 billion Renewable Energy
trading at earnings multiples that are in line with the broader
Loan Guarantee scheme. Guaranteeing loans should reassure
market, where historically they have traded at a premium. In
financiers worried about lending in today’s economic
addition, despite – or perhaps because of – the economic
environment – helping to improve loan terms and attract new
headwinds, New Energy continues to gain legislative support.
providers of credit to the wind and solar sectors.
The exact form of the US’s economic stimulus package will
On the 8th of January, President Obama stated in an economic become clear in the coming weeks, but whatever the final
stimulus speech that he would like “to double renewable energy outcome, it confirms that New Energy is rising up the political
production over the next three years”. That would mean agenda. This is encouraging for many of the Trust’s holdings.
installing more than 20 gigawatts of renewable energy in that
time period, the majority of which, in our view, would be wind. So
far, Congress has not included a firm target for renewables in the * Source: www.barackobama.com 30/01/09

Important information you should read


BlackRock New Energy Investment Trust plc involves an above average risk and is suitable only for financially sophisticated investors who are capable of evaluating the risks and merits of such
investment and who have sufficient resources to bear any loss which might result from such investment. The Company may hold up to 25% of its assets in unquoted companies. Whilst great care is
taken in their valuation such valuations cannot, by their nature, be exact. A larger percentage of the Company’s assets may also be held in smaller companies. These can involve a higher level of risk
because their shares tend to be more volatile and less liquid than those of larger companies. You should also be aware that when overseas investments are held, changes in rates of exchange may cause
the value of investments to go up or down. BlackRock New Energy Investment Trust plc has appointed BlackRock Investment Managers Limited as Investment Manager. The purpose of this factsheet
is to provide summary information concerning the Company and does not constitute a recommendation to buy or sell shares in the Company. BlackRock New Energy Investment Trust plc is traded on
the London Stock Exchange and dealing may only be through a member of the Exchange. BlackRock is a trading name of BlackRock Investment Management (UK) Limited. SEDOL™ is a trademark of
the London Stock Exchange plc and is used under licence. The BlackRock Investment Trusts stocks and shares ISA is managed by BlackRock Investment Management (UK) Limited and the BlackRock
Investment Trusts Savings Plan is operated by BlackRock Investment Management (UK) Limited. This factsheet is issued by BlackRock Investment Management (UK) Limited (authorised and regulated
by the Financial Services Authority). Registered office: 33 King William Street, London, EC4R 9AS. Registered in England No. 2020394. For your protection, telephone calls are usually recorded.

Further Information
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08457 405 405 broker services@blackrock.com
0800 44 55 22 uk.investor@blackrock.com blackrock.co.uk/its

05010BR Feb09

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