Carbon Finance

Centre for Energy StudiesIndian Institute of Technology

New Delhi, June 4,  2 0 0 8

Carbon finance for Solar Energy Applications

Chandra Shekhar SinhaHead for Asia, Environmental Markets

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English_General

This presentation was prepared exclusively for the benefit and internal use of the JPMorgan client to whom it is directly addressed and delivered (including such client’s subsidiaries, the “Company”) in order to assist the Company in evaluating, on a preliminary basis, the feasibility of a possible transaction or transactions and does not carry any right of publication or disclosure, in whole or in part, to any other party. This presentation is for discussion purposes only and is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by JPMorgan. Neither this presentation nor any of its contents may be disclosed or used for any other purpose without the prior written consent of JPMorgan.

The information in this presentation is based upon any management forecasts supplied to us and reflects prevailing conditions and our views as of this date, all of which are accordingly subject to change. JPMorgan’s opinions and estimates constitute JPMorgan’s judgment and should be regarded as indicative, preliminary and for illustrative purposes only. In preparing this presentation, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was provided to us by or on behalf of the Company or which was otherwise reviewed by us. In addition, our analyses are not and do not purport to be appraisals of the assets, stock, or business of the Company or any other entity. JPMorgan makes no representations as to the actual value which may be received in connection with a transaction nor the legal, tax or accounting effects of consummating a transaction. Unless expressly contemplated hereby, the information in this presentation does not take into account the effects of a possible transaction or transactions involving an actual or potential change of control, which may have significant valuation and other effects.

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JPMorgan is a marketing name for investment banking businesses of JPMorgan Chase & Co. and its subsidiaries worldwide. Securities, syndicated loan arranging, financial advisory and other investment banking activities are performed by a combination of J.P. Morgan Securities Inc., J.P. Morgan plc, J.P. Morgan Securities Ltd. and the appropriately licensed subsidiaries of JPMorgan Chase & Co. in Asia-Pacific, and lending, derivatives and other commercial banking activities are performed by JPMorgan Chase Bank, N.A. JPMorgan deal team members may be employees of any of the foregoing entities.

This presentation does not constitute a commitment by any JPMorgan entity to underwrite, subscribe for or place any securities or to extend or arrange credit or to provide any other services.

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Outline of the Presentation

Background Culprits of climate change

International agreements to address climate change

Market mechanisms in international agreements to address climate change

Carbon Markets: carbon credits or offsets and allowances

Impact of carbon credits on projects

Carbon finance for Solar Energy Application

Annex: Carbon Finance at JP Morgan

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Flow Diagram: Global Greenhouse Gas Emissions -- the “culprits” of climate change

Source: WRI, Baumert et al, 2005

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Cumulative Investment in Energy Infrastructure, 2005 - 2030

Source: IEA, WEO, 2006

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Incremental Coal-fired Investment

While there is no silver bullet solution for climate change – there is a single bullet that can kill…. COAL

CO2 emissions from electricity, largely from increases in coal, are projected to increase by 2/3 between 2004 and 2030, rising at about 2% a year.

This increase occurs in spite of efficiency improvements in coal fired generation (from 42% in 1990, to 46% today). Efficiency is expected to reach 51% in 2030.

7785 TWh

Source: IEA, WEO, 2006

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International Agreements to Address Climate Change

United Nations Framework Convention 0n Climate Change (UNFCCC) – 1992 Ultimate objective of stabilizing global greenhouse gas concentrations in the atmosphere

Developed countries (Annex I countries) to

aim to restore GHG emissions to 1990 levels

Support capacity building in, and facilitate technology transfer to developing countries to mitigate, and to adapt to climate change

Meet as a “Conference of Parties” in the future, consider progress

The Kyoto Protocol to the UNFCCC – 1997

38 Developed Countries and Economies in Transition (Annex B countries) agreed in 1997 to:

reduce GHG emissions by 5.2 % below 1990 levels in the commitment period 2008-2012

Create market mechanism to manage the cost of GHG reductions

Status: In force since February 2005

Coming into force: required ratification of 55 Parties to UNFCCC representing 55 % of CO2 emissions

United States (36% of GHG emission) is not a Party

Marrakech Accord: agreed in Nov 2001 sets rules of implementation

Total demand created for GHG Reductions: ~2800 or 4800 Mt CO2, including US

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Carbon Finance as a Market Instrument to Address Climate Change

Two Main drivers till date

Kyoto Protocol

European Trading Systems

Increasingly relevant in the future

Japans industries (Keidanren) voluntary action plan

Regional trading systems in the United States and Australia

Voluntary offset programs in Europe and United States

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Global treatyGlobal treaty

The Kyoto Protocol—Dominant international compliance market

The KP contains the following market mechanismsInternational Emissions Trading (IET): Trading blocks of

emissions credits between emissions-capped industrialized countries at the national level

Joint Implementation: Project-based trading between annex 1 countries (developed countries)—generate Emission Reduction Unit (ERU)

Clean Development Mechanism: Project-based trading between annex 1 and non-annex 1 countries—generate Certified Emission Reduction (CER)

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TimelineTimeline

European Emission Trading Scheme Phases

2005 2006 20112007 201220102008 2009

Feb 2005

Allocation of 2005 EUA’s

Jan 2005

Launch of EU ETS

Mar 2006

Verification of 2005 EUA’s

Jan 2011

Proposed introduction of aviation into EU

ETS

Phase II Phase IIIPhase I

Allocation of year’s EUAs is in February of that year

Verification of previous year’s EUA’s is in March

Surrender of previous year’s EUAs is in April

Feb 2008

Allocation of 2008 EUA’s

April 2006

Surrender of 2005

EUA’s

Mar 2009

Verification of 2008 EUA’s

April 2009

Surrender of 2008

EUA’s

Feb 2009

Allocation of 2009 EUA’s

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Cap-and-trade proposals before senateCap-and-trade proposals before senate

U.S. Federal legislation is coming

Senate bill Scope of coverage Other details

Feinstein-Cooper, S.317,

introduced 01/17/07

Electricity sector, “downstream” regulation

Allocation is output-based for generators; auctioned amount increases with time

Kerry-Snow,

introduced 02/ 01/ 07

Economy-wide, point of regulation not specified

President determines allocation

McCain-Lieberman, S.280,

introduced 01/ 12/ 07

Economy-wide, large sources “downstream”, fuels “upstream”

EPA Administrator determines allocation

Sanders-Boxer, S.309,

introduced 01/ 15/ 07

Economy-wide, point of regulation not specified

Cap-and-trade is permitted, but not required

Bingaman, discussion draft

Economy-wide, “upstream” regulation

Allocation is specified for some sectors

Cap and trade, proposes carbon efficiency board

Lieberman-Warner S2192 most important introduced 10/ 07

Economy-wide, upstream and downstream

Allocation is specified for some sectors; auctioned amount increases with time

The next U.S. administrationThe next U.S. administration

GHG Target Auto Standard Ren. Energy CCS

Obama -80% by 2050 40 mpg by 2020; 50% improvement by 2025

25% by 2025 No ban on new coal

Clinton -80% by 2050 55 mpg by 2030 25% by 2025 All new coal w/ CCS; fund 10 demos

McCain -65% by 2050 35 mpg std. Opposed stds Support clean coal

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EmissionReduction

Specific place in host party

Specific place in host party

GH

G em

ission from coal

Fired pow

er plant

GH

G em

ission fromG

as-based power

Baseline Scenario Project Scenario

Host Party which does not have an

emission cap

Annex I Party (e.g EU country) which has an

emission cap

CER

Acquired CERs/ ERUs are added to the allowed emissions

Host Party benefits From technology and financial flows

$$

1. Kyoto creates binding greenhouse gas emission limit only for Industrialized countries and economies in transition

2. Allows a part of the emission reductions (Certified Emission Reductions) to be generated in developing (host) countries and Emission Reduction Units in countries with commitments

ERUs

ActualEmissions

Carbon Market and the Kyoto Protocol

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Market Volume Growth 2007 (World Bank assessment, May

2008)

(in MtCO2e)

Allowance Markets

Project-Based Transactions

EU Emission Trading Scheme

Chicago Climate

Exchange

New South Wales Certificates

CDM

551

23

25

2,061

Voluntary& Retail

42

SecondaryCDM

240

JI41

x 1.0

x 2.5

x 3

x 10

x 2 x 1.3

x 2

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Market Value Growth 2007 (World Bank assessment,

May 2008)

(in MUS$)

Allowance Markets

Project-Based Transactions

EU Emission Trading Scheme

Chicago Climate

Exchange

New South Wales Certificates

CDM

7,400

70

220

50,100

Voluntary& Retail

270

SecondaryCDM

5,500

JI500x

1.3

x 4

x 3.5

x 12

x 1 x 2

x 2

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Market size

Carbon Market Overview Regulatory framework Tradable units 2007 2012E

EU ETS EU Emissions Trading Scheme

Largest multi-national, GHG emissions trading scheme globally

Commenced operation on 01/ 01/ 05

J I and CDM credits eligible via “Linking Directive”

Compliance EUAs (EU Emissions Allowance)

46 325

Other Kyoto compliance

Protocol to the UN Framework Convention on Climate Change (UNFCCC)

Assigns mandatory emission limitations for the reduction of GHG emissions to the signatory nations Key nations include:

J apan

Canada

Kyoto driven compliance CERs (Certified Emissions Reduction/ ERUs (Emission Reduction Units)

20 140

North America pre-compliance voluntary

Entities (including corporations, governments, and individuals) voluntarily participate in the reduction of their GHG emissions

U.S. is key market

Potential compliance market based on cap-and-trade bills in the senate

Voluntary/ pre-compliance

Compliance

VERs (Verified Emissions Reduction)

0.2 3

42—1501

Total 66 510—618

$bn$bn

1 [Market value with carbon prices seen in EU-ETS, $30/tonne could be $150bn in 2012 and $250bn in 2015 (Warner-Lieberman Bill—Point Carbon Analyst Feb 2008]

Size of the environmental markets

With growing linkages between these markets and the advent of a regulated US market,the environmental products market could approach $550+bn by 2012

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EUA and CER Market Overview

Current Market StatusCurrent Market Status

EUA Dec-08 and CER Dec-08 Historical Prices (€/MT)EUA Dec-08 and CER Dec-08 Historical Prices (€/MT)

0

5

10

15

20

25

30

35

J un-06 Aug-06 Nov-06 Feb-07 May-07 J ul-07 Oct-07 J an-08 Apr-08

CER Dec 08 EUA Dec 08 EUAs/CERs Spread

Source: JPMorgan, data as of April04, 2008

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J an-06 Apr-06 J ul-06 Oct-06 J an-07 Apr-07 J ul-07 Oct-07 J an-08 Apr-08

Dec-06 Dec-07 Dec-08 Dec-09

EUA Historical Prices (€/MT): Dec-06, Dec-07, Dec-08, Dec-09

EUA Historical Prices (€/MT): Dec-06, Dec-07, Dec-08, Dec-09

Designed as an entity-based domestic cap and trade emissions allowance programme that started operation on January 1, 2005

Allowances allocation in accordance with a national allocation plan (NAP I,II and III) Phase I (2005-07) - Learning Phase 2006: $24.5 billion market Phase II (2008-12) – Next Operational Phase Phase III (Post 2012) – Review of the Directive: policy

NAP I (long), NAP II (short ?), NAP III (could be very short)

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11 12 13 144 16 17 18 192 20 21 22 23 24 25 26 273 5 6 7 8 9

0

10

20

30

40

-10

-100

-110

-90

-70

-80

-20

-30

-40

-50

-60

-120

-130

-140

1010

-150

-160

15

There are significant opportunities to achieve needed abatement at costs of less than €40/tCO2e

Insulation improvements

Fuel-efficient commercial vehicles

Lighting systems

Air Conditioning

Water heating

Fuel-efficientvehicles

Sugarcanebiofuel

Nuclear

Livestock/soils

Forestation

Industrialnon-CO2

CCS EOR,new coal

Industrial feedstock substitution

Wind,lowpen.

Forestation

Celluloseethanol CCS,

new coal

Soil

Avoided deforestationAmerica

Industrial motorsystems

Coal-to-gas shift

CCS, coal retrofit

Waste

Industrial CCS

Avoided defores-tation Asia

Co-firingbiomass

Solar

Source:McKinsey

Stand-by losses

Smart transitSmall hydro

Industrial non-CO2Airplane efficiency

COST OF ABATEMENT, EUR/t CO2e, 2030

AbatementGt CO2e/year

Uncertainties which could decrease abatement supply

Uncertainties which could increase abatement supply

• Regional or no participation

• Technology

• Consumer behavior

• More nuclear

• CSS (retrofit)

• Consumer behaviors

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All CDM Projects in the Pipeline in Brazil + Mexico + India + China

as a fraction of all projects

0%

20%

40%

60%

80%

100%Q

1-04

Q2-

04Q

3-04

Q4-

04Q

1-05

Q2-

05Q

3-05

Q4-

05Q

1-06

Q2-

06Q

3-06

Q4-

06Q

1-07

Q2-

07Q

3-07

Q4-

07Q

1-08

Pro

ject

s

Mexico

Brazil

China

India

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Number of projects in Asia by type

Affore-station & Refore-

station0%

Renew ables

39%

Supply-side EE8%

Demand-side EE

12%

HFC & N2O reduction

6%

Agriculture1%

Fuel switch1%

Landfill etc33%

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Carbon Fund

Carbon Fund

$$ $$

22 22

Emission ReductionPurchase Agreement

BanksInvestor

DebtEquity

Power Purchase Agreement

$$

Electricity

$$

CarbonCredits

Nature of Carbon Financing Contract

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Impact of Carbon Finance

5y ('08-'12) 7y 10y 14y 21y Impact per Unit$5.00 0.5% 0.6% 0.8% 1.0% 1.2% $3.16 / MWh

$10.00 1.0% 1.4% 1.7% 2.1% 2.3% $6.33 / MWh$15.00 1.6% 2.1% 2.7% 3.1% 3.3% $9.49 / MWh$20.00 2.2% 2.9% 3.6% 4.1% 4.5% $12.65 / MWh

5y ('08-'12) 7y 10y 14y 21y0.58 tCO2e/tSW 0.74 tCO2e/tSW 0.93 tCO2e/tSW 1.11 tCO2e/tSW 1.29 tCO2e/tSW Impact per Unit

$5.00 17.9% 24.1% 29.2% 31.7% 32.8% $41 / MWh$10.00 52.3% 59.1% 62.4% 63.5% 63.8% $82 / MWh$15.00 88.2% 93.3% 95.4% 95.9% 96.0% $124 / MWh$20.00 123.7% 127.3% 128.6% 128.8% 128.9% $165 / MWh

*tSW = ton solid waste

5y ('08-'12) 7y 10y 14y 21y$5.00 110.8% 112.3% 112.7% 112.7% 112.7%

$10.00 176.7% 177.3% 177.4% 177.4% 177.4%$15.00 227.3% 227.6% 227.7% 227.7% 227.7%$20.00 270.0% 270.2% 270.2% 270.2% 270.2%

*65% tax applied on carbon revenues

ER PricesPurchase period

INCREMENTAL IRR - CARBON FINANCERenewable Energy

Purchase period

INCREMENTAL IRR - CARBON FINANCESolid Waste

ER Prices

ER PricesPurchase period

INCREMENTAL IRR - CARBON FINANCEHFC23

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Potential Opportunities in the Power Sector

Generation Generation from renewable energy (hydro, wind, geothermal, biomass, solar)

— Limitations on large (>20MW) hydro Fuel switching from coal and oil to natural gas Investment in super critical / ultra super critical power generation for coal Replacement of equipment such as turbines and boilers to improve efficiency

Power Transmission and Distribution Decentralized power generation (mini-grids or off-grid applications) Electricity loss reduction from transmission and distribution networks

Reduction of leakage of SF6 in transformers and switch gears

Energy (end-use) Efficiency Measures Energy efficient lighting Municipal water pumping

Power SectorPower Sector

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Solar Energy Applications and Carbon Finance

A Solar Thermal or PV power project connected to the grid might affect:

The choice and/or timing of new power plants (or life extension of existing ones), i.e. the build margin, and/or

The operation of existing power plants, i.e. the operating margin

The methodology for estimating the emission reduction (ACM0002) uses “combined margin” approach, or average of averages with different subsets of power plants, but averages at the end

Calculate a baseline emission factor EFy as the average of the Operating Margin emission factor (EF_OMy ) and the Build Margin emission factor (EF_BMy,):

EFy = 0.5 * EF_OMy + 0.5 * EF_BMy

CEA database in TCO2e/MWh (December 2007) availabale at http://cea.nic.in

Power Generation – Grid ApplicationsPower Generation – Grid Applications

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  2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

North 0.72 0.73 0.74 0.71 0.71 0.71 0.72

East 1.09 1.06 1.11 1.10 1.08 1.08 1.03

South 0.73 0.75 0.82 0.84 0.78 0.74 0.72

West 0.90 0.92 0.90 0.90 0.92 0.87 0.85

North-East 0.42 0.41 0.40 0.43 0.32 0.33 0.39

India 0.82 0.83 0.85 0.85 0.84 0.82 0.80

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Solar Energy Applications and Carbon Finance

Contribution of carbon finance to the cost of electricity

Power Generation – Grid ApplicationsPower Generation – Grid Applications

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US cents/kWh

Carbon credit price ($/TCO2e)

  2006-07 10 15 20 25 30 35

North 0.72 0.72 1.08 1.45 1.81 2.17 2.53

East 1.03 1.03 1.54 2.05 2.57 3.08 3.59

South 0.72 0.72 1.08 1.44 1.79 2.15 2.51

West 0.85 0.85 1.28 1.70 2.13 2.55 2.98

North-East 0.39 0.39 0.58 0.78 0.97 1.16 1.36

India 0.80 0.80 1.20 1.60 2.01 2.41 2.81

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Solar Energy Applications and Carbon Finance

Can be for solar thermal or PV power generation for capacity < 15MW Default emission factor: 0.8TCO2e/MWh or where there is adequate justification:

Power Generation – Off- grid ApplicationsPower Generation – Off- grid Applications

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Carbon credit price ($/TCO2e) US cents/kWh

EF 10 15 20 25 30 35

2.40 2.40 3.60 4.80 6.00 7.20 8.40

1.20 1.20 1.80 2.40 3.00 3.60 4.20

0.80 0.80 1.20 1.60 2.00 2.40 2.80

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Solar Energy Applications and Carbon Finance

Small-scale methodology applicable for thermal generation capacity up to 45MW for thermal devices (co-firing is permitted) that supply individual household or users. Solar thermal water heaters, dryers and solar cookers would fall in this category. Methodology I.C is applicable.

Baseline emission: fossil fuel that would have been used in the absence of the solar technology. IPCC default emission factors can be used. Cogeneration application is permitted. Equivalent electricity (from grid or captive

generation) and thermal energy is used for estimation of the baseline emissions.

When non-renewable biomass was used for thermal energy and is displaced (instead of fossil fuels) by the renewable technology (such as solar cooker), use small-scale methodology I.E Some limitations (e.g. non-renewable biomass in use since 31 December 1989) Assume that equivalent fossil fuel likely to be used by similar consumers instead

of the non-renewable biomass (using IPCC default values) Need to ensure that definition of non-renewable biomass and of renewable

biomass is met

Solar Thermal ApplicationsSolar Thermal Applications

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Solar Energy Applications and Carbon Finance

Carbon markets have developed rapidly, driven by the EU Emissions Trading System and the Clean Development Mechanism of the Kyoto Protocol India has been at the forefront of this development

Solar technologies have seen limited benefits of the carbon market Carbon prices have been low till very recently Solar technologies have been relatively expensive and only now does it seem

that cost reduction potential may be achievable

While there are some uncertainties about the size of the carbon market, the long term prospects are very promising In India the development of promotional policy and addressing of institutional

issues may permit rapid expansion and diffusion of the solar technologies, partially aided by carbon finance.

ConclusionsConclusions

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Chandra Shekhar SinhaHead for Asia, Environmental Markets

JP Morgan Chase NA,

Mafatlal Centre (9th Floor), Nariman Point, Mumbai.

T: +91-22-6719-8084

E: [email protected]

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JPMorgan’s activity in the carbon market

Environmental Markets are a growth business within the JPMorgan Energy BusinessEnvironmental Markets are a growth business within the JPMorgan Energy Business

Emission Trading: JPMorgan can provide transactional support services for the compliance and pre-compliance/voluntary

carbon markets

Emission Distribution: JPMorgan benefits from its extensive Global Energy Franchise and has, so far, built a solid distribution

platform of secondary-market Certified Emissions Reduction (CERs) to compliance buyers in Europe and Japan

Emission Origination: In order to originate quality CERs in specific markets, JPMorgan is working with selected quality

specialists that combine:— Local presence and knowledge of doing business in their local emerging markets— Have the relevant expertise in Clean Development Mechanism (CDM) methodology and

execution Origination agreements established with a number of leading suppliers of registered CERs in Asia,

Africa and Latin America

Climate Care acquisitionClimate Care acquisition

JPMorgan has significantly expanded its team capabilities to address growing client demand. As part of this build out, the bank has hired highly experienced staff and also recently acquired Climate Care, a pioneer in carbon emission reductions; offering carbon offsets to businesses and individuals.

Combined strength provides a strong platform for JPMorgan to invest in large-scale carbon emission reduction projects and renewable energy credits that meet high quality requirements.

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Environmental markets are a growth business within JPMorgan’s commodities business

Power Coal and emissionsOil and

refined productsGas

Actively trading since 1997

WTI, Brent, Tapis, Dubai and Urals

Also present in light products, distillates and fuel oil, covering and offering a wide range of products and services

Experienced team with strong relationship with major producers and consumers worldwide

Actively trading since 2004

Rapidly developing business

Supply power to utilities, retail power suppliers and end users

These activities are quickly establishing JPMorgan as a top tier player in the electricity derivatives and risk management marketplace

Actively trading since 1997

Significant presence in NYMEX futures and options

Basis—large number of locations actively traded

Actively trading since 2004

Coal, including PRB and Central Appalachian

Emissions allowances (SO2, NOx)

EU ETS carbon

Kyoto Protocol Driven CDM and JI Carbon Credit origination

Voluntary emission reductions

Renewable energy credit and RPS risk management

Physical and financial capabilities

JPMorgan Energy TradingCatherine Flax and Ray Eyles

Bruce Tozer Global Head

Environmental Markets

Global Commodities Blythe Masters

Note: Please refer to annex for acronyms

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Our environmental markets team has both depth and experience

Principal Investments

Trading and riskmanagement

Mansoor Sheikh, Head European Energy, London, 44 207 7774392

Nigel Felgate, Executive Director, London, 44 207 7779925

Sales

Bruce Tozer, Global Head Environmental Markets, London, [email protected], 44 207 7771531

Donnatella Cuocci, Vice President, London, 44 207 7774005

Charlie Pool, Analyst, London, 44 207 777 3674

Kedin Kilgore, Head Environmental Markets Americas, [email protected], 1 212 834 6387

Bhavna Prasad, Vice President, New York 1 212-834-2231

Tina Reine, Vice President, New York 212 834 4281

Chris Neidow, Head of Energy Sales and Marketing Asia, Singapore, (65) 68822107

Daniel Rosetto, Vice President, Sydney, 61 2 9220 1503

Project origination

and structuring

Odin Knudsen, Managing Director, Policy and Business Development, D.C., [email protected], 1 202 585 3785

Chandra S. Sinha, Head for Asia, Mumbai, 91 22 6719 8084

Fernando Cubillos, Vice President, Origination, Santiago

Tiffany Bourgoin-Heskia, Associate, London, 44 207 777 0381

Paul Kelly, Executive Director, New York, 1 212 834 7263

Jose Tumkaya, Vice President, New York, 1 212 834 5654

Matt Ginzberg, Analyst, New York, 1 212 834 9103

Climate Care

Mike Mason, founder of Climate Care, Oxford

Edward Hanrahan, Head of Sales, Oxford

Tom Morton, Head of Origination, Nairobi

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