leaders in the design, implementation and operation of markets for electricity, gas and water....
TRANSCRIPT
Leaders in the design, implementation and operation of markets for electricity, gas and water.
Portfolio Generation Investment Under Uncertainty
Michael Wagner
Mathematics in the management of energy systems29 January 2008
Agenda
• Investment Rationale• Balancing Generation and Demand• Generation Investment
− Coal vs Gas Generation
• Competitor Analysis• Construction & Operation Risk• Conclusions
Investment Rationale
• Major power companies− Vertically integrated utilities− Generation investment considered in context
• Generation & customer portfolio• Optimising generation-demand balance• Balancing commodity & carbon price risk exposure
− Maintaining portfolio competitiveness• Relative cost structures• Relative risk profiles
− Maximising returns on portfolio assets• Balance sheet financing
Generation-Demand Balance
• Managing generation demand balance− Strategy to source significant proportion of supply
from own generation
• Portfolio balance driver for generation investment− Examine both energy requirements & ability to
meet load profiles • Plant technology & economics• Plant flexibility
Example GB Portfolio Balances
• Example graphs in here??− long/short UK portfolio’s..
RWE average week day generation/demand profile in JanuaryAverage week day generation = 5,740MW, average week day demand = 6,841MW
0
2,000
4,000
6,000
8,000
10,000
1 5 9 13 17 21 25 29 33 37 41 45
Half-hour period
MW
Non-FGD Coal CCGT CHP Other Demand
EdF Average week day generation/demand profile in JanuaryAverage week day generation = 4,097MW, average week day demand = 7,241MW
0
2,000
4,000
6,000
8,000
10,000
1 5 9 13 17 21 25 29 33 37 41 45
Half-hour period
MW
Non-FGD Coal CCGT FGD Coal Gasoil Demand
GB Example Portfolio Balances
Weekday Average - January 2007
-8000
-6000
-4000
-2000
0
2000
4000
6000
1 5 9 13 17 21 25 29 33 37 41 45Half-Hour Period
MW
Lo
ng
Others (Range) BE Centrica EdF
British Energy: Long Baseload
Centrica: Short Baseload & Shape
EDF: Short Baseload
EON, RWE SSE, SP:
~Balanced
Maintaining Generation-Demand Balance
• Future requirement for new generation capacity• Generation closures
− Most plant life can be extended• Investment requirements vary but typically less than new build
− Emissions restrictions (LCPD)• Closure of coal plant due to sulphur emissions
− Nuclear plant• Planned lifetimes - although extensions likely
− Hunterston & Hinkley Point recently granted extensions− Closures provide brown field sites
• Re-use existing infrastructure
• Load growth− Mature supply market
• Significant market share penetration unlikely − Load growth slowing
• Increasing energy efficiency
Investing in Generation Technologies• Range of generation technology options
− Nuclear• Supported by Government policy• Significant capital investment & long development timescales
− Need to build a fleet?− Too much technology exposure for single utility− Could utilities work together to develop nuclear build programme?
− Renewables (EU Targets)• Dependent upon financial support• Limited availability of sites & transmission
• Gas or coal still key technologies− Relatively rapid project development
• Particularly for CCGT plant
− Similar risk structures• Commodity price exposure• Carbon price/allocation exposure• Capital costs
− Coal significantly greater cost than CCGT
Coal vs Gas Competitiveness
• Relativity of gas, coal and carbon prices− No one technology guaranteed to always
be high merit• Competition between technologies
− Seasonality of gas prices• Competitiveness varies across year
− Volatile commodity prices• Coal plant particularly sensitive to carbon price
• Position varies across asset life
• Competition within technology merit order
Coal vs Gas CompetitivenessGB Power Sector Modelling
Coal vs Gas - High Case Scenario
Apr
-10
Apr
-11
Apr
-12
Apr
-13
Apr
-14
Apr
-15
Apr
-16
Apr
-17
Apr
-18
Apr
-19
Apr
-20
Mar
gina
l Cos
t £/M
Wh(
e)
Gas (eff=41-55%) Coal (eff=40%) Coal (eff=33%)
Coal vs Gas - Low Case Scenario
Apr
-10
Apr
-11
Apr
-12
Apr
-13
Apr
-14
Apr
-15
Apr
-16
Apr
-17
Apr
-18
Apr
-19
Apr
-20
Mar
gina
l Cos
t £/M
Wh(
e)
Gas (eff=41-55%) Coal (eff=40%) Coal (eff=33%)
New Coal Plant - Range of Load Factors
0.5
0.6
0.7
0.8
0.9
1.0
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
LF
Range of Scenarios
New CCGT Plant - Range of Load Factors
0.5
0.6
0.7
0.8
0.9
1.0
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
LF
Range of Scenarios
Investment DecisionsGB Power Sector Modelling
• Return on investment− Analysis of fully built-up project costs
• Coal or CCGT could provide returns under different commodity price scenarios
• Coal plant significantly greater capital cost than CCGT− Retrofitting reduces capital expenditure by reusing infrastructure
− Capital is a limited resource
• Portfolio balance sheet investment
• Project financing provides capital flexibility but with stricter terms
Difference in Fully Built Up Costs Across Range of Scenarios
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Retro
fit C
oal
- G
as
(£/M
Wh
)Gas more competitive
Coal more competitive
Competitor Analysis
• Generation Investment for Utilities − Additional issues relative to merchant plant valuation
• Investments need to show economic returns
• Managing competitiveness of portfolio− Managing supply-demand balance
• Power and energy requirements across year
− Managing portfolio generation mix• Minimise portfolio costs
• Hedging portfolio power price risk
• Manage commodity and carbon price risk
• Significant driver of investment decisions− Understand portfolio commodity & power price risk
• Explore exposures under commodity scenarios
GB Portfolio ExposureGB Power Sector Modelling
EDF Annual Generation
0%
10%
20%
30%
40%
50%
60%
70%
80%
2010 2014 2017 2020 2010 2014 2017 2020
High Gas High Coal
Pro
po
rti
on
of
Dem
an
d
FGD Coal Gas
SSE Annual Generation
0%
10%
20%
30%
40%
50%
60%
70%
80%
2010 2014 2017 2020 2010 2014 2017 2020
High Gas High Coal
Pro
po
rti
on
of
Dem
an
d
FGD Coal Gas
• EDF− Short
generation
− Dependence on coal plant
− Exposed under high coal scenario
• SSE− More balanced
− Mix of coal & gas plant
− Less exposed to commodity price volatility
Construction & Operation Risk
• CCGT projects− Established technology− Fixed price turnkey EPC contracts − Manufacturer O&M contracts with performance guarantees
• Coal Projects− Retrofit, Super-critical, IGCC− Relatively little recent European experience− Developers may have to share construction & operation risk− Significant restrictions in industry capacity
• Need for new plant to be flexible− May need to sacrifice thermal efficiency to achieve flexibility− Designs may not target high risk new technology
• Manufacturer guarantees on flexibility
Conclusions
• Portfolio generation investment decisions− Differences to merchant plant development
• Timing & technology decisions
− Managing portfolio supply-demand balance• Hedging portfolio power price risk
− Managing portfolio generation mix• Minimise portfolio costs• Manage commodity and carbon price risk
Conclusions
• GB Power market− Gas and coal generation likely to provide major capacity
additions• Relatively rapid project development
• Number of potential sites
• 16GW CCGT & 12GW coal project developments
• No clear technology winner− Coal or gas could provide returns under different scenarios
• Relativity of gas, coal and carbon prices & allocations
• CCGT projects− Established technology− Significantly lower development risk− Lower capital cost
Conclusions
• Man-marking between major portfolios− Mixed generation portfolios
• Minimising portfolio generation costs• Hedge against volatile coal, gas and carbon prices
− Move toward balance own generation and demand• Hedging exposure to power price
− Similar risk structures
• Investment decisions based on portfolio contribution− Relative competitiveness− Relative portfolio risk structure− Different portfolios have different generation investment
requirements• Portfolios will continue to develop range of projects
− Many will not be developed to completion− Real optionality in projects under development
Thank You
Michael Wagner
IPA Energy + Water Consulting
41 Manor Place
Edinburgh
EH3 7EB
+44 131 240 0840