A Timera Energy briefing
May 2015
10
8
6
4
50
CCGT @52%
Sum15
Win16
54 58
CCGT @49%
Win15
Sum17
CCGT @47%
Sum16
52% CCGTs displacing
36% coal in Summers coal [$/t]
62 66 70
0
20
10
80
70
60
50
40
30

Gas hub price weakness is supporting a recovery in gas plant competitiveness… & risk adjusted asset values
•
• Gas price slump: European hub prices are falling as a result of a growing global oversupply of LNG and weaker oil prices. Europe is absorbing higher volumes of LNG as a market of last resort. This may tip the gas market into pronounced oversupply.
Gas vs coal plant: Lower gas prices are reducing the gap in gas vs coal plant competitiveness. Gas-fired power plants play an important role in absorbing surplus hub gas, meaning higher load factors and plant margins.
10
5
0
30
25
20
UK coal vs gas generation costs (CDS – CSS) recent fall in coal plant competitive advantage
15
-5
-10
Source: Timera Energy
• UK first: Significant gas vs coal switching is already taking place in the UK given the carbon price floor and this looks set to continue. This is starting to increase realised CCGT margins and load factors.
• Continent next: At current hub prices, Continental gas plants remain ‘out of the money’. But competitiveness is improving, increasing peak margin capture opportunities in some markets (e.g. Belgium, France).
• Asset value: Falling gas prices increase the ‘in the moneyness’ of gas plant optionality. This means higher expected margins, more value in the right tail of asset margin distributions (asymmetric upside) and higher risk adjusted asset values.
1) 2

The UK is Europe’s ‘canary in the coal mine’ for gas displacement of coal plant… and it is already a reality
30
25
UK CCGT (49%) and coal (36%) plant generation margins
CDS CSS
CDS falling
10
Current UK gas vs coal (36%) switching dynamics
CCGT @52%
Sum15
Win16
CCGT @49%
Win15
Sum17
CCGT @47%
Sum16
80
20
15 weak forward
CDS & CSS
52% CCGTs displacing
36% coal in Summers
70
60
10
8
50
40
5
6
30
0 20
-5 some CSS recovery
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4 0
50 54 58 62 66 70 coal [$/t]
Source: Timera Energy
• Spreads: Realised UK spark spreads (CSS) have started to recover over the last year, although forward market pricing remains weak. Dark spreads (CDS) have fallen as power prices drop (with gas hub prices) and the UK carbon price floor rises.
• Switching: At current NBP forward summer hub prices, newer CCGT (52%) are displacing older coal plants (36%).
• Margin capture: Once price shape & volatility are overlaid, the increase in CCGT competitiveness translates into a greater ability to capture margin, i.e. the ‘in the moneyness’ of CCGT optionality increases.
1) 3

CCGT values have been deeply discounted by owners… but falling gas prices support peak margin capture
• Spreads: Continental spark spreads (CSS) remain negative, with coal plants dominating marginal setting of power prices.
• Role of gas: CCGTs have been relegated to a peaking role, 10
Current German gas vs coal (36%) switching dynamics
CCGT @52%
Win15
Sum17
CCGT @49%
Sum16
Sum15
CCGT @47%
Win16 but this role is becoming increasingly important in some markets over winter e.g. Belgium & France.
• Switching: Gas hub prices need to fall from current levels
8
Significant gas plant competitiveness gap remains in Germany
6 around 7 $/mmbtu to below 5 $/mmbtu to induce structural
(baseload) displacement of coal plants by CCGTs. But as hub prices fall, CCGT load factors will increase in peak periods.
4
50 54 58 coal [$/t]
62 66 70
Source: Timera Energy
• Margin capture: As gas prices fall, CCGT competitiveness is improving, albeit from a very weak starting point. In other words the ‘out of the moneyness’ of CCGT optionality is falling and peak margin capture opportunities are increasing.
• Asset value: The challenge for Continental CCGTs is covering fixed costs, hence current low asset values. But capacity payments are being progressed across NW Europe. And CCGT’s have asymmetric value upside as gas prices fall & power volatility rises.
1) 4

The global gas market is entering a new phase of oversupply... putting pressure on European hub prices
Gas price phases: Europe in a global context
2014-15 gas price dynamics
• Slump in Asian LNG spot prices
• Sharp drop in oil-index contract prices
• Flexible LNG flowing back into European hubs as a market of last resort
• Regional price convergence (Europe vs Asia) sharp decline and convergence in global gas prices
Implications
• European hubs (NBP/TTF) are currently acting as global gas price support/floor
• Hub prices may need to fall further, to a level where power sector gas demand provides support (via higher CCGT load factors)
Source: Timera Energy
1) 5

Europe will need to absorb surplus flexible LNG as a market of last resort... but at what price?
BCMA
600
EU demand recovery?
Hub price tipping point
• Surplus LNG volumes are flowing to Europe
& displacing Russian contract volumes
• The European gas market is close to the
‘tipping point’ where LNG surplus exceeds contractual flex to reduce Russian volumes
• Beyond this point, European hubs may fall sharply (& disconnect from oil-indexation)
Gas-fired plant impact
• Once the flexibility to reduce Russian contract volumes is exhausted, power sector gas demand will become a primary factor supporting European hub prices
500
400
300
200
100
0
Non RU pipeline
EU demand Non flex supply
European Gas
LNG to displace flex RU gas
EU
LNG
Req
 LNG
Surplus
Can Europe soakup surplus LNG?
Incremental demand & supply will dictate global pricing
Uncertain
Chinese LNG demand
China
Emerging market
EU flex supply requirement
LNG available for Europe
Source: Timera Energy
Non EU LNG Global LNG demand supply
Global LNG
465
365
265
165
65
-35
-135
1) 6

In an oversupplied European gas market, higher CCGT load factors provide key gas demand support
European supply and demand balance (2016)
• Russian oil-indexed contract prices (~ 7 $/mmbtu) are currently driving marginal hub price dynamics
• But European LNG import volumes (green supply tranche), may be close to the ‘tipping point’ where oil-index contracts are pushed off the margin
• Gas vs coal plant switching then becomes a key source of incremental demand and price support
• The UK provides initial switching support: ~ 20 bcma in a 5.50-7.00 $/mmbtu gas price range
• But more significant oversupply may also require
Continental switching to induce demand support:
~80bcma in a 4.00 to $6.00 $/mmbtu price range.
higher gas demand at lower prices as CCGT load factors increase
Source: Timera Energy
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UK gas vs coal switching is already acting to alleviate downward pressure on European hub prices
UK ‘canary in the coal mine’
• UK is 1 st European market to switch given: o Carbon price floor (penalises coal) o Gas dominance of marginal pricing
25
UK Coal vs CCGT output 2014-15 (GW)
20
• So as NBP/TTF prices fall, it is UK CCGT gas demand that first supports NBP/TTF prices
15
10
Switching already a reality
• NBP/TTF price slump from surplus LNG flow in Summer 2014 caused 5-10GW of coal to be displaced by more efficient CCGTs (Jun-Sep)
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5
• 2015 Summer gas vs coal prices are now again at a level where switching will occur
5-10GW of CCGT displacement of coal in summer 2014
Coal CCGT Source: Timera Energy
1) 8

Forward UK CSS remains relatively weak… but gas vs coal switching is set to boost realised CCGT margins
• Switching: CCGTs displacing coal over summers. Further gas price falls will push more CCGTs into merit for longer periods.
• Realised margin: As plants move into merit, load factors and margin capture increase and running costs (e.g. starts) decrease.
• Non-linearity: margin recovery has a non-linear relationship to price, i.e. realised margin can increase quickly (ATM optionality).
70
Current vs historic (2010+) UK gas vs coal (36%) switching
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50
45
40
65
60
35
30
50 55 60 65 coal [$/t]
70 75
CCGT @52%
CCGT @49%
CCGT @47%
Historic
Sum15
Win15
Sum16
Win16
Sum17
80
Source: Timera Energy
60
50
40
30
20
10
0
UK CCGT (52%) vs coal plant (36%) SRMC
CCGT @52% Coal @36%
Transport cost
Variable O&M
UK Carbon cost
EU Carbon cost
Fuel cost
1) 9

Robust valuation of European gas-fired plants requires quantification of asset risk/return distributions
• Gas plant role: European gas plants are currently operating as peaking and mid-merit capacity. This means a large portion of asset value is being realised over the day-ahead and within-day horizon.
• Shape & volatility: In this environment, the ability of assets to capture hourly price shape and respond to periods of price volatility is a key driver of asset values.
• Valuing gas assets: Asset optionality (flexibility) in capturing margin
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40
35
30
25
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15
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5
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Example modelled CCGT margin envelope (5%, 50%, 95%) asymmetric value upside non-linear margin increase as gas prices fall from price shape and volatility needs to be valued properly. A Base,
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Example 2022 CCGT margin distribution
High & Low margin scenario approach does not do this justice.
• Capturing risk/return: A probabilistic (e.g. simulation) based modelling approach is required to value this optionality. This generates asset risk/return distributions (see charts) which are as important as ‘expected’ (50%) margin in quantifying asset value. asset value distribution has ‘fat’ right tail which increases expected value
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An increase in gas plant competitiveness should translate into higher risk adjusted asset values
• New reality: A structural oversupply of LNG and weaker oil prices are driving a downward trend in European gas hub prices.
This is increasing European gas plant competiveness i.e. the ‘out of the moneyness’ of gas plant optionality is decreasing.
• Margin impact: Realised CCGT margin capture in the UK has started to increase. Peak margin capture opportunities are improving in some Continental markets. But forward CSS remain weak, although less negative now on the Continent.
• Market interest: Buyer interest in UK CCGTs has significantly increased over the last 12-18 months. But deep value discounts remain for Continental gas plants given more challenging risk/return dynamics and bearish CSS sentiment.
• Value increase: There are two ways gas plant value can increase as a result of falling gas hub prices:
1.
Higher peak margins, increasing the right tail of asset value distributions & peak insurance values
2.
Structural recovery in gas plant competitiveness (e.g. hub prices reach the tipping point as LNG imports rise)
• Value quantification: In order to quantify the impact of 1. and 2. on risk adjusted asset value and asset risk/return dynamics, it is important to use a probabilistic plant valuation model that generates asset margin distributions.
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We offer expertise on value & risk in energy markets... and have a client base of leading companies
Our clients include Service
Valuation
Investment
Contracting
Value Monetisation
Risk Management
Description market analysis, value quantification and risk/return analysis for power plants, gas storage assets and gas/LNG supply contracts.
investment case development, entry/exit strategy, market value driver analysis, portfolio structuring and transaction support.
contract sales strategy, negotiation, structuring and reopener support for gas/LNG supply, gas storage & power offtake contracts.
asset value maximisation, hedging strategy and commercial analytics for flexible power, gas & LNG assets & portfolios.
exposure definition, risk measurement, capital allocation, risk limits, risk governance & controls.
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Our team members have extensive senior industry experience and practical commercial knowledge
Olly Spinks
• 20 years energy industry experience
• Expert in commercial and risk analysis
• Ran BP’s gas & power commercial analytics function
David Stokes
• 20 years energy/commodity market experience
• Expert in value/risk management of flexible assets
• Industry roles with Origin, Williams, JP Morgan
Nick Perry
• 30 years industry experience (Amoco, Exxon, Enron)
• Expert in commercial & risk management strategy
• Board level experience (Director Enron Europe)
Diederick Tesselaar
• Former Head of Trading at Petronas (UK)
• 15 years structured gas and power trading experience
• Head of Structured Trading EGL, Power Trader at Nuon
Howard Rogers
• 30 years gas industry experience (BP, OIES)
• Expert in fundamental analysis of energy markets
• Director of Gas Research Programme at OIES
Emilio Viudez-Ruido
• 15 years experience in European gas and power markets
• Strong expertise in valuation, hedging and risk analysis
• Expert in deconstruction & analysis of asset exposures
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We deliver practical solutions adding tangible value to our clients… based on first hand experience
Project
Gas plant investment
UK Capacity
Market
CCGT monetisation
CCGT investment
Centrica CCGT asset sales
Client
Infrastructure
Fund
UK Generator
Infrastructure
Fund
Infrastructure
Fund
Infra fund
Summary
• Advisory on CCGT and peaking plant investment opportunities across NW Europe
• Analysis of market evolution, asset margins and project risk/return dynamics
• Analysis of capacity price evolution & margin impact for different asset classes
• Impact of capacity/energy margin evolution on asset margin/investment strategy
• Analysis of practical constraints in monetising CCGT portfolio in prompt/fwd market
• Delivery of commercial/risk analytics capability to support asset monetisation
• Identification and analysis of specific CCGT investment opportunities
• Market analysis, asset risk/return analysis, offtake contract structuring
• UK power market projections & asset margin analysis to feed DCF model
• Advised on structuring & negotiation of tolling & energy management contracts
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The following list covers some areas of potential collaboration
We have worked for with a number of large private equity and infrastructure funds in the following areas:
 Asset valuation - applying our in-house stochastic asset valuation modelling capability
 Market analysis - using our market models for European power & gas markets to analyse asset margins
 Investment case development – e.g. analysis of risk/return dynamics, monetisation strategy, business model
 Entry/exit strategy – defining target assets and investment lifecycle strategy
 Asset contracting – defining contracting, hedging and optimisation strategies (& asset value impact)
 Energy services contracting – structuring of pricing, exposure transfer, incentivisation & performance metrics
 Transaction support – e.g. bid advisory, due diligence
 Asset integration – post acquisition integration and business capability development
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