CFDS: POTENTIAL OPPORTUNITIES FOR HYDRO PROJECTS. John Puddephatt October 29th 2014

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1 CFDS: POTENTIAL OPPORTUNITIES FOR HYDRO PROJECTS John Puddephatt October 29th 2014

2 Statkraft at a glance Installed capacity * MW Power production (2013) * 55.9 TWh 97% renewable energy employees UK 272 MW Germany MW Norway MW Sweden MW Finland 66 MW Nepal 34 MW STATKRAFT SN POWER Panama (project) Peru 271 MW (+ project) Chile 157 MW Albania (project) Turkey 20 MW (+ projects) Brazil 137 MW Zambia 11 MW India 136 MW Laos 100 MW Philippines 293 MW AGUA IMARA * Includes: Share in subsidiaries where Statkraft is majority owner 100 % of SN Power and Agua Imara s installed capacity

3 UK Hydro Rheidol Hydro Power Station, near Aberystwyth, Mid-Wales Completed 1962 Installed Capacity: 56MW Annual Energy Production: 85 GWh equivalent to 12,350 homes 3

4 UK Wind Power } United Kingdom Onshore Wind Farms - Alltwalis (Carmarthenshire): 23MW - Baillie (Highlands): 52.5MW - Berryburn (Moray) : 66.7MW Offshore Wind Farm - Sheringham Shoals: 317MW* - Dudgeon: 402MW* *Joint Ventures 4

5 Statkraft Operational PPAs in the UK Operational Construction Wind Solar Biomass 5

6 Contract for Difference } The Feed in Tariff Contract for Difference (FiT CfD) will replace the Renewable Obligation (RO) as the primary support mechanism for large scale renewable/low carbon generators. } The FiT CfD is a long-term contract which remunerates low carbon generation at a defined strike price. The generator is expected to sell its output into the wholesale electricity market and receive a portion of its revenue from this. In addition, the generator may receive (or pay) top up payments between a defined electricity market index (the market reference price) and the strike price. } If the wholesale market reference price is below the contract strike price, then the generator receives a difference payment and if the reference price is above the strike price, the generator makes the difference payment 6

7 Difference Payment } CfD will pay difference between Market Reference Price and Strike Price on every MWh generated. } Payment at any time will be capped by reference to the final installed capacity commissioned by the facility by the Longstop Date (and in no circumstances can be higher than the initial installed capacity estimate). } The Market Reference Price for intermittent generation will be calculated on an hourly basis using day-ahead trading on the APX and N2Ex power exchanges. } The Market Reference Price for baseload generation will be a steady season long price calculated through a volume weighted average of season-ahead trades on the LEBA and NASDAQ power exchanges conducted in the previous season. 7

8 High Level Principles } The covenant strength of the LCCCo is underpinned by payment from suppliers where the LCCCo does not receive these payments, it is not liable to pay under the CfD. } There will be very limited opportunities to amend the CfD standard form - minor and necessary changes. } Very limited rights for termination of a CfD, and these only apply in favour of LCCCo. } Suspension of payment only applies where there are certain metering breaches or where a project ceases to generate eligibly. } The signatory of the CfD must be the owner of the physical asset at all times } A direct agreement 120 day grace period prior to any termination or suspension of payment. CfD PPA Contract with the Low Carbon Contracts Company (LCCCo) Not Government Funded by Consumers Long/short PPA with Market participants (Licensed suppliers, Traders, Consolidators, etc.) Off-taker of Last Resort (OLR) - default (Back-stop PPA) 8

9 Off-taker of Last Resort and the Back-stop PPA } CfD-FiT ambitions are to encourage a vibrant competitive PPA market - One major flaw what if nobody offers a route to market? } Introduction of the concept of an Off-taker of Last Resort (OLR) and a default (Back-stop PPA) to address market failure and off-taker insolvency risks month PPA at a known discount to the Strike Price ( 25/MWh) - Big Six will be mandatory providers, other suppliers can enter the process week window to obtain a Back-stop PPA process run by Ofgem - OLR providers will bid a Management Fee } OLR provides a floor to CfD PPA discounts at 25/MWh but clearly has a massive impact on debt sizing capacity 9

10 CfD PPA General Processes Greater input required from generator and offtaker than under ROC/FiT } Power - Day ahead hourly index Trade and risk management to point of delivery - Market Reference Price X( /MWh or %) - Ancillary services - No Floor required } Green Benefits - LECs and REGOs } Working Capital - LECs } Credit Support - PCG on the Power element } Registration - CVA Registration Process } Settlement - Standard CVA Settlement Process 10

11 CfD PPA Contract CONTENTS Clause Heading Page 1 DEFINITIONS AND INTERPRETATION 4 2 CONDITIONS PRECEDENT 34 3 COMMENCEMENT OF THE COMMISSIONING PERIOD 34 4 COMMENCEMENT OF THE COMMERCIAL OPERATIONS PERIOD 35 5 SALE AND PURCHASE 35 6 REGISTRATION & ACCREDITATION 36 7 TRANSFER OF BENEFITS 38 8 TRANSFER DEFAULT 40 9 BENEFIT REVOCATION REGOS & NEW BENEFITS PAYMENTS ALLOCATION ERRORS & ESTIMATES PAYMENT TERMS FLOOR PRICE SET OFF CREDIT SUPPORT EXTENSIONS METERING FORECASTS & DATA PROVISION MAINTENANCE, OUTAGES AND AVAILABILITY FORCE MAJEURE TERM & TERMINATION CONSEQUENCES OF TERMINATION INSURANCE LIMITATION OF LIABILITY REPRESENTATIONS, WARRANTIES AND UNDERTAKINGS TRANSFER OF RIGHTS/OBLIGATIONS CHANGE IN LAW NOTICES CONFIDENTIALITY DISPUTE RESOLUTION GENERAL GOVERNING LAW AND JURISDICTION APPLICATION OF THE NATIONAL TERMS OF CONNECTION 91 SCHEDULE 1 AGREEMENT SPECIFICS 93 SCHEDULE 2 CONDITIONS, COMMISSIONING REQUIREMENTS AND OPERATIONAL REQUIREMENTS 95 SCHEDULE 3 PRICES & SHARING PERCENTAGES 97 SCHEDULE 4 FLOOR PRICE 103 SCHEDULE 5 FORECASTING REQUIREMENTS 106 SCHEDULE 6 - CONTACT DETAILS 110 SCHEDULE 7 - DIRECT AGREEMENT 119 SCHEDULE 8 - PARENT COMPANY GUARANTEE 143 SCHEDULE 9 BANK GUARANTEE 154 ROC References Removed Floor References Removed } Structurally a CfD PPA will look very similar to a ROC PPA - References to CfD legislation and processes - Eligibility - Termination provisions and cross default - CfD Counterparty Credit - Settlement - Negative Prices - Ancillary Services 11

12 Administrative Strike Prices 12

13 Overall CfD Budget and Technology Pots Delivery Year m (2011/12 prices) 2015/ / / / / /21 CfD Budget (2014 release) Pot 1 (established technologies) Pot 2 (less established technologies)

14 CfD Technology Pots Pot 1 (established technologies) Administrative Strike Price (2015/16) Pot 2 (less established technologies) Administrative Strike Price (2016/17) Pot 3 Onshore Wind (>5MW) 95 Offshore wind 150 Biomass conversion Solar Photovoltaic (>5MW) Energy from Waste with CHP 120 Wave Tidal Stream 305 Hydro (>5MW and <50MW) 100 Advanced Conversion Technologies 150 Landfill Gas 55 Anaerobic Digestion* 150 Sewage Gas 75 Dedicated biomass with CHP 125 Geothermal

15 Pot 1: Hydro (>5MW and <50MW) Administrative Strike Price Competition } Hydro: 100 } Onshore wind > 5MW: 95 } Solar Photo-Voltaic >5MW: 120 } Energy from Waste with CHP: 80 Current CfD Interest } Administrative prices only - generators may tender bids below these levels to increase their chances of winning a CfD } High wind sites already competitive below administrative strike price } Solar PV - potential capex cost reduction for future delivery periods } Energy from waste with CHP large, substantial generation investor/funder interest 15

16 Eligibility Requirements } Planning consents received for the proposed generating station and other relevant works that enable the facility to be established or altered and electricity to be supplied } Connection agreement requirements: - For projects connecting directly to the transmission or distribution system, a grid connection agreement - For projects connecting indirectly (private networks), an agreement between the applicant and the operator of the private network that permits connection to the transmission or distribution system - For projects not connecting to the transmission or distribution system, a declaration stating no connection is applicable } Supply Chain Approval Certificate (for projects of 300MW and above) received from DECC 16

17 Auction Process } Each project submits sealed bids (strike price they are willing to accept) into the relevant delivery year, which is the year in which the Target Commissioning Date of the project falls } Auction ranks all projects in a pot by price and accepts cheapest first in any delivery year (regardless of technology type), until the budget for the pot is used up } Clearing price for a pot is the price of the most expensive project accepted in that delivery year (pay-as-clear rule) } For a successful project its CfD strike price is the applicable clearing price, capped at the relevant Administrative Strike Price 17

18 Flexible Bids } Generators are allowed to submit flexible bids, i.e. a bid which allows the bidder to vary the capacity, price and/or delivery date of their project } For each application, an applicant may submit up to 10 flexible bids } No more than three flexible bids may be in any given delivery year } Each flexible bid must have: - a different strike price; - a capacity no greater than that in the original application; and - a Target Commissioning Date which is no earlier than that in the original application } The flexible bid with the lowest strike price will be considered first and should be the applicant s first choice bid 18

19 Advantages vs ROC/FiT } CfD is awarded prior to construction commencement } Reduced accreditation/degression risk } Greater price visibility ahead of commencing planning process } Indexed annually no market exposure/simplified financial modelling } Ease of financing } Cost of Capital/Debt } Increased Gearing } Increased competition amongst PPA offtakers } Potentially wider scope for project sizes 19

20 Disadvantages vs ROC/FiT } Complicated process to win initial contracts } 12 month gap between each auction } Uncertainty of receiving CfD even after meeting eligibility requirements } Indexed by lower CPI rather than RPI less profitable } 15 years subsidy vs 20 years on ROC/FiT } Reduced financial incentive for generation management 20

21 Potential Positives } Developers/investors not restricted to small scale projects } Long term asset (lengthy post CfD energy only period) } Larger projects/increased generation long term vs short term returns } Long term security of supply } Long term energy demand expectations } No feedstock considerations (Biomass, EfW etc) } Investor appetite for UK energy assets } Funding for large scale projects } EIS/VCT 21

22 Potential Negatives } Risk of not receiving a CfD } Potential for future amendment/removal/replacement of the CfD system } >5MW unsuitable for small scale hydro and micro-hydro } Cost/timescales to meet eligibility requirements } Limited locations suitable for large scale developments } Lengthy hydro construction phase 22

23 Future Allocation Rounds } Next allocation round to be held in October 2015 } The Government is currently minded to release 50m for allocation in the October 2015 allocation round for Pot 1 (pot including hydro) projects commissioning from 2016/17 } A decision currently awaited on an indicative budget for Pot 2 (less established technologies) or Pot 3 (biomass conversion) } The remaining LCF budget to 2020/21 is in excess of 1bn in the DECC Medium Scenario } Possible funds for future CfD projects will be detailed later this year in DECC s Consumer Funded Policies a report to Parliament 23

24 THANK YOU John Puddephatt Mobile: Statkraft UK Ltd 4th Floor 41 Moorgate London EC2R 6PP United Kingdom