European gas vs coal plant switching

Transcription

1 gas [$/mmbtu] gas [p/th] Sum15 Win15 Sum16 Win16 Sum17 80 European gas vs coal plant switching % CCGTs displacing 36% coal in Summers A Timera Energy briefing May coal [$/t] 0

2 /MWh Headlines: Gas plant competitiveness increasing 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 UK coal vs gas generation costs (CDS CSS) Source: Timera Energy recent fall in coal plant competitive advantage 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

3 Jan- Jul- Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 /MWh gas [$/mmbtu] gas [p/th] Gas vs coal switching: UK The UK is Europe s canary in the coal mine for gas displacement of coal plant and it is already a reality UK CCGT (49%) and coal (36%) plant generation margins CDS CSS CDS falling some CSS recovery weak forward CDS & CSS coal [$/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. 8 6 Current UK gas vs coal (36%) switching dynamics Sum15 Win15 Sum16 Win16 Sum17 52% CCGTs displacing 36% coal in Summers )3

4 gas [$/mmbtu] Gas vs coal switching: Continent 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, 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 around 7 $/mmbtu to below 5 $/mmbtu to induce structural (baseload) displacement of coal plants by CCGTs. But as hub prices fall, CCGT load factors will increase in peak periods. 8 6 Current German gas vs coal (36%) switching dynamics Win15 Sum16 Win16 Sum17 Sum15 Significant gas plant competitiveness gap remains in Germany coal [$/t] 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

5 European gas price dynamics The global gas market is entering a new phase of oversupply... putting pressure on European hub prices gas price dynamics Gas price phases: Europe in a global context 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

6 Dom prod LT/T Contract Russian ToP Pipeline JP, TW, KO, Ind Flex RU Pipeline Flex (ST/Spot) Hub prices under pressure from rising LNG imports Europe will need to absorb surplus flexible LNG as a market of last resort... but at what price? 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 BCMA EU demand recovery? Non RU pipeline EU demand Non flex supply European Gas Europe vs global LNG market balance (2016) 2016 Global LNG Balance LNG to displace flex RU gas EU LNG Req EU flex supply requirement LNG Surplus Can Europe soakup surplus LNG? Incremental demand & supply will dictate global pricing LNG available for Europe Source: Timera Energy Uncertain Chinese LNG demand China Emerging market Non EU LNG Global LNG demand supply Global LNG )6

7 Gas plant switching support for hub prices In an oversupplied European gas market, higher CCGT load factors provide key gas demand support Russian oil-indexed contract prices (~ 7 $/mmbtu) are currently driving marginal hub price dynamics European supply and demand balance (2016) 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 $/mmbtu gas price range higher gas demand at lower prices as CCGT load factors increase But more significant oversupply may also require Continental switching to induce demand support: ~80bcma in a 4.00 to $6.00 $/mmbtu price range. Source: Timera Energy 1)7

8 UK case study: switching already a reality 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 So as NBP/TTF prices fall, it is UK CCGT gas demand that first supports NBP/TTF prices Switching already a reality NBP/TTF price slump from surplus LNG flow in Summer 2014 caused 5-GW of coal to be displaced by more efficient CCGTs (Jun-Sep) 2015 Summer gas vs coal prices are now again at a level where switching will occur UK Coal vs CCGT output (GW) 5-GW of CCGT displacement of coal in summer 2014 Coal CCGT Source: Timera Energy 1)8

9 gas [p/th] /MWh UK case study: current pricing 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 (20+) UK gas vs coal (36%) switching 60 UK CCGT (52%) vs coal plant (36%) SRMC Transport cost Historic Sum15 Win15 Sum Variable O&M UK Carbon cost EU Carbon cost Fuel cost Win16 Sum coal [$/t] Source: Timera Energy 0 1)9

10 Quantifying gas asset margin & load factors 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 from price shape and volatility needs to be valued properly. A Base, 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 Example modelled CCGT margin envelope (5%, 50%, 95%) asymmetric value upside non-linear margin increase as gas prices fall Example 2022 CCGT margin distribution asset value distribution has fat right tail which increases expected value 1)

11 Commercial implications 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 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. 1)11

12 Timera Energy & what we do We offer expertise on value & risk in energy markets... and have a client base of leading companies 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. Our clients include 1)12

13 Timera Energy team 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) Howard Rogers 30 years gas industry experience (BP, OIES) Expert in fundamental analysis of energy markets Director of Gas Research Programme at OIES 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 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 1)13

14 Examples of recent client work We deliver practical solutions adding tangible value to our clients based on first hand experience Project Client Summary Gas plant investment UK Capacity Market CCGT monetisation CCGT investment Centrica CCGT asset sales Infrastructure Fund Advisory on CCGT and peaking plant investment opportunities across NW Europe Analysis of market evolution, asset margins and project risk/return dynamics UK Generator Analysis of capacity price evolution & margin impact for different asset classes Infrastructure Fund Infrastructure Fund 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 Infra fund UK power market projections & asset margin analysis to feed DCF model Advised on structuring & negotiation of tolling & energy management contracts 1)14

15 Areas we could work with you 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 1)15