OFF-TAKE UNDER THE CFD - BUSINESS AS NORMAL? Electricity Market Reform: Edging Towards Delivery 24 September 2014

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1 OFF-TAKE UNDER THE CFD - BUSINESS AS NORMAL? Electricity Market Reform: Edging Towards Delivery 24 September 2014

2 Statkraft providing Pure Energy Statkraft is Europe s largest generator of renewable energy Hydropower, wind power, gas power and district heating assets. Statkraft in the UK owns and develops on and off shore wind and hydropower assets Market leader independent long term PPA provider Over 2000MW under contract ROC and CfD Off-take contracts 2

3 The UK renewable support system is changing Renewables Obligation Top-up to the energy price for 20 years Generator exposed to the future electricity price Contract for Difference Fixed, index-linked Per MWh income for 15 years Designed to de-risk capital-intensive investments Index linked income Any surplus not retained

4 But much remains the same Legal PPA framework terms Route to market in place Terms Electricity market Participation, costs confirmed, investable State Aid Legal framework Sale and purchase approval received Return Grid Connection, operation adequate; index-linked Consenting/Financing Project costs, debt Energy industry Evolution, replacement

5 The first auction is imminent Deadline for applying: 29 th October Much smaller allocation than anticipated Offshore wind maybe just one project Wind and Solar PV will compete with each other - Paid as cleared not Bid - Will bids at the margin be sensible Tight timescales post allocation 5

6 Business as normal? With a few notable exceptions off-take under the CfD is very similar to off-take under the RO - Counterparty financial and credibility covenants - Tenor of agreements - Discounts against the Reference Price - Operations (registration, billing and settlement, information) - Contracts Much of this will continue to be driven by who (debt or equity) is funding the project 6

7 Off-take decision process Basis Risk Difference between hedging forecast and last usable forecast Priced into power price discount Imbalance Difference between last usable forecast and delivery Priced into power price discount Discount Discount covers basis and imbalance risks, operational costs, credit costs and profit Floor price option fees and working capital (ROCs) not required Index CfD difference is calculated on ta Day-Ahead Reference Price Doing anything else introduces risks (or opportunities) of not matching the index Term Strength and performance of off-taker Future view on basis and imbalance risks Availability of competitive off-take Credit Less payment obligations to support Off-taker of Last Resort caps Delivered Unpaid exposure 7

8 Basis risk an illustration Imbalance Re-trading Risk 8

9 Current Early 2020 s Late 2020 s Cost CfD basis risk Basis risk exists from day one, however, success of EMR (and the RO) in delivering renewables will drive up basis risk - Within day trading (from confirmation of reference price to Gate Closure) - Imbalance - Negative Prices Price the risk now or take it on later? Negative prices Intra-day trading Imbalance 9

10 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 Structurally a CfD PPA will look very similar to a ROC PPA - References to CfD legislation, processes and dates - Eligibility - Termination provisions and cross default - CfD Counterparty Credit - Settlement - Negative Prices - Ancillary Services 10

11 CfD market operations Trading and re-trading of power Registration and reporting Interaction with Grid Interaction with the CfD Counterparty - Settlement - Information provision - Credit Comparisons with running a large power station - are independent generators willing or able? 11

12 Market requirements Financing market unlikely to rapidly change its view: Principally we are looking for a counterparty who purchases all power and related benefits for the duration of at least the debt term, removes those risks and uncertainties relating to power sales that a SPV with a project finance loan cannot manage well or at all (i.e. balancing, downside price protection), and has the capabilities and financial strength to manage and stand behind these obligations Gerard Pieters, NordLB DECC expects the PPA to be in place prior to CfD allocation: PPAs should be signed on a conditional basis before a strike price needs to be submitted, allowing independent generators to receive indicative financing terms from lenders, and reducing their cost uncertainties DECC's latest CfD consultation response 12

13 Route to Market for Pure Energy Statkraft still has a massive appetite for short and long term offtake (1-15 years) Route to market decision driven by; - Counterparty credibility - Sponsor and/or Funder view of long term risks (imbalance, basis, market activity) Contract very similar to ROC PPA Discounts broadly less - Lower working capital and credit costs - Potentially higher imbalance and basis costs 13

14 TAKK Tim Foster DIRECT +44 (0) MOBILE +44 (0) Switchboard +44 (0) Fax +44 (0) Statkraft UK Ltd 4 th Floor 41 Moorgate London EC2R 6PP United Kingdom

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