10
CCGT @49%
Win15
Sum17
CCGT @47%
Sum16
80
70
European gas vs coal
plant switching
A Timera Energy briefing
May 2015
gas [$/mmbtu]
52% CCGTs displacing
36% coal in Summers
60
8
50
40
30
6
20
10
4
0
50
54
58
coal [$/t]
62
66
70
gas [p/th]
CCGT @52%
Sum15
Win16
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
UK coal vs gas generation costs (CDS – CSS)
30
global oversupply of LNG and weaker oil prices. Europe is absorbing higher
20
pronounced oversupply.
15
plant competitiveness. Gas-fired power plants play an important role in
absorbing surplus hub gas, meaning higher load factors and plant margins.
£/MWh
volumes of LNG as a market of last resort. This may tip the gas market into
• Gas vs coal plant: Lower gas prices are reducing the gap in gas vs coal
recent fall in coal
plant competitive
advantage
25
10
5
0
-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
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
25
CCGT @52%
Sum15
Win16
CDS falling
CSS
10
20
weak forward
CDS & CSS
15
gas [$/mmbtu]
£/MWh
Current UK gas vs coal (36%) switching dynamics
10
5
0
CCGT @49%
Win15
Sum17
CCGT @47%
Sum16
80
70
52% CCGTs displacing
36% coal in Summers
8
60
50
40
30
6
20
Jul-17
Jan-17
Jul-16
Jan-16
10
Jul-15
Jan-15
Jul-14
Jan-14
Jul-13
Jul-12
Jan-12
Jul-11
Jan-11
Jul-10
Jan-10
Jan-13
some CSS recovery
-5
gas [p/th]
30
4
0
50
54
58
coal [$/t]
62
66
70
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
Gas vs coal switching: Continent
CCGT values have been deeply discounted by owners… but falling gas prices support peak margin capture
Current German gas vs coal (36%) switching dynamics
• Spreads: Continental spark spreads (CSS) remain negative,
CCGT @52%
Win15
Sum17
with coal plants dominating marginal setting of power prices.
10
• Role of gas: CCGTs have been relegated to a peaking role,
CCGT @49%
Sum16
Sum15
CCGT @47%
Win16
markets over winter e.g. Belgium & France.
• Switching: Gas hub prices need to fall from current levels
around 7 $/mmbtu to below 5 $/mmbtu to induce structural
(baseload) displacement of coal plants by CCGTs. But as hub
prices fall, CCGT load factors will increase in peak periods.
gas [$/mmbtu]
but this role is becoming increasingly important in some
8
Significant gas plant
competitiveness gap
remains in Germany
6
4
50
54
58
62
coal [$/t]
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
European gas price dynamics
The global gas market is entering a new phase of oversupply... putting pressure on European hub prices
2014-15 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
sharp decline and
convergence in
global gas prices
• Regional price convergence (Europe vs Asia)
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
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?
Europe vs global LNG market balance (2016)
2016 Global LNG Balance
& displacing Russian contract volumes
Russian ToP Flex RU
Pipeline
Pipeline
• Surplus LNG volumes are flowing to Europe
500
• The European gas market is close to the
contractual flex to reduce Russian volumes
• Beyond this point, European hubs may fall
sharply (& disconnect from oil-indexation)
300
200
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

LNG
Surplus
Can Europe soakup surplus LNG?
Non RU
pipeline
Dom prod
‘tipping point’ where LNG surplus exceeds
400
EU
LNG
Req
100
Incremental
demand & supply
will dictate global
pricing
4
Uncertain
Chinese LNG
demand
China
Flex
(ST/Spot)
LNG to displace flex RU gas
3
2
LT/T Contract
BCMA EU demand
recovery?
600
JP, TW, KO, Ind
Hub price tipping point
1
6
Emerging
market
-3
0
-1
EU demand
Non flex
supply
European Gas
EU flex supply LNG available
requirement
for Europe
Source: Timera Energy
Non EU LNG
demand
Global LNG
supply
Global LNG
1)6
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)
European supply and demand balance (2016)
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
higher gas demand at
lower prices as CCGT
load factors increase
• 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 $/mmbtu price range.
Source: Timera Energy
1)7
UK case study: switching already a reality
UK gas vs coal switching is already acting to alleviate downward pressure on European hub prices
UK ‘canary in the coal mine’
UK Coal vs CCGT output 2014-15 (GW)
• UK is 1st European market to switch given:
25
o Carbon price floor (penalises coal)
o Gas dominance of marginal pricing
20
• So as NBP/TTF prices fall, it is UK CCGT gas
15
demand that first supports NBP/TTF prices
5-10GW of CCGT
displacement of coal
in summer 2014
10
Switching already a reality
• NBP/TTF price slump from surplus LNG flow
in Summer 2014 caused 5-10GW of coal to be
5
-
displaced by more efficient CCGTs (Jun-Sep)
• 2015 Summer gas vs coal prices are now
again at a level where switching will occur
Coal
CCGT
Source: Timera Energy
1)8
UK case study: current pricing
Forward UK CSS remains relatively weak… but gas vs coal switching is set to boost realised CCGT margins
• Switching: CCGTs displacing coal over summers. Further gas price falls will push more CCGTs into merit for longer periods.
• Realised margin: As plants move into merit, load factors and margin capture increase and running costs (e.g. starts) decrease.
• Non-linearity: margin recovery has a non-linear relationship to price, i.e. realised margin can increase quickly (ATM optionality).
70
Current vs historic (2010+) UK gas vs coal (36%) switching
60
UK CCGT (52%) vs coal plant (36%) SRMC
65
CCGT @49%
55
40
CCGT @47%
Historic
50
Sum15
45
Win15
40
Sum16
35
Win16
30
Sum17
50
55
60
65
coal [$/t]
70
75
80
Source: Timera Energy
£/MWh
gas [p/th]
50
CCGT @52%
60
Transport cost
Variable O&M
30
UK Carbon cost
EU Carbon cost
20
Fuel cost
10
0
CCGT @52%
Coal @36%
1)9
Quantifying gas asset margin & load factors
Robust valuation of European gas-fired plants requires quantification of asset risk/return distributions
peaking and mid-merit capacity. This means a large portion of asset
Example modelled CCGT margin envelope (5%, 50%, 95%)
asymmetric
40
value upside
value is being realised over the day-ahead and within-day horizon.
30
• Gas plant role: European gas plants are currently operating as
• 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.
45
35
non-linear
margin increase
25
as gas prices fall
20
15
10
5
0
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Example 2022 CCGT margin distribution
• 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
asset value distribution
has ‘fat’ right tail which
increases expected value
important as ‘expected’ (50%) margin in quantifying asset value.
1)10
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 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.
1)11
Timera Energy & what we do
We offer expertise on value & risk in energy markets... and have a client base of leading companies
Service
Description
Valuation
market analysis, value quantification and risk/return analysis for power
plants, gas storage assets and gas/LNG supply contracts.
Investment
investment case development, entry/exit strategy, market value driver
analysis, portfolio structuring and transaction support.
Contracting
contract sales strategy, negotiation, structuring and reopener support
for gas/LNG supply, gas storage & power offtake contracts.
Value Monetisation
asset value maximisation, hedging strategy and commercial analytics
for flexible power, gas & LNG assets & portfolios.
Risk Management
exposure definition, risk measurement, capital allocation, risk limits,
risk governance & controls.
Our clients include
1)12
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
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
Infrastructure
Fund
• Advisory on CCGT and peaking plant investment opportunities across NW Europe
UK Capacity
Market
UK Generator
• Analysis of capacity price evolution & margin impact for different asset classes
CCGT
monetisation
Infrastructure
Fund
• Analysis of practical constraints in monetising CCGT portfolio in prompt/fwd market
CCGT
investment
Infrastructure
Fund
• Identification and analysis of specific CCGT investment opportunities
Centrica CCGT
asset sales
Infra fund
• UK power market projections & asset margin analysis to feed DCF model
• Analysis of market evolution, asset margins and project risk/return dynamics
• Impact of capacity/energy margin evolution on asset margin/investment strategy
• Delivery of commercial/risk analytics capability to support asset monetisation
• Market analysis, asset risk/return analysis, offtake contract structuring
• Advised on structuring & negotiation of tolling & energy management contracts
1)14
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