Attracting investment in energy: how does the UK stack-up?

Power Generation Investment, 24th October, One Whitehall Place, London

Steve Riley, CEO and President, GDF SUEZ Energy UK-Europe

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Electricity an important energy carrier

140

130

120

110

100

90

80

70

60
1985 1990 1995 2000 2005 2010 2015
Electricty (298.1TWh in 1985=100)
Primary Energy (201.7 mtoe in 1985=100)
Carbon intensity electricty (620 gms/kWh in 1985 = 100)

Source: Electricity production from BP Statistical Review of World Energy

and Digest of UK Energy Statistics, 2011

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 A diverse UK electricity sector
Sector Company Parent Consumers / MW* Technology
Million accounts
Nuclear, coal, gas, CHP,
Vertically Integrated EDF Energy 3.48 12,712
renewables

RWE Npower 3.79 14,668 Coal, gas, oil, renewables

E.On UK 4.54 11,038 Coal, gas, oil, CHP, renewables

Centrica 6.79 7,462 Gas, renewables

Coal, gas, pump storage

Scottish Power 2.83 6,685
renewables
Scottish and Coal, gas, oil, pump storage,
5.05 13,552
Southern Energy renewables
GDF SUEZ Energy Coal, gas, oil, CHP, pump
Independent Generators 7,034
UK-Europe storage, renewables

Drax 3,964 Coal, gas, renewables

DONG Energy 1,159 Gas, renewables

Intergen 1,610 Gas

Eggborough Power 1,960 Coal

ESBI 415 Gas, renewables

Phillips 66 1,240 CHP

Source*: Two data sources used - Digest of UK Energy Statistics and Elexon data. Capacity allocated by
% ownership and long term tolling agreements also taken into account; all units in service included plus
mothballed capacity and excluded any commissioning plant

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Increasing environmental taxes on electricity sector
£ billion

6 Carbon Price Floor

5 Carbon Reduction
Commitment
4 EU Emissions Trading
Scheme
3 Landfill Tax

2 Aggregates Tax

1 Climate Change Levy

0
2010 2011 2012 2013 2014 2015

Source: Environmental Taxes, Cloe Smith MP, Energy Focus, Parliamentary

Group on Energy studies , 16 July 2012
Notes: Does not include CERT , CESP or their successor

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Global presence, global opportunities

UK-Europe Asia
London Bangkok

Total capacity in operation Total capacity in operation

13.9GW 9.6GW
Projects in construction
Projects in construction
0.0GW 2.9GW

North America
Houston

Total capacity in operation

14.9GW
Projects in construction
Australia
Melbourne
0.4GW
Total capacity in operation
3.5GW
Latin America
Middle East, Projects in construction
Florianópolis
Turkey & Africa 0.0GW
Dubai
Total capacity in operation
Total capacity in operation
11.5GW
Projects in construction
22.1GW
Projects in construction
5.5GW 4.0GW

Total power capacity

Generation LNG/Gas Retail Water desalination In operation: 75.6GW
Projects in construction 12.8GW
Note: MW gross figures as at December 31st, 2011

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 Investing in different markets
Lower Risk Projects
 History of regulatory stability
 Reliable forecast of market supply
Merchant  Stable / predictable fuel prices
 Mechanisms promoting price stability
(e.g., capacity payments, caps/floors)
 Credit-worthy offtaker or guarantee
from Credit-worthy Government
 Contractual risks are under the control
‘Contracted’ of IPR and in line with our experience
(e.g., Operations, Trading)
 Contractual risks are predictable
 Committed Financing in place
 Committed Engineering, Procurement
and Construction Contract in place, with
General back to back penalties with Offtake
contract
 No Development Risk
Higher Risk Projects
 History of regulatory changes, with
negative impact on participants
 Unpredictable demand or supply
 Unpredictable fuel prices (e.g., US Shale
Gas)
 No price protection mechanisms
 Concerns about credit-worthiness of
offtaker
 Contractual risks are not under the
control of IPR or are not in line with our
experience (e.g., Dispatch risk)
 Contractual risks are unpredictable
 Financing Risk
 Contract Risk
 Development Risk
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 International Power’s investments in emerging economies
Saudi Arabia – Gas
 1,730MW (gross) gas-fired project, 20%
owned by IPR
 100% contracted under a 20 year PPA (1)
with state controlled Saudi-Electricity
Company
 Total Investment Cost will be
approximately 2.1 billion USD.
 IPR takes risk under the PPA on
construction cost, operations cost and
efficiency of the plant. SEC takes risk on
dispatch levels, electricity price and fuel
price
 Project to reach Commercial Operations
in 2013
Notes: (1), Power Purchase Agreement
Brazil – Hydro
 3,750MW (gross) hydro project, 50.1%
owned by IPR
 50 units x 75 MW each
 73% contracted under 30 year PPAs (1),
indexed to inflation
 Energy not contracted (net of PPA) to be
sold in the free market and/or via future
auctions
 Project to start phased commissioning in
early 2013
– River deviation successfully
completed in September 2011
– Fast ramp up to full assured energy
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International Power’s investments in the UK

Increasing
technology Wind
maturity

Biomass

Carbon Capture and Storage

Tidal

Key risk

Technology Complexity Fuel supply Political

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New UK policy initiatives implications for investment

Policy initiative Degree of certainty Promotes investment

Renewables Banding • Banding Review outcomes published in • Yes - the actual technology deployed
Review July 2012 will depend on ROC values
• New banding values applicable in 2013
Carbon Price Support • Long term trend established • Beneficial for renewables and nuclear
• Value fixed two years ahead; and • Could deter new gas plant running
indicative values beyond

Contract for Difference • Will be introduced 2014
Feed in Tariffs • Strike price and reference market to be
determined
• Counterparty to be determined
Capacity Payments • Mechanism will be ready for 2014
Mechanism • First auction could be run in 2014
Emission Performance • Level set for new plant beginning 2013
Standard • Ongoing consultation on some issues
• Potential Review in 2015
• Yes, encourages all new low carbon
generation
• Less exposure to wholesale price
• Yes – necessary to maintain overall
system security
• No – but does limit new coal generation,
creating more ‘space’ for other
technologies

Gas Generation • Strategy completed Autumn 2012 • Yes, since it recognises the need for
Strategy • Capacity mechanism to provide incentives flexible thermal plant

Carbon intensity for • Proposed for inclusion in the Energy Bill in • Yes, additional ‘comfort’ for new low
the electricity sector September 2012 carbon generation
• Could deter new gas thermal

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Levy Control Framework implication for investment

 Purpose of the Levy Control Framework

(LCF) is to ensure policies achieve their
objective cost effectively
 DECC will have to address policy if
forecast to overspend the ‘envelope’
agreed with HMT:
 It will consider making adjustment to
policy
 Any decisions to be made by
Ministers will follow normal
procedures
 No retrospective changes on existing
investments
 The LCF increases risk to those
developing new projects

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Summary

 Many opportunities in emerging markets resulting in strong competition for capital

 Developed markets are becoming more sophisticated, with increasing government
intervention
 UK is moving from a liberalised to a ‘managed’ electricity market and the electricity
sector is under considerable pressure from different stakeholders
 The UK electricity sector needs greater certainty:
– Some important issues for the RO still to be resolved
– Details of EMR ‘instruments’ and institutions need to be developed
– Role of the Gas Generation Strategy needs to be established
– Role of the UK’s existing thermal fleet needs to be clarified
– Some aspects of the operation of budget control mechanisms
 Investor confidence in the UK increases if:
– There is transparency of government decision making
– An holistic approach is adopted to market evolution
– An evidence based policy approach is maintained
– The grandfathering principle applies

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