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1 O C T O B E R 2 0 0 8
European Utilities Research TeamChris RogersAC +44 20-7325 9069 [email protected] LaitungAC +44 20-7325 6826 [email protected] Garrido +34 91- 516 1557 [email protected] Casali +44 20-7325 9023 [email protected]
For specialist sales advice, please contact:Ian Mitchell +44 20-7325 8623 [email protected]
For full J.P. Morgan Global Utilities Team details, please see inside cover
See page 133 for analyst certification and important disclosures, including investment banking relationships.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. The analysts listed above are employees of either J.P. Morgan Securities Ltd. or another non-US affiliate of JPMSI, and are not registered/qualified as research analysts under NYSE/NASD rules, unless otherwise noted.
E U R O P E A N U T I L I T I E S B A S I C S 2.0 - E L E C T R I C I T Y & G A S I N D U S T R Y O V E R V I E W
J.P. Morgan Securities Ltd
Global utilities team
Chris Rogers - Germany, Nordic, France, UK, [email protected] Garrido - Spain, [email protected] Casali – UK [email protected] [email protected] Keenan, CFA - [email protected] Specialist Sales advice, please contact:Ian [email protected]
Andrew [email protected] [email protected] [email protected]
Grace [email protected]
Edmond Lee, [email protected] Mirchandani – Hong Kong, Philippines [email protected] Kan – [email protected] Krishnan – [email protected] Jamal – [email protected] Chong – [email protected] Chawalitakul – [email protected] Tantri – [email protected]
Sergey [email protected] [email protected]
Lilyanna Yang, [email protected] Frey, [email protected] Souza [email protected]
USAUSA
Latin AmericaLatin America
RussiaRussia
Asia PacificAsia Pacific
AustraliaAustralia
EuropeEurope
EU
RO
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AN
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ILIT
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Agenda
Page
Appendix
Valuation and drivers
Renewables
Climate change
The energy value chainElectricity generation…………………………………………………………………………………………………………………… 4Natural gas upstream sourcing……………………………………………………………………………………………………… 61Energy trading……………………………………………………………………………………………………………………………… 69Transmission and distribution……………………………………………………………………………………………………… 71Supply…………………………………………………………………………………………………………………………………………… 88
2
97
107
112
124
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Business drivers…………………………………………………………………………………………………………………………… 111Valuation methods………………………………………………………………………………………… …………………………… 116Stock price drivers……………………………………………………………………………………………………………………… 117Major M&A over the last decade………………………………………………………………………………………………… 121
Acronyms…………………………………………………………………………………………………………………………………… 125Glossary……………………………………………………………………………………………………………………………………… 127Abbreviations……………………………………………………………………………………………………………………………… 128Conversions………………………………………………………………………………………………………………………………… 129Metrics………………………………………………………………………………………………………………………………………… 130Key websites………………………………………………………………………………………………………………………………… 131Bloomberg codes………………………………………………………………………………………………………………………… 132
1
Agenda
Page
Valuation and drivers
Renewables
Climate change
The energy value chain
Electricity generation………………………………………………………………………… 4Natural gas upstream sourcing……………………………………………………………61Energy trading…………………………………………………………………………………… 69Transmission and distribution…………………………………………………………… 71Supply………………………………………………………………………………………………… 88
2
97
107
112
2EU
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The energy value chain
TradingSourcing, despatch, management, proprietary
ELECTRICITYValue chain
NATURAL GASValue chain
Regulated networksTransmission &
Distribution
Regulated networksTransmission &
Distribution
Dua
l-fu
el c
ontr
acts
Fuel
sou
rcin
g
Upstream sourcing / E&P
Supply
Supply
Source: J.P. Morgan
Generation
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The energy value chain
TradingSourcing, despatch, management, proprietary
ELECTRICITYValue chain
NATURAL GASValue chain
Regulated networksTransmission &
Distribution
Regulated networksTransmission &
Distribution
Dua
l-fu
el c
ontr
acts
Fuel
sou
rcin
g
Generation
Upstream sourcing / E&P
Supply
Supply
Source: J.P. Morgan
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Electricity generation
i. Economics
The load curve……………………………………………………………………………………………………… 6
The merit order…………………………………………………………………………………………………… 7
Short run margin cost – wholesale prices, spreads……………………………………………… 8
Long run marginal cost – system adequacy/ reserve margins……………………………… 14
i. Technology………………………………………………………………………….……. 26
Solid fuel – coal………………………………………………………………………………………………… 28
Gaseous fuel – gas……………………………………………………………………………………………… 37
Liquid fuel – oil…………………………………………………………………………………………………… 39
Nuclear………………………………………………………………………………………………………………… 40
Renewables…………………………………………………………………………………………………………… 49
Wind………………………………………………………………………………………………………… 50
Biomass & Biofuel…………………………………………………………………………………… 52
Geothermal……………………………………………………………………………………………… 53
Solar………………………………………………………………………………………………………… 55
Marine……………………………………………………………………………………………………… 56
Hydro………………………………………………………………………………………………………… 57
i. In Europe……………………………………………………………………………………… 59
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Economics - the load curve
Time (Day / Year)
Dem
and
/ Su
pply
/ P
rice
/ C
ost
BaseloadDemand present most of the time (c.80%)Baseload power plants operate continuously, even when it might not be economical to do soGeneration: nuclear, lignite, r-o-r hydro, CCGTs Gas: long term contracts with long distance suppliers
Mid-meritDemand present 30 – 80% of the time, predictable variabilityGeneration: coal, CCGTs. Gas: contracts with near distance suppliers, seasonal storage and spot
Peak loadComes on and off very quicklyDemand present <30% of the time, timing of peaks predictable, levels less soGeneration: oil, OCGTs, storage hydro. Gas: spot market and daily storage
RenewablesTend to be outside the load curve on a must-take basis – run when they canImpact on environment offset partly by need for balancing power
Source: J.P. Morgan
Shows the order in which different plants are called upon to run based
on their variable operating cost
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Economics - the merit order
The short run marginal cost (SRMC) of the last unit required to meet demand sets the marginal price of power at any given point in time
Drives day-to-day price, based only on cost of fuel & CO2 permits
Electricity demand has to be met instantaneously by supply - electricity cannot be stored
Price tends to be set by mid-merit plant for most hours of the day
Baseload plants (hydro, coal, nuclear) have large margins since the marginal unit is typically gas-fired, which tend to have higher costs
A unit with operating cost below the current price keeps the margin
However, the long term power price is driven by the long run marginal cost (LRMC)
The cost of generating a unit of electricity when all factors of production (i.e. including capital) can be varied
If new capacity is required, a profit margin (spread) sufficient to cover all capital costs is needed
We therefore need to look at future reserve margins (system adequacy) to determine where spreads need to be
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Economics - SRMC
price
time (hours)
merit order / load curve
demand
Source: J.P. Morgan 8760
Which type of power plant will set the power price?
Currently ≈indifferent between building a coal or gas plant in Central Europe as SRMC are the same at prevailing market fuel prices
Other considerations, e.g. Germany reliant on Russian gas, whereas Spain uses gas from a variety of sources (pipeline and LNG) so more inclined to build gas fired power plants
Indifference between building a new clean (i.e. using CCS technology) or dirty coal plant is a function of the CO2 emission permit price
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* Worked example: attractiveness of coal vs. gas *
Source: RWE Factbook 20071 including renewables and CHP2 oil, OCGT, hydro, etc.
GermanyGermany UKUK
Large proportion of low SRMC plant Large proportion of high SRMC plant
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Interconnectorand must run1
Nuclear
New hard coal
Hard coal CCGT
New CCGT
Peaking2
Min MaxHourly demandPower price
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Must run1 Nuclear
New lignite
Lignite Hard coal
New hard coal
Min MaxHourly demandPower price
Peaking2
OCGT&
CCGT
New CCGT
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Economics - wholesale pricesPrice at which electricity generators/ gas producers sell to the market
Market arrangements are based on bilateral trading between generators, suppliers, traders and customers
such as BETTA in the UK
Power exchanges have been launched in recent years to provide screen-based anonymous 24 hour trading
EEX in Germany
Powernext in France
OMEL in Spain and Portugal
GME in Italy
APX in The Netherlands
UKPX (a subsidiary of APX) in the UK
Nordpool in Scandanavia
Generators have contracts with the transmission grid for
Connection
Use of the system
Balancing services including reactive power
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Economics - spreads
“Spark” corresponds to gas
“Dark” corresponds to coal
“Quark” corresponds to nuclear
“Dirty” = “brown”
“Clean” = “green”
Dirty CleanSpark = power price = power price
- cost of gas - cost of gas - carbon price
Dark = power price = power price - cost of coal - cost of coal
- carbon price
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* Worked example – Central European spreads *
New hard coal plant, no CO2 capture, 2008ENew hard coal plant, no CO2 capture, 2008E
t/MWh€/$1t) shippingof costcoalof 1tof (price ×+
intensity CO COof price 22 ×
( )per year hours 8760factor load
return requiredcost capitallife plantcost capitalM&Op
×
×+
+
73
0.72t/MWh)-(27€/t×
( ) ( )
3.025.7- 22.7
100087600.8
)10%1144501144(43
−==
××
×++−
- Fuel cost:
- Carbon cost:
- Fixed cost:
0.3257)/1.55-(140.3 ×+
Power price
= Clean dark spread (€/MWh) =22.7
Long term new entrant breakeven price is forecast at €73/MWh
This assumes API2 coal at $140/t and carbon at €27/t
Therefore
If commodity costs stay high, power prices will have to rise to encourage new build
If not, coal prices will need to fall to $140/t for a new entrant to breakeven at €73/MWh
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Please see our 1 July 2008 report European Utilities – Most of what you need to know about power prices for more
* Worked example – Central European spreads *
New CCGT, no CO2 capture, 2008ENew CCGT, no CO2 capture, 2008E
1000€/$rate) heatgasof 1mmbtuof (price
××
intensity CO COof price 22 ×
68
0.37t/MWh)-(27€/t×
( ) ( )
-1.812.9-11.1
100087600.8
)10%52030520(21
==
××
×++−
- Fuel cost:
- Carbon cost:
- Fixed cost:
Power price
10001.55h)5900btu/kW(12.3
××−
( )per year hours 8760factor load
return requiredcost capitallife plantcost capitalM&Op
×
×+
+
= Clean spark spread (€/MWh) =11.1
Long term new entrant breakeven price is forecast at €68/MWh
This assumes gas at $12.3/mmbtu and carbon at €27/t
Therefore
If commodity costs stay high, power prices will have to rise to encourage new build
If not, gas prices will need to fall to $12.3/mmbtu for a new entrant to breakeven at €68/MWh
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Please see our 1 July 2008 report European Utilities – Most of what you need to know about power prices for more
Economics - LRMC
European system adequacy
i. Nordel
ii. UK
iii. UCTE
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UCTE system adequacy forecastUCTE - Union for the Co-ordination of Transmission of Electricity
Association of transmission system operators in continental Europe* (i.e. excluding the UK and Scandinavia)
50 years of joint activities
Synchronous operation of interconnected transmission grids
Publishes data on forecasts of the security of supply over the next 12 years
Publication: UCTE System Adequacy Forecast 2008-20
Starts with stated build/ close plans for power plants
Then looks at potential development in demand, average load evolution
Also factors in expected changes in transmission grids and interconnections
Updated annually at www.UCTE.org
Source: UCTE
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* The UCTE region includes: Installed capacity (GW)Germany 128.3 Austria 19.2 Greece 12.0 Bosnia Herzegovina 4.1France 115.9 Switzerland 17.5 Bulgaria 10.5 Slovenia 2.8Italy 93.6 Romania 16.2 Serbia 8.4 Western Ukraine 2.5Spain 84.3 Czech Republic 16.5 Hungary 8.4 Luxembourg 1.7Poland 32.5 Belgium 16.3 Slovakia 7.3 Macedonia 1.4Netherlands 22.3 Portugal 14.0 Croatia 3.8 Montenegro 0.9
UCTE system adequacy forecast
Compared to the adequacy reference margin(ARM)
ARM (GW)= peak load – load at reference time+ minimum reserve capacity
Minimum reserve capacity= 5% of national generating capacity
Terms
3 reference points— 3rd Wednesday of January at 11:00— 3rd Wednesday of January at 19:00 (close to peak)— 3rd Wednesday of July at 11:00
Estimates under ‘normal climatic conditions’ (i.e. temperature and precipitation at long term averages)
Reserve margin = RC/NGCamount of unused available capacity at peak load as a percentage of total capacity
Generation adequacyGeneration adequacy
Remaining capacity (RC)
RC (GW)= national generating capacity (NGC)
– non-usable capacity
- maintenance and overhauls
- outages
- system services reserve
– reference load
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UCTE forecast: generation adequacy
Source: UCTE System Adequacy Forecast 2008-20
Without considerable new build/ life extension beyond current estimates the system will be out of balance in continental Europe post-2015
5% seen as minimum ‘adequate’ to limit the risk of system interruptions such as
Brown outs (voltage dips) or
Black outs (system collapse)
NB. 1GW = 1000MW, or one large coal power station
77.7
69.6
78.9 77.6
69.6
78.9
87.1
78.5
87.8
75.9
66.8
75.0
30.0
21.8
33.1
0
10
20
30
40
50
60
70
80
90
100
January
11:00 am
January
7:00 pm
July
11:00 am
January
11:00 am
January
7:00 pm
July
11:00 am
January
11:00 am
January
7:00 pm
July
11:00 am
January
11:00 am
January
7:00 pm
July
11:00 am
January
11:00 am
January
7:00 pm
July
11:00 am
2008 2010 2013 2015 2020
Rem
aini
ng c
apac
ity
(GW
)
5%
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UCTE retrospect: reserve margin There has been large oversupply across Europe in the past
The reserve margin is expected to fall below 5% post-2015
Therefore significant reinvestment in generation capacity is needed
Source: UCTE System Adequacy Retrospect reports 2001-2007 and System Adequacy Forecast 2008-20All readings 3rd Wednesday at 11:00am
Minimum reserve capacity
5%
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
2001A 2002A 2003A 2004A 2005A 2006A 2007A 2008E 2010E 2015E 2020E
rese
rve
mar
gin
JanJuly
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UCTE system adequacy forecast
Imports can support a system provided there is sufficient import and export capacity
Overall ‘not an obstacle to power balance management’ in the UCTE area
Sufficient transmission capacity
Import and export capacity looks likely to satisfy (RC – ARM)
Transmission adequacyTransmission adequacy
New buildNew build
Source: UCTE, J.P. Morgan estimates. Based on UCTE forecast capacity. Positive = net new build, negative = net retirements.
GW By 2015 By 2020Net additions ( = new build - retirements) 107 114Of which:
Wind 47.3 62.7Gas 36.8 38.4Renewables ex wind and hydro 14.8 21.0Hard coal 14.2 4.9Oil 13.1 13.3Hydro 8.7 11.8Non attributable 0.5 0.5Mixed oil/ gas -12.3 -12.5Lignite -12.2 -13.4Nuclear -3.9 -13.3
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Nordel system adequacy forecast
Nordel – organisation for the Nordic Transmission System Operators
Publication: Nordel Power Balances 2008-12
Conclusions:
From 2008 to 2012, the Nordic system ‘is sufficient to handle the peak demand situation even in very cold conditions’
In practice the net export balance will depend on Nordic and neighbouring electricity market conditions
Terms:
Looks at MWh/h equivalent to the available capacity in MW
Available capacity (MWh/h)
= installed – unavailable - reserves
Peak consumption (MWh/h)
= maximum one hour load in very cold conditions (probability one winter in 10 years)
Net power export (MWh/h)
= available capacity - peak consumption
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Nordel system adequacy forecast
Temperatures corresponding to the coldest day in 10 years
Forecast net importer under peak conditions in 2008-10
New nuclear unit in Finland expected to be in operation in 2011
Forecast to become a net exporter in 2010-11
GW By 2011Net additions 7.5Nuclear 2.8Wind 2.1Other thermal 1.8Hydro 0.7
Source: Nordel Power Balances 2008/09, 2009/10, 2010/11 and 2011/12
Based on capacity decided and planned. Source: Nordel Power Balances 2011/12, J.P.
Morgan estimates
70000
71000
72000
73000
74000
75000
76000
77000
78000
79000
80000
2008/09E 2009/10E 2010/11E 2011/12E
Avai
labl
e pr
oduc
tion
or
peak
dem
and
(MW
h/h)
-3000
-2000
-1000
0
1000
2000
3000
4000
5000
6000
Net
pow
er e
xpor
t (M
Wh/
h)
Available production (lhs)
Peak demand (lhs)
Net power export (rhs)
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UK system adequacy forecastPublication: National Grid Seven Year Statement (SYS) 2008
Terms:
3 different generation background forecasts:
SYS based total capacity (GW)
= existing generation projects
+ those proposed new generation projects for which an appropriate Bilateral Agreement1 is in place
Consents based total capacity (GW)
= existing generation projects
+ those proposed new generation projects been granted the necessary consents under Section 36 of the Electricity Act 1989 and Section 14 of the Energy Act 1976 for connection to the network
Existing or under construction total capacity (GW)
1 An agreement between National Grid and a generator for future connection to the transmission system
Existing or under construction
Consented
SYS
Based on SYS forecast capacity. Source: National Grid Seven Year Statement 2008
GW By 2015Net additions 30.2Of which:
CCGT 13.9Onshore wind 6.2Offshore wind 5.9Coal 3.3Other 0.9
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UK system adequacy forecast
ACS (average cold spell) peak demand base case (GW) - the combination of weather elements that give rise to a level of peak demand within a year that has a 50% chance of being exceeded as a result of weather variations alone, with base case assumptions of economic growth
Plant margin - amount by which the installed generation capacity exceeds the peak demand as a proportion of peak demand
N.B. this is a very different calculation to UCTE/ Nordpool and not wholly comparable
As generating units are not available to generate 100% of the time, in the past, large integrated power system utilities (e.g. the Central Electricity Generating Board in England and Wales) sought to achieve a plant margin of ≈ 24%
Now, the operational plant margin requirement for real time generation is generally ≈ 10% depending on prevailing circumstances
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UK system adequacy forecast
Source: National Grid Seven Year Statement 2008
-
20,000
40,000
60,000
80,000
100,000
120,000
2007/08E 2008/09E 2009/10E 2010/11E 2011/12E 2012/13E 2013/14E 2014/15E
Cap
acit
y/ d
eman
d (G
W)
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
Plan
t m
argi
n (%
)
Existing, underconstruction,consented and notconsented plantsExisting, underconstruction andconsented plants
Existing and underconstruction only
ACS peak demand(base case)
Existing, underconstruction,consented and notconsented plantsExisting, underconstruction andconsented plants
Existing and underconstruction only
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UK system adequacy forecast
Source: National Grid Seven Year Statement 2008
Plant margin is likely to exceed 24% over the entire forecast period, even under the conservative existing/ under construction background
This is a significant contrast to the UCTE
24%
0%
10%
20%
30%
40%
50%
60%
70%
2007/08E 2008/09E 2009/10E 2010/11E 2011/12E 2012/13E 2013/14E 2014/15E
Plan
t m
argi
n (%
) =
capa
city
-pea
k de
man
d/pe
ak d
eman
d
Existing, under construction, consented and not consented plants
Existing, under construction and consented plants
Existing and under construction only
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Power generation technologyThermal generation –
Electricity produced using a steam generating boiler
Steam drives turbine
Turbine generates electricity via an alternator (an electromechanical device that converts mechanical energy into alternating current)
Coal, oil, gas, nuclear, solar thermal, biomass, geothermal
Non-thermal generation -
Turbine is driven by energy other than steam
Hydro, wind, solar photovoltaic
Thermal efficiency - efficiency with which the energy content (measured in gross calorific value) of the input fuel is turned into electrical energy by the generating station
Source: www.tva.gov
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Power generation technology
Electricity generation resources
Solid fuel – coal…………………………………………………………………………… 28
Gaseous fuel – gas………………………………………………………………………… 37
Liquid fuel – oil………………………………………………………………………………39
Nuclear………………………………………………………………………………………… 40
Renewables…………………………………………………………………………………… 49
Wind……………………………………………………………………………………… 50
Biomass & Biofuel………………………………………………………………… 52
Geothermal……………………………………………………………………………53
Solar……………………………………………………………………………………… 55
Marine…………………………………………………………………………………… 56
Hydro…………………………………………………………………………………… 57
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Electricity generation resources - solid fuel
CoalCoal
Source: www.tva.gov
Source: Department for Business, Enterprise & Regulatory Reform Digest of United Kingdom energy statistics 2007, IEA, Alstom, J.P. Morgan estimates
Advantages
World coal reserves are large
c. 164 years of supply (when used at current rates)
vs. only 63 years for natural gas
and 48 years for oil
Can load follow
Dense so can be sourced globally
Typical thermal efficiency (btu/KWh)
Typical thermal efficiency (%)
Where in load
Load factor (%)
Load factor (hr/a)
Start up time
CO2 (t/MWh)
Hard coalOld technology 9,000 38% Midmerit 66% 5,782 1-3 days 0.90New technology 7,757 44% Midmerit 66% 5,782 0.86LigniteOld technology 11,000 31% Baseload 80% 7,008 1-3 days 1.25New technology 8,100 42% Baseload 80% 7,008 1.10
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Coal is formed when plant material is covered by a layer of sediment, preventing complete decomposition
The weight of the overlying layers produces various chemical changes that force out oxygen and hydrogen, leaving behind a layer of carbon-rich coal
Coal deposits vary significantly by their:
Heating value – determined mainly by carbon content
Ash content (the lower the better)
Sulphur and other impurities (sulphur dioxide can be removed from emissions by ‘scrubbers’)
Moisture content (can be removed by heating)
and many other chemical and physical properties
Electricity generation resources - solid fuelCoal - formationCoal - formation
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Steam/thermal coal is pulverised and burnt for power generation
Coking/metallurgical coal is used in steel production
There are four general categories/ ranks:
Coal-to-Liquids
Highly capital intensive projects
Have been used successfully outside the US
Well suited to countries with large coal reserves but limited liquid fuels reserves e.g. South Africa
Electricity generation resources - solid fuelCoal - usesCoal - uses
Source: J.P. Morgan, American Society for Testing and Materials
Rank Steam or coking
Age Carbon content
Heat value (BTU/lb)
Moisture content
Use
Lignite/ brown coal Steam Youngest 26 - 52% 8,300 Highest Less energy per tonne so used for mouth of mine generation, e.g. in GermanyRelatively more sulphur and ashFixed cost of production so not at the mercy of the global coal market
Sub-bituminous Steam Older 37 - 56% 8,300-11,500 Less Industrial uses, attractive for generation due to low sulphur content
Bituminous Both Older 45 - 86% 10,500-15,400 Less Electricity generation and production of coke for steel
Anthracite/ hard coal Steam Oldest 81 - 98% 13,500-15,300 Lowest Domestic heating, industrial uses
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API#4 – 6,000kcal/kg coal at Richards Bay, South Africa ($/t)
API#2 - 6,000kcal/kg coal delivered to Amsterdam/Rotterdam/Antwerp Cost, Insurance, Freight ($/t)
Contract spread a proxy for global freight market
Electricity generation resources - solid fuelCoal - contractsCoal - contracts
0
50
100
150
200
250
2001 2002 2003 2004 2005 2006 2007 2008
$/t
0
5
10
15
20
25
30
35
40
$/t
API2 one year forward (LHS) API4 one year forward (LHS) Freight (RHS)
Source: Bloomberg, J.P. Morgan estimates
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Near term the global coal market remains very tight:
In real terms current commodity prices are in the range seen when serious industrialization is underway
Infrastructure constraints (rail and port)
Shipping capacity delays
Growing demand especially from the BRIC countries (we believe global resources are currently scaled to supply the Americas, Europe and Japan only)
Supply shortage to be met by exports from the US, Columbia and Indonesia
It could take several years before new capacity is built as producers are yet to commit capital based on higher prices
Electricity generation resources - solid fuelCoal - market outlookCoal - market outlook
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Longer term (2010-12):
Significant new investment to improve freight infrastructure
We expect imports to India to decrease as the effect of the nationalisation of reserves is reversed
Older mines, labour issues and rising strip ratios (units of overburden that must be removed to access a unit of coal) could bring problems on the mining front
J.P. Morgan coal price forecasts
Electricity generation resources - solid fuelCoal - market outlookCoal - market outlook
$/t 2007A 2008E 2009E 2010E 2011E Long termInternational thermal coal new 55.7 125 150 125 100 70
old 55.7 120 100 80 70 60
Excluding freight. Source: J.P. Morgan estimates
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Years of coal in the ground (based on current production)Years of coal in the ground (based on current production)
US and
Canada
20%
Russia
5%
China
41%
Australia
7%
India
6%
Indonesia
3%
Others
13%
US and
Canada
28%
Russia
18%China
14%
Australia
9%
India
7%
South Africa
6%
Indonesia
1%
Others
17%
South Africa
5%
Electricity generation resources - solid fuelCoal - reservesCoal - reserves
Production
Reserves
Source: BP Statistical Review of World Energy 2008
Percentage of world production and reservesPercentage of world production and reserves
25
45
95
97
118
178
194
234
332
500
0 100 200 300 400 500 600
Indonesia
China
Canada
Colombia
India
South Africa
Austalia
US
Kazakhstan
Russia
Years
Source: BP Statistical Review of World Energy 2008
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Electricity generation resources - solid fuelCoal – major global marketsCoal – major global markets
US and Canada – largest reserves but second largest coal producer – production growth has been sluggish
Abundance of coal keeps costs relatively low except for mature Appalachian coal fields
CAPP (Central Appalachian) – primarily bituminous
PRB (Powder River Basin) – sub-bituminous, fastest growing coal producing region, among the cheapest energy sources per BTU, lower sulphur, utilities have been slowly switching to this over the last 20 years
Russia - second largest coal reserves in the world – has the greatest potential for increasing exports
But majority of coal basins are located in the central part of the country, far from the eastern ports
Domestic consumption increasing
China – worlds largest coal producer but expected to be a net importer for 2008 and has only 48 years of reserves left
Cap on coal exports has been imposed
Current infrastructure makes importing from Indonesia cheaper than transporting coal from North China (where the price is R200/t) to South (R700/t)
Australia - world’s largest exporter to the seaborne metallurgical coal trade, mostly from Newcastle
Recent cost pressures and supply side problems from delay of Dalrymple Bay terminal expansion
Longer term - infrastructure and port expansion projects to improve the logistics chain
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Electricity generation resources - solid fuelCoal - major global marketsCoal - major global markets
India – growing demand for imports
Government has ambitious power addition target of 75GW 2007-12, most of which will be coal-fired
South Africa - world’s largest exporter to the seaborne thermal coal trade, mostly from Richards Bay
Richards Bay terminal is expected to expand to 91mt from 76mt by 1H09, however the movement of coal to the ports is constrained by the rail capacity
A growing percentage of exports are now reaching India, creating a supply gap in the Atlantic basin
A stronger AUD vs ZAR should make SA the more economic region for new coal supplies
Traditionally had mines that supplied either the export or the power market
Recently greater flexibility - new mines have planned to sell to both markets from the onset
Indonesia – world’s largest thermal coal exporter
Expected to provide the bulk of incremental supply to the Asian region
Development of new roads and ports should help
But government plans to cap coal exports will limit incremental supplies
Poland - no longer exporting to Europe but becoming a net importer from Russia
Columbia - biggest coal exporter in Latin America and could double its production by early next decade subject to getting infrastructure in place
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Electricity generation resources – gaseous fuel
Source: Department for Business, Enterprise & Regulatory Reform Digest of United Kingdom energy statistics 2007, IEA, GEpower.com, J.P. Morgan estimates
The cleanest fossil fuel from a pollution perspective
CCGTs can be baseload or midmerit
Latest CCGTs are highly efficient but still have relatively high operating costs in the current commodity price environment
GasGas
Typical thermal efficiency (btu/KWh)
Typical thermal efficiency (%)
Where in load
Load factor (%)
Load factor (hr/a)
Start up time
(from cold)
CO2 (t/MWh)
OCGTOld technology 10,500 33% Peak load <20% <1,752 5-10 mins 0.70New technology 9,250 37% Peak load <20% <1,753 0.60CCGTOld technology 7,000 49% Base/ 50-60% 4,380-5,256 1-2 hours 0.43New technology 5,700 60% Base/ 50-60% 4,380-5,256 0.37
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Electricity generation resources – gaseous fuel
OCGT (open cycle gas turbine) – old style, can start up quickly during peak demand
CCGT (combined cycle gas turbine) - by-product heat is used to generate additional electricity via steam cycle, optimally run base load or mid merit
CHP (combined heat and power) - by-product heat is used to warm local homes or businesses
Source: powergeneration.siemens.com
Gas - technologyGas - technology
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Electricity generation resources – liquid fuel
Can start quickly during peak demand
Highest operating costs due to:
Low thermal efficiency
Low number of hours to amortise fixed costs across
Most polluting
Source: Department for Business, Enterprise & Regulatory Reform Digest of United Kingdom energy statistics 2007, IEA, J.P. Morgan estimates
Source: www.tva.gov
OilOil
Typical thermal efficiency (btu/KWh)
Typical thermal efficiency (%)
Where in load
Load factor (%)
Load factor (hr/a)
Start up time
CO2 (t/MWh)
Oil 12,000 28% Peak load <20% <1752 1-2 mins 0.82
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Electricity generation resources – nuclear
Advantages
Security of supply – reduces dependence on finite, and often imported fossil fuels
Long term resource
Environment protection – zero CO2 emissions
Uranium reserves are mostly located in stable countries and are abundant
Could be almost unlimited due to uranium’s multiple energy potential
Depends on prevalence of reprocessing
Up to 96% of spent fuel can be recycled
High capital cost but very low operating costs
Disadvantages
Take 1-3 days to start so only shut down when necessary
Need to be refuelled every 12-18 months
Chequered safety and operation history although image and statistics do not always match
Nuclear - pros & consNuclear - pros & cons
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Electricity generation resources – nuclear
International Nuclear Event Scale
0 – no safety significance
1 – anomaly (e.g. minor defects in pipework)
2 – incident
3 – serious incident (e.g. radioactive doses to workers sufficient to cause acute health effects)
4 – accident without significant off-site risk
5 – accident with off-site risk (e.g. severe damage to the installation)
6 – serious accident
7 – major accident (e.g. external release of a large quantity of radioactive material)
Areva estimates:
Operational incidents (e.g. uncontrolled boron dilution): 1 in 100 chance per reactor per year
Infrequent accidents (e.g. control rod withdrawal at full power): 1 in 100 to 1 in 10,000
Hypothetical accidents (e.g. control rod ejection): 1 in 10,000 to 1 in 1,000,000
Source: www.iaea.org/Publications/Factsheets/English/ines.pdf, Areva Technical Days
Nuclear - safetyNuclear - safety
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Electricity generation resources – nuclear
Public acceptance in the US
The political climate is favourable towards
Renewal of nuclear operating licenses and
Construction of new nuclear plants
There is much more sympathy for nuclear power now than there was a couple of years ago in terms of:
Siting (building new plants adjacent to existing ones)
Safety concerns
Environmental benefits (a key issue will be the way cap-and-trade and Renewable Portfolio Standards are implemented in the US)
The private sector is willing to build new nuclear, however…
… investors are hesitant to put up capital due to the time-scale of building a plant,…
… the latest Energy Bill from Congress makes federal loan guarantees available to build several nuclear plants, but not on an extensive scale…
… Congress has not done anything about long-term storage of nuclear waste since the Yucca Mountain storage site was effectively blocked and …
… the Nuclear Regulatory Commission, which has to approve new plants and extensions of old plants, is currently profoundly under-resourced
Nuclear – public opinionNuclear – public opinion
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Electricity generation resources – nuclear
Public acceptance in Europe – examples of opinionNuclear – public opinionNuclear – public opinion
Pro
UK
Gvt consulted on the future of nuclear power
Nuclear operators will have to cover the full costs of decommissioning and their share of the management and disposal costs
France
80% of generating capacity is nuclear
Has been generally positive as there have been no accidents and wholesale prices have been remarkably low
Nordic countries ex Denmark
Unquestionable shift in favour of new nuclear
Low support for a phase-out in Sweden, despite negative attitudes in the early 1980s
2002 public debate and resulting new build in Finland
Baltics
Smaller demand base seems to be leading to multinational cooperation
Anti
Germany
Nuclear closure program remains controversial
Public increasingly considering the policy unrealistic
Spain
Full moratorium
Potential for change but unlikely to be soon
Italy
Nuclear power abandoned following 1987 referendum but current gvt has pledged to bring it back
Belgium
No new build after closure of the existing two plants scheduled to run til 2015-25, with potential life extension to 2025-2035
Austria
Vehemently anti-nuclear
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Reliable base-load generation at stable and low cost
A complex nuclear fission process ≈an atomic kettle attached to a steam turbine
Generation I: reactors mainly being shut down end of this decade (Magnox)
Generation II: 1970s – 2050s (AGR)
Generation III: 1990s – at least 2050s (PWR, BWR)
Generation III+: improved safety and reliability, 1990s – at least 2060s (EPR)
Generation IV: will be ready to market between 2020 and 2030 (VHTR, PMBR, Fast breeder reactors)
Fusion reactors post 2050 (ITER): experimental plant under construction
Electricity generation resources – nuclear
Source: Areva Technical Days
Nuclear - technologyNuclear - technology
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Electricity generation resources – nuclear
Source: Creative Commons
AGR (Advanced gas-cooled reactor)
Generation II (1960s)
Mostly used in the UK
Graphite is the moderator, CO2 is the coolant
The moderator slows down the neutrons released by the uranium fuel preventing run-away reactions
Gas picks up the heat generated by the fission reaction
Hot gas circulates past the heat exchanger
Final steam conditions at the boiler stop valve are identical to that of conventional thermal plants
… so the same design of turbo-generator is used
The control rods can be raised or lowered to adjust the reactor power
1. Charge tubes2. Control rods3. Graphite moderator4. Fuel assemblies5. Concrete pressure vessel and
radiation shielding6. Gas circulator7. Water8. Water circulator9. Heat exchanger10. Steam
Nuclear - technologyNuclear - technology
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Electricity generation resources – nuclear
Source: Areva Technical Days
Nuclear - technologyNuclear - technology
BWR (Boiling water reactor)
Generation III
Pressurized boiler
Light water (‘normal’ water i.e. H2O not 2H2O) is the moderator and the coolant
Bundles of uranium-filled fuel rods
Heat is produced by a fission chain reaction
Water circulating from the bottom to the top of the reactor is brought to 290°C
Generates steam, which drives the turbine
Series of strong, leak-tight physical barriers shield against radiation
— Metal cladding of fuel rods
— Metal enclosure of reactor primary circuit
— Containment of reactor
Net power output 1250MW
Reactor core
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Electricity generation resources – nuclear
PWR (Pressurized water reactor)
Generation III
More complex than a BWR
2 circuits
Light water is the moderator and the coolant
Water under constant pressure so it doesn’t boil –155bar higher than a BWR
Primary circuit of water at 313°C
Secondary circuit of steam heated by the primary circuit completely separate and closed
Water and steam circulate so constantly cooling down and heating back up
Unchanging and uninterrupted
Cooling circuit removes residual heat from the core – part of this water evaporates
Net power output 1600MW
Source: Areva Technical Days
Nuclear - technologyNuclear - technology
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Electricity generation resources – nuclear
EPR (European pressurised reactor)Generation III+Takes advantage of the latest operating experience and incorporates the results of French and German R&D programsHigher power, efficiency and life expectancyGenerating cost per kWh 10% lower than Areva’s latest PWRMore advanced passive safety & lower risk of human-errorLower waste production
Net power output 1600MWBeyond
Generation IV potential designs:— ‘Fast breeder’ reactors – fast neutron reactor without moderator, fully closed cycle, minimises production of
long-lived waste, gas-, lead- or sodium-cooled— Pebble Bed Modular Reactor (PMBR) – smaller size, no super-criticality risk but as-yet unproven— Advanced water designs, e.g. the very high temperature reactor (VHTR), with water at 1000°C, also allows
hydrogen production
Source: Department for Business, Enterprise & Regulatory Reform Digest of United Kingdom energy statistics 2007, IEA, Areva-np.com, wikipedia, J.P. Morgan estimates
Nuclear - technologyNuclear - technology
Typical thermal efficiency (btu/KWh)
Typical thermal efficiency (%)
Where in load
Load factor (%)
Load factor (hr/a)
Start up time
CO2 (t/MWh)
Nuclear - AGR 8,300 41% Baseload 60-80% 5,256-7,008 1-3 days 0.01BWR 9,200 37% Baseload 80-90% 7,008-7,884 1-3 days 0.01PWR 10,000 34% Baseload 80-90% 7,008-7,885 1-3 days 0.01EPR 9,500 36% Baseload 80-90% 7,008-7,886 1-3 days 0.01
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Electricity generation resources – renewables
Source: Department for Business, Enterprise & Regulatory Reform Digest of United Kingdom energy statistics 2007, www.geo-energy.org/aboutGE/powerPlantCost.asp, J.P. Morgan estimates
Load factor (%)
Load factor (hr/a)
Start up time
Build cost (€m/MW)
Offshore wind 30-40% 2,628-3,504 <30 sec 2.1
Onshore wind 20-30% 1,752-2,628 <30 sec 1.3
Biomass 40-70% 3,504-6,132 1 hour 0.8-1.2
Geothermal 95% 8,322 1 day 2.1
Solar PV 10-25% 876-2,190 instant 6.0-7.0
Concentrated solar 10-35% 876-3,066 instant 4.0
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Electricity generation resources – renewables
Wind blows and sets the turbine blades in motion, generating power that can be converted into electricity
A steel or concrete tower with a nacelle that turns horizontally in a way such that the rotor (usually equipped with two or three blades) always faces the wind
Generation depends on:
cube of wind speed (double wind speed gives eight times more power)
square of rotor diameter (double rotor diameter gives four times more power)
density of the air (If the air is 10°C colder, density and power production increase by ≈3%. Moist air is less dense and so will lower power production)
mechanical efficiency of generator
aerodynamic shape of blades
Source: EC Energy Research
WindWind
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Electricity generation resources – renewables
Source: Vestas.com
Typical hub height 80m
Typical blade length 40m
1. Rotor lock2. Pillow block3. Main frame4. Impact noise insulation5. Hydraulic parking brake6. Coupling7. Generator frame8. Control panel9. Heat exchanger10. Generator11. Gearbox12. Yaw drive13. Rotor shaft14. Rotor hub15. Pitch drive16. Nose cone
WindWind
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Electricity generation resources – renewables
Biomass
Plant-derived organic matter (fix CO2 as they grow, so their use does not add to the levels of atmospheric carbon on a life-cycle basis)
E.g. forest residues, agricultural residues, pulp and paper operation residues, animal waste, landfill gas and energy crops
Co-firing in existing power plants (usually coal) can be used to reduce average CO2 emissions and potentially get ‘green certificates’
Burnt in conventional steam boilers
Biofuel
Many different conversion technologies to produce solid, liquid and gaseous fuels
Biomass gasification (release via heat)
Anaerobic digestion (release via bacteria)
Biomass & biofuelBiomass & biofuel
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Electricity generation resources – renewables
Conventional geothermal applications rely on the geological coincidence of water-bearing, hot permeable rocks occurring at economically accessible depths
At fluid temperatures of 85 - 150°C, electricity generation requires the use of binary cycles, in which a working fluid is heated and vaporised in a closed circuit
The vapour drives a turbine, before being cooled and condensed, and the cycle begins again
At fluid temperatures >150°C steam can be used to drive turbines
Source: Energy Manager Training
GeothermalGeothermal
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Electricity generation resources – renewables
Enhanced Geothermal Systems utilize heat stored in rocks that are technically accessible but lack the natural permeability
Hence they allow geothermal generation to be used in a wider range of locations than before
A well is drilled into >180°C fractured basement rock and stimulated to enhance the natural permeability of the fracture network and create a heat exchanger into which additional wells are drilled
Water circulated through the wells gathers heat
Source: EC Energy Research
GeothermalGeothermal
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Electricity generation resources – renewables
Solar photovoltaic
PV cells transform the photon energy in solar radiation directly into electrical energy without an intermediate mechanical or thermal process
Technology is currently very expensive
Concentrated solar/ solar thermal
Optical devices focus direct solar radiation onto an area where a receiver is located
The radiation is transformed into heat in a medium (oil) and then to steam and electricity as per thermal power
Continues to work after dark until collected heat dissipates
Technology requires a very large area
SolarSolar
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WaveUtilizes the effect of the wind on the sea
Not yet economically viable
TidalUtilizes the daily rise and fall of water
Highly predictable
Not yet economically viable
CurrentUtilizes
the temperature gradient between surface and deep sea water
the salinity gradient (pressure differential between seawater and fresh water
Electricity generation resources – renewables
MarineMarine
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Run-of-the-river (r-o-r)Natural flow and elevation drop of a river are used to generate electricity
‘free fuel’
ReservoirEnergy extracted depends on the volume and on the head (difference in height between the source and the water's outflow)
Pumped storageRequires energy to pump water into reservoir - when the wholesale price is low (hence not ‘free fuel’)
Supplies peak demand - when the wholesale price is high
Not pumped Uses reservoirs that are naturally elevated
Electricity generation resources – hydroelectric
HydroHydro
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Electricity generation resources – hydroelectricSource: Department for Business, Enterprise & Regulatory Reform Digest of
United Kingdom energy statistics 2007, J.P. Morgan estimatesHydroHydro
Where in load
Load factor (%)
Load factor (hr/a)
Start up time
R-o-R Baseload 70% 6,132 1-2 mins
Storage Peak load 15% 1,314 1-2 mins
Source: Department for Business, Enterprise & Regulatory Reform Digest of United Kingdom energy statistics 2007, J.P. Morgan estimates
Source: www.tva.gov
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Electricity generation resources in Europe
Germany, Poland and Spain – have historically had large domestic coal industries
UK, Norway and the Netherlands - have been major producers of oil and gas
UK and Netherlands now in decline
New sources: Russia by pipeline, Liquefied Natural Gas by boat for elsewhere in the world
‘Dash for gas’ – gas power station new build
UK, Spain, Italy
Cleaner, cheaper, more efficient than coal
Nordic region - ≈60% of generation comes from hydro
France (dearth of natural resources) - has developed the largest nuclear capacity in Europe
Germany - has launched a drive to install Europe’s largest wind fleet
Other major wind players: Spain, Denmark
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European generation mixOutput (2005A, TWh)Output (2005A, TWh)
Low load factor → output on average proportionally lower than capacity e.g. hydro
High load factor → output on average proportionally higher than capacity e.g. nuclear
Source: IEA and EIA
Capacity (2005A, GW)Capacity (2005A, GW)
Nuclear, 133, 18%
Renewables, 133, 18%
Gas, 165, 22%
Oil, 31, 4%
Coal, 254.9, 32%
Hydro, 169.5, 21%
Gas, 721 , 21% Nuclear,
992.5, 28.6%
Oil, 135 , 4%Renewables, 160.7, 5%
Hydro, 526.5, 15%
Coal, 994.4, 28.7%
Please see our publication European Utilities Basics – Country Profiles for more detail on generation mix
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The energy value chain
TradingSourcing, despatch, management, proprietary
ELECTRICITYValue chain
NATURAL GASValue chain
Regulated networksTransmission &
Distribution
Regulated networksTransmission &
Distribution
Dua
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sou
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Generation
Upstream sourcing / E&P
Supply
Supply
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Gas sourcing
i. Exploration and production (E&P)
ii. Storage
iii. Liquefied natural gas (LNG)
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Gas sourcing
Natural gas is a regional commodity
Its physical properties make it hard to transport, particularly intercontinentally without liquefaction
Most natural gas is transported in gaseous form via pipeline
Gas markets still regional rather than continental or global
European natural gas is priced using an oil-referenced formula
The widespread adoption of Liquefied Natural Gas (LNG) should change the gas market from regional to global
Large natural gas consumers (especially power plant operators and retail suppliers) have incentives to hedge their physical commodity exposure as well as the basis (location) risk associated with dealing in different markets
Exploration and productionExploration and production
Source: J.P. Morgan ‘Oil&Gas Basics Presentation’
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Gas sourcing
Exploration and productionExploration and production
Why be involved in upstream gas?
No indigenous supply
Security
Economic hedge
If not involved upstream, generators tend to be beholden to very long term contracts (≈20 years - whereas the coal market is spot-based) with NOCs (National Oil Companies)
Major market drivers
Weather is both a demand and supply factorDemand for central heating
Hydro conditions in areas that depend on hydropower drive requirement for CCGT power
Oil price – long term contracts tend to be oil-based, take-or-buy decisions impact the natural gas market
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Gas sourcing
Gas providers can…
Carry out exploration and production themselves
Have a stake in a project operated by another party
Receive gas from a pipeline under contract e.g. Siberia → Spain
Receive gas from an LNG train e.g. Australia → USLNG is natural gas that is stored and transported at atmospheric pressure and a temperature of –260°F
Liquefaction Boat transportation Regasification
UK daily consumption is 301,000,000m3 (gaseous volume) of natural gasSo one tanker is enough for ≈ 1/3 of a day’s demand
One LNG boat ≈150 000m3
(liquid volume) of LNGVolume increases ≈600 times
Source: IEA, J.P. Morgan
Exploration and productionExploration and production
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Gas sourcing
Natural gas is stored in inventory underground under pressure in 3 types of facilities
Depleted reservoirs in oil/ gas fields
Aquifers
Salt cavern formations
Each storage type has its own characteristics which govern its suitability
Physical (capacity, deliverability rate, porosity, permeability, retention capability)
Economic (site preparation and maintenance costs, deliverability rates, and cycling capability)
System integrity maintenance – meeting baseload requirements
Seasonal storage
Excess supply in the summer traditionally stored to meet winter demand
Increasing prevalence of air conditioning in many countries has lowered seasonality but increased demand
System balancing – meeting peakload requirements
Smoothing day-to-day
Buffer to meet unexpected demand surges
StorageStorage
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Gas sourcing
The global LNG market is small but growing rapidly: c. 250bcm/y, 7% of global gas supply
Declining US gas production means LNG is vital to satisfy demand growth and prevent price appreciation
Low European natural gas prices have historically led to a flood of shipments to US terminals
The last 2 years have seen a growing trend toward increased US imports in the spring
Major market drivers
Upstream additions (Equatorial Guinea, Egypt)
Demand patterns (hydro conditions in Spain, Norwegian flows into the UK)
Asian demand (economic growth, major Japanese nuclear plant outages)
Trans-Atlantic arbitrage
Crude oil arbitrage
Operating performance at liquefaction, export and import terminals
LNG projects are among the most expensive energy projects
Constructing a liquefaction and regasification terminal costs >€1b so there is a minimum distance threshold (compared to pipelines)
Regasification may be regulated or merchant
LNGLNG
Source: J.P. Morgan ‘Oil&Gas Basics Presentation’
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Gas sourcing
* An example of corporate LNG capacity *
Source: 2007 company reports
LNGLNG
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Gas Natural GDF SuezTankers Owned 11 16
Under construction 5 5Regas capacity existing bcm / y 10.9 21.6
projected bcm / y 16.0 n.aLiquefaction capacity bcm - 1.4Long term LNG supply contracts bcm / y 15.0 23.3
The energy value chain
TradingSourcing, despatch, management, proprietary
ELECTRICITYValue chain
NATURAL GASValue chain
Regulated networksTransmission &
Distribution
Regulated networksTransmission &
Distribution
Dua
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acts
Generation
Upstream sourcing / E&P
Supply
Supply
Fuel
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Trading
Why do utilities trade?
Risk management
Financial
Operational
Profit opportunity
Some companies dynamically manage their energy portfolios
e.g. EDF’s trading has been very profitable
Strong correlation between oil, gas, electricity and CO2 prices
companies can enter into multi-commodity swaps
Gas price = f(oil, temperature)
Power price = f(gas, coal, CO2, temperature, precipitation)
CO2 price = f(gas, coal)
Therefore coal, oil, gas, power and CO2 can be traded in ‘pairs’ or ‘swaps’
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The energy value chain
TradingSourcing, despatch, management, proprietary
ELECTRICITYValue chain
NATURAL GASValue chain
Regulated networksTransmission &
Distribution
Regulated networksTransmission &
Distribution
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Generation
Upstream sourcing / E&P
Supply
Supply
Fuel
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Electricity transmission & distribution
2.3 – 3kV
Transmission towers
115 – 345kV
(AC current)
120 - 240V
Power station Step up transformer
Step down substation
Local substation
Homes and small
businesses
Distribution pole
2.3 – 34kV
Commercial and industrial
customers
Source: J.P. Morgan
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Drivers of network build
Growth of demand
Improvements in qualityMaintaining voltage, security of supply, preventing blackouts
Investment to make the system more robust
Change in supply profile, e.g. renewables: route grid → mesh grid
Interconnector security
Transmission network build choices
Overhead or undergroundUnderground cable installation is 2x more expensive at 11kV, 20x more expensive at 400kV than an equally rated overhead line2
Route or meshPartly a function of geography, load centres and resources
International interconnector requirement
Electricity transmission & distribution
2 Source: energynetworks.org
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Germany has a mesh grid
Italy has a route grid
Electricity transmission & distribution
Cost
System security
Source: J.P. Morgan
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RegulationRegulation
Needed for networks as they’re natural monopolies
Also end customer prices where competition is not effective (See ‘Energy supply’ pp. 72-80)
Main concerns
Costs for customers
Security of supply – short and long term
Government policy on energy mix, climate etc
Network regulation varies significantly:
Cost plus (a specific allowed return based on actual realised costs) e.g. France, Germany (changing next year), most US states
Incentive (regulator sets allowed revenue – may be based on current costs or what the regulator believes costs ‘ought’ to be)
e.g. UK. There are a whole range of degrees of incentive strengths
May (UK) or may not (Spain) have an explicit regulated asset value in remuneration formulae
Unitary (per MWh) or absolute (€m)
Single or multi-year
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Network regulation – key concepts
Regulatory asset/capital value/base
Allowed Return
+ Opex
+ Capex or Depreciation
= Revenue or price cap
x WA
CC
Source: J.P. Morgan
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Network regulation – key conceptsRAV
Allowed Return
x WA
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Allowed return may be unitary (per MWh) or absolute (€m)
Has to cover interest expense and dividends
Regulatory Asset Value normally scaled over time (by depreciation and capex), may include inflation link
Weighted average cost of capital (WACC) may be
Pre- or post-tax
Real or nominal (i.e. with or without inflation)
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Network regulation – key concepts
Allowed Return
Opex
Operating expensesActual in cost plusAllowed in incentiveMay be volume based or absolute
RAV
x WA
CC
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Network regulation – key concepts
Allowed Return
Opex
Capex or Depreciation
Capital expenditureBased on agreed outcomes in incentiveBased on defined budget in cost-plusMay be volume based or absolute
RAV
x WA
CC
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Network regulation – key concepts
Allowed Return
Opex
Capex or Depreciation
Revenue or price cap
Revenue or price capProvides potential for outperformanceOften multi-year
RAV
x WA
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Revenue or price cap in year 1
OpexCapex or
Depreciation
Network regulation – key conceptsRAV
Allowed Return Opex Capex or Depreciation
x WA
CC
Allowed Return
Revenue or price cap in year 5
Often a downward price trajectory to induce efficiency improvements
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Revenue or price cap
Opexefficiencies
Capexoutcome below
Budgetor Depreciation
longer asset life
Achieved WACCOutperformance
☺
Network regulation – key conceptsRAV
Allowed Return Opex Capex
x WA
CC
Year 1
Year 2
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Revenue or price cap
Opexefficiencies
Achieved return(above allowed return)
If can reduce opex and/or capex, can make an achieved return > the allowed return
→ assets worth > RAV
Have outperformed the regulator’s assumptions ☺
Normally can retain outperformance in, or across periods (2 – 5 years)
Of course, with tough regulation the opposite can occur
Opexefficiencies
Network regulation – key conceptsRAV
Allowed Return Opex Capex or Depreciation
x WA
CC
Achieved WACCOutperformance
Capexoutcome below
Budgetor Depreciation
longer asset life
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Capexoutcome below
Budgetor Depreciation
longer asset life
Network regulation – detailsThe regulator defines
Regulated Asset Base / Capital Value / Asset Value (RAB, RCV, RAV)
Not necessarily equivalent to the true value or book value of the assets
E.g. in UK based on EV after privatisation + capex – depreciation
In Sweden based on a computer model of optimal network as if built ‘from scratch’
Allowed return
Regulator makes assumptions on gearing, cost of debt, cost of equity
Pre or post tax?
Real or nominal?
If the regulator is correct in all assumptions (efficiency, cost of operations and capital projects, cost of capital) then the value of the business, by definition, is its RAV
Valuations are based on a premium/ discount to RAV methodology
Recent M&A transactions have occurred at a premium to RAV i.e. assuming outperformance
Revenue = allowed opex + allowed capex + allowed return
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Ways to outperform on opex
Raise employee productivity
e.g. reduce headcount
Minimise wage inflation
Invest in IT infrastructure
Reduce network losses (but not always in regulated opex)
Improve service time on maintenance
e.g. In the 2007 Gas Distribution Price Control Review, Ofgem’sconsultants (PB Power) proposed an 11% reduction in total GDN opex for 2008/09 – 2012/13, including
Work management -10.6%
Emergency -11.0%
Repairs -14.2%
Maintenance -14.1%
Opex
Opex
Year 1
Year 2
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Ways to outperform on capex
Procurement
Use an established network of suppliers
Economies of scale e.g. ‘buy in bulk’
R&D
Invest in innovative, more efficient technologies
e.g. In the 2007 Gas Distribution Price Control Review, consultants proposed an 18% reduction in total GDN net capex for 2008/09 – 2012/13, including
Local Transmission System & storage -23.4%
Connections -22.9%
Mains reinforcement -12%
Capex
Year 1
Year 2Capex
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Ways to outperform on WACC
Capital structure
Higher gearing than the regulator assumes
Lowers pre-tax WACC and provides tax shields
Cost of debt
Cheaper financing than the regulator assumesIndex-linked debt
Covered bonds
Derivatives (optimal strategy may depend on market conditions e.g. demand for different currencies)
— Fixed-floating swaps— Forex swaps
x WA
CC
Year 1
Year 2
x WA
CC
6.55%7%WACC
9%9%Cost of equity
5.5%5%Cost of debt
70%50%D/EV
AchievedRegulated
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The energy value chain
TradingSourcing, despatch, management, proprietary
ELECTRICITYValue chain
NATURAL GASValue chain
Regulated networksTransmission &
Distribution
Regulated networksTransmission &
Distribution
Dua
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Generation
Upstream sourcing / E&P
Supply
Supply
Fuel
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Electricity and gas supplySale of electricity to the final customer
Commercial
Residential
Metering, billing and customer relationship
Retail price is ≈ sum of generation and transmission so very little value added here
Competitive metering in many countries – suppliers compete on price and service
Dual-fuel (gas and electricity) contracts
Consumer services often also provided to generate additional revenue e.g. boiler breakdown cover
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Retail / Consumer tariff regulation
In a fully competitive market there are advantages of:
Cost control (low prices)
Investment incentives
Consumer choice
Quality of service improvement
However markets are not always competitive…
… and governments like to intervene…
… therefore often tariffs are ‘managed’ or regulated
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EU tariff regulation
EU Electricity Directives
History of regulated tariffs - recent trend towards liberalisation of generation and supply
UK pioneered privatisation, deregulation and liberalisation of utilities – has not had controls on retail prices since 2002
EU pushing for free competition throughout the region‘From July 2007 at the latest, all consumers will be free to shop around for gas and electricity supplies’
In theory tariff regulation should not exist, in reality it does
Third EU competition directive for electricity and gas will seek to stamp out tariff regulation –although not immediately
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EU tariff liberalisationEC Benchmarking Report (2006) - conclusions
Nordic countriesLiberalisation fully embraced
GermanyBroad acceptance – all gas and electricity customers are free to choose supplier
Pressure for unbundling of RWE and E.ON’s distribution activities
Domination by a few large players prevents effective competition
ItalyMany calling for more control of prices
Tariffs are adjusted on a quarterly basis to reflect commodity prices
FranceCentrally controlled tariffs
Liberalisation in theory but not really in practice
EDF and GDF only partially privatised
SpainTariff deficit system
The Directives have not been transposed
The regulatory framework does not allow for effective competition
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Tariff deficit
Occurs when the regulated price is < the market price
Represents both a system failure and possible upside depending on what the market prices in
We forecast shortfall in Spain: 2008E tariff deficit of €3bn
Due to internalised cost of CO2 by companies lowering sector revenues
Spanish legislation requires that utilities are reimbursed
In France: GDF have forecast a gas tariff deficit of ≈€1bn
The shortfall of regulated revenues from the tariffs versus revenue that would be realised by prevailing market prices
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Unbundling
Many countries have pursued a regulatory policy of unbundling
Separation of transmission and distribution from generation and supply
Intended to increase competition by improving the fairness of network access
Many countries and corporates have resisted unbundling citing
Diversification of risk
Scale/ scope economies
Legal/ management unbundling ‘should’ be sufficient
Regulatory/ compliance oversight may be used
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The end customer bill – retail power
Taxes•VAT•Environmental•Public service
Network access•Regulated fee•Balancing costs•Transmission ¼•Distribution ¾
Generation•Pool / spot price•Cost-plus basedGas sourcing•L.T. contracts•Oil / coal link
Unliberalised – France (2009E)Total: €125/MWh
Taxes = €37/MWh•VAT
•Local taxes•CTA for pensions
•CSPE for public services
Network access = €49/MWh•7.25% pre-tax
•No inflation link•Cost plus
Generation = €39/MWhCost plus based
Features 80% nuclearRemainder bought in Germany
Liberalised – Germany (2009E)Total: €235/MWh
Taxes and levies = €82/MWh•VAT (32.5)
•Concession fee (17.9)•Electricity tax (20.5)
•CHP act (2.9)•Renewables act (8.2)
Network access = €62/MWh•6.5% post-tax
•Inflation link for old assets•Moving to incentive
•Review due April/May 2008 for 2009-13 pricing period
Generation = €82/MWhBased on EEX
Mostly a coal systemNeed for coal / gas to replace
nuclearCO2 approx €8/MWh for gas and
€18/MWh for coalSales/marketing = €9/MWh
Typical retail consumer uses 3.5MWh/a
(29)
(8)
Source: J.P. Morgan estimates95T
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The end customer bill - European comparison
Power cost % GDP
€/MWhPrice ex
tax TaxPrice
with tax
Italy 165.8 44.6 210.4
Ireland 146.5 19.7 166.2
Germany 143.3 46.3 189.6
Portugal 142.0 8.0 150.0
Netherlands 140.0 89.0 229.0
Norway 136.1 42.6 178.7
Slovakia 129.2 25.5 154.7
UK 125.4 6.1 131.5
Belgium 122.9 34.8 157.7
Denmark 117.0 138.4 255.4
Sweden 108.8 58.6 167.4
Austria 105.0 49.8 154.8
Hungary 101.9 22.1 124.0
Spain 100.4 22.1 122.5
Poland 94.5 27.9 122.4
France 92.1 28.4 120.5
Czech Republic 89.8 16.5 106.3
Slovenia 88.7 19.8 108.5Finland 87.7 27.8 115.5
Romania 85.5 18.8 104.3
Greece 66.1 6.0 72.1
Lithuania 65.8 11.8 77.6
Estonia 63.5 11.5 75.0
Latvia 58.3 3.5 61.8
Bulgaria 54.7 11.2 65.9
Based on final domestic customer with 3.5MWh annual consumption, €/MWh, 2007A
Based on final domestic customer with 3.5MWh annual consumption, €/MWh, 2007A
Source: Eurostat
Affordability - Retail power cost/ GDP per capita, 2007A
Affordability - Retail power cost/ GDP per capita, 2007A
Source: Eurostat
Increasing power costs as a proportion of GDP →political
pressure on utilities
Power cost % GDPRomania 3.7%
Slovakia 3.2%
Poland 3.2%
Italy 2.9%
Denmark 2.9%
Portugal 2.9%
Hungary 2.7%
Netherlands 2.5%
Bulgaria 2.4%
Germany 2.3%
Sweden 1.9%
Czech Republic 1.9%
Belgium 1.9%
Lithuania 1.8%
Spain 1.7%
Austria 1.7%
Ireland 1.6%
Slovenia 1.7%UK 1.6%
France 1.6%Latvia 1.5%
Estonia 1.5%
Finland 1.4%
Norway 1.4%
Greece 1.0%
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Agenda
Page
Appendix
Valuation and drivers
Renewables
Climate change
The energy value chain
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Climate change regulation
1992 – UNFCCC (UN Framework Convention on Climate Change) established
1997 - Kyoto Protocol signed
41 industrialised countries (‘Annex 1 countries’) agreed to reduce their greenhouse gas emissions (GHGs: CO2, NOx, methane, CFCs) by a specific percentage by 2008-2012 from 1990 levels
5% cut in total globally
8% cut for EU-15 and most other European countries
These targets define each country’s volume of ‘allowed’ emissions (AAUs)
Burden sharing principle
Use of flexible mechanisms (market mechanisms, cap-and-trade schemes)
Clean Development Mechanism (CDM) – system for pollution reduction schemes in developing economies
Permits : Certified Emission Reductions (CERs)
Joint Implementation (JI) – system for pollution reduction schemes in developed economiesPermits : Emission Reduction Units (ERUs)
Emissions Trading Scheme (ETS) – EU emission permits trading schemePermits: EU Emission Allowances (EUAs)
CERs can be transferred into EUAs etc. but the total number of AAUs is fixed 98CL
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Climate change regulation
AE AE AAUAAU
CERs
EUAs
CERs→ EUAs
GermanyBrazil
If Germany’s actual emissions are higher than its assigned allocation it can purchase CERsfrom Brazil and transfer them into EUAs
Total AE = total AAU
AE – actual emissions
AAU – assigned allocation unit
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Climate change regulation
EU target
8% by 2010 from 1990 levels
20% by 2020 or
30% by 2020 if a broad-based global agreement on GHGs can be reached
Emissions Trading Scheme was set up
Member states are given National Allocation Plans (NAPs) for CO2 permits
Covers power, paper, steel, iron, mining, oil and cement
Import allowance for CDM/JI subject to certain limits
CO2 emission permits can be traded within each phase with banking also possible between phases II and III
Phase I: 2005-07
Phase II: 2008-12
Phase III: 2013-20— Includes new sectors such as airlines, aluminium, petrochemicals, etc.
Note other trading schemes will probably emerge globally, but may not necessarily be fungible with the EU ETS
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EUA price forecast
Estimation:
Long-term demand for permits
A function of EUA shortage vs demand
Allocation plans
Compliance buyers including governments
Non-compliance buyers
CER/ERU balance
Abatement opportunities – various methods of abatement have different costs
CDM/JI permits – trade at a discount to EUAs due to project failure risk
UK coal-to-gas switching
German lignite-to-coal switching
Industrial abatement (N.B little willingness for this from industrials so far)
Carbon capture and sequestration…
Existing and new plants
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EUA price forecast
‘Clean coal’
Capture via post-combustion, pre-combustion or oxyfuel combustion
Storage in deep geological formations, deep oceans or mineral carbonates away from the atmosphere (although UN unlikely to approve ocean & carbonation)
Alternatively the gas captured may be sold for various industrial uses
Technology for large scale capture of CO2 already commercially available, problem is pipeline and regulation
Capturing and compressing CO2 requires energy lowers overall thermal efficiency
There are firm plans for around 8.3GW of CCS-type capacity – 51mt/year of abatement
Abatement cost estimate €28-30/t a function of:
Margin loss
(CCS plant new build cost – coal ex-CCS plant new build cost + energy loss) x CO2 avoided
Estimate: €16-17/MWh output or €24/t of CO2
Transport cost
Estimate: €2-2.5/t
Storage cost
Estimate: €3-3.5/t
Carbon capture and sequestrationCarbon capture and sequestration
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EUA price forecast
2008 abatement stack
The price of CO2 is determined by the
Demand for abatement
Supply of abatement
We expect EUAs to trade at c. €27/t for Phase II and c. €33/t for Phase III
Source: J.P. Morgan estimates
0
10
20
30
40
50
60
70
80
90
0 20 40 60 80 100 120
€/t
Cement production
Steel production
Oil refining
UK Coal to Gas Switching, Summer
Paper production
German Lignite to Coal
Switching
UK Coal to Gas Switching,
Winter
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Climate change regulation outcomes
Phase I ETS was effectively bankrupt since there has been a surplus of permits
Currently Phase II permits are trading at around €25-27/t
We expect c. €27/t for Phase II
Emissions of 2,300mt/a, a 10% cut in NAPs vs. Phase I, 160mt total extra demand from airlines, a shortfall of 210mt/a on average and CDM/JI permit deliveries of 780mt total
Phase III deeper and broader
Emergence of subnational and national schemes
Extension to other GHGs, other industries
Utility sector the most impacted
Positive for revenues
Negative for costs – depending on free allocations/ auctioning
Free allocations have been positive for profits overall, but unlikely post 2012
Although windfall for low / zero CO2 emitting plants will remain
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Climate change regulation outcomes
Impact on utilities’ profits:
Marginal cost pricingHigher variable costs per MWh and higher long-term power prices
Revenue will include 100% of the price of a permit
Windfall profits are incurred if permits are allocated to thermal plants for free…
… and non-thermal plants are price takers
Degree of forward contractinge.g. E.ON and RWE have already sold forward a large part of 2008 and 2009 output so the impact of volatility of Phase II CO2 on them will be minimal
Change in load stackA higher CO2 price will move gas-fired power plants further into the baseload compared to coal-fired
Coal-fired plants will suffer from lower volumes and hence lower profits and fixed costs per MWh
Carbon intensity relative to average will drive valuationExposure to coal vs. nuclear etc.
Exposure to generation vs. networks and supply
For more information, see our series ‘All you ever wanted to know about carbon trading’ at www.JPMorgan.com/climatechange
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EU thermal regulation: LCPD (2001)Large Combustion Plant Directive (LCPD)
Applies to combustion plants with a thermal output of >50 MW
Aims to reduce acidification, ground level ozone and reduce aerosol particulates throughout Europe by controlling emissions of sulphur dioxide (SO2), nitrogen oxides (NOx) and dust
Using emission limit values (ELVs)
The UK’s National Grid has warned the extra costs of coping with the implementation of LCPD could substantially increase transmission constraint costs
Set to have an impact on system costs of around £15m
≈12GW of capacity has opted out of the LCPD
Running hours of these plants will be limited on a chimney stack basis (either the whole plant is running or not) to 20,000 hours across the 8 year period to 2015
NG says it expects operators will look to maximize earnings from the remaining 20,000 hours by optimizing running and operating multiple units as a single block at the same time
Coal plant will be the most affected
For opted out coal units, the 20,000 hour limit is likely to act as a constraint on output and the costs of reserve will rise
NG has put forward 2 possible scenarios for plant operations:
Summer-cold regime – generators decide to run the units over the winter and make them unavailable over the summer, either on maintenance or moth-balled
Year-round running regime – generators will focus their running hours on the peak power price periods across the year, irrespective of season
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Renewables
Climate change
The energy value chain
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Mapping the renewable energy space
Drivers : Climate change; Energy Security; Economics
Renewable / Alternative Energy
Transportation
Electricity
Biofuels Hybrids / Plug-ins
Traditional
New Tech
Clean Thermal
Policy regimes: Standards; Pricing/support; R&D
Nuclear Mini hydro
Wind
Onshore Offshore
Solar
PV Thermal
Equipment
Operators
Autos
Big oil
New entrants
Utilities
New entrants
Marine
BiomassCCS
Concepts Technologies Corporates108R
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Renewables – raison d’être
Renewables
Climate change concerns
Energy security concerns
Solar, wind, r-o-r hydro and geothermal technologies do not emit any GHGs
Pumped storage hydro uses a small amount of electricity
Biomass combustion emits CO2, but unlike fossil fuel combustion, this has not been ‘out’ of the carbon cycle for a long time
By definition, renewable energy is not finite
It allows a country to reduce its reliance on foreign imports of electricity/coal/oil/gas
Hence governments have been very keen to encourage investment in renewable energy capacity…
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Renewables capacity support mechanisms
Feed-in tariffs – fixed pricing framework with a cap-and-floor of floating prices to provide a return well over WACC
e.g. Spain RD486 and RD661
Green certificate schemes— Energy suppliers required to submit certificates to show they have sourced a certain % of
supplies from renewables— Certificates bought from a pseudo market ‘buy-out fund’
e.g. Renewable Obligation Certificates in UK
Tax credits – levy charged on all suppliers unless they qualify for an exemption
e.g. Production Tax Credit in US, CCLECs in UK
Capital subsidies – can by-pass state aid rules
e.g. Greece: 35-55% of capital cost
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EU renewables targetsEC proposals on member state targets for renewable energy as a proportion of all energy consumptionEC proposals on member state targets for renewable energy as a proportion of all energy consumption
The targets proposed on 23 Jan 08 were harsh but widely expected and the horizon is far out
A proposal for tradeable‘Guarantee Of Origin’ (GOO) certificates would allow suppliers to meet their obligations with output from another country
Positive for suppliers and generators with pipeline in low tariff/high deliverability countries
Negative for generators in green certificate/ low deliverability countries e.g. Italy and the UK
2005 RES 2020 Target-RES Basis points/year % CAGR
Austria 23.3% 34% 71.3 2.6%
Belgium 2.2% 13% 72 12.6%
Bulgaria 9.4% 16% 44 3.6%
Cyprus 2.9% 13% 67.3 10.5%
Czech Republic 6.1% 13% 46 5.2%
Denmark 17.0% 30% 86.7 3.9%
Estonia 18.0% 25% 46.7 2.2%
Finland 28.5% 38% 63.3 1.9%France 10.3% 23% 84.7 5.5%Germany 5.8% 18% 81.3 7.8%Greece 6.9% 18% 74 6.6%Hungary 4.3% 13% 58 7.7%Ireland 3.1% 16% 86 11.6%Italy 5.2% 17% 78.7 8.2%Latvia 34.9% 42% 47.3 1.2%Lithuania 15.0% 23% 53.3 2.9%Luxembourg 0.9% 11% 67.3 18.2%Malta 0.0% 10% 66.7Netherlands 2.4% 14% 77.3 12.5%Poland 7.2% 15% 52 5.0%Portugal 20.5% 31% 70 2.8%Romania 17.8% 24% 41.3 2.0%Slovakia 6.7% 14% 48.7 5.0%Slovenia 16.0% 25% 60 3.0%Spain 8.7% 20% 75.3 5.7%Sweden 39.8% 49% 61.3 1.4%UK 1.3% 15% 91.3 17.7%EU 27 6.4% 20% 90.8 7.9%
Source: European Commission, J.P. Morgan estimates
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Page
Appendix
Valuation and drivers
Renewables
Climate change
The energy value chain
112
Business drivers…………………………………………………………………………………111Valuation methods……………………………………………………………………….... 116Stock price drivers…………………………………………………………………………….117Major M&A over the last decade………………………………………………………121
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Business drivers - what makes a successful utility?
i. Generation
ii. Transmission and distribution
iii.Supply
iv.Big vs. small
113VA
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ND
DR
IV
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What makes a successful utility?
GenerationGeneration
‘Success’ mainly derives from operations rather than business model
New build on time/budget
Minimise outages
Efficient fund sourcing
Efficient operating costs
Off take contracting, e.g. fixed cost contracts, PPAs ideally
Returns/ sustainability a function of type
Carbon ‘clean’ vs. ‘dirty’
Fuel price volatility/ availability
‘Correct’ funding
Diversity in a given region is important
Exposure to fuel vs. price setter
Development potential
Plant improvements - operational, environmental
Life extensions
Expansion via new plant including new regions
114VA
LU
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NA
ND
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IV
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What makes a successful utility?
Transmission & Distribution networksTransmission & Distribution networks
Regulatory relationshipDelivery
Constructive dialogue
Reliability
Health and safety
OpexIT – management of inventory
Sourcing at a low cost
Optimal staffing
CapexPurchasing at a low cost
Pipeline delivery within budget and on time
Partly exogenousPolitics and type of regulation
115VA
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NA
ND
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IV
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What makes a successful utility?
SupplySupply
Competitive upstream sourcing
A function of the competitive environmentPeer group behaviour
Degree of consolidation
Politics
Pricing for margin vs. pricing for market share
Superior customer service to peers
Dual fuel contracts
Well hedged exposure to wholesale power prices
116VA
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What makes a successful utility?
Load (lower fixed costs per MWh)
Economies of scale in procurement
Economies of scale in financing
Reputation and brand nameLarge customer base
R&D possibilities, patents
Integrated utilities tend to be largerUpstream/downstream hedging
Management cost savings
Expertise
Operational diversification
Geographical diversification
Advantages of scaleAdvantages of scale
117VA
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ND
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Valuation methodsAbsolute
Discounted cash flows (DCF)/ dividend discount model (DDM) – utilities generate long term cash flows with high visibility
Premium/ discount to RAB
Sum of the parts (SOP) – useful in diversified utilitiesMultiples
DCF/ DDM
RAB-based
Relative
Traditional relative multiples – limited usefulness due to diversityP/E – more useful under IFRS
Dividend yield – generally income stocks with growth
EV/EBITDA – traditional measure, free cash flow (FCF) yield important given capex cycle
Utilities-specific multiples – according to assetSupply: EV/#customers
Generation: EV/MW, Nuclear Relative Multiples
Networks: EV/RAB
118VA
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Utilities stock price drivers – the five forces1. Energy prices
Raw materials prices - Coal, oil, gas, uranium, equipment
Wholesale power prices
2. Regulation
Tariffs: e.g. unexpected (or earlier than expected) changes, politics
Networks: RAV and allowed return, e.g. expectations of a forthcoming review
Carbon: pricing and allocations
3. Politics
Electricity and gas often perceived to be public goods, with lots of political levers available:
Windfall taxes
Competition reviews
Mainstream tariff controls
Social assistance
State operator action
119VA
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Utilities stock price drivers – the five forces4. Macroeconomics
Dividend yield spread over Treasuries – in the absence of newsflow utility stocks can trade as a bond proxy
Demand growth
Weather
Temperature affects demand
Precipitation drives hydroelectric generation
Interest rates and taxes
5. Corporate strategy
Opex and capex plans
Short/ medium term targets
M&A prospects
Re-gearing potential, buy-backs, dividends
120VA
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Major M&A over the last decade - UKAnnouncement Date
Completion Date
Target Target BusinessTarget Nationality
Acquiror Acquiror BusinessAcquiror Nationality
Divestor Divestor BusinessDivestor Nationality
Deal Value $m
Stake%
23-Nov-98 31-Dec-99London Electricity
Supplies and distributes electricity to 2m customers in London. Subsidiary ofUS-based Entergy UK EDF Integrated electricity France Entergy Corp
Global integrated energy company US 3,173.554 100
25-Sep-00 09-Nov-00 Thames Water
Water and waste, design, consultancy and construction UK RWE AG
Energy, mining, raw materials, petroleum, chemicals, waste disposal, engineering and construction Germany 8,882.396 100
09-Apr-01 28-Jun-02 PowerGen
Generation and sale of electricity, engineering, oil and gas in the North Sea UK E.ON AG
Electricity generation and distribution Germany 13,814.937 100
22-Mar-02 27-May-02 Innogy Holdings Integrated energy UK RWE AG
Energy, mining, raw materials, waste, engineering and construction Germany 7,374.519 100
22-Apr-02 21-Oct-02 Lattice Group
275,000km of gas grids, LNG storage facilities, telco and fiberoptic networks UK
National Grid Group
Operates the electricity transmission system UK 17,441.637 100
18-Jun-02 29-Jul-02 SEEBOARD
Distribution and supply of electricity, retail of electrical goods UK EDF
Generates and distributes electricity France
American Electric Power Co Inc
Electric utility holding company US 2,059.180 100
01-Oct-03 17-Jan-05British Energy (97.5%)
Owner and operator of nuclear power stations UK Creditors Creditors UK 2,880.383 97.5
16-Oct-06 01-Dec-06Thames Water Holdings
Water and wastewater services UK
Macquarie, Kemble Water
Investment, commercial and retailbanking in Australia and around the world Australia RWE AG Integrated energy Germany 14,849.188 100
28-Nov-06 24-Apr-07 Scottish Power
Integrated electricity, gas supply, water and teleco services UK Iberdrola SA Integrated electricity Spain 22,954.919 100
22-Nov-07 08-Feb-08 Kelda Group Water and waste water services. UK
Citigroup AI, GIC SI, HSBC, Infracapital Partners Investment company UK 10,602.933 100
04-Jan-08 15-Feb-08Airtricity Holdings Renewable energy Ireland
Scottish&Southern Energy International energy UK 2,142.542 100V
AL
UA
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ON
AN
DD
RI
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Source: Dealogic
Major M&A over the last decade - EuropeAnnouncement Date
Completion Date
Target Target BusinessTarget Nationality
Acquiror Acquiror BusinessAcquiror Nationality
Divestor Divestor BusinessDivestor Nationality
Deal Value $m
Stake%
22-Sep-05 27-Jul-06Union Fenosa SA (22.07%)
Electric power generator and distributor. Spain ACS
Construction, engineering and environmental services to the public and private sectors Spain
Banco Santander Central Hispano Commercial bank Spain 2,709.081 22.07
18-Aug-06 18-Aug-06Endesa SA (3.4%) Electric utility Spain
Deutsche Bank AG
Retail and investment bank Germany 1,238.168 3.4
02-Apr-07 05-Oct-07Endesa SA (46.05%) Electric utility Spain ENEL, Acciona Integrated electricity Italy
Caja Madrid (9.9% - 2.9%), SEPI Savings bank Spain 52,625.922 46.05
30-Jul-08Union Fenosa SA
Electric power generator and distributor Spain
Gas Natural SDG SA
Supplies, stores, transmits and distributes natural gas Spain
CAM (45.3% / 5.15%), ACS
Savings and commercial bank Spain 35,854.814 100
13-May-05 26-Oct-05Edison SpA (30.462%) Integrated energy Italy EDF
Electricity generation and distribution Italy EDF Electric utility France 3,301.580 30.462
04-Jun-07 20-Dec-07ASM Brescia SpA
Electricity and gas supply Italy AEM SpA
Generates and distributes electricity and natural gas in the Milan area Italy
Comune di Brescia (69.238%) Brescia city hall Italy 5,721.018 100
17-Nov-99 07-Feb-01 EnBW (25.01%)
Integrated energy, water, waste and telco Germany EDF Integrated electricity France
State of Baden-Wuerttemberg Germany 2,484.538 25.01
17-Nov-99 17-Nov-99 VIAG AG (10%)
Power and gas services, packaging, chemicals, logistic and telcos Germany Veba AG
Generates and distributes electricity, gas, district heating and water services Germany
Federal State of Bavaria Germany 1,638.738 10
03-Jul-02 07-Mar-03Ruhrgas AG (40%) Gas distribution Germany E.ON AG
Integrated emergy and water, oil exploration and production Germany
Royal Dutch/Shell, Exxon Mobil, TUI Investors International 4,043.791 40
27-Feb-06 22-Jul-08 Gaz de France Natural gas utility France Suez SAEnergy, water, waste and telco services France
Republic of France (79.45%) France 58,705.279 100
19-Aug-99 08-Dec-99Tractebel SA (47.8%)
Integrated energy and water Belgium
Suez Lyonnaise des Eaux
Water supply and treatment, electricity,waste management and communication France 7,326.309 47.8
09-Aug-05 08-Dec-05
Electrabel SA/NV (49.92%)
Generates and supplies electricity, distributes gas, provides cable TV services Belgium Suez SA
Energy, water, waste and telco services France
Intermixt (4.56%)
Group of local authority energy suppliers Belgium 13,871.498 49.92V
AL
UA
TI
ON
AN
DD
RI
VE
RS
Source: Dealogic
Major M&A over the last decade - miscAnnouncement Date
Completion Date
Target Target BusinessTarget Nationality
Acquiror Acquiror BusinessAcquiror Nationality
Divestor Divestor BusinessDivestor Nationality
Deal Value $m
Stake%
06-Oct-04 28-Apr-06
Slovenske Elektrarne(66%)
Generates and distributes electricity
Slovak Republic ENEL SpA Integrated electricity Italy Slovak Republic
Slovak Republic 3,855.155 66
15-Sep-07 15-Oct-07OGK-4 OAO (69.34%)
Electric power generator Russia E.ON AG
Electricity generation and transmission, gas, oil, water, waste disposal, chemicals and telecos Germany
Unified Energy System of Russia Integrated energy Russia 5,775.407 69.34
28-Feb-08 TGK-10 OAO Electric utility Russia Fortum Oyj International energy Finland
Unified Energy System of Russia (23.34%) Integrated energy Russia 5,067.361 100
27-Feb-06 20-Oct-06 KeySpan Corp
Holding company for group involved in gas distribution US National Grid
Electricity and gas networks. 2002 merger between Lattice Group and National Grid UK 12,421.290 100
27-Mar-07 03-Jul-07Horizon Wind Energy LLC Wind farm developer US EDP Integrated electricity Portugal
Goldman Sachs Group Inc
Global investment banking and securities US 2,330.000 100
04-Oct-07 18-Dec-07Airtricity, N America Electric utility US E.ON AG
Electricity generation and transmission, gas, oil, water, waste disposal, chemicals and telecos Germany Airtricity Wind farm developer Ireland 1,400.000 100
123VA
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Source: Dealogic
Agenda
Page
Appendix
Valuation and drivers
Renewables
Climate change
The energy value chain
124
Acronyms………………………………………………………………………………………… 125Glossary…………………………………………………………………………………………… 127Abbreviations…………………………………………………………………………………… 128Conversions……………………………………………………………………………………… 129Metrics……………………………………………………………………………………………… 130Key websites…………………………………………………………………………………… 131Bloomberg codes…………………………………………………………………………….. 132
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Acronyms
emission limit valueELV
new electricity trading arrangementsNETAexploration and productionE&P
national allocation planNAPcombined heat and powerCHP
molten salt reactor MSRCertified Emission ReductionCER
long run marginal costLRMCClean Development MechanismCDM
liquified natural gasLNGcarbon capture and sequestrationCCS
lead fast breeder reactor LFRclimate change levy exemption certificateCCLEC
local distribution zoneLDZcombined cycle gas turbineCCGT
large combustion plant directiveLCPDboiling water reactorBWR
Joint ImplementationJIBritish electricity trading and transmission arrangementsBETTA
gas fast breeder reactor GFRadequacy reserve marginARM
EU Emission AllowanceEUAaverage revenue per userARPU
Emissions Trading SchemeETSadvanced gas cooled reactorAGR
Emission Reduction UnitERUaverage cold spellACS
European pressurised reactorEPRAssigned Allocation UnitAAU
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Acronyms
very high temperature reactor VHTR regulated asset valueRAV
UN Framework Convention on Climate ControlUNFCCCregulated asset baseRAB
Union for the Co-ordination of Transmission of ElectricityUCTEpressurised water reactorPWR
third party accessTPAphotovoltaicPV
seven year statementSYSproduction tax creditPTC
short run marginal costSRMCpublic service obligationPSO
sodium fast breeder reactor SFRpublic service contractsPSCs
super-critical water reactor SCWRpower purchase agreementPPA
renewable portfolio standardRPSEngland and Wales water regulatorOFWAT
renewable obligation certificateROCBritish electricity and gas regulatorOFGEM
royal decree (Spain)RDopen cycle gas turbineOCGT
regulated capital valueRCVnational oil companyNOC
remaining capacity RCnotification of inadequate system marginNISM
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GlossaryAdequacy reference margin = margin against the peak load +minimum reserve capacity
British thermal unit – a unit of heat equal to ≈ 252 calories, enough heat to raise the temperature of one pound of water 1°F
Load curve – order in which different plants are called upon to run based on their variable operating cost
Minimum reserve capacity = 5% of national generating capacity
Margin against the peak load = peak load – load at reference point
Plant margin - amount by which the installed generation capacity exceeds the forecast peak demand
Remaining capacity = reliably available capacity – reference load
Reliably available capacity = total generating capacity – non-usable capacity – maintenance and overhauls –outages – system services reserve
Reserve margin – amount of unused available capacity of an electric power system at peak load, expressed as a percentage of total capacity
Tariff deficit – the shortfall of regulated revenues from tariffs versus the revenues that would be realised by prevailing market prices
Thermal efficiency - efficiency with which the energy content (measured in gross calorific value) of the input fuel is turned into electrical energy by the generating station
Thermal generation – electricity production using a steam-driven turbine
Windfall profits – additional profits due to free CO2 allocations
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Abbreviations
per day/d
per year/y or /a
megawatt hoursMWh
terrawattTW
gigawattGW
megawattMW
kilowattKW
British thermal unitBtu
billion tonnes of oil equivalentBtoe or Gtoe
million tonnes of oil equivalentMtoe
tonne of oil equivalenttoe
thousand barrelskb
thousand boekboe
barrel of oil equivalentboe
million tonnesMt
million cubic feetMcf
metric tonnet
billion cubic metresbcm
cubic feetcf
barrelb or bbl
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Conversions
1 TWh
= 1,000 GWh
= 1,000,000 MWh
= 1,000,000,000 kWh
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To: LNGFrom: kWh MWh therm mmbtu kJ GJ kcal Gcal ft3 bcf m3 bcm boe mboe toe mtoe tce mtce tonne
kWh 1 0.001 0.0341 0.00341 3,600 0.0036 860 0.00086 3.3 3.3E-09 0.093 9.3E-11 0.00059 5.9E-10 0.00008 8E-11 0.00014 1.4E-10 0.000066MWh 1,000 1 34.12 3.412 3,600,000 3.6 859,845 0.8598 3,300 0.0000033 93 0.000000093 0.59 0.00000059 0.08 0.00000008 0.14 0.00000014 0.066therm 29.31 0.0293 1 0.1 105,506 0.1055 25,200 0.0252 96.2 9.62E-08 2.72 2.72E-09 0.17 0.00000017 0.0024 2.4E-09 0.004 0.000000004 0.0019
mmbtu 293.07 0.293 10 1 1,055,060 1.0551 252,000 0.252 962 0.000000962 27.2 2.72E-08 1.7 0.0000017 0.024 0.000000024 0.04 0.00000004 0.019kJ 0.000278 2.778E-07 0.00000948 9.478E-07 1 0.000001 0.2388 2.388E-07 0.0091 9.1E-12 0.000026 2.6E-14 0.00000016 1.6E-13 0.00000016 1.6E-13 0.000000038 3.8E-14 0.000000018
GJ 277.8 0.2778 9.48 0.948 1,000,000 1 238,800 0.2388 9,100 0.0000091 26 0.000000026 0.16 0.00000016 0.16 0.00000016 0.038 0.000000038 0.018kcal 0.00116 0.000001163 0.00003968 0.000003968 4.19 4.1868E-06 1 0.000001 0.0038 3.8E-12 0.00011 1.1E-13 0.00000066 6.6E-13 0.000000093 9.3E-14 0.00000016 1.6E-13 0.000000076
Gcal 1163 1.163 39.68 3.968 4,186,800 4.19 1,000,000 1 3,800 0.0000038 110 0.00000011 0.66 0.00000066 0.093 0.000000093 0.16 0.00000016 0.076ft3 0.3 0.0003 0.0104 0.00104 1,097 0.00109726 262 0.00026 1 0.000000001 0.0283 2.834E-11 0.00017 1.7E-10 0.000024 2.4E-11 0.000042 4.2E-11 0.00002bcf 300,000,000 300,000 10,400,000 1,040,000 1.09726E+12 1,097,260 2.62E+11 262,000 1,000,000,000 1 28,340,000 0.0283 170,000 0.17 24,000 0.024 42,000 0.042 20,000m3 11.0 0.011 0.367 0.0367 38722 0.0387 9,249 0.00925 35.29 3.529E-08 1 0.000000001 0.0061 6.1E-09 0.00083 8.3E-10 0.0015 1.5E-09 0.00071
bcm 11,000,000,000 11,000,000 3.67E+08 36,700,000 3.8722E+13 38,722,000 9.249E+12 9,249,000 35,290,000,000 35.29 1,000,000,000 1 6,100,000 6.1 830,000 0.83 1,500,000 1.5 710,000boe 1,700 1.7 60 6 6,300,000 6.3 1,500,000 1.5 5600 0.0000056 160 0.00000016 1 0.000001 0.14 0.00000014 0.23 0.00000023 0.1
mboe 1,700,000,000 1,700,000 60,000,000 6,000,000 6.3E+12 6,300,000 1.5E+12 1,500,000 5,600,000,000 5.6 160,000,000 0.16 1,000,000 1 140,000 0.14 230,000 0.23 100,000toe 12,700 12.7 425 42.5 45,000,000 45 11,000,000 11 42000 0.000042 1200 0.0000012 7.5 0.0000075 1 0.000001 1.7 0.0000017 0.8
mtoe 12,700,000,000 12,700,000 425,000,000 42,500,000 4.5E+13 45,000,000 1.1E+13 11,000,000 42,000,000,000 42 1200000000 1.2 7,500,000 7.5 1,000,000 1 1,700,000 1.7 800,000tce 7,100 7.1 250 25 26,000,000 26 6,300,000 6.3 24500 0.0000245 700 0.0000007 4.3 0.0000043 0.6 0.0000006 1 0.000001 0.5
mtce 7,100,000,000 7,100,000 250,000,000 25,000,000 2.6E+13 26,000,000 6.3E+12 6,300,000 24,500,000,000 24.5 700,000,000 0.7 4,300,000 4.3 600,000 0.6 1,000,000 1 500,000tonne 14,000 14 520 52 55,000,000 55 13,000,000 13 52,000 0.000052 1,400 0.0000014 8.9 0.0000089 1.2 0.0000012 1.9 0.0000019 1
Power CoalTherms Joules Calories Natural gas Oil
Electricity margin metrics
Reserve margin (%) = capacity reserve / demand
Capacity margin (%) = capacity reserve / available capacity
Output = Capacity x Time
[kWh] = [kW] x [h]
capacity Installedgeneratedy Electricit
factor Load =
Load factor ≠ 100%
Power plants sometimes have technical problems and have to shut down
The wholesale price may be too low for it to be economical to run the plant
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Key websites
www.Dti.gov.uk/energy/statistics/index.html
www.Iea.org
www.Eia.doe.gov
System adequacywww.UCTE.org
www.Nordel.org
www.Nationalgrid.com/uk/Electricity/SYS/
Technologywww.Alstom.com
www.Powergeneration.siemens.com
www.Gepower.com
www.Areva.com/servlet/finance/investorrelations/arevatechnicaldays-en.html
www.Vestas.com
EUhttp://ec.europa.eu/research/energy/index_en.htm
http://ec.europa.eu/energy/electricity/benchmarking/index_en.htm
http://epp.eurostat.ec.europa.eu
http://ec.europa.eu/environment/climat/climate_action.htm
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Bloomberg codes
SX6P Index (Dow Jones Stoxx European Utilities index)
ERIXP Index (renewable energy index)
EPWR (European electricity prices)
PWNX (French electricity prices)
ELEU (UK electricity prices)
ELGE (German electricity prices)
ELNF (Nordpool electricity prices)
EGAS (European gas prices)
UGAS (UK gas prices)
CLCL (global coal prices)
EMIT (EU emission allowances)
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Analyst Certification:
The research analyst(s) denoted by an “AC” on the cover of this report certifies (or, where multiple research analysts are primarily responsible for this report, the research analyst denoted by an “AC” on the cover or within the document individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of any of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report.
Important Disclosures
Explanation of Equity Research Ratings and Analyst(s) Coverage Universe:
J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] The analyst or analyst’s team’s coverage universe is the sector and/or country shown on the cover of each publication. See below for the specific stocks in the certifying analyst(s) coverage universe.
Coverage Universe: Chris Rogers: British Energy (BGY.L), CEZ (CEZP.PR), Centrica (CNA.L), E.ON (EONGn.DE), EDP Renovaveis (EDPR.LS), EEN (EEN.PA), Fortum(FUM1V.HE), Iberdrola Renovables (IBR.MC), National Grid (NG.L), Pennon (PNN.L), RWE (RWEG.F), Scottish & Southern Energy (SSE.L), Severn Trent (SVT.L), United Utilities (UU.L), Veolia Environnement (VIE.PA)
J.P. Morgan Equity Research Ratings Distribution, as of June 30, 2008
*Percentage of investment banking clients in each rating category.For purposes only of NASD/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category.
Valuation and Risks: Please see the most recent company-specific research report for an analysis of valuation methodology and risks on any securities recommended herein. Research is available at http://www.morganmarkets.com , or you can contact the analyst named on the front of this note or your J.P. Morgan representative.
Analysts’ Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues, which include revenues from, among other business units, Institutional Equities and Investment Banking.
Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-US affiliates of JPMSI, are not registered/qualified as research analysts under NASD/NYSE rules, may not be associated persons of JPMSI, and may not be subject to NASD Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.
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Other Disclosures
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General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to JPMSI and/or its affiliates and the analyst’s involvement with the issuer that is the subject of the research. All pricing is as of the close of market for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own independent decisions regarding any securities or financial instruments mentioned herein. JPMSI distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.
“Other Disclosures” last revised September 29, 2008.
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