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INVESTING IN AUSTRALIA’S ENERGY MARKET An International Perspective

GDF SUEZ Australian Energy February 2014


Contents  

GDF Suez Overview Key Investment Considerations • The Basics – Why is Electricity Important? • Project Economics – The Fundamentals • The Deal – Key Stakeholders • Renewable Generation Projects in Australia

Local Issues • Recent Trends in Australian Energy Demand • Impact of PV Uptake & Energy Efficiency • Declining Industrial Energy Consumption

• Maturity of Renewable Technologies • Generation Alternatives GDF SUEZ Australian Energy

• East Coast LNG Construction • Where to from here?

Investing in Australia’s Energy Market

 

How does Australia Stack up Internationally? Questions


GDF Suez Overview

Energy Europe

Energy International

Global Gas & LNG

Infrastructures

Energy Services

SUEZ Environment

North America

UK-Europe

Middle East, Turkey & Africa

GDF Suez Energy International

Latin America

Asia

Australian Energy GDF SUEZ Australian Energy – Investing in Australia’s Energy Market 2014

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GDF Suez Australian Energy

Power Generation

Exploration & Production

Trading & Portfolio Management Supply and Infrastructures

Sales and Energy Services

GDF SUEZ Australian Energy – Investing in Australia’s Energy Market 2014

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KEY INVESTMENT CONSIDERATIONS 

The Basics – Why is Electricity Important?

Project Economics – The Fundamentals

The Deal – Key Stakeholders

Renewable Generation Projects in Australia


The Basics – Why is Electricity Important? Technical stuff aside…

GDF SUEZ Australian Energy – Investing in Australia’s Energy Market 2014

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Project Economics – The Fundamentals What do you need for a generation project to be economic?

1

Market characteristics

 Market fundamentals and growth potential  Right project, right time  Strategic fit, operational synergies

2

Financial characteristics

Manageable

 Funding and financing  Balance sheet impact  Appropriate risk allocation and management

3

Viable Project

Commercial environment

 Experienced and willing counterparties and contractors  Skilled, affordable and productive workforce

4

Regulatory environment

Uncertain

Luck

 Supportive regulatory framework  Stable legal institutions and policy  Labour policy

GDF SUEZ Australian Energy – Investing in Australia’s Energy Market 2014

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The Deal – Key Stakeholders Attracting Equity:  Maximise shareholder return  Suitable return on investment, given risks  Usually more willing to accept volatility in rates of return

Convincing Debt:

Debt

PPA/Offtake

Equity

Project

OEMs (equipment)

 Fixed rate of return Fuel Supply  Confidence that debt will be repaid Agreements on time, with interest Fuel Transport  Don’t like variability and: Agreements • Dislike merchant market exposure Land • Dislike below-investment grade Agreements entities

Generation Licence

Major Contractors

Operations Agreements

Connection Co Agreement

LTSA EBA

Environmental En Approvals

Regulatory Approval (FIRB)

Lawyers, Engineers, Insurers, Accountants, Tax experts, etc.

GDF SUEZ Australian Energy – Investing in Australia’s Energy Market 2014

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Renewable Generation Projects in Australia

Financing Issues:

Location and Timing:

 Mostly wind – large capacity, intermittent generation  Largely via non-recourse project finance, but increasingly self-funded by majors.  Power Purchase Agreements (PPA) provide revenue certainty for loan duration – needed to be bankable.  PPA buyers seek firming deals.  Long term PPAs may be risky.

 Connection to grid costs may be prohibitive:  Locations suitable for maximising generation (wind/solar) are remote.  Trade-off:  High voltage – extremely costly:  Low voltage – greater losses.  Connection of large generation installations necessarily distorts market in short-term.

15 year PPA

Debt coverage T=0

+ option to extend

Equity coverage T = 10

Merchant market exposure

T = 15 GDF SUEZ Australian Energy – Investing in Australia’s Energy Market 2014

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LOCAL ISSUES

GDF SUEZ Australian Energy

Recent Trends in Australian Energy Demand

Impact of PV Uptake & Energy Efficiency

Declining Industrial Energy Consumption

Maturity of Renewable Technologies

Generation Alternatives

East Coast LNG

Where to from here?

How does Australia stack up Internationally?


Recent Trends in Australian Energy Demand  Energy demand appears to have peaked in 2008: • •

SA annual demand is actually lower than 2000-levels. QLD has recorded the greatest and most sustained increase in demand.

2013 demand was 16.8TWh lower than its 2008 peak

Source: AEMO

* Includes Snowy region

GDF SUEZ Australian Energy – Investing in Australia’s Energy Market 2014

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Impact of PV Uptake and Increasing Energy Efficiency ‘Peak clipping’ phenomenon as a result of: - Solar PV: bigger and cheaper installations, - Increasingly efficient electrical appliances, - Active demand-side management.

Source: AEMO

GDF SUEZ Australian Energy – Investing in Australia’s Energy Market 2014

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Declining Industrial Energy Consumption Case Study: Aluminium  Significant reduction in aluminium smelting activity since 2008 peak.  Large drop off in world aluminium prices with mild recovery since then.  Too late for several Australian smelters:  300MW Kurri Kurri (NSW) closed in 2012,  Doubts about future of 360MW Point Henry (VIC).  Excluding Point Henry, smelters represent 2,400MW of demand across the NEM.

Source: World Bank

GDF SUEZ Australian Energy – Investing in Australia’s Energy Market 2014

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Maturity of Renewable Technologies

Source: EPRI technology status data 2010

  

Hydro: offers limited scope for further development or expansion. Solar thermal: remains interruptible and is expensive. Wind: gaining greater demand penetration, however still interruptible and still poses some technology risk. GDF SUEZ Australian Energy – Investing in Australia’s Energy Market 2014

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Generation Alternatives Source: AEMO NEFR 2013

New thermal capacity (if any):

Renewables

 Likely to be met by OCGT with capacity for conversion to CCGT,  Economics of thermal plant uncertain in medium term given low energy demand and possibility of international price linkage of gas, black coal,  No thermal plant under construction or committed.

 RET predominantly met by wind capacity,  Intermittent by nature and does not provide a significant level of dependable peak capacity,  Investors require PPAs as prices tend to be high when (because) wind is low, especially in South Australia.

GDF SUEZ Australian Energy – Investing in Australia’s Energy Market 2014

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East Coast LNG Construction  

Three large LNG export terminals under construction. 33 mtpa gas demand by LNG terminals represents three times current total east coast gas demand Assuming Japanese LNG demand remains high, international gas price linkage could significantly increase cost of domestic gas-fired generation as domestic gas contracts roll off and are replaced by oil-, JCCindexed contracts.

With gas prices of $8–12/GJ… ...coupled with - weakening demand and - removal of the carbon tax, new gas fired generation projects may become increasingly uneconomic.

GDF SUEZ Australian Energy – Investing in Australia’s Energy Market 2014

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Where to from here? Key trends to look out for:

• • •

Difficult to predict changes in domestic demand, Continued weakness in Eurozone economies, Persistently high Australian dollar (or, purposeful devaluation of USD by Fed), • High cost of doing business in Australia. How sustainable is current growth in China and other emerging economies? Impact of restart of Japanese nuclear power on world LNG demand?

Source: RBA

Source: AEMO

49GW of Japanese nuclear power replaced by gas, oil and coal … will it last? Source: OilPrice.com GDF SUEZ Australian Energy – Investing in Australia’s Energy Market 2014

Source: AFR

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How does Australia stack up Internationally? ‘No reserve deficits in New South Wales, Victoria, South Australia, or Tasmania until after 2022-23.’ AEMO ESOO 2013

To summarise:  Investment in the Australian electricity sector has some head winds  Clean Energy Act has fostered great uncertainty  There are many elements to investment considerations, but if there’s one thing that’s certain …

We work in an exciting, challenging and ever-changing environment. GDF SUEZ Australian Energy – Investing in Australia’s Energy Market 2014

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QUESTIONS?

GDF SUEZ Australian Energy Investing in Australia’s Energy Market

Wei Liao Energy Trader Trading & Portfolio Management GDF SUEZ Australian Energy Ph: 03 9617 8454 Mob: 0478 881 459 Email: Wei.Liao@gdfsuezau.com www.eeaust.com.au

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