Europe Middle East - Investis Digitalfiles.investis.com/intpower/invconference02/europe...Tight...

Europe & Middle EastEurope & Middle EastRichard Lappin, Tony Concannon,

Paul Turney & Ranald Spiers

Contents

• European electricity market overview

• Central & Northern Europe

• United Kingdom

• West Mediterranean

• Middle East

Privatising

Fully deregulated

Deregulating

Slow/No Change

Nordpool

Island

Central Europe

Peninsular Markets

Main Interconnects

Planned Interconnects

European Electricity Markets by Type & Hub

Our strategy is based on a European electricity market which is, in fact, five subregional markets, modestly interconnected

0%-1.9% p.a.

>3% growth p.a.

2.0%-2.9% p.a.

NordPoolNordPool TotalTotal

Electricity Market Size and Growth 2000/01Market sizes in TWhGrowth rates are for 2002-06Market sizes in Market sizes in TWhTWhGrowth rates are for 2002Growth rates are for 2002--0606

1941943838

3131311311

424424

8282

101101

5656

300300

4949

492492

350350

6363

138138

26263838

Our priority is large, high growth markets, but selective acquisition opportunities exist in other markets

Reserve Margins & Spark Spreads 2002

Tight reserve margins

Wide reserve margins

Moderate reserve margins

Gas – CoalBrackets denote negative spread

Spark Spread range shown in €/MWhSpark Spread range shown in €/Spark Spread range shown in €/MWhMWh

15-24 8-17

5

5-811-13

(5)-3

8-63-20

0-8

0-2*

(2)-15

(1)-219-27

*For whole Nordpool

Represents fuel price vs baseload power price

Our priority is high spark spread / low reserve margin markets but less sought after opportunities may also exist in other markets

European Opportunities –IPR Target Markets

Low priority

Top priority

Medium priority

Czech RepublicCzech RepublicCEZ PrivatisationCEZ Privatisation

SlovakiaSlovakiaSE PrivatisationSE Privatisation

ItalyItalyCCGT GreenfieldCCGT GreenfieldGencoGenco acquisitionacquisition

IberiaIberiaPossible Incumbent divestmentPossible Incumbent divestmentCCGT & Wind developmentCCGT & Wind development

United KingdomUnited KingdomDistressed sellersDistressed sellersCoal or GasCoal or Gas

NetherlandsNetherlandsGencoGenco acquisitionacquisitionLimited GreenfieldLimited Greenfield

HungaryHungaryDivestmentsDivestments

PolandPolandPrivatisationPrivatisation

Central EuropeCentral Europe

Technical CharacteristicsTechnical Characteristics Market StructureMarket StructureTransitional

• CEZ dominates market • 65% of generation, 100% of transmission, 50% of supply• End User Tariffs regulated.• Bilateral contracts and new day ahead market

• Liberalising market will be influenced by EU accession Temelinand June elections

Czech Republic Merit OrderCzech Republic Merit Order IPR AssetsIPR Assets

Installed Capacity Dec 2001

Coal42%

Hydro13%

Nuclear12%

IPPs33%

02000400060008000

100001200014000160001800020000

2002

MW

Cap

acity

Hydro PeakersThermal PeakersImportsIPPsCEZ ThermalEOPNuclearAverage DemandPeak Demand

€ 15/MWhCoalCoal

€ -2/MWhSpark spread Spark spread GasGas

€ 23/MWhBaseloadBaseload PricePrice

57%Reserve MarginReserve Margin

15.9 GWInstalled CapacityInstalled Capacity

10.1 GWPeak DemandPeak Demand

2% p.aDemand GrowthDemand Growth

63 TWhMarket SizeMarket Size

At the ‘crossroads’ of European Energy

Czech Republic – Market Fundamentals

Seasonal baseload

Oligopolistic heating business

4850

2000

360

EOP

Market Position

155007200Heat Sales (TJ)

2001350Sales (GWh)

138330Capacity (MW)

PTETPlant

The EOP GroupThe EOP Group

EOP AssetsEOP Assets

Czech RepublicCzech Republic

PraguePrague

Profitable and low cost businessProfitable and low cost business

Central Europe - 2002

• 2nd largest generator• Strong forward cover• Steady earnings (winter seasonal

peak)• Fully compliant with EU

environmental legislation• Low cost operation• Cost effective skill base• Bordering German & Polish

markets (large export potential)• First wave EU accession

Opportunities: >20,000MWOpportunities: >20,000MW•• Czech Republic: CEZ PrivatisationCzech Republic: CEZ Privatisation•• Slovakia: SE PrivatisationSlovakia: SE Privatisation•• Poland: Plant privatisationPoland: Plant privatisation•• Hungary: DisposalsHungary: Disposals•• Slovenian privatisationSlovenian privatisation

Outlook:Outlook:•• Gas becoming prominentGas becoming prominent•• Capacity margins tighteningCapacity margins tightening•• Spark spreads encouraging Spark spreads encouraging

newnew--build build •• Preference for minePreference for mine--mouth plant mouth plant

with export potentialwith export potential•• Embryonic asset backed tradingEmbryonic asset backed tradingPlant TargetsPlant Targets

Central Europe Strategy – Medium Term

Low priority

Top priority

Medium priorityPlentiful opportunities to grow and to access the German market even without an actual presence

Technical CharacteristicsTechnical Characteristics Market StructureMarket StructureFully-Liberalised

• Supply market liberalised; customers choose supplier• Fragmented generation market, over 20 players

• Large degree of generation & distribution/supply integration e.g. Innogy (RWE) and Scottish Power

• NETA launched 27 March 2001, (dominated by bilateral contract framework)

• Key players Innogy (RWE), PowerGen (EoN), TXU, Centrica, Scottish and Southern, Scottish Power and EdF.

England & Wales Merit OrderEngland & Wales Merit OrderIPR AssetsIPR Assets


Coal39%

Hydro3%Nuclear

15%

Gas30%

Oil6%

Other7%

0

10000

20000

30000

40000

50000

60000

70000

80000

2002

Gro

ss M

W C

apac

ity

Pumped StorageOilGas & CoalInterconnectorCHPNuclearHydroAverage DemandPeak Demand

Mid-MeritBaseload/Mid-merit

Market Position

Medium Term tolling agmt

Merchant (1 unit mothballed)

Contract Cover

6,5001,200Sales (GWh)

CoalGas CCGTType

1000500Capacity (MW)

RugeleyDeesidePlant

€ 8/MWhCoalCoal

€ 5/MWhSpark spread # Spark spread # GasGas



67 GWInstalled CapacityInstalled Capacity

53 GWPeak DemandPeak Demand

1.5% p.aDemand GrowthDemand Growth


England & Wales – Market Fundamentals

Deeside

Rugeley

UK Portfolio

Rugeley• Acquired in Jul 01• 2 x 500MW coal-fired,

Commissioned 1970• 38% efficiency• Tolling agreement with

TXU• 140 IPR staff, 93 full-time

contractors

Deeside• 500MW CCGT• 13E2 ABB design• Commissioned Nov 1994• 52.7% efficiency• Merchant operation• 56 staff including traders

Why Rugeley?

• Contracted forward in a difficult market;

• Fuel diversity;

• Gas prices expected to remain high; coal competitive with gas;

• Proven plant

• Tight reserve margin anticipated in the medium term

Sources:

Heren report 27 May 2002

API#2 coal price

47.6% HHV gas

38% efficiency for coal

Forward curves . . .

• Spark spread (coal and gas) not sustainable

• Coal competitive with gas

• Increasing volatility in day ahead market

• Gas arbitrage likely in winter

• No recognition of environmental constraints£0

£5

£10

£15

£20

£25

Day Ahea

dW

eek A

head

Summer 02

Wint

er 0 2

Summer 03

Winter 0

3Sum

mer 04

Winter 0

4Sum

mer 05

Winter

05Su

mmer 06

Wint

er 06

Summer 07

Gas baseload spark

Gas peak spark

Coal baseload spark spread

Coal peak spark spread

Gas / Coal spark spread comparisons (£ per MWh)Baseload and Peak

England & Wales market - outlook

• Very limited new build of fossil fired plant

• More contracts (fuel and electricity) lapse. More capacity withdrawn. Increased pressure for market correction

• Tightening environmental constraints

• Govt reliance on renewables: expect to slip – continued reliance on fossil fired generation

• Reserve margin will reduce

• Gas prices expected to remain relatively high

• Combined heat and power projects stalled

• NETA remains complex and demanding

IPR position in the UK

• Opportunities to buy assets selectively at reduced prices

• Has fuel diversity (coal and gas)

• Two complementary businesses in place

• Proven performance under NETA

• Can exploit near term volatility

Italy and IberiaItaly and Iberia

Italy and Iberia 2002

• Iberia – liberalised oligopoly

• Population 49 M, highest growth rate of major EU countries

• Tight reserve margins

• Limited interconnects

• Second highest spark-spreads in Europe (€8-€24)– incumbents need to maintain these

• Good fuel diversity

• Acquisitions frequently limited to incumbents and greenfield first-mover difficult to secure

• One of better markets in EU

• Italy – monopoly in transition

• Increasing per capita electricity consumption

• Very tight reserve margins

• Limited interconnects

• Highest spark-spreads in Europe (€19-€27)– incumbents need to maintain these

• Over dependence on oil and gas

• Larger deal-flow than Spain

• IPR amongst first-movers in greenfields

• Best market for IPR in Europe

Technical CharacteristicsTechnical Characteristics Market StructureMarket StructureTransition to a pool market

• Currently in the process of liberalisation.• ENEL must divest an additional 2,611 MW to reach the 15,000

MW stated in the Bersani Decree.• Maximum production after January 2003 per company will be

50%.• High number of new-build requests.• Large portion of divested plant to be repowered with gas.

• Market share at December 2000 as follows:

Italian Merit Order*Italian Merit Order*

IPR is currently developing new CCGT and considering IPR is currently developing new CCGT and considering medium sized acquisitions.medium sized acquisitions.

Key areas of focus are offKey areas of focus are off--take and fuel supply. Careful take and fuel supply. Careful management of local relationships.management of local relationships.


Coal12%

Natural Gas9%

Renewable2%

GasOil31%

Fuel Oil

19%

Hydro27%

0

10000

20000

30000

40000

50000

60000

70000

80000

2002

Gro

ss M

W C

apac

ity

Pumped StorageOilNatural GasCoalInterconnectorsRenewablesHydroAverage DemandPeak Demand

3%INTERPOWER

13%OTHERS

3%SONDEL

8%ENDESA

17%EDISON

56%ENEL€27 /MWhCoalCoal

€19 /MWhSpark spread GasSpark spread Gas

€45 /MWhBaseloadBaseload PricePrice

33%Reserve Margin*Reserve Margin*





*Adjusted for *Adjusted for Hydro ROR availabilityHydro ROR availability

Italy – Market Fundamentals

IPR’s greenfield development:

• Well positioned around demand centres in north, and high demand growth in south

• Located in regions of power deficit

• Will be heavily forward contracted

• Focus on local concerns with strong local partners

• First mover advantage (permitting process ahead of many competitors)

• Main commercial issues are off-take and fuel

Italian Greenfield Programme

(800MW)

(800MW)

Technical CharacteristicsTechnical Characteristics Market StructureMarket StructureTransition

• Players have Long Term PPAs with grid owner, REN.• Market largely dominated by EDP.• January 2003 - single market with Spain, although constrained

due to interconnector capacity between Spain and Portugal 2003-2006.

Portuguese Merit OrderPortuguese Merit Order


Coal20%

Oil23%

Gas11%

Hydro46%

0

1000

2000

3000

4000

5000

6000

7000

8000

2002

Gro

ss M

W C

apac

ity

Pumped StorageOilGasCoalHydroAverage DemandPeak Demand

€ 24/MWhCoalCoal

€ 15/MWhSpark spread GasSpark spread Gas







8%OTHERS7%IPR10%RWE75%EDP

45%Ownership share

Baseload/Mid-meritMarket Position

Long Term PPA agreementContract Cover

4,022 Sales (GWh)

CoalType

600Capacity (MW)

PegoPlant

*Adjusted for *Adjusted for Hydro ROR availabilityHydro ROR availability

Portugal – Market Fundamentals

Oligopolistic market structure. Because of this, incumbents dominate most major acquisition opportunities and greenfield first-move position difficult to secure. Pending integration of Portuguese and Spanish markets will provide new opportunities for IPR.

Currently pursuing CCGT development opportunities and several renewable projects in the peninsula.

Technical CharacteristicsTechnical Characteristics Market StructureMarket StructureLiberalised-Oligopoly

• Pool market governed by bilateral contracts.• End users will choose supplier by January 2003.• Incumbents vertically integrated acting as an oligopoly.• Market share is as follows:

Spanish Merit Order*Spanish Merit Order*


Coal23%

Nuclear15%

Fuel Oil9%

Gas Oil7%

Hydro32%

Renewables

6%

Special Regime

8%

7%Others

7%HidroCantabrico13%Union Fenosa30%Iberdrola43%Endesa

€ 17/MWhCoalCoal

€ 8/MWhSpark spread Spark spread GasGas

€ 35/MWhBaseloadBaseload Pr icePr ice

22%Reserve Margin*Reserve Margin*



3.6% p.aDemand GrowthDemand Growth


05000

1000015000200002500030000350004000045000

2002

Gro

ss M

W C

apac

ity

Pumped StorageOilCoalNuclearInterconnectorSpecial RegimeRenewablesHydroAverage DemandPeak Demand

*Adjusted for *Adjusted for hydro ROR availabilityhydro ROR availability

Spain – Market Fundamentals

Conclusion

• Well placed in attractive European markets

• Assets provide steady earnings

• Substantial opportunity for growth

• Quality growth opportunities in medium term horizon

• Selective approach to growing the business

Middle EastMiddle East

Rational for investment in Middle East

• High growth markets with substantial demand for new capacity and opportunity to take advantage of privatisation of incumbent generation

• Long term contract cover on financeable terms available from power purchases backed by investment grade sovereign guarantees

• Opportunities to realise effective US dollar-denominated returns well in excess of our weighted average cost of capital

• Potential for investment in ‘associated’ assets such as desalination plant or natural gas infrastructure

Where are the opportunities in the Middle East ?

MoroccoMorocco Credit Rating:BB

Capacity:3,750 MW (2002)4,600 MW (2007)

Potential Opportunity1,800 MW (new build & secondary market)


TunisiaTunisia Credit Rating:BBB

Capacity:2,190 MW (2002)4,000 MW (2007)

Potential Opportunity2,500 MW (new build & secondary assets)


EgyptEgyptCredit Rating:BB+

Capacity:17,150 MW (2002)22,000 MW (2007)

Potential Opportunity15,000 MW (new build/privatisation/secondary assets)


JordanJordanCredit Rating:BB-

Capacity:1,500 MW (2002)2,000 MW (2007)

Potential Opportunity1,000 MW (new build/privatisation)


TurkeyTurkey

Credit Rating:B-

Capacity:26,200 MW (2002)35,000 MW (2007)

Potential Opportunity10,000 MW (new build/TORs/asset salessecondary assets)


Saudi ArabiaSaudi ArabiaCredit Rating:Aaa3

Capacity:23,500 MW (2002)35,000 MW (2007)

Potential Opportunity15,000 MW + 500 MIGD(new build/privatisation)


KuwaitKuwaitCredit Rating:A+

Capacity:6,900 MW (2002)9,400 MW (2007)

Potential Opportunity2,500 MW (new build)


BahrainBahrainCredit Rating:A3

Capacity:1,300 MW (2002)1,800 MW (2007)

Potential Opportunity500 MW (new build)


QatarQatarCredit Rating:A-

Capacity:1,950 MW (2002)3,100 MW (2007)

Potential Opportunity1,150 MW + 75 MIGD (new build/secondary assets)


UAEUAECredit Rating:A2

Capacity:8,300 MW (2002)11,800 MW (2007)

Potential Opportunity4,000 MW + 250 MIGD (new build/privatisation/secondary assets)


OmanOmanCredit Rating:BBB

Capacity:2,260 MW (2002)3,000 MW (2007)

Potential Opportunity1,200 MW + 80 MIGD (new build/privatisation/secondary assets)

Shuweihat S1 Power and Water Project,Abu Dhabi

• 1,500 MW of power, 100 million imperial gallons per day

• Siemens V94.3A2 GTs and FisiaItalimpianti desalinisation distillers

• 20 year Power and Water Purchase Agreement signed in August 2001

• Financial close achieved on 1 December 2001

• $1.6 bn combined Islamic and conventional 20-year term loans

• $355m equity bridge loan until PCOD (15 August 2004)

• Partners CMS Energy of USA (20%) and ADWEA (60%)

1 02

By passes

Heat RecoveryS team Generators

MSF D istillers

ProductWat er

Treatment

DumpCondensers

SeawaterS upply Seaw ater

Outf all

Potable WaterOut

SupplementaryFiring

Low Press ureSteam Main

Steam TurbineGenerat ors

High Press ureSteam Main

Typical Combined Cycle Power & Water Plant (Multistage Flash technology) - Block Flow Diagram

Fuel

Gas TurbineGenerators

Desalination opportunities worldwide

AmericasAmericas Middle East/Europe

Middle East/Europe

Rest ofWorldRest ofWorld

5,000 MIGD in 2002 – 60% in Middle East

44% of all desalination plant is by distillation

25,000 MIGD by 2020 – 50% in Middle East

1,200MIGD1,200MIGD

3,000MIGD3,000MIGD

12,000MIGD

12,000MIGD

800MIGD800

MIGD

5,500MIGD5,500MIGD

20022002

20202020

7,500MIGD7,500MIGD

Fewer competitors since the mid 1990s• Total, Tractabel and AES are main

regional competitors

• Exit of several US developers after September 11/ Enron debacle

• Large size of power/water opportunities means that partnering is desirable to share risk or to keep below market cap

• The structural nature of RFPs, combined with existing in-country experience of competitors, means that low capital costs and innovative O&M is essential for success

• CMS Energy are partners in Shuweihat; Mitsui / TEPCO are current partners on Umm Al Nar bid in Abu Dhabi

Bids for Abu DhabiPrivatisation ProjectsBids for Abu DhabiPrivatisation Projects

EnronCMSPSEG

MarubeniIntergen/Bechtel

TractabelNational Power

EnronCMSPSEG

MarubeniIntergen/Bechtel

TractabelNational Power

CMS/IPRTractabel/Mitsui/TEPCOAESPSEG/Marubeni

CMS/IPRTractabel/Mitsui/TEPCOAESPSEG/Marubeni

7

4

Al TaweelahA2

1998

Al TaweelahA2

1998

ShuweihatS12001

ShuweihatS12001

Our vision for 2007

• Broad portfolio across the region, with a mix of operating projects under construction, and new development

• Secure cash flows underpinned by long-term contracts, with development funded by high deal flow/closed projects

• Bringing assets together (including Pakistan) for potential monetisation; harness local capital / investment funds / IPOs

• ‘Horizontal’ integration into related infrastructure (desalination, natural gas, regasification, etc)

• Build up semi-autonomous indigenous operation with complete range of skills (O&M, financing, technical, legal etc)

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