Investing In Australia`s Energy Market

INVESTING IN AUSTRALIA’SENERGY MARKETAn International Perspective

GDF SUEZAustralian Energy

February 2014

Contents

GDF Suez Overview

Key Investment Considerations

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The Basics – Why is Electricity Important?

Project Economics – The Fundamentals

The Deal – Key Stakeholders

Renewable Generation Projects in Australia

Local Issues

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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 Construction

Where to from here?


Investing in Australia’s EnergyMarket

How does Australia Stack up Internationally?

Questions

GDF Suez Overview

EnergyEurope

EnergyInternatio

nal

Global Gas & LNG

EnergyService

s

SUEZ EnvironmentInfrastructures

LatinAmeric

a

NorthAmeric

a

UK-Europe

Middle East, Turkey &

Africa

Asia

AustralianEnergy

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

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GD

F S

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Inte

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GDF Suez Australian Energy

Power Generation

Exploration &Production

Trading & PortfolioManagement

Supply andInfrastructur

es

Sales and Energy Services


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KEY INVESTMENTCONSIDERATIONS The Basics – Why is Electricity Important?

Project Economics – The Fundamentals



The Basics – Why is Electricity Important?

Technical stuff aside…


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

1 Market characteristics

Market fundamentals and growth potentialRight project, right timeStrategic fit, operational synergies

Manageable2 Financial characteristics

Funding and financingBalance sheet impactAppropriate risk allocation and management

3 Commercial environment

Experienced and willing counterparties andcontractorsSkilled, affordable and productive workforce

LuckUncertain

4 Regulatory environment

Supportive regulatory frameworkStable legal institutions and policyLabour policy


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Viable Project


Attracting Equity:

Maximise shareholder returnSuitable return on investment, given risksUsually more willing to accept volatility in rates of return

Convincing Debt:

Fixed rate of returnConfidence that debt will be repaidon time, with interestDon’t like variability and:

• Dislike merchant marketexposureDislike below-investment gradeentities

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GenerationLicence

Connection reement

EnvironmentalApprovals

Lawyers, Engineers, Insurers,

Accountants,Tax experts, etc.

Regulatory Approval (FIRB)

PPA/Offtake

Fuel SupplyAgreements

Fuel TransportAgreements

LandAgreements

Project

OEMs(equipment)

MajorContractors

OperationsAgreements

CoAg

EnLTSA

EBA

EquityDebt


Mostly wind – large capacity,intermittent generationLargely 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.

Connection to grid costs may beprohibitive: 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.

PPA buyers seek firming deals.Long term PPAs may be risky.


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15 year PPA + option to extend

Debt coverage Equity coverage Merchant market exposure

T = 0 T = 10 T = 15

Location and Timing:Financing Issues:

GDF SUEZ Australian Energy

LOCAL ISSUES Recent Trends in Australian Energy Demand

Impact of PV Uptake & Energy Efficiency




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.

Source: AEMO

* Includes Snowy region


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2013 demand was16.8TWh lower

than its 2008 peak

Impact of PV Uptake and Increasing Energy Efficiency

‘Peak clipping’ phenomenon as a result of:

- Solar PV: bigger and cheaperinstallations,Increasingly efficient electrical appliances,

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- Active demand-side management.

Source: AEMO


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Source: World Bank


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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: 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.


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Source: AEMO NEFR 2013


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Renewables 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.

New thermal capacity (if any): 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 orcommitted.

East Coast LNG Construction

...coupled with--

weakening demand andremoval of the carbon tax,new gas fired generation

projects may becomeincreasingly uneconomic.


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With gas prices of $8–12/GJ…

Three large LNG export terminals under construction.

33 mtpa gas demand by LNG terminalsrepresents 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-, JCC- indexed contracts.

Where to from here?

• Difficult to predict changes in domesticdemand,Continued weakness in Eurozone economies, Persistently high Australian dollar(or, purposeful devaluation of USD by Fed),

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• 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: AEMO

49GW of Japanesenuclear power replaced by gas, oil and coal … will it last?Source: RBA

Source: OilPrice.com Source: AFR


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Key trends to look out for:

How does Australia stack up Internationally?

‘No reserve deficits in NewSouth Wales, Victoria, South Australia, or Tasmania until after 2022-23.’

AEMO ESOO 2013

To summarise:

Investment in the Australianelectricity 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.


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QUESTIONS?

Wei LiaoEnergy Trader

Trading & Portfolio Management

GDF SUEZ Australian Energy

Ph: 03 9617 8454

Mob: 0478 881 459

Email: [email protected]


Investing in Australia’s EnergyMarket

www.eeaust.com.au

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