Indonesia s Generation Fuel Mix in an Era of Price Uncertainty Tom Parkinson 14 April 215
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Overview 1 2 3 4 5 6 Indonesia s capacity expansion plans Historical fuel price movement Screening curve analysis Comparison with regional players Recent fuel price volatility Impacts on economic expansion 3
Installed Capacity (MW) We focus on Java-Bali, as they dominate the total capacity mix 4, 35, 3, 25, Hydro Steam-turbine Gas-turbine Others Geothermal Combined Cycle Diesel IPP 2, 15, 1, 5, Java-Bali Sumatera Sulawesi Kalimantan NTB Maluku Papua NTT Source: PLN, TLG analysis Furthermore, most coal-on-gas competition occurs on Java-Bali 4
Annual Generation (TWh) The official expansion plan for Java-Bali relies heavily on new coal investment 35 3 25 2 Gas Coal Hydro Fuel Oil & Diesel Geothermal The latest official plan (RUPTL) forecasts out to 222 Gas usage is static, although some LNG is needed as part of the gas mix Domestic coal use increases substantially (assuming all coal plant comes online as planned) 15 1 There is some expansion of geothermal following on from Geothermal Law 21/214 and a higher FiT of between USD 13 to 3 per MWh 5 The rate at which new build can be finished to meet demand is probably over-optimistic 213 215 217 219 221 Source: PLN, TLG analysis 5
Average Capacity Factor (percent) New coal build will depress capacity factors for gas-fired plant 8 7 Steam Coal Build-out of coal-fired plant is fast official plans predict additions of close to 2 GW by 222, doubling coal-fired capacity 6 5 4 3 CCGT New coal pushes the average CCGT capacity factor down to about 4 percent But delays in financing, permitting, and PPA negotiations have tended historically to cause delays to new coal additions 2 Such delays were seen in coal-build Fast Track Program I 1 213 215 217 219 221 Source: PLN, TLG analysis 6
Capacity Added (MW) Capacity additions for Fast Track Program I lagged plan by two to four years and we suspect that similar underlying issues could affect Fast Track Program II 5, 4,5 4, Original Plan 3,5 3, 2,5 2, 1,5 Revised Plan 1, 5 29 21 211 212 213 214 215 Source: PLN, TLG analysis 7
Overview 1 2 3 4 5 6 Indonesia s capacity expansion plans Historical fuel price movements Screening curve analysis Comparison with regional players Recent fuel price volatility Impacts on economic expansion 8
Fuel Price (USD/mmbtu) Fuel prices have historically been key drivers in capacity mix decisions 3 Coal window #1 Coal window #2 25 2 15 1 Brent Crude 5 Newcastle FOB Coal 197 1974 1978 1982 1986 199 1994 1998 22 26 21 214 218 Notes: Coal: 197 to 222: Australian Newcastle FOB coal. Historic from World Bank, futures from ICE. Oil: 197 to 1997: Dubai crude adjusted to approximate Brent. 1997 to 222: Brent. Historic from World Bank, futures from ICE. Technology and fuel use decisions are easy when large price gaps emerge 9
2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 Gas Price (USD/mmbtu) In 27, Asian LNG prices opened a large gap relative to US and UK prices as Asian LNG is priced off Brent and the gap widened until roughly a year ago 25 2 Asian LNG price (assuming 13.5 slope and USD.8 constant) JKM 15 1 NBP 5 Henry Hub Sources: ICE, CME, Platts, TLG analysis 1
Coal price (USD/mmbtu) By contrast, Indonesian coal prices closely track the Newcastle (AUS) index 6 5 4 3 FOB Newcastle FOB Indonesian Coal Reference Price The Newcastle FOB coal price and the FOB Indonesian coal reference (HBA) price track each other closely in terms of USD per tonne Also, as the calorific values are very similar, the price per energy unit (mmbtu) also exhibit a close correlation 2 In order to have a basis for a forward price for Indonesian coal, we have used forward prices for Newcastle coal as a proxy 1 29 21 211 212 213 214 215 (to March) Sources: World Bank, Ministry of Energy and Mineral Resources 11
Fuel Price (real USD/mmbtu) Indonesia s capacity expansion plans were probably formed based on relative marginal gas and coal prices, prior to fuel prices falling last year 2 18 16 14 12 1 8 6 4 2 Imported LNG Newcastle Delivered 29 21 211 212 213 214 215 216 217 218 219 22 221 Notes: Imported LNG price is based on ICE Brent futures times a 12.5 percent slope plus shipping of USD 1./mmbtu and regas of USD.7/mmbtu. Coal price is based on ICE futures for Newcastle coal. While the gas/coal spot price ratio neared 5:1 last year, declining Brent futures prices implied a reduction in the ratio to about 3.5:1 by 221 12
Overview 1 2 3 4 5 6 Indonesia s capacity expansion plans Historical fuel price movements Screening curve analysis Comparison with regional players Recent fuel price volatility Impacts on economic expansion 13
In this section, I analyze Indonesia s optimal fuel mix decision My intent is to identify the least-cost mix of Indonesian resources, based on fuel price expectations as of June 214 In order to simplify presentation, I will focus on a first-year analysis of units coming on line in 218 A key issue involves the determination of gas value, since there are three distinctly different sources of gas in Indonesia: Piped gas. This gas is priced via existing contracts, whereby prices escalate with inflation and defined indices Imported LNG. Prices for imported and exported LNG are largely tied to crude prices (particularly Brent) Domestic market obligation (DMO) LNG. By law, gas producers seeking to export LNG must set aside at least 25 percent of production for the domestic market, at prices that represent roughly a 15 percent discount to imported LNG While the marginal source of gas for PLN is probably the DMO LNG, I argue that imported LNG sets the opportunity cost of gas for Indonesia. 14
From producers perspective, the domestic market obligation is basically a tax Without DMO Allocation Total LNG Production With DMO Allocation DMO Allocation Tax Imported LNG Price Revenues = Total LNG Production * Imported LNG Price DMO LNG Price Revenues = Total LNG Production * Imported LNG Price (Imported LNG Price DMO LNG Price) * DMO Allocation This tax is passed directly to consumers as a subsidy 15
Screening curve analysis is based on fixed and variable cost components for each technology (using real dollars) Plant Type Gas CCGT Greenfield Coal Geothermal Capital Cost Generic Cost (USD/kW) 9 1,6 3,475 Construction Time (years) 2.5 3.5 7. Total Cost (USD/kW) 976 1,832 5,754 Economic Life (years) 25 3 3 Station-Own Consumption (percent) 1.5 4. 4. Annualized Capital Cost (USD/kW) 118.22 999 Fixed Cost Fixed O&M (USD/kW-year) 13 25 16 Fuel Costs Gross Fuel Cost (HHV) (USD/mmbtu) 13.4 3.55 Heat Rate (mmbtu/mwh) 7. 9.. Variable Costs Variable O&M (USD/MWh) 2 4 1 16
Total Cost (USD/kW-year) Given the fixed and variable cost components, the total cost of generation is proportional to capacity factor 1,4 1,2 1, 8 6 4 2 Geothermal CCGT Coal 1 2 3 4 5 6 7 8 9 1 Capacity Factor (percent) Our analysis assumes a 218 start date for new plant We used the forward curve for Newcastle coal plus delivery to approximate the Indonesian Reference Coal Price, yielding a real price of 3.55 USD/mmbtu in 218 We assumed that the imported LNG price equals the Brent forward price times a slope of 12.5 percent, plus shipping of 1. USD/mmbtu and regas cost of.7 USD/mmbtu, yielding a real gas price of 13.4 USD/mmbtu Source: TLG analysis 17
Cost (USD/MWh) We can also express the results directly in terms of USD/MWh energy cost 32 28 Coal-fired plant is clearly the least expensive base load option 24 2 Geothermal CCGTs are the least expensive option for capacity factors below 21-22 percent 16 12 8 4 CCGT Coal CCGT Coal At our assumed costs (consistent with breakeven operation at the lower end of the geothermal FiT), geothermal is simply not economic 1 2 3 4 5 6 7 8 9 1 Capacity Factor (percent) Source: TLG analysis 18
Load (MW) The breakeven capacity factor coupled with the load duration curve provides some indication of the optimal mix of coal and CCGT capacity CCGT Capacity Breakeven Capacity Factor Load Duration Curve Coal Capacity % 1% 2% 3% 4% 5% 6% 7% 8% 9% 1% Cumulative Hours (percent) This screening curve analysis suggests an optimal capacity mix quite similar to that in the RUPTL official plan except with lower CCGT capacity factors 19
Total Cost (USD/kW-year) Cost (USD/MWh) Even with CO 2 priced at 5 USD/tonne, the optimal mix does not shift but the breakeven CCGT capacity factors rise to about 4 percent 1,4 32 1,2 Geothermal 28 Geothermal 1, 8 CCGT 24 2 6 4 Coal 16 12 8 CCGT Coal 2 Breakeven Capacity Factor 4 Breakeven Capacity Factor 1 2 3 4 5 6 7 8 9 1 1 2 3 4 5 6 7 8 9 1 Capacity Factor (percent) Capacity Factor (percent) Source: TLG analysis 2
Overview 1 2 3 4 5 6 Indonesia s capacity expansion plans Historical fuel price movements Screening curve analysis Comparison with regional players Recent fuel price volatility Impacts on economic expansion 21
Generation (TWh) Thailand is overbuilding gas-fired plant due to social resistance to coal 4 35 Domestic Hydro Gas Imported Coal Renewables Import Hydro Domestic Lignite Import Lignite Nuclear This is based on new build in Power Development Plan 21 (revision 3), but generation dispatch is based on our fuelto-power optimization modelling 3 Large rise in hydro imports from Laos 25 2 15 1 5 21 215 22 225 23 Source: TLG analysis Generation is dominated by gas, but the percentage eases from 67 to 57 percent of the total by 23 Domestic lignite (Mae Moh plant) holds at present generation levels, while lignite-fired imports from Laos rise Generation from imported coal-fired plant gradually rises Renewables (mainly wind and solar) rise steadily through the forecast period Nuclear comes on line by 226 22
Malaysia s generation mix is the legacy of mispriced domestic gas Source: Energy Commission Surge in coal-fired generation reflects impact of pricing signals on new build decisions 23
1971 1974 1977 198 1983 1986 1989 1992 1995 1998 21 24 27 21 213 Generation (percent) By contrast, Singapore has migrated almost entirely to gas-fired generation 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% Oil Gas Singapore inherited oil-fired generation capacity from the 197s Missed the coal development window of the late 7s and early 8s Committed to pipeline natural gas (PNG) imports in the 9s Began development of the LNG regas terminal in 26, which came online in 213 % Source: IEA (1971-21), EMA website (211 212), 213 and 214 numbers are estimated Placed a moratorium on new PNG and induced generators to commit to LNG Policy decisions have driven Singapore s dependency on gas 24
Overview 1 2 3 4 5 6 Indonesia s capacity expansion plans Historical fuel price movements Screening curve analysis Comparison with regional players Recent fuel price volatility Impacts on economic expansion 25
2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 Gas Price (USD/mmbtu) In the last year, the Asian LNG premium virtually disappeared in the blink of an eye forever? 25 2 Asia LNG price (assuming 13.5 slope and USD.8 constant) JKM 15 1 NBP 5 Henry Hub Source: ICE, CME, Platts, TLG analysis 26
2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 215 216 217 218 219 22 Gas Price (USD/mmbtu) Now that Asian spot LNG prices have fallen so drastically, the forward curve slopes strongly upward 25 2 15 1 Asian oil-indexed LNG prices based on oil forward curve 5 Source: ICE, CME, Platts, TLG analysis 27
Fuel Price (real USD/mmbtu) While spot gas prices have dropped dramatically, long-term price expectations have moved far less perhaps 2 percent for both gas and coal 2 18 16 14 12 1 8 6 4 Imported LNG Newcastle Delivered 2 29 21 211 212 213 214 215 216 217 218 219 22 221 Notes: Imported LNG price is based on ICE Brent futures times a 12.5 percent slope plus shipping of USD 1./mmbtu and regas of USD.7/mmbtu. Coal price is based on ICE futures for Newcastle coal. Coal futures prices have also declined, such that the long-term gas/coal price ratio has actually widened to 3.9:1 over the last year 28
Overview 1 2 3 4 5 6 Indonesia s capacity expansion plans Historical fuel price movements Screening curve analysis Comparison with regional players Recent fuel price volatility Impacts on economic expansion 29
Cost (USD/MWh) Cost (USD/MWh) Fuel price declines make new-build CCGTs for mid-merit operation only marginally more competitive June 214 April 215 32 32 28 28 24 Geothermal 24 Geothermal 2 2 16 16 12 8 CCGT Coal 12 8 CCGT 4 CCGT Coal 4 CCGT Coal Coal 1 2 3 4 5 6 7 8 9 1 Capacity Factor (percent) 1 2 3 4 5 6 7 8 9 1 Capacity Factor (percent) Coal at USD 3.55/mmbtu, LNG at USD 13.4/mmbtu Coal at USD 2.43/mmbtu, LNG at USD 9.7/mmbtu 3
Summary Relative coal vs gas pricing Since June 214 the prices of crude oil, international gas, and coal have fallen significantly Forward prices for all fuels indicate a modest recovery These fuel price shifts have not significantly altered the relative pricing and role of coal and gas Java Bali Our screening curve analysis focuses on Java-Bali, which accounts for 75 percent of electricity demand in Indonesia Java-Bali is also the area which is resource short and so has to import fuels from other regions or abroad Coal vs gas windows We are still in a coal window in which pricing favours coal for base load operation Gas pricing places it in a mid-merit role Domestic and imported LNG will play an increasing role in gas supply to Java-Bali Constraints Delays to coal new build may be repeated in Fast Track Program II There is potential for power transmission constraints in West Java Both factors could drive building of gas-fired CCGTs above that in an unconstrained world 31
Thank you! For more information please contact us: Power Utilities Energy By email Insight Rigour Value Tom Parkinson tparkinson@lantaugroup.com Neil Semple nsemple@lantaugroup.com By phone +852 2521 551 (office) By mail 462-466 Tower 1, Metroplaza 223 Hing Fong Road, Kwai Fong, Hong Kong Online www.lantaugroup.com 32 The The Lantau Lantau Group Group