Wholesale electricity an uncertain outlook Mark Collette Group Executive Manager, Energy Markets UBS Australian Resources, Energy & Utilities Conference, Sydney
Agenda About EnergyAustralia Key market drivers Outlook for marginal generators Case study: South Australia Conclusion 2
EnergyAustralia is one of Australia s big three energy companies One of Australia s largest gas and electricity utilities The largest privately held supplier of generation output to the National Electricity Market Australia s third largest energy retailer with market share of 22% across Eastern Australia by customer accounts Owns one of the largest underground gas storage facilities in Australia with long-term gas supply contracts Pipeline of development opportunities in retail, generation and coal seam gas Experienced management team Owned by CLP Holdings Limited listed on the HK Stock Exchange Rebranded as EnergyAustralia in Q3 2012 3 Hallett Power Station (203MW) Cathedral Rocks (66/33MW) Legend Gas assets Generation assets Waterloo (111MW) SA Retail 0.2M accounts Adelaide Gas Storage Facility (22PJ Storage; 500TJ/d Processing) QLD Retail 63,000 accounts Qld Retail 0.1M accounts NSW /ACT Retail 1.4M accounts VIC Retail 1.2M accounts Melbourne Ecogen Hedge (up to 966MW) Sydney Yallourn Power Station & Coal Mine (1480MW) Brisbane 20% interest in Narrabri Gas Project (500PJ) Delta West GenTrader (2,400MW) Tallawarra Power Station (420MW)
Annual energy (TWh sent out) Electricity demand has been falling since 2008/09 250 NEM Energy Forecasts 240 230 220 210 200 190 180 170 Actual AEMO 2010 (medium) AEMO 2011 (medium) AEMO 2012 (medium) AEMO 2013 (estimate) 4
Capacity (MW) Renewables continue to be forced into a shrinking market by the Renewable Energy Target Existing and Required Wind Capacity to meet 2020 RET target 12000 10000 8000 6000 New Committed Operational (NEM states) 4000 2000 0 Commissioning Year 5
$/MWh (ex Carbon) Unsurprisingly, electricity prices remain subdued in response to these conditions 1 Year Forward Swap and Cap Prices vs 1 Year Rolling Average Spot 90 80 70 60 50 40 30 20 10 0 NSW Swap NSW spot NSW Cap 6
Brown coal $ per MWh Black coal (mine mouth) Black coal (market) Gas CCGT Fuel prices, particularly in gas, will drive increasing generation costs in the next two to three years $80.00 $70.00 Merit Order Impact of Carbon and Fuel Price $60.00 $50.00 $40.00 $30.00 $20.00 $10.00 $- $0 Carbon $15 Carbon $23 Carbon 7
Annual operating cash flow, $M In this environment (with nothing else changing), generators exposed to market coal and gas face significant medium term losses Average Operating Cash Flow for 1000 MW Generator $100 $80 $60 $40 $20 $0 -$20 -$40 -$60 Gas - Steam Black Coal - NSW Gas - CCGT Brown Coal Black Coal - Qld Source: EnergyAustralia modelling. Includes carbon cost. Excludes Energy Security Fund payments 8
With this outlook, generators are likely to minimise costs. This will lead to increased forced outages and over the medium term (5 years+) unit shutdowns. Outlook Investment Performance Closure mode Positive cash flow outlook Invest in the asset to maximise economic production over the asset life (~20 years) Low forced outage rates, primarily planned outages Unlikely unless outlook changes Weak / negative cash flow outlook Minimise capex, fund the asset on enough to keep running on a bare bones basis until the next outage (~5 years) More frequent and longer forced outages. If outlook remains weak, eventually units will break and not be worth repairing 9
Average Output MW The changes that result under these market conditions are difficult to predict but potentially large consider South Australia SA Large Thermal Generation Output Q2 2013 vs 2010 1800 1600 1400 1200 1000 800 600 Coal Gas - steam Gas - CCGT Avg Demand 400 200 Average price ($/MWh) $31.63 $99.58 10 0 2010 Q2 2013 Q2 to date
Demand, Wind Production (MW) Spot Price ($/MWh) The SA price increases are driven by an unwillingness to run below cost SA Demand, Wind Production and Price 2000 $200 1750 1500 1250 1000 $175 $150 $125 $100 750 500 250 0 SRMC range for thermal plant Subeconomic to run $75 $50 $25 $0 Time of Day 3 May 2013 SA Demand Wind Production SA Spot Price 11
Market conditions will place generators under pressure; EnergyAustralia s response is to continue driving our portfolio to lower cost and higher flexibility operations Subdued prices with rising fuel costs Market outlook Key performance drivers Lowest cost operations (both fuel and operations) Generators will focus on minimising costs and subeconomic operations Fuel and portfolio flexibility Channels to market Marginal generators face mothballing and shutdown signals Market conditions will become increasingly uncertain in response Policy supporting efficient, economic and sustainable returns to generators 12