Discussion Area CURRENT MARKET REGIME. FIT CFD s PPA. COMPARISON OF FIT CFD v ROC BACK STOP PPA S

Transcription

1 PPA s under FIT-CfD

2 Discussion Area CURRENT MARKET REGIME FIT CFD s PPA COMPARISON OF FIT CFD v ROC BACK STOP PPA S

3 CURRENT MARKET REGIME

4 Current PPA Market PPA Revenue are generated via 5 core components; ROC Buyout ROC Recycle LEVY Exemptions certificates / Embedded benefits Market linked wholesale prices ROC s are RPI linked with a 20 year price commitment for the term of the regime ROC buyout CP per ROC based on 2.5% RPI year 20 Recycle indicatively 10%, but not guaranteed. Impacted by Supply requirements, Generation, Weather conditions etc Levy Exemption certificates are discounted to reflect market conditions. Current CCL rate 5.24 per MWh rising to 5.41 per MWh in April 2014 Significant market change since 2010 Renewable Power now being discounted to supply customers

5 PPA Power Price Power Price discounted by Off taker; Imbalance risk (Technology and Supplier dependent). Longer Prices fixes increase level on uncertainty Cost to serve Market Price have shown significant volatility over last 6 years; Highs of 80 MWH plus pre recession Lows of 36 Per MWH within 9 months Power price impacted by Global event i.e. Libya, Japan and USA Increasing Imported fuels Declining base load generation stack increasing intermittent technologies Danish experience v Price predictions No defined link between Power prices and CPI or RPI

6 High 69 per MWH Low 45 per MWH 24 per MWH of value lost over a 7 month period Driven by external forces LCPD Cheap Coal prices

7 63 Forward Power Prices Winter increasing by 13.4% Summer increasing by 11.55% Summer per MWH Winter per MWH Prices driven up by Carbon tax on fossil fuel generation Declining Supply and Demand gap Risk Premia associated to forward prices

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9 Key Challenges in the Market from PPA perspective Wholesale Power Market liquidity limited with price offers for 3 to 5 year maximum. Counterparties unwilling to take exposure into their book Price potentially will be an index rather than a market price Floors giving price security beyond years 5 are limited, low and expensive taking value out of projects. Floor costs potentially 1-1.5% of the project value Changes to how the Power market is settled in 2015 and changing power stack add uncertainty. New regime fundamentally change imbalance prices Potentially contracts will be reopened for imbalance costs Reduced base load and increasing intermittent generation add unknown long term risks

10 Key Challenges in the Market from PPA perspective Limited Off Power off take providers in the market who are willing to offer 15 year agreements. Big 6 generally have limited appetite Banks are requiring significant credit requirements from Off takers which often are expensive and limit market interest. PCG and Letter of credit tie up capital reducing number of PPA options Cost associated takes value out of deals Change of Law and re-evaluation of the pricing methodology could impact on LEC s and Embedded Benefits. Originally 2010 CCL was going to be replaced no long term guarantee EB subject to DUOS review

11 FIT CFD s

12 FIT CFD SUMMARY Guaranteed Strike Price paid by the Government for a term of 15 years. Available for Sept Strike Price is technology dependent linked to the Consumer Price index prices published are 2012 values. PPA s will be required from Energy Supplier who will buy power at Market index potentially N2EX. N2EX or other market indicates follow supply and demand fundamentals and are volatile effecting cash flow. Off taker will buy power at market index minus a commercial fee for balancing and cost to serve. Generator will be paid the difference between Strike price and reference price by the CFD counterparty.

13 Proposal for PPA under FIT-CfD* Size of discount impacted by term and technology PPA mechanics while Fee is known Under arrangement you will never receive full Strike price Difference will be topped up by CFD counterparty 0.00 Power Price Payment from PPA Provider Hours within day Developer pays Back CfD Strike Price Net to Developer (power + CfD)

14 Proposal for PPA under FIT-CfD* 180 Payment Required Strike Price Net Price Power Price Payment by PPA Provider

15 N2EX Key Statistics Traded 2.5 TWH s of volume last week (C1/3 of UK Generation) N2EX in last 12 months out-turned 43 times above 125 per MWh Trading over 50 times below 25 per MWh Peak /10/12 19:00 Low /6/2013 6:00 Average price per MWh 1 year Forward power price from Oct per MWh

16 FIT CFD KEY POINTS N2EX or alternative index when chosen is very liquid and easy to access for supply counterparties. Pricing at a point close to delivery reduces imbalance risk for counterparty potentially reducing discounts. Generators lose exposure to long term volatile power markets and ROC off take risk Supply companies need to place less credit support to close financial deals increasing PPA opportunities. PPA agreement will be simplified, off takers who can fix discounts for 15 years will guarantee revenues for the full term. Generators can still obtain LEC s and Embedded benefit

17 STRIKE PRICES FOR SOLAR PV Year of Commencement 2014/ / / / /19 Draft Strike prices ( /MWh) (2012 prices) Draft Strike prices ( /MWh) (Real Value with 2014 start) Draft Strike prices ( /MWh) (Real Value with 2015 start) Draft Strike prices ( /MWh) (Real Value with 2016 start) Draft Strike prices ( /MWh) (Real Value with 2017 start) Draft Strike prices ( /MWh) (Real Value with 2018 start) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) ( ) Using CPI of 2,85% for 2012; 2,7% for 2013 and 2% (target) for 2014 onwards

18 FIT CFD v ROC

19 FIT-CfD and RO Renewable Obligation FIT-CfD Power Price Exposure to Market No Exposure Government Support ROC Buy-Out + ROC Recycle (Variable) Contract for Difference (Guaranteed) Support Duration 20 years 15 years Supported Installed Effect No minimum From 5 MW onwards

20 Secured Return per MWh (Bankable) Power price unknown CfD Index CPI ROC PPA (3% RPI) Using CPI of 2,85% for 2012; 2,7% for 2013 and 2% (target) for 2014 onwards

21 Power Prices + ROC v Strike Price Increased certainty Government guarantees the value of total Strike Price vs. only RO element No exposure to long term fluctuation in Power Price. No Need for Floor or Fixed Price CPI adjustment over the whole Strike Price vs. RPI adjustment to RO element No Upside Potential If Power Prices rise more than CPI, Upside is not accessible under CfD

22 Conclusions FIT CFD should generate Lower discounts for PPA s. During planning and due diligence phase price will be known. Increased certainty in years 6 to 15. Larger Debt sizing possible due to guarantees. Downside is you could lose potential upside. Negotiation on the discount to reference price only.

23 Any Questions?

24 Backstop PPA

25 Backstop PPA Proposal to provide a supplier of last resort providing guaranteed terms to support bankability. Requirement motivated by; Generator concerns and challenges in finding a route to market. Supplier companies may not contract with FIT CFD as no associated ROC s. Contracting counterparties may only look for short term contracts causing uncertainty around future discounts Short term contracts could also be driven by credit status In the event of PPA off taker defaulting providing a route to market

26 Key Features of Backstop PPA s Generators will have legal right to a backstop PPA. The route to market will be guaranteed and their will be a fixed discount to market; Expectation discounts will not be market reflective. Providing a last resort when alternatives could not be found Potentially covering bank not equity investment Caps (Floors) Generators long term route to market costs Discounts to market index never exceed Back stop PPA Short term solution giving the generator the option to find an alternative more beneficial contracting structure.

27 Key Benefits Improving competition by allow access to short term offers from new entrants. Greater choice and competition reducing discounts of index. Removing pressure for off takers to absorb long term imbalance risk generating further market interest. Limiting requirements for Floors and Credit guarantees will ensure more value is retained within PPA structures. Backstop PPA doesn t remove requirements on generators to manage assets and control imbalance costs, reducing cost impact to the consumer.

28 Questions to be Answered Which suppliers be obligated to provide the agreements? Could suppliers opt to be a voluntary backstop provider What will the commercial discounts look like; The level of discount and term of commitment Payment terms How will the costs associated to the supplier for the provision of a backstop PPA be calculated and recovered Will it satisfy the requirement of the financial and equity lenders. Could this distort the Market for Generators

29 DECC Given Time Lines August October 2013 resolve policy design issues including working with effected parties on proposal QTR workshops planned to present design and consult on policy Early 2014 draft secondary legislation published for consultation Summer 2014 secondary legislation presented to Parliament FIT CFD will be approved and available for contracting in advance of approval.

30 Thank you