Jpmorgan Electricitygasindustryoverview

1 OCTOBER 2008
E U R O P E A N U T I L I T I E S B A S I C S 2.0 - E L E C T R I C I T Y & G A S I N D U S T R Y O V E R V I E W
European Utilities Research Team Chris RogersAC +44 20-7325 9069 AC Sarah Laitung +44 20-7325 6826 Javier Garrido +34 91- 516 1557 Nathalie Casali +44 20-7325 9023 For specialist sales advice, please contact: Ian Mitchell +44 20-7325 8623
christopher.g.rogers@jpmorgan.com sarah.l.laitung@jpmorgan.com javier.x.garrido@jpmorgan.com nathalie.x.casali@jpmorgan.com
ian.e.mitchell@jpmorgan.com
J.P. Morgan Securities Ltd
For full J.P. Morgan Global Utilities Team details, please see inside cover
See page 133 for analyst certification and important disclosures, including investment banking relationships. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. The analysts listed above are employees of either J.P. Morgan Securities Ltd. or another non-US affiliate of JPMSI, and are not registered/qualified as research analysts under NYSE/NASD rules, unless otherwise noted.
Global utilities team

EUROPEAN UTILITIES BASICS - ELECTRICITY & GAS INDUSTRY OVERVIEW Europe Europe Asia Pacific Asia Pacific
Chris Rogers - Germany, Nordic, France, UK, Renewables

christopher.g.rogers@jpmorgan.com
Edmond Lee, CFA

edmond.ch.lee@jpmorgan.com
Javier Garrido - Spain, Italy

javier.x.garrido@jpmorgan.com
Ajay Mirchandani Hong Kong, Philippines

Ajay.mirchandani@jpmorgan.com
Nathalie Casali UK power

nathalie.x.casali@jpmorgan.com
Boris Kan China

boris.cw.kan@jpmorgan.com
Sarah Laitung
sarah.l.laitung@jpmorgan.com
Shilpa Krishnan India

shilpa.x.krishnan@jpmorgan.com
Olek Keenan, CFA - Credit

olek.keenan@jpmorgan.com
Abid Jamal Pakistan

abid.r.jamal@jpmorgan.com
For Specialist Sales advice, please contact: Ian Mitchell

ian.e.mitchell@jpmorgan.com
Lucius Chong Malaysia

lucius.j.chong@jpmorgan.com
Sukit Chawalitakul Thailand

chawalitakul.sukit@jpmorgan.com
Ami Tantri Indonesia

USA USA
ami.t.tantri@jpmorgan.com
Russia Russia
Andrew Smith
andrew.l.smith@jpmorgan.com
Stefka Gerova
stefka.g.gerova@jpmorgan.com
Sergey Arinin
sergey.v.arinin@jpmorgan.com
Raquel Antonious
raquel.s.antonious@jpmorgan.com
Australia Australia
Vladislav Nigmatullin
vladislav.r.nigmatullin@jpmorgan.com
Latin America Latin America
Grace Chan
grace.ky.chan@jpmorgan.com
Lilyanna Yang, CFA

lilyanna.yang@jpmorgan.com
Anderson Frey, CFA

anderson.frey@jpmorgan.com
Ademar Souza Neto

ademar.s.neto@jpmchase.com
Agenda
EUROPEAN UTILITIES BASICS - ELECTRICITY & GAS INDUSTRY OVERVIEW
Page
The energy value chain

Electricity generation Natural gas upstream sourcing Energy trading Transmission and distribution Supply
2
4 61 69 71 88
Climate change Renewables Valuation and drivers

Business drivers Valuation methods Stock price drivers Major M&A over the last decade
97 107 112
111 116 117 121
Appendix
124
125 127 128 129 130 131 132 1
Acronyms Glossary Abbreviations Conversions Metrics Key websites Bloomberg codes
Agenda
Page
Electricity generation 4 Natural gas upstream sourcing61 Energy trading 69 Transmission and distribution 71 Supply 88 Climate change Renewables Valuation and drivers 97 107 112

ELECTRICITY Value chain
Generation
Regulated networks Transmission & Distribution
Supply Dual-fuel contracts Supply

3
Fuel sourcing
Trading Sourcing, despatch, management, proprietary
C H AI N
Upstream sourcing / E&P
E N E R GY
VALU E
NATURAL GAS Value chain

Source: J.P. Morgan
TH E

Generation

4
Fuel sourcing
C H AI N
E N E R GY
VALU E

Source: J.P. Morgan
TH E
Electricity generation
i.
Economics
The load curve 6 The merit order 7 Short run margin cost wholesale prices, spreads 8 Long run marginal cost system adequacy/ reserve margins 14
i.
Technology.. 26
28 37 39
Solid fuel coal Gaseous fuel gas Liquid fuel oil
Nuclear 40 Renewables 49 Wind

C H AI N
50 52 53 55 56
Biomass & Biofuel Geothermal Solar Marine
VALU E
Hydro 57
E N E R GY
i.
In Europe 59
TH E
Economics - the load curve

Shows the order in which different plants are called upon to run based on their variable operating cost Demand / Supply / Price / Cost Peak load Comes on and off very quickly Demand present <30% of the time, timing of peaks predictable, levels less so Generation: oil, OCGTs, storage hydro. Gas: spot market and daily storage
Mid-merit Demand present 30 80% of the time, predictable variability Generation: coal, CCGTs. Gas: contracts with near distance suppliers, seasonal storage and spot Baseload Demand present most of the time (c.80%) Baseload power plants operate continuously, even when it might not be economical to do so Generation: nuclear, lignite, r-o-r hydro, CCGTs Gas: long term contracts with long distance suppliers Renewables Tend to be outside the load curve on a must-take basis run when they can Impact on environment offset partly by need for balancing power Time (Day / Year)
Source: J.P. Morgan
TH E
E N E R GY
VALU E
C H AI N
Economics - the merit order

The short run marginal cost (SRMC) of the last unit required to meet demand sets the marginal price of power at any given point in time
Drives day-to-day price, based only on cost of fuel & CO2 permits Electricity demand has to be met instantaneously by supply - electricity cannot be stored Price tends to be set by mid-merit plant for most hours of the day Baseload plants (hydro, coal, nuclear) have large margins since the marginal unit is typically gasfired, which tend to have higher costs A unit with operating cost below the current price keeps the margin
However, the long term power price is driven by the long run marginal cost (LRMC)
C H AI N
The cost of generating a unit of electricity when all factors of production (i.e. including capital) can be varied If new capacity is required, a profit margin (spread) sufficient to cover all capital costs is needed We therefore need to look at future reserve margins (system adequacy) to determine where spreads need to be
TH E
E N E R GY
VALU E
Economics - SRMC
price demand
merit order / load curve time (hours)
Source: J.P. Morgan
8760
C H AI N
Which type of power plant will set the power price?

Currently indifferent between building a coal or gas plant in Central Europe as SRMC are the same at prevailing market fuel prices Other considerations, e.g. Germany reliant on Russian gas, whereas Spain uses gas from a variety of sources (pipeline and LNG) so more inclined to build gas fired power plants
E N E R GY
VALU E
Indifference between building a new clean (i.e. using CCS technology) or dirty coal plant is a function of the CO2 emission permit price
8
TH E
* Worked example: attractiveness of coal vs. gas *
Germany Germany
UK UK Min Hourly demand Max
Power price
Power price
Min
Hourly demand
Max
New lignite
New hard coal
New CCGT
New hard coal
New CCGT
Peaking2 OCGT& Must run1 Nuclear CCGT Lignite 40% 50% 60% Hard coal 70% 80% 90% 100% Nuclear Interconnector and must run1 0% 10% 20% 30% Hard coal CCGT
Peaking2
C H AI N
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
E N E R GY
VALU E
Large proportion of low SRMC plant
Large proportion of high SRMC plant
Source: RWE Factbook 2007 1 including renewables and CHP 2 oil, OCGT, hydro, etc.
TH E
Economics - wholesale prices

Price at which electricity generators/ gas producers sell to the market Market arrangements are based on bilateral trading between generators, suppliers, traders and customers
such as BETTA in the UK
Power exchanges have been launched in recent years to provide screen-based anonymous 24 hour trading
EEX in Germany Powernext in France OMEL in Spain and Portugal GME in Italy APX in The Netherlands
C H AI N
UKPX (a subsidiary of APX) in the UK Nordpool in Scandanavia
VALU E
Generators have contracts with the transmission grid for

Connection Use of the system Balancing services including reactive power
10
TH E
E N E R GY
Economics - spreads
Dirty Spark = power price - cost of gas Clean = power price - cost of gas - carbon price Dark = power price - cost of coal = power price - cost of coal - carbon price
Spark corresponds to gas Dark corresponds to coal Quark corresponds to nuclear Dirty = brown Clean = green
TH E
E N E R GY
VALU E
C H AI N
11
* Worked example Central European spreads *

Long term new entrant breakeven price is forecast at 73/MWh This assumes API2 coal at $140/t and carbon at 27/t Therefore If commodity costs stay high, power prices will have to rise to encourage new build If not, coal prices will need to fall to $140/t for a new entrant to breakeven at 73/MWh
New hard coal plant, no CO2 capture, 2008E New hard coal plant, no CO2 capture, 2008E
C H AI N
Power price - Fuel cost: - Carbon cost: = Clean dark spread (/MWh) - Fixed cost: + (capital cost required return) Op & M + capital cost plant life load factor 8760 hours per year
73
(price of 1t of coal + cost of shipping 1t)

price of CO2 CO2 intensity
/$
t/MWh
-(140.3 + 7)/1.55 0.325

-(27/t 0.72t/MWh)
=22.7
+ (1144 10% )) 50 1000 0.8 8760 = 22.7 - 25.7 = 3.0 (43 + 1144
VALU E
TH E
E N E R GY
Please see our 1 July 2008 report European Utilities Most of what you need to know about power prices for more
12
* Worked example Central European spreads *

Long term new entrant breakeven price is forecast at 68/MWh This assumes gas at $12.3/mmbtu and carbon at 27/t Therefore If commodity costs stay high, power prices will have to rise to encourage new build If not, gas prices will need to fall to $12.3/mmbtu for a new entrant to breakeven at 68/MWh
New CCGT, no CO2 capture, 2008E New CCGT, no CO2 capture, 2008E
C H AI N
Power price - Fuel cost: - Carbon cost: (price of 1mmbtu of gas heat rate)
price of CO2 CO2 intensity
68
/$ 1000
(12.3 5900btu/kWh)
1.55 1000
VALU E
-(27/t 0.37t/MWh)
=11.1
= Clean spark spread (/MWh) - Fixed cost: + (capital cost required return) Op & M + capital cost plant life load factor 8760 hours per year
E N E R GY
TH E
+ (520 10% )) 30 1000 0.8 8760 = 11.1- 12.9 = -1.8 (21 + 520
13
Please see our 1 July 2008 report European Utilities Most of what you need to know about power prices for more
Economics - LRMC
European system adequacy
i. Nordel ii. UK iii. UCTE
TH E
E N E R GY
VALU E
C H AI N
14
UCTE system adequacy forecast

UCTE - Union for the Co-ordination of Transmission of Electricity Association of transmission system operators in continental Europe* (i.e. excluding the UK and Scandinavia) 50 years of joint activities Synchronous operation of interconnected transmission grids Publishes data on forecasts of the security of supply over the next 12 years Publication: UCTE System Adequacy Forecast 2008-20
Starts with stated build/ close plans for power plants Then looks at potential development in demand, average load evolution Also factors in expected changes in transmission grids and interconnections
C H AI N
Updated annually at www.UCTE.org

* The UCTE region includes: Germany 128.3 Austria France 115.9 Switzerland Italy 93.6 Romania Spain 84.3 Czech Republic Poland 32.5 Belgium Netherlands 22.3 Portugal
Source: UCTE
TH E
E N E R GY
19.2 17.5 16.2 16.5 16.3 14.0
Greece Bulgaria Serbia Hungary Slovakia Croatia
12.0 10.5 8.4 8.4 7.3 3.8
Installed capacity (GW) Bosnia Herzegovina 4.1 Slovenia 2.8 Western Ukraine 2.5 Luxembourg 1.7 Macedonia 1.4 Montenegro 0.9
VALU E
15

Generation adequacy Generation adequacy
Terms Remaining capacity (RC) RC (GW)

= national generating capacity (NGC) non-usable capacity - maintenance and overhauls - outages - system services reserve reference load
Compared to the adequacy reference margin (ARM) ARM (GW)

= peak load load at reference time + minimum reserve capacity
Minimum reserve capacity

= 5% of national generating capacity
C H AI N
3 reference points
3rd Wednesday of January at 11:00 3rd Wednesday of January at 19:00 (close to peak) 3rd Wednesday of July at 11:00
VALU E
Estimates under normal climatic conditions (i.e. temperature and precipitation at long term averages) Reserve margin = RC/NGC
amount of unused available capacity at peak load as a percentage of total capacity
TH E
E N E R GY
16
UCTE forecast: generation adequacy
Without considerable new build/ life extension beyond current estimates the system will be out of balance in continental Europe post-2015 5% seen as minimum adequate to limit the risk of system interruptions such as Brown outs (voltage dips) or
100 87.1 77.7 69.6 70 78.9 77.6 69.6 78.9 78.5 87.8
Black outs (system collapse) NB. 1GW = 1000MW, or one large coal power station
75.9 66.8 75.0
90
80
Remaining capacity (GW)
60
50
40 30.0 30 21.8 20 33.1
VALU E
C H AI N
5%
10
0 January 11:00 am January July January January July January January July January January July January January July
E N E R GY
7:00 pm 11:00 am 11:00 am 2008
7:00 pm 11:00 am 11:00 am 2010
7:00 pm 11:00 am 11:00 am 2013
7:00 pm 11:00 am 11:00 am 2015
7:00 pm 11:00 am 2020
TH E
Source: UCTE System Adequacy Forecast 2008-20
17
UCTE retrospect: reserve margin

18% 16% 14% 12% reserve margin 10% 8% 6% 4% 2% 0% 2001A -2%
Source: UCTE System Adequacy Retrospect reports 2001-2007 and System Adequacy Forecast 2008-20 All readings 3rd Wednesday at 11:00am
There has been large oversupply across Europe in the past The reserve margin is expected to fall below 5% post-2015
Jan July
Therefore significant reinvestment in generation capacity is needed
Minimum reserve capacity 5%
E N E R GY
VALU E
C H AI N
2002A
2003A
2004A
2005A
2006A
2007A
2008E
2010E
2015E
2020E
TH E
18

New build New build
GW Net additions ( = new build - retirements) Of which: Wind Gas Renewables ex wind and hydro Hard coal Oil Hydro Non attributable Mixed oil/ gas Lignite Nuclear
By 2015 107 47.3 36.8 14.8 14.2 13.1 8.7 0.5 -12.3 -12.2 -3.9
By 2020 114 62.7 38.4 21.0 4.9 13.3 11.8 0.5 -12.5 -13.4 -13.3
Source: UCTE, J.P. Morgan estimates. Based on UCTE forecast capacity. Positive = net new build, negative = net retirements.
C H AI N
Transmission adequacy Transmission adequacy
Imports can support a system provided there is sufficient import and export capacity Overall not an obstacle to power balance management in the UCTE area Sufficient transmission capacity Import and export capacity looks likely to satisfy (RC ARM)
TH E
E N E R GY
VALU E
19
Nordel system adequacy forecast

Nordel organisation for the Nordic Transmission System Operators Publication: Nordel Power Balances 2008-12 Conclusions: From 2008 to 2012, the Nordic system is sufficient to handle the peak demand situation even in very cold conditions In practice the net export balance will depend on Nordic and neighbouring electricity market conditions Terms: Looks at MWh/h equivalent to the available capacity in MW Available capacity (MWh/h)
C H AI N
= installed unavailable - reserves Peak consumption (MWh/h) = maximum one hour load in very cold conditions (probability one winter in 10 years) Net power export (MWh/h) = available capacity - peak consumption
TH E
E N E R GY
VALU E
20
Nordel system adequacy forecast

Temperatures corresponding to the coldest day in 10 years Forecast net importer under peak conditions in 2008-10 New nuclear unit in Finland expected to be in operation in 2011
Net power export (MWh/h)
80000 79000 Available production or peak demand (MWh/h) 78000 77000 76000
Available production (lhs) Peak demand (lhs) Net power export (rhs)
6000 5000 4000 3000 2000
Forecast to become a net exporter in 2010-11
75000 1000 74000 73000 72000 71000 70000 2008/09E 2009/10E 2010/11E 2011/12E 0 -1000 -2000 -3000
VALU E
GW Net additions Nuclear Wind Other thermal Hydro
By 2011 7.5 2.8 2.1 1.8 0.7
C H AI N
Based on capacity decided and planned. Source: Nordel Power Balances 2011/12, J.P. Morgan estimates
E N E R GY
Source: Nordel Power Balances 2008/09, 2009/10, 2010/11 and 2011/12
TH E
21
UK system adequacy forecast

Publication: National Grid Seven Year Statement (SYS) 2008 Terms: 3 different generation background forecasts: SYS based total capacity (GW) = existing generation projects + those proposed new generation projects for which an appropriate Bilateral Agreement1 is in place
GW Net additions Of which: CCGT Onshore wind Offshore wind Coal Other
C H AI N
By 2015 30.2 13.9 6.2 5.9 3.3 0.9
Consented
Existing or under construction
Based on SYS forecast capacity. Source: National Grid Seven Year Statement 2008
Consents based total capacity (GW) = existing generation projects SYS
VALU E
E N E R GY
+ those proposed new generation projects been granted the necessary consents under Section 36 of the Electricity Act 1989 and Section 14 of the Energy Act 1976 for connection to the network Existing or under construction total capacity (GW)
1 An agreement between National Grid and a generator for future connection to the transmission system
TH E
22

ACS (average cold spell) peak demand base case (GW) - the combination of weather elements that give rise to a level of peak demand within a year that has a 50% chance of being exceeded as a result of weather variations alone, with base case assumptions of economic growth Plant margin - amount by which the installed generation capacity exceeds the peak demand as a proportion of peak demand
N.B. this is a very different calculation to UCTE/ Nordpool and not wholly comparable
As generating units are not available to generate 100% of the time, in the past, large integrated power system utilities (e.g. the Central Electricity Generating Board in England and Wales) sought to achieve a plant margin of 24% Now, the operational plant margin requirement for real time generation is generally 10% depending on prevailing circumstances
C H AI N TH E E N E R GY VALU E
23

Existing, under construction, consented and not consented plants Existing, under construction and consented plants Existing and under construction only Plant margin (%)
120,000
0.7
100,000
0.6
0.5 Capacity/ demand (GW) 80,000 0.4 60,000 0.3 40,000 0.2
ACS peak demand (base case) Existing, under construction, consented and not consented plants Existing, under construction and consented plants Existing and under construction only
C H AI N
VALU E
20,000
0.1
E N E R GY
2007/08E 2008/09E 2009/10E 2010/11E 2011/12E 2012/13E 2013/14E 2014/15E

Source: National Grid Seven Year Statement 2008
TH E
24

Plant margin is likely to exceed 24% over the entire forecast period, even under the conservative existing/ under construction background This is a significant contrast to the UCTE
70% Plant margin (%) = capacity-peak demand/ peak demand 60% 50% 40% 30% 20% 10% 0% 2007/08E 2008/09E 2009/10E 2010/11E 2011/12E 2012/13E 2013/14E 2014/15E
Existing, under construction, consented and not consented plants Existing, under construction and consented plants Existing and under construction only
Source: National Grid Seven Year Statement 2008
24%
TH E
E N E R GY
VALU E
C H AI N
25
Power generation technology

Thermal generation Electricity produced using a steam generating boiler Steam drives turbine Turbine generates electricity via an alternator (an electromechanical device that converts mechanical energy into alternating current) Coal, oil, gas, nuclear, solar thermal, biomass, geothermal Non-thermal generation Turbine is driven by energy other than steam Hydro, wind, solar photovoltaic Thermal efficiency - efficiency
with which the energy content (measured in gross calorific value) of the input fuel is turned into electrical energy by the generating station
C H AI N TH E E N E R GY
Source: www.tva.gov
VALU E
26
Power generation technology

Electricity generation resources
Solid fuel coal 28 Gaseous fuel gas 37 Liquid fuel oil39 Nuclear 40 Renewables 49 Wind 50 Biomass & Biofuel 52 Geothermal 53 Solar 55
C H AI N
Marine 56 Hydro 57
TH E
E N E R GY
VALU E
27
Electricity generation resources - solid fuel

Coal Coal
Typical thermal Typical thermal efficiency (btu/KWh) efficiency (%) Hard coal Old technology New technology Lignite Old technology New technology 11,000 8,100 31% 42% 9,000 7,757 38% 44%
Where in Load factor Load factor load (%) (hr/a) Midmerit Midmerit Baseload Baseload 66% 66% 80% 80% 5,782 5,782 7,008 7,008
Start up time 1-3 days
CO2 (t/MWh) 0.90 0.86
1-3 days
1.25 1.10
Source: Department for Business, Enterprise & Regulatory Reform Digest of United Kingdom energy statistics 2007, IEA, Alstom, J.P. Morgan estimates
Advantages World coal reserves are large

C H AI N
c. 164 years of supply (when used at current rates) vs. only 63 years for natural gas and 48 years for oil
VALU E
Can load follow Dense so can be sourced globally
TH E
E N E R GY
Source: www.tva.gov
28

Coal - formation Coal - formation
Coal is formed when plant material is covered by a layer of sediment, preventing complete decomposition The weight of the overlying layers produces various chemical changes that force out oxygen and hydrogen, leaving behind a layer of carbon-rich coal Coal deposits vary significantly by their: Heating value determined mainly by carbon content Ash content (the lower the better) Sulphur and other impurities (sulphur dioxide can be removed from emissions by scrubbers) Moisture content (can be removed by heating)
C H AI N
and many other chemical and physical properties
TH E
E N E R GY
VALU E
29

Coal - uses Coal - uses
Steam/thermal coal is pulverised and burnt for power generation Coking/metallurgical coal is used in steel production There are four general categories/ ranks:
Rank Lignite/ brown coal Steam or coking Steam Age Youngest Carbon content 26 - 52% Heat value (BTU/lb) 8,300 Moisture content Highest Use Less energy per tonne so used for mouth of mine generation, e.g. in Germany Relatively more sulphur and ash Fixed cost of production so not at the mercy of the global coal market Industrial uses, attractive for generation due to low sulphur content Electricity generation and production of coke for steel Domestic heating, industrial uses
Sub-bituminous Bituminous Anthracite/ hard coal

C H AI N
Steam Both Steam
Older Older Oldest
37 - 56% 45 - 86% 81 - 98%
8,300-11,500 10,500-15,400 13,500-15,300
Less Less Lowest
Source: J.P. Morgan, American Society for Testing and Materials
Coal-to-Liquids Highly capital intensive projects Have been used successfully outside the US Well suited to countries with large coal reserves but limited liquid fuels reserves e.g. South Africa
TH E
E N E R GY
VALU E
30

Coal - contracts Coal - contracts
API#4 6,000kcal/kg coal at Richards Bay, South Africa ($/t) API#2 - 6,000kcal/kg coal delivered to Amsterdam/Rotterdam/Antwerp Cost, Insurance, Freight ($/t) Contract spread a proxy for global freight market
250 40 35 200 30 25 $/t
31
150 $/t
20 100 15 10 5 0 2001 2002 2003 2004 2005 2006 2007 2008 0
C H AI N
50
E N E R GY
VALU E
API2 one year forward (LHS)

Source: Bloomberg, J.P. Morgan estimates
API4 one year forward (LHS)
Freight (RHS)
TH E

Coal - market outlook Coal - market outlook
Near term the global coal market remains very tight: In real terms current commodity prices are in the range seen when serious industrialization is underway Infrastructure constraints (rail and port) Shipping capacity delays Growing demand especially from the BRIC countries (we believe global resources are currently scaled to supply the Americas, Europe and Japan only) Supply shortage to be met by exports from the US, Columbia and Indonesia It could take several years before new capacity is built as producers are yet to commit capital based on higher prices
TH E
E N E R GY
VALU E
C H AI N
32

Coal - market outlook Coal - market outlook
Longer term (2010-12): Significant new investment to improve freight infrastructure We expect imports to India to decrease as the effect of the nationalisation of reserves is reversed Older mines, labour issues and rising strip ratios (units of overburden that must be removed to access a unit of coal) could bring problems on the mining front J.P. Morgan coal price forecasts
$/t International thermal coal new old
C H AI N
Excluding freight. Source: J.P. Morgan estimates
2007A 55.7 55.7
2008E 125 120
2009E 150 100
2010E 125 80
2011E Long term 100 70 70 60
TH E
E N E R GY
VALU E
33

Coal - reserves Coal - reserves Percentage of world production and reserves Percentage of world production and reserves Years of coal in the ground (based on current production) Years of coal in the ground (based on current production)
Russia Kazakhstan 332 234 194 178 118 97 95 45 25 0
Source: BP Statistical Review of World Energy 2008
Reserves
Others 17% Others Indonesia 1% 3% South Africa South Africa 6% 5% India 7%
C H AI N
500
US and Canada 20%
US and Canada 28%
Indonesia
Production
13%
US Austalia South Africa India Colombia Canada
Russia 5%
India 6% Australia 7%
Australia 9% China 41% China 14% Russia 18%
VALU E
China Indonesia
E N E R GY
100
200
300 Years
400
500
600
Source: BP Statistical Review of World Energy 2008
TH E
34

Coal major global markets Coal major global markets
US and Canada largest reserves but second largest coal producer production growth has been sluggish
Abundance of coal keeps costs relatively low except for mature Appalachian coal fields CAPP (Central Appalachian) primarily bituminous PRB (Powder River Basin) sub-bituminous, fastest growing coal producing region, among the cheapest energy sources per BTU, lower sulphur, utilities have been slowly switching to this over the last 20 years
Russia - second largest coal reserves in the world has the greatest potential for increasing exports
But majority of coal basins are located in the central part of the country, far from the eastern ports Domestic consumption increasing
China worlds largest coal producer but expected to be a net importer for 2008 and has only 48 years of reserves left
C H AI N
Cap on coal exports has been imposed Current infrastructure makes importing from Indonesia cheaper than transporting coal from North China (where the price is R200/t) to South (R700/t)
VALU E
Australia - worlds largest exporter to the seaborne metallurgical coal trade, mostly from Newcastle
Recent cost pressures and supply side problems from delay of Dalrymple Bay terminal expansion Longer term - infrastructure and port expansion projects to improve the logistics chain
TH E
E N E R GY
35

Coal - major global markets Coal - major global markets
India growing demand for imports

Government has ambitious power addition target of 75GW 2007-12, most of which will be coal-fired
South Africa - worlds largest exporter to the seaborne thermal coal trade, mostly from Richards Bay
Richards Bay terminal is expected to expand to 91mt from 76mt by 1H09, however the movement of coal to the ports is constrained by the rail capacity A growing percentage of exports are now reaching India, creating a supply gap in the Atlantic basin A stronger AUD vs ZAR should make SA the more economic region for new coal supplies Traditionally had mines that supplied either the export or the power market Recently greater flexibility - new mines have planned to sell to both markets from the onset
Indonesia worlds largest thermal coal exporter

C H AI N
Expected to provide the bulk of incremental supply to the Asian region Development of new roads and ports should help But government plans to cap coal exports will limit incremental supplies
VALU E
E N E R GY
Poland - no longer exporting to Europe but becoming a net importer from Russia Columbia - biggest coal exporter in Latin America and could double its production by early next decade subject to getting infrastructure in place
36
TH E
Electricity generation resources gaseous fuel

Gas Gas
Start up Typical thermal Typical thermal efficiency (btu/KWh) OCGT Old technology New technology CCGT Old technology New technology 7,000 5,700 49% 60% Base/ Base/ 50-60% 50-60% 4,380-5,256 1-2 hours 4,380-5,256 0.43 0.37 10,500 9,250 33% 37% Peak load Peak load <20% <20% <1,752 5-10 mins <1,753 0.70 0.60 efficiency (%) Where in Load factor Load factor load (%) time CO2 (t/MWh) (hr/a) (from cold)
Source: Department for Business, Enterprise & Regulatory Reform Digest of United Kingdom energy statistics 2007, IEA, GEpower.com, J.P. Morgan estimates
The cleanest fossil fuel from a pollution perspective CCGTs can be baseload or midmerit
C H AI N
Latest CCGTs are highly efficient but still have relatively high operating costs in the current commodity price environment
TH E
E N E R GY
VALU E
37
Electricity generation resources gaseous fuel

Gas - technology Gas - technology
OCGT (open cycle gas turbine) old style, can start up quickly during peak demand
CCGT (combined cycle gas turbine) - by-product heat is used to generate additional electricity via steam cycle, optimally run base load or mid merit
E N E R GY
VALU E
Source: powergeneration.siemens.com
C H AI N
TH E
CHP (combined heat and power) - by-product heat is used to warm local homes or businesses
38
Electricity generation resources liquid fuel

Oil Oil
Oil
Typical thermal Typical thermal efficiency (btu/KWh) efficiency (%) 12,000 28%
Where in Load factor Load factor load (%) (hr/a) Peak load <20% <1752
Start up time 1-2 mins
CO2 (t/MWh) 0.82
Source: Department for Business, Enterprise & Regulatory Reform Digest of United Kingdom energy statistics 2007, IEA, J.P. Morgan estimates
Can start quickly during peak demand Highest operating costs due to:
Low thermal efficiency Low number of hours to amortise fixed costs across
Most polluting
Source: www.tva.gov
39
Electricity generation resources nuclear

Nuclear - pros & cons Nuclear - pros & cons
Advantages Security of supply reduces dependence on finite, and often imported fossil fuels Long term resource Environment protection zero CO2 emissions Uranium reserves are mostly located in stable countries and are abundant Could be almost unlimited due to uraniums multiple energy potential
Depends on prevalence of reprocessing Up to 96% of spent fuel can be recycled
High capital cost but very low operating costs Disadvantages

C H AI N
Take 1-3 days to start so only shut down when necessary Need to be refuelled every 12-18 months Chequered safety and operation history although image and statistics do not always match
TH E
E N E R GY
VALU E
40

Nuclear - safety Nuclear - safety
International Nuclear Event Scale 0 no safety significance 1 anomaly (e.g. minor defects in pipework) 2 incident 3 serious incident (e.g. radioactive doses to workers sufficient to cause acute health effects) 4 accident without significant off-site risk 5 accident with off-site risk (e.g. severe damage to the installation) 6 serious accident 7 major accident (e.g. external release of a large quantity of radioactive material) Areva estimates:
C H AI N
Operational incidents (e.g. uncontrolled boron dilution): 1 in 100 chance per reactor per year Infrequent accidents (e.g. control rod withdrawal at full power): 1 in 100 to 1 in 10,000 Hypothetical accidents (e.g. control rod ejection): 1 in 10,000 to 1 in 1,000,000
TH E
E N E R GY
Source: www.iaea.org/Publications/Factsheets/English/ines.pdf, Areva Technical Days
VALU E
41

Nuclear public opinion Nuclear public opinion
Public acceptance in the US The political climate is favourable towards

Renewal of nuclear operating licenses and Construction of new nuclear plants
There is much more sympathy for nuclear power now than there was a couple of years ago in terms of:
Siting (building new plants adjacent to existing ones) Safety concerns Environmental benefits (a key issue will be the way cap-and-trade and Renewable Portfolio Standards are implemented in the US)
The private sector is willing to build new nuclear, however

investors are hesitant to put up capital due to the time-scale of building a plant,
C H AI N
the latest Energy Bill from Congress makes federal loan guarantees available to build several nuclear plants, but not on an extensive scale Congress has not done anything about long-term storage of nuclear waste since the Yucca Mountain storage site was effectively blocked and the Nuclear Regulatory Commission, which has to approve new plants and extensions of old plants, is currently profoundly under-resourced
TH E
E N E R GY
VALU E
42

Nuclear public opinion Nuclear public opinion
Public acceptance in Europe examples of opinion Pro UK

Gvt consulted on the future of nuclear power Nuclear operators will have to cover the full costs of decommissioning and their share of the management and disposal costs
Anti Germany
Nuclear closure program remains controversial Public increasingly considering the policy unrealistic
France
80% of generating capacity is nuclear Has been generally positive as there have been no accidents and wholesale prices have been remarkably low
C H AI N
Spain
Full moratorium Potential for change but unlikely to be soon
Italy
Nuclear power abandoned following 1987 referendum but current gvt has pledged to bring it back
Nordic countries ex Denmark

Unquestionable shift in favour of new nuclear Low support for a phase-out in Sweden, despite negative attitudes in the early 1980s 2002 public debate and resulting new build in Finland
Belgium
No new build after closure of the existing two plants scheduled to run til 2015-25, with potential life extension to 2025-2035
VALU E
E N E R GY
Baltics
Smaller demand base seems to be leading to multinational cooperation
Austria
Vehemently anti-nuclear
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43

Nuclear - technology Nuclear - technology
Reliable base-load generation at stable and low cost A complex nuclear fission process an atomic kettle attached to a steam turbine Generation I: reactors mainly being shut down end of this decade (Magnox) Generation II: 1970s 2050s (AGR) Generation III: 1990s at least 2050s (PWR, BWR) Generation III+: improved safety and reliability, 1990s at least 2060s (EPR) Generation IV: will be ready to market between 2020 and 2030 (VHTR, PMBR, Fast breeder reactors) Fusion reactors post 2050 (ITER): experimental plant under construction
C H AI N TH E E N E R GY
Source: Areva Technical Days
VALU E
44

AGR (Advanced gas-cooled reactor) Generation II (1960s) Mostly used in the UK Graphite is the moderator, CO2 is the coolant The moderator slows down the neutrons released by the uranium fuel preventing run-away reactions Gas picks up the heat generated by the fission reaction Hot gas circulates past the heat exchanger Final steam conditions at the boiler stop valve are identical to that of conventional thermal plants
C H AI N
so the same design of turbo-generator is used The control rods can be raised or lowered to adjust the reactor power
VALU E
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
TH E
E N E R GY
Charge tubes Control rods Graphite moderator Fuel assemblies Concrete pressure vessel and radiation shielding Gas circulator Water Water circulator Heat exchanger Steam
Source: Creative Commons
45

BWR (Boiling water reactor) Generation III Pressurized boiler Light water (normal water i.e. H2O not 2H2O) is the moderator and the coolant Bundles of uranium-filled fuel rods Heat is produced by a fission chain reaction Water circulating from the bottom to the top of the reactor is brought to 290C Generates steam, which drives the turbine Series of strong, leak-tight physical barriers shield against radiation
C H AI N
Metal cladding of fuel rods Metal enclosure of reactor primary circuit Containment of reactor
Reactor core
VALU E
Net power output 1250MW
E N E R GY
TH E
46

PWR (Pressurized water reactor) Generation III More complex than a BWR 2 circuits Light water is the moderator and the coolant Water under constant pressure so it doesnt boil 155bar higher than a BWR Primary circuit of water at 313C Secondary circuit of steam heated by the primary circuit completely separate and closed
C H AI N
Water and steam circulate so constantly cooling down and heating back up Unchanging and uninterrupted Cooling circuit removes residual heat from the core part of this water evaporates Net power output 1600MW
TH E
E N E R GY
VALU E
47

EPR (European pressurised reactor)

Generation III+ Takes advantage of the latest operating experience and incorporates the results of French and German R&D programs Higher power, efficiency and life expectancy Generating cost per kWh 10% lower than Arevas latest PWR More advanced passive safety & lower risk of human-error Lower waste production Net power output 1600MW
Beyond
Generation IV potential designs: Fast breeder reactors fast neutron reactor without moderator, fully closed cycle, minimises production of long-lived waste, gas-, lead- or sodium-cooled Pebble Bed Modular Reactor (PMBR) smaller size, no super-criticality risk but as-yet unproven Advanced water designs, e.g. the very high temperature reactor (VHTR), with water at 1000C, also allows hydrogen production
C H AI N
Typical thermal Typical thermal Nuclear - AGR BWR PWR EPR efficiency (btu/KWh) 8,300 9,200 10,000 9,500 efficiency (%) 41% 37% 34% 36%
Where in Load factor Load factor load Baseload Baseload Baseload Baseload (%) 60-80% 80-90% 80-90% 80-90% (hr/a) 5,256-7,008 7,008-7,884 7,008-7,885 7,008-7,886
Start up time 1-3 days 1-3 days 1-3 days 1-3 days
CO2 (t/MWh) 0.01 0.01 0.01 0.01
E N E R GY TH E
VALU E
Source: Department for Business, Enterprise & Regulatory Reform Digest of United Kingdom energy statistics 2007, IEA, Areva-np.com, wikipedia, J.P. Morgan estimates
48
Electricity generation resources renewables

Load factor (%) Offshore wind Onshore wind Biomass Geothermal Solar PV Concentrated solar 30-40% 20-30% 40-70% 95% 10-25% 10-35% Load factor (hr/a) 2,628-3,504 1,752-2,628 3,504-6,132 8,322 876-2,190 876-3,066 Start up time <30 sec <30 sec 1 hour 1 day instant instant Build cost (m/MW) 2.1 1.3 0.8-1.2 2.1 6.0-7.0 4.0
Source: Department for Business, Enterprise & Regulatory Reform Digest of United Kingdom energy statistics 2007, www.geo-energy.org/aboutGE/powerPlantCost.asp, J.P. Morgan estimates
TH E
E N E R GY
VALU E
C H AI N
49

Wind Wind
Wind blows and sets the turbine blades in motion, generating power that can be converted into electricity A steel or concrete tower with a nacelle that turns horizontally in a way such that the rotor (usually equipped with two or three blades) always faces the wind Generation depends on:
cube of wind speed (double wind speed gives eight times more power) square of rotor diameter (double rotor diameter gives four times more power) density of the air (If the air is 10C colder, density and power production increase by 3%. Moist air is less dense and so will lower power production) mechanical efficiency of generator aerodynamic shape of blades
50
Source: EC Energy Research
TH E
E N E R GY
VALU E
C H AI N

Wind Wind
C H AI N
Source: Vestas.com
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.
Rotor lock Pillow block Main frame Impact noise insulation Hydraulic parking brake Coupling Generator frame Control panel Heat exchanger Generator Gearbox Yaw drive Rotor shaft Rotor hub Pitch drive Nose cone
VALU E
Typical hub height 80m Typical blade length 40m
TH E
E N E R GY
51

Biomass & biofuel Biomass & biofuel
Biomass Plant-derived organic matter (fix CO2 as they grow, so their use does not add to the levels of atmospheric carbon on a life-cycle basis)
E.g. forest residues, agricultural residues, pulp and paper operation residues, animal waste, landfill gas and energy crops
Co-firing in existing power plants (usually coal) can be used to reduce average CO2 emissions and potentially get green certificates Burnt in conventional steam boilers
C H AI N
Biofuel Many different conversion technologies to produce solid, liquid and gaseous fuels Biomass gasification (release via heat) Anaerobic digestion (release via bacteria)
TH E
E N E R GY
VALU E
52

Geothermal Geothermal
Conventional geothermal applications rely on the geological coincidence of water-bearing, hot permeable rocks occurring at economically accessible depths At fluid temperatures of 85 - 150C, electricity generation requires the use of binary cycles, in which a working fluid is heated and vaporised in a closed circuit
The vapour drives a turbine, before being cooled and condensed, and the cycle begins again
C H AI N
At fluid temperatures >150C steam can be used to drive turbines
VALU E
Source: Energy Manager Training
TH E
E N E R GY
53

Geothermal Geothermal
Enhanced Geothermal Systems utilize heat stored in rocks that are technically accessible but lack the natural permeability Hence they allow geothermal generation to be used in a wider range of locations than before A well is drilled into >180C fractured basement rock and stimulated to enhance the natural permeability of the fracture network and create a heat exchanger into which additional wells are drilled
Water circulated through the wells gathers heat
C H AI N VALU E
TH E
E N E R GY
Source: EC Energy Research
54

Solar Solar
Solar photovoltaic PV cells transform the photon energy in solar radiation directly into electrical energy without an intermediate mechanical or thermal process Technology is currently very expensive Concentrated solar/ solar thermal Optical devices focus direct solar radiation onto an area where a receiver is located
C H AI N
The radiation is transformed into heat in a medium (oil) and then to steam and electricity as per thermal power Continues to work after dark until collected heat dissipates Technology requires a very large area
Source: Solar Millennium AG, Erlangen
TH E
E N E R GY
VALU E
55

Marine Marine
Wave
Utilizes the effect of the wind on the sea Not yet economically viable
Tidal
Utilizes the daily rise and fall of water Highly predictable Not yet economically viable
Current
Utilizes the temperature gradient between surface and deep sea water the salinity gradient (pressure differential between seawater and fresh water
56
Electricity generation resources hydroelectric

Hydro Hydro
Run-of-the-river (r-o-r) Natural flow and elevation drop of a river are used to generate electricity free fuel Reservoir Energy extracted depends on the volume and on the head (difference in height between the source and the water's outflow) Pumped storage
Requires energy to pump water into reservoir - when the wholesale price is low (hence not free fuel) Supplies peak demand - when the wholesale price is high
Not pumped
Uses reservoirs that are naturally elevated
TH E
E N E R GY
VALU E
C H AI N
57
Electricity generation resources hydroelectric

Hydro Hydro
Source: Department for Business, Enterprise & Regulatory Reform Digest of United Kingdom energy statistics 2007, J.P. Morgan estimates
Where in Load factor Load factor load R-o-R Storage Baseload Peak load (%) 70% 15% (hr/a) 6,132 1,314
Start up time 1-2 mins 1-2 mins
Source: Department for Business, Enterprise & Regulatory Reform Digest of United Kingdom energy statistics 2007, J.P. Morgan estimates
E N E R GY
VALU E
C H AI N
Source: www.tva.gov
TH E
58
Electricity generation resources in Europe

Germany, Poland and Spain have historically had large domestic coal industries UK, Norway and the Netherlands - have been major producers of oil and gas
UK and Netherlands now in decline New sources: Russia by pipeline, Liquefied Natural Gas by boat for elsewhere in the world
Dash for gas gas power station new build

UK, Spain, Italy Cleaner, cheaper, more efficient than coal
Nordic region - 60% of generation comes from hydro France (dearth of natural resources) - has developed the largest nuclear capacity in Europe
C H AI N
Germany - has launched a drive to install Europes largest wind fleet

Other major wind players: Spain, Denmark
TH E
E N E R GY
VALU E
59
European generation mix

Capacity (2005A, GW) Capacity (2005A, GW) Output (2005A, TWh) Output (2005A, TWh)
Renewables, 133, 18%
Oil, 31, 4% Coal, 254.9, 32%
Renewables, 160.7, 5% Hydro, 526.5, 15%
Oil, 135 , 4% Coal, 994.4, 28.7%
Hydro, 169.5, 21%
Gas, 165, 22%
Nuclear, 133, 18%
Gas, 721 , 21%
Nuclear, 992.5, 28.6%
C H AI N VALU E
Source: IEA and EIA
E N E R GY
Low load factor output on average proportionally lower than capacity e.g. hydro High load factor output on average proportionally higher than capacity e.g. nuclear
Please see our publication European Utilities Basics Country Profiles for more detail on generation mix
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Generation

61
Fuel sourcing
C H AI N
E N E R GY
VALU E
TH E
Gas sourcing
i. Exploration and production (E&P) ii. Storage iii. Liquefied natural gas (LNG)
TH E
E N E R GY
VALU E
C H AI N
62
Gas sourcing
Exploration and production Exploration and production
Natural gas is a regional commodity Its physical properties make it hard to transport, particularly intercontinentally without liquefaction Most natural gas is transported in gaseous form via pipeline Gas markets still regional rather than continental or global European natural gas is priced using an oil-referenced formula The widespread adoption of Liquefied Natural Gas (LNG) should change the gas market from regional to global Large natural gas consumers (especially power plant operators and retail suppliers) have incentives to hedge their physical commodity exposure as well as the basis (location) risk associated with dealing in different markets
TH E
E N E R GY
Source: J.P. Morgan Oil&Gas Basics Presentation
VALU E
C H AI N
63
Gas sourcing
Why be involved in upstream gas? No indigenous supply Security Economic hedge If not involved upstream, generators tend to be beholden to very long term contracts (20 years - whereas the coal market is spot-based) with NOCs (National Oil Companies) Major market drivers Weather is both a demand and supply factor
Demand for central heating
C H AI N
Hydro conditions in areas that depend on hydropower drive requirement for CCGT power
TH E
E N E R GY
VALU E
Oil price long term contracts tend to be oil-based, take-or-buy decisions impact the natural gas market
64
Gas sourcing
Gas providers can Carry out exploration and production themselves Have a stake in a project operated by another party Receive gas from a pipeline under contract e.g. Siberia Spain Receive gas from an LNG train e.g. Australia US
LNG is natural gas that is stored and transported at atmospheric pressure and a temperature of 260F
Liquefaction
Boat transportation
One LNG boat 150 000m3 (liquid volume) of LNG
Regasification
Volume increases 600 times
C H AI N
UK daily consumption is 301,000,000m3 (gaseous volume) of natural gas So one tanker is enough for 1/3 of a days demand
E N E R GY TH E
Source: IEA, J.P. Morgan
VALU E
65
Gas sourcing
Storage Storage
Natural gas is stored in inventory underground under pressure in 3 types of facilities Depleted reservoirs in oil/ gas fields Aquifers Salt cavern formations Each storage type has its own characteristics which govern its suitability Physical (capacity, deliverability rate, porosity, permeability, retention capability) Economic (site preparation and maintenance costs, deliverability rates, and cycling capability) System integrity maintenance meeting baseload requirements Seasonal storage
C H AI N
Excess supply in the summer traditionally stored to meet winter demand Increasing prevalence of air conditioning in many countries has lowered seasonality but increased demand System balancing meeting peakload requirements Smoothing day-to-day Buffer to meet unexpected demand surges
66
TH E
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Gas sourcing
LNG LNG
The global LNG market is small but growing rapidly: c. 250bcm/y, 7% of global gas supply Declining US gas production means LNG is vital to satisfy demand growth and prevent price appreciation Low European natural gas prices have historically led to a flood of shipments to US terminals The last 2 years have seen a growing trend toward increased US imports in the spring Major market drivers
Upstream additions (Equatorial Guinea, Egypt) Demand patterns (hydro conditions in Spain, Norwegian flows into the UK) Asian demand (economic growth, major Japanese nuclear plant outages)
C H AI N
Trans-Atlantic arbitrage Crude oil arbitrage Operating performance at liquefaction, export and import terminals
VALU E
LNG projects are among the most expensive energy projects

Constructing a liquefaction and regasification terminal costs >1b so there is a minimum distance threshold (compared to pipelines)
E N E R GY
Regasification may be regulated or merchant

Source: J.P. Morgan Oil&Gas Basics Presentation
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Gas sourcing
LNG LNG
* An example of corporate LNG capacity *

Tankers Regas capacity existing projected Liquefaction capacity Long term LNG supply contracts
Source: 2007 company reports
Owned Under construction bcm / y bcm / y bcm bcm / y
Gas Natural 11 5 10.9 16.0 15.0
GDF Suez 16 5 21.6 n.a 1.4 23.3
TH E
E N E R GY
VALU E
C H AI N
68

Generation

69
Fuel sourcing
C H AI N
E N E R GY
VALU E
TH E
Trading
Why do utilities trade? Risk management Financial Operational Profit opportunity Some companies dynamically manage their energy portfolios e.g. EDFs trading has been very profitable Strong correlation between oil, gas, electricity and CO2 prices companies can enter into multi-commodity swaps
C H AI N
Gas price = f(oil, temperature) Power price = f(gas, coal, CO2, temperature, precipitation) CO2 price = f(gas, coal)
E N E R GY
VALU E
Therefore coal, oil, gas, power and CO2 can be traded in pairs or swaps
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Generation

71
Fuel sourcing
C H AI N
E N E R GY
VALU E
TH E
Electricity transmission & distribution
Power station 2.3 3kV
Step up transformer
Transmission towers 115 345kV (AC current)
Step down substation
Local substation
C H AI N
Distribution pole 2.3 34kV
Homes and small businesses
VALU E
120 - 240V Commercial and industrial customers

Source: J.P. Morgan
TH E
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72

Drivers of network build Growth of demand Improvements in quality
Maintaining voltage, security of supply, preventing blackouts Investment to make the system more robust
Change in supply profile, e.g. renewables: route grid mesh grid Interconnector security
Transmission network build choices Overhead or underground

C H AI N
Underground cable installation is 2x more expensive at 11kV, 20x more expensive at 400kV than an equally rated overhead line2
VALU E
Route or mesh
Partly a function of geography, load centres and resources
E N E R GY
International interconnector requirement
TH E
2 Source: energynetworks.org
73

Germany has a mesh grid
Cost
Italy has a route grid
VALU E
C H AI N
E N E R GY
System security
TH E
Source: J.P. Morgan
74
Regulation
Regulation
Needed for networks as theyre natural monopolies Also end customer prices where competition is not effective (See Energy supply pp. 72-80)
Main concerns
Costs for customers Security of supply short and long term Government policy on energy mix, climate etc
Network regulation varies significantly:

Cost plus (a specific allowed return based on actual realised costs)
e.g. France, Germany (changing next year), most US states
C H AI N
Incentive (regulator sets allowed revenue may be based on current costs or what the regulator believes costs ought to be)
e.g. UK. There are a whole range of degrees of incentive strengths
VALU E
May (UK) or may not (Spain) have an explicit regulated asset value in remuneration formulae Unitary (per MWh) or absolute (m) Single or multi-year
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Network regulation key concepts

Regulatory asset/capital value/base x WACC
Allowed Return
+ Opex
C H AI N
+ Capex or Depreciation
E N E R GY
VALU E
= Revenue or price cap

Source: J.P. Morgan
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RAV
Regulatory Asset Value normally scaled over time (by depreciation and capex), may include inflation link Weighted average cost of capital (WACC) may be Pre- or post-tax Real or nominal (i.e. with or without inflation)
x WACC
TH E E N E R GY VALU E C H AI N
Allowed Return
Allowed return may be unitary (per MWh) or absolute (m) Has to cover interest expense and dividends
77

RAV x WACC Allowed Return Operating expenses Actual in cost plus Allowed in incentive May be volume based or absolute
Opex
TH E
E N E R GY
VALU E
C H AI N
78

RAV x WACC Allowed Return
Opex
C H AI N
Capex or Depreciation
VALU E
Capital expenditure Based on agreed outcomes in incentive Based on defined budget in cost-plus May be volume based or absolute
79
TH E
E N E R GY

RAV x WACC Allowed Return Opex
C H AI N E N E R GY VALU E
Revenue or price cap Provides potential for outperformance Often multi-year Revenue or price cap
Capex or Depreciation
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80

RAV x WACC Allowed Return Opex Capex or Depreciation Revenue or price cap in year 1
C H AI N
Allowed Return
Opex
Capex or Depreciation Often a downward price trajectory to induce efficiency improvements
VALU E
TH E
E N E R GY
Revenue or price cap in year 5
81

RAV x WACC Allowed Return Opex Capex Year 1 Revenue or price cap
C H AI N
Outperformance
Capex Achieved WACC Opex efficiencies

outcome below Budget
TH E
E N E R GY
VALU E
or Depreciation
longer asset life
Year 2
82

RAV x WACC Allowed Return Opex Capex or Depreciation If can reduce opex and/or capex, can make an achieved return > the allowed return assets worth > RAV Revenue or price cap Have outperformed the regulators assumptions Capex
C H AI N
Outperformance
Achieved WACC
Opex efficiencies
Normally can retain outperformance in, or across periods (2 5 years) Of course, with tough regulation the opposite can occur
or Depreciation
longer asset life
VALU E
Capex Achieved return (above allowed return) Opex efficiencies

E N E R GY
or Depreciation
longer asset life
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Network regulation details

The regulator defines Regulated Asset Base / Capital Value / Asset Value (RAB, RCV, RAV)
Not necessarily equivalent to the true value or book value of the assets E.g. in UK based on EV after privatisation + capex depreciation In Sweden based on a computer model of optimal network as if built from scratch
Allowed return
Regulator makes assumptions on gearing, cost of debt, cost of equity Pre or post tax? Real or nominal?
C H AI N
Revenue = allowed opex + allowed capex + allowed return

If the regulator is correct in all assumptions (efficiency, cost of operations and capital projects, cost of capital) then the value of the business, by definition, is its RAV Valuations are based on a premium/ discount to RAV methodology Recent M&A transactions have occurred at a premium to RAV i.e. assuming outperformance
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84
Ways to outperform on opex

Raise employee productivity
e.g. reduce headcount
Minimise wage inflation Invest in IT infrastructure Reduce network losses (but not always in regulated opex) Improve service time on maintenance Opex Year 1
e.g. In the 2007 Gas Distribution Price Control Review, Ofgems consultants (PB Power) proposed an 11% reduction in total GDN opex for 2008/09 2012/13, including
Work management -10.6%
C H AI N
Emergency -11.0% Repairs -14.2% Maintenance -14.1%
Opex
Year 2
TH E
E N E R GY
VALU E
85
Ways to outperform on capex

Procurement
Use an established network of suppliers Economies of scale e.g. buy in bulk
R&D
Invest in innovative, more efficient technologies
Capex Year 1
e.g. In the 2007 Gas Distribution Price Control Review, consultants proposed an 18% reduction in total GDN net capex for 2008/09 2012/13, including
Local Transmission System & storage -23.4%
C H AI N
Connections -22.9% Mains reinforcement -12%
Capex
Year 2
TH E
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86
Ways to outperform on WACC

Capital structure Higher gearing than the regulator assumes Lowers pre-tax WACC and provides tax shields Cost of debt Cheaper financing than the regulator assumes
Index-linked debt Covered bonds Derivatives (optimal strategy may depend on market conditions e.g. demand for different currencies) Fixed-floating swaps Forex swaps
x WACC x WACC
Year 1
Year 2
C H AI N
Regulated D/EV Cost of debt Cost of equity WACC
Achieved
50% 5% 9%
7%
70% 5.5% 9%
6.55%
TH E
E N E R GY
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87

Generation
Supply
Dual-fuel contracts
Fuel sourcing
C H AI N
E N E R GY
VALU E
Supply

88
TH E
Electricity and gas supply

Sale of electricity to the final customer
Commercial Residential
Metering, billing and customer relationship Retail price is sum of generation and transmission so very little value added here Competitive metering in many countries suppliers compete on price and service Dual-fuel (gas and electricity) contracts Consumer services often also provided to generate additional revenue e.g. boiler breakdown cover
TH E
E N E R GY
VALU E
C H AI N
89
Retail / Consumer tariff regulation

In a fully competitive market there are advantages of: Cost control (low prices) Investment incentives Consumer choice Quality of service improvement
However markets are not always competitive and governments like to intervene therefore often tariffs are managed or regulated
90
EU tariff regulation
EU Electricity Directives History of regulated tariffs - recent trend towards liberalisation of generation and supply UK pioneered privatisation, deregulation and liberalisation of utilities has not had controls on retail prices since 2002 EU pushing for free competition throughout the region
From July 2007 at the latest, all consumers will be free to shop around for gas and electricity supplies
In theory tariff regulation should not exist, in reality it does Third EU competition directive for electricity and gas will seek to stamp out tariff regulation although not immediately
TH E
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C H AI N
91
EU tariff liberalisation
EC Benchmarking Report (2006) - conclusions Nordic countries
Liberalisation fully embraced
Germany
Broad acceptance all gas and electricity customers are free to choose supplier Pressure for unbundling of RWE and E.ONs distribution activities Domination by a few large players prevents effective competition
Italy
Many calling for more control of prices Tariffs are adjusted on a quarterly basis to reflect commodity prices
France
Centrally controlled tariffs
C H AI N
Liberalisation in theory but not really in practice EDF and GDF only partially privatised
VALU E
Spain
Tariff deficit system The Directives have not been transposed The regulatory framework does not allow for effective competition
TH E
E N E R GY
92
Tariff deficit
The shortfall of regulated revenues from the tariffs versus revenue that would be realised by prevailing market prices
Occurs when the regulated price is < the market price Represents both a system failure and possible upside depending on what the market prices in We forecast shortfall in Spain: 2008E tariff deficit of 3bn
Due to internalised cost of CO2 by companies lowering sector revenues Spanish legislation requires that utilities are reimbursed
In France: GDF have forecast a gas tariff deficit of 1bn
TH E
E N E R GY
VALU E
C H AI N
93
Unbundling
Many countries have pursued a regulatory policy of unbundling Separation of transmission and distribution from generation and supply Intended to increase competition by improving the fairness of network access Many countries and corporates have resisted unbundling citing
Diversification of risk Scale/ scope economies Legal/ management unbundling should be sufficient Regulatory/ compliance oversight may be used
TH E
E N E R GY
VALU E
C H AI N
94
The end customer bill retail power

Unliberalised France (2009E) Total: 125/MWh Taxes VAT Environmental Public service Taxes = 37/MWh VAT (29) Local taxes CTA for pensions CSPE for public services Network access = 49/MWh 7.25% pre-tax No inflation link Cost plus Liberalised Germany (2009E) Total: 235/MWh Taxes and levies = 82/MWh
VAT (32.5) Concession fee (17.9) Electricity tax (20.5) CHP act (2.9) Renewables act (8.2)
(8)
Network access Regulated fee Balancing costs Transmission Distribution

C H AI N
Network access = 62/MWh 6.5% post-tax Inflation link for old assets Moving to incentive Review due April/May 2008 for 2009-13 pricing period
TH E
E N E R GY
Generation Pool / spot price Cost-plus based Gas sourcing L.T. contracts Oil / coal link
VALU E
Generation = 39/MWh Cost plus based Features 80% nuclear Remainder bought in Germany
Generation = 82/MWh Based on EEX Mostly a coal system Need for coal / gas to replace nuclear CO2 approx 8/MWh for gas and 18/MWh for coal Sales/marketing = 9/MWh
95
Source: J.P. Morgan estimates
Typical retail consumer uses 3.5MWh/a
The end customer bill - European comparison

Based on final domestic customer with 3.5MWh annual Based on final domestic customer with 3.5MWh annual consumption, /MWh,cost % GDP Power 2007A consumption, /MWh, 2007A Affordability - Retail power cost/ Affordability - Retail power cost/ GDP per capita, 2007A GDP per capita, 2007A
/MWh Italy Ireland Germany Portugal Netherlands Norway Slovakia UK Belgium Denmark Sweden Austria Hungary Spain Poland France Czech Republic Slovenia Finland Romania Greece Lithuania Estonia Latvia Bulgaria
Source: Eurostat
Price ex tax 165.8 146.5 143.3 142.0 140.0 136.1 129.2 125.4 122.9 117.0 108.8 105.0 101.9 100.4 94.5 92.1 89.8 88.7 87.7 85.5 66.1 65.8 63.5 58.3 54.7
Tax 44.6 19.7 46.3 8.0 89.0 42.6 25.5 6.1 34.8 138.4 58.6 49.8 22.1 22.1 27.9 28.4 16.5 19.8 27.8 18.8 6.0 11.8 11.5 3.5 11.2
Price with tax 210.4 166.2 189.6 150.0 229.0 178.7 154.7 131.5 157.7 255.4 167.4 154.8 124.0 122.5 122.4 120.5 106.3 108.5 115.5 104.3 72.1 77.6 75.0 61.8 65.9
Romania Slovakia Poland Italy Denmark Portugal Hungary Netherlands Bulgaria Germany Sweden Czech Republic Belgium Lithuania Spain Austria Ireland Slovenia UK France Latvia Estonia Finland Norway Greece
Source: Eurostat
Power cost % GDP 3.7% 3.2% 3.2% 2.9% 2.9% 2.9% 2.7% 2.5% 2.4% 2.3% 1.9% 1.9% 1.9% 1.8% 1.7% 1.7% 1.6% 1.7% 1.6% 1.6% 1.5% 1.5% 1.4% 1.4% 1.0%
Increasing power costs as a proportion of GDP political pressure on utilities
TH E
E N E R GY
VALU E
C H AI N
96
Agenda
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The energy value chain Climate change Renewables Valuation and drivers Appendix
2 97 107 112 124
97
Climate change regulation

1992 UNFCCC (UN Framework Convention on Climate Change) established 1997 - Kyoto Protocol signed 41 industrialised countries (Annex 1 countries) agreed to reduce their greenhouse gas emissions (GHGs: CO2, NOx, methane, CFCs) by a specific percentage by 2008-2012 from 1990 levels 5% cut in total globally 8% cut for EU-15 and most other European countries These targets define each countrys volume of allowed emissions (AAUs) Burden sharing principle Use of flexible mechanisms (market mechanisms, cap-and-trade schemes) Clean Development Mechanism (CDM) system for pollution reduction schemes in developing economies
Permits : Certified Emission Reductions (CERs)
C H AN G E
Joint Implementation (JI) system for pollution reduction schemes in developed economies
Permits : Emission Reduction Units (ERUs)
C L I M AT E
Emissions Trading Scheme (ETS) EU emission permits trading scheme

Permits: EU Emission Allowances (EUAs)
CERs can be transferred into EUAs etc. but the total number of AAUs is fixed
98

s CER s E UA
EUAs
If Germanys actual emissions are higher than its assigned allocation it can purchase CERs from Brazil and transfer them into EUAs Total AE = total AAU
AE actual emissions AAU assigned allocation unit
CERs
AAU
AE
AE
AAU
Brazil
C H AN G E
Germany
C L I M AT E
99

EU target 8% by 2010 from 1990 levels 20% by 2020 or 30% by 2020 if a broad-based global agreement on GHGs can be reached Emissions Trading Scheme was set up Member states are given National Allocation Plans (NAPs) for CO2 permits Covers power, paper, steel, iron, mining, oil and cement Import allowance for CDM/JI subject to certain limits CO2 emission permits can be traded within each phase with banking also possible between phases II and III
Phase I: 2005-07 Phase II: 2008-12
C H AN G E
Phase III: 2013-20 Includes new sectors such as airlines, aluminium, petrochemicals, etc.
Note other trading schemes will probably emerge globally, but may not necessarily be fungible with the EU ETS
C L I M AT E
100
EUA price forecast

Estimation: Long-term demand for permits A function of EUA shortage vs demand Allocation plans Compliance buyers including governments Non-compliance buyers CER/ERU balance Abatement opportunities various methods of abatement have different costs CDM/JI permits trade at a discount to EUAs due to project failure risk UK coal-to-gas switching German lignite-to-coal switching
C H AN G E
Existing and new plants
Industrial abatement (N.B little willingness for this from industrials so far) Carbon capture and sequestration
C L I M AT E
101
EUA price forecast

Carbon capture and sequestration Carbon capture and sequestration
Clean coal Capture via post-combustion, pre-combustion or oxyfuel combustion Storage in deep geological formations, deep oceans or mineral carbonates away from the atmosphere (although UN unlikely to approve ocean & carbonation) Alternatively the gas captured may be sold for various industrial uses Technology for large scale capture of CO2 already commercially available, problem is pipeline and regulation Capturing and compressing CO2 requires energy lowers overall thermal efficiency There are firm plans for around 8.3GW of CCS-type capacity 51mt/year of abatement Abatement cost estimate 28-30/t a function of:
Margin loss (CCS plant new build cost coal ex-CCS plant new build cost + energy loss) x CO2 avoided
C H AN G E
Estimate: 16-17/MWh output or 24/t of CO2 Transport cost Estimate: 2-2.5/t Storage cost Estimate: 3-3.5/t
102
C L I M AT E
EUA price forecast
The price of CO2 is determined by the

Demand for abatement Supply of abatement
We expect EUAs to trade at c. 27/t for Phase II and c. 33/t for Phase III
90 80 70 60 /t 50 Paper production UK Coal to Gas Switching, Summer UK Coal to Gas Switching, Winter German Lignite to Coal Switching
2008 abatement stack
40 Steel production 30 Oil refining Cement production 20
C H AN G E
10 0 0
Source: J.P. Morgan estimates
C L I M AT E
20
40
60
80
100
120
103
Climate change regulation outcomes

Phase I ETS was effectively bankrupt since there has been a surplus of permits Currently Phase II permits are trading at around 25-27/t We expect c. 27/t for Phase II Emissions of 2,300mt/a, a 10% cut in NAPs vs. Phase I, 160mt total extra demand from airlines, a shortfall of 210mt/a on average and CDM/JI permit deliveries of 780mt total Phase III deeper and broader Emergence of subnational and national schemes Extension to other GHGs, other industries Utility sector the most impacted Positive for revenues Negative for costs depending on free allocations/ auctioning Free allocations have been positive for profits overall, but unlikely post 2012
C H AN G E
Although windfall for low / zero CO2 emitting plants will remain
C L I M AT E
104
Climate change regulation outcomes

Impact on utilities profits: Marginal cost pricing
Higher variable costs per MWh and higher long-term power prices Revenue will include 100% of the price of a permit Windfall profits are incurred if permits are allocated to thermal plants for free and non-thermal plants are price takers
Degree of forward contracting

e.g. E.ON and RWE have already sold forward a large part of 2008 and 2009 output so the impact of volatility of Phase II CO2 on them will be minimal
Change in load stack

A higher CO2 price will move gas-fired power plants further into the baseload compared to coal-fired Coal-fired plants will suffer from lower volumes and hence lower profits and fixed costs per MWh
Carbon intensity relative to average will drive valuation

Exposure to coal vs. nuclear etc. Exposure to generation vs. networks and supply
C H AN G E
For more information, see our series All you ever wanted to know about carbon trading at www.JPMorgan.com/climatechange
C L I M AT E
105
EU thermal regulation: LCPD (2001)

Large Combustion Plant Directive (LCPD) Applies to combustion plants with a thermal output of >50 MW Aims to reduce acidification, ground level ozone and reduce aerosol particulates throughout Europe by controlling emissions of sulphur dioxide (SO2), nitrogen oxides (NOx) and dust Using emission limit values (ELVs) The UKs National Grid has warned the extra costs of coping with the implementation of LCPD could substantially increase transmission constraint costs
Set to have an impact on system costs of around 15m 12GW of capacity has opted out of the LCPD Running hours of these plants will be limited on a chimney stack basis (either the whole plant is running or not) to 20,000 hours across the 8 year period to 2015 NG says it expects operators will look to maximize earnings from the remaining 20,000 hours by optimizing running and operating multiple units as a single block at the same time Coal plant will be the most affected For opted out coal units, the 20,000 hour limit is likely to act as a constraint on output and the costs of reserve will rise
C H AN G E
NG has put forward 2 possible scenarios for plant operations: Summer-cold regime generators decide to run the units over the winter and make them unavailable over the summer, either on maintenance or moth-balled Year-round running regime generators will focus their running hours on the peak power price periods across the year, irrespective of season
106
C L I M AT E
Agenda
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107
Mapping the renewable energy space

Drivers : Climate change; Energy Security; Economics Policy regimes: Standards; Pricing/support; R&D
Renewable / Alternative Energy
Equipment Operators Electricity
Utilities
New entrants Autos Big oil New entrants Transportation Nuclear Hybrids / Plug-ins Wind
R E N E W AB L E S
Traditional
Clean Thermal CCS Biomass
Mini hydro
New Tech
Biofuels
Solar
Marine
Onshore Concepts Technologies
Offshore
PV
Thermal
Corporates
108
Renewables raison dtre

Climate change concerns Solar, wind, r-o-r hydro and geothermal technologies do not emit any GHGs Pumped storage hydro uses a small amount of electricity
Renewables
Biomass combustion emits CO2, but unlike fossil fuel combustion, this has not been out of the carbon cycle for a long time
Energy security concerns By definition, renewable energy is not finite It allows a country to reduce its reliance on foreign imports of electricity/coal/oil/gas
R E N E W AB L E S
Hence governments have been very keen to encourage investment in renewable energy capacity
109
Renewables capacity support mechanisms

Feed-in tariffs fixed pricing framework with a cap-and-floor of floating prices to provide a return well over WACC
e.g. Spain RD486 and RD661
Green certificate schemes

Energy suppliers required to submit certificates to show they have sourced a certain % of supplies from renewables Certificates bought from a pseudo market buy-out fund
e.g. Renewable Obligation Certificates in UK
Tax credits levy charged on all suppliers unless they qualify for an exemption
e.g. Production Tax Credit in US, CCLECs in UK
Capital subsidies can by-pass state aid rules

e.g. Greece: 35-55% of capital cost
R E N E W AB L E S
110
EU renewables targets
EC proposals on member state targets for renewable energy as a proportion of all energy consumption EC proposals on member state targets for renewable energy as a proportion of all energy consumption
2005 RES Austria Belgium Bulgaria Cyprus Czech Republic Denmark Estonia Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Malta Netherlands Poland Portugal Romania Slovakia Slovenia Spain Sweden UK EU 27 23.3% 2.2% 9.4% 2.9% 6.1% 17.0% 18.0% 28.5% 10.3% 5.8% 6.9% 4.3% 3.1% 5.2% 34.9% 15.0% 0.9% 0.0% 2.4% 7.2% 20.5% 17.8% 6.7% 16.0% 8.7% 39.8% 1.3% 6.4%
Source: European Commission, J.P. Morgan estimates
2020 Target-RES 34% 13% 16% 13% 13% 30% 25% 38% 23% 18% 18% 13% 16% 17% 42% 23% 11% 10% 14% 15% 31% 24% 14% 25% 20% 49% 15% 20%
Basis points/year 71.3 72 44 67.3 46 86.7 46.7 63.3 84.7 81.3 74 58 86 78.7 47.3 53.3 67.3 66.7 77.3 52 70 41.3 48.7 60 75.3 61.3 91.3 90.8
% CAGR 2.6% 12.6% 3.6% 10.5% 5.2% 3.9% 2.2% 1.9% 5.5% 7.8% 6.6% 7.7% 11.6% 8.2% 1.2% 2.9% 18.2% 12.5% 5.0% 2.8% 2.0% 5.0% 3.0% 5.7% 1.4% 17.7% 7.9%
The targets proposed on 23 Jan 08 were harsh but widely expected and the horizon is far out A proposal for tradeable Guarantee Of Origin (GOO) certificates would allow suppliers to meet their obligations with output from another country
Positive for suppliers and generators with pipeline in low tariff/high deliverability countries Negative for generators in green certificate/ low deliverability countries e.g. Italy and the UK
R E N E W AB L E S
111
Agenda
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The energy value chain Climate change Renewables Valuation and drivers
2 97 107 112
Business drivers111 Valuation methods.... 116 Stock price drivers.117 Major M&A over the last decade121 Appendix 124
112
Business drivers - what makes a successful utility?

i. Generation ii. Transmission and distribution iii. Supply iv. Big vs. small
VALUATI O N
AND
DRIV E R S
113
What makes a successful utility?

Generation Generation
Success mainly derives from operations rather than business model

New build on time/budget Minimise outages Efficient fund sourcing Efficient operating costs Off take contracting, e.g. fixed cost contracts, PPAs ideally
Returns/ sustainability a function of type

Carbon clean vs. dirty Fuel price volatility/ availability Correct funding
DRIV E R S
Diversity in a given region is important

Exposure to fuel vs. price setter
AND
Development potential
Plant improvements - operational, environmental Life extensions Expansion via new plant including new regions
114
VALUATI O N

Transmission & Distribution networks Transmission & Distribution networks
Regulatory relationship
Delivery Constructive dialogue Reliability Health and safety
Opex
IT management of inventory Sourcing at a low cost Optimal staffing
Capex
Purchasing at a low cost Pipeline delivery within budget and on time
DRIV E R S
Partly exogenous
Politics and type of regulation
VALUATI O N
AND
115

Supply Supply
Competitive upstream sourcing A function of the competitive environment

Peer group behaviour Degree of consolidation Politics
Pricing for margin vs. pricing for market share Superior customer service to peers Dual fuel contracts Well hedged exposure to wholesale power prices
DRIV E R S VALUATI O N AND
116

Advantages of scale Advantages of scale
Load (lower fixed costs per MWh) Economies of scale in procurement Economies of scale in financing Reputation and brand name
Large customer base
R&D possibilities, patents Integrated utilities tend to be larger

Upstream/downstream hedging Management cost savings Expertise
DRIV E R S
Operational diversification Geographical diversification
VALUATI O N
AND
117
Valuation methods
Absolute Discounted cash flows (DCF)/ dividend discount model (DDM) utilities generate long term cash flows with high visibility Premium/ discount to RAB Sum of the parts (SOP) useful in diversified utilities
Multiples DCF/ DDM RAB-based
Relative Traditional relative multiples limited usefulness due to diversity

P/E more useful under IFRS Dividend yield generally income stocks with growth
DRIV E R S
EV/EBITDA traditional measure, free cash flow (FCF) yield important given capex cycle
Utilities-specific multiples according to asset

Supply: EV/#customers Generation: EV/MW, Nuclear Relative Multiples Networks: EV/RAB
VALUATI O N
AND
118
Utilities stock price drivers the five forces

1. Energy prices Raw materials prices - Coal, oil, gas, uranium, equipment Wholesale power prices 2. Regulation Tariffs: e.g. unexpected (or earlier than expected) changes, politics Networks: RAV and allowed return, e.g. expectations of a forthcoming review Carbon: pricing and allocations 3. Politics Electricity and gas often perceived to be public goods, with lots of political levers available:
Windfall taxes Competition reviews Mainstream tariff controls Social assistance State operator action
119
VALUATI O N
AND
DRIV E R S
Utilities stock price drivers the five forces

4. Macroeconomics Dividend yield spread over Treasuries in the absence of newsflow utility stocks can trade as a bond proxy Demand growth Weather
Temperature affects demand Precipitation drives hydroelectric generation
Interest rates and taxes 5. Corporate strategy

DRIV E R S
Opex and capex plans Short/ medium term targets M&A prospects Re-gearing potential, buy-backs, dividends
VALUATI O N
AND
120
Major M&A over the last decade - UK

Announce Completio Target ment Date n Date Target Business Target Nationality Acquiror Acquiror Business Acquiror Nationality Divestor Divestor Business Divestor Nationality Deal Value $m Stake % Supplies and distributes electricity to 2m customers in London. Subsidiary of UK US-based Entergy
London 23-Nov-98 31-Dec-99 Electricity
EDF
Integrated electricity France Energy, mining, raw materials, petroleum, chemicals, waste disposal, engineering Germany and construction
Entergy Corp
Global integrated energy company
US
3,173.554
100
25-Sep-00 09-Nov-00 Thames Water
Water and waste, design, consultancy and construction
UK
RWE AG
8,882.396
100
09-Apr-01 28-Jun-02 PowerGen
Generation and sale of electricity, engineering, oil and gas in the North Sea UK
E.ON AG
Electricity generation Germany and distribution Energy, mining, raw materials, waste, engineering and construction
13,814.937
100
22-Mar-02 27-May-02 Innogy Holdings Integrated energy 275,000km of gas grids, LNG storage facilities, telco and fiberoptic networks Distribution and supply of electricity, retail of electrical goods Owner and operator of nuclear power stations
UK
RWE AG
Germany
7,374.519
100
22-Apr-02 21-Oct-02 Lattice Group
UK
National Grid Group
Operates the electricity transmission system UK
17,441.637
100
18-Jun-02
29-Jul-02 SEEBOARD
UK
EDF
Generates and distributes electricity France
American Electric Electric utility Power Co Inc holding company
US
2,059.180
100
DRIV E R S
British Energy 01-Oct-03 17-Jan-05 (97.5%)
UK
Creditors
Creditors
UK
2,880.383
97.5
AND
Thames Water 16-Oct-06 01-Dec-06 Holdings
Water and wastewater services
UK
Macquarie, Kemble Water
Investment, commercial and retail banking in Australia and around the world Australia
RWE AG
Integrated energy
Germany
14,849.188
100
VALUATI O N
28-Nov-06 24-Apr-07 Scottish Power
Integrated electricity, gas supply, water UK and teleco services
Iberdrola SA
Integrated electricity Spain
22,954.919
100
22-Nov-07 08-Feb-08 Kelda Group Airtricity 04-Jan-08 15-Feb-08 Holdings
Water and waste water services. Renewable energy
UK Ireland
Citigroup AI, GIC SI, HSBC, Infracapital Investment company UK Partners Scottish&South International energy UK ern Energy
10,602.933 2,142.542
100 100
Source: Dealogic
Major M&A over the last decade - Europe

Announce Completio Target ment Date n Date Target Business Target Nationality Acquiror Acquiror Business Acquiror Nationality Divestor Divestor Business Divestor Nationality Deal Value $m Stake % Construction, engineering and environmental services to the public Spain ACS and private sectors Deutsche Bank Retail and Germany AG investment bank
Union Fenosa 22-Sep-05 27-Jul-06 SA (22.07%) Endesa SA 18-Aug-06 18-Aug-06 (3.4%) Endesa SA 02-Apr-07 05-Oct-07 (46.05%)
Electric power generator and distributor. Electric utility
Spain Spain
Banco Santander Central Hispano Commercial bank
Spain
2,709.081 1,238.168
22.07 3.4
Electric utility Electric power generator and distributor
Spain
ENEL, Acciona
30-Jul-08
Union Fenosa SA
Spain
Gas Natural SDG SA
Integrated electricity Italy Supplies, stores, transmits and distributes natural Spain gas Electricity generation Italy and distribution Generates and distributes electricity and natural gas in Italy the Milan area
Caja Madrid (9.9% - 2.9%), SEPI
Savings bank
Spain
52,625.922
46.05
CAM (45.3% / 5.15%), ACS
Savings and commercial bank
Spain
35,854.814
100
Edison SpA 13-May-05 26-Oct-05 (30.462%)
Integrated energy
Italy
EDF
EDF
Electric utility
France
3,301.580 30.462
Electricity and gas supply Integrated energy, water, waste and 17-Nov-99 07-Feb-01 EnBW (25.01%) telco
ASM Brescia 04-Jun-07 20-Dec-07 SpA
Italy
AEM SpA
Comune di Brescia (69.238%) State of BadenWuerttemberg
Brescia city hall
Italy
5,721.018
100
Germany
EDF
Integrated electricity France
Germany
2,484.538
25.01
DRIV E R S
Power and gas services, packaging, chemicals, logistic 17-Nov-99 17-Nov-99 VIAG AG (10%) and telcos
Germany
Veba AG
Generates and distributes electricity, gas, district heating Germany and water services Integrated emergy and water, oil exploration and production
Federal State of Bavaria
Germany
1,638.738
10
Ruhrgas AG 03-Jul-02 07-Mar-03 (40%)
Gas distribution
Germany
E.ON AG
Germany
Royal Dutch/Shell, Exxon Mobil, TUI Investors Republic of France (79.45%)
International
4,043.791
40
AND
27-Feb-06
22-Jul-08 Gaz de France
Natural gas utility
France
Suez SA
Energy, water, waste France and telco services
France
58,705.279
100
VALUATI O N
Tractebel SA 19-Aug-99 08-Dec-99 (47.8%)
Integrated energy and water Generates and supplies electricity, distributes gas, provides cable TV services
Belgium
Water supply and treatment, electricity, Suez Lyonnaise waste management des Eaux and communication France
7,326.309
47.8
Electrabel SA/NV 09-Aug-05 08-Dec-05 (49.92%)
Belgium
Suez SA
Energy, water, waste France and telco services
Intermixt (4.56%)
Group of local authority energy suppliers
Belgium
13,871.498
49.92
Source: Dealogic
Major M&A over the last decade - misc

Announce Completio Target ment Date n Date Target Business Target Nationality Acquiror Acquiror Business Acquiror Nationality Divestor Divestor Business Divestor Nationality Slovak Republic Deal Value $m Stake % Slovenske Slovak Elektrarne(66% Generates and 06-Oct-04 28-Apr-06 ) distributes electricity Republic
ENEL SpA
Integrated electricity Italy Electricity generation and transmission, gas, oil, water, waste disposal, chemicals Germany and telecos
Slovak Republic
3,855.155
66
OGK-4 OAO 15-Sep-07 15-Oct-07 (69.34%)
Electric power generator
Russia
E.ON AG
Unified Energy System of Russia Integrated energy Unified Energy System of Russia Integrated energy (23.34%)
Russia
5,775.407
69.34
28-Feb-08
TGK-10 OAO
Electric utility
Russia
Fortum Oyj
27-Feb-06 20-Oct-06 KeySpan Corp
Holding company for group involved in gas US distribution
National Grid
International energy Finland Electricity and gas networks. 2002 merger between Lattice Group and UK National Grid
Russia
5,067.361
100
12,421.290 Global investment banking and securities
100
27-Mar-07
Horizon Wind 03-Jul-07 Energy LLC
Wind farm developer US
EDP
Integrated electricity Portugal Electricity generation and transmission, gas, oil, water, waste disposal, chemicals Germany and telecos
Goldman Sachs Group Inc
US
2,330.000
100
Airtricity, N 04-Oct-07 18-Dec-07 America
Electric utility
US
E.ON AG
Airtricity
Wind farm developer Ireland
1,400.000
100
DRIV E R S VALUATI O N AND
Source: Dealogic
123
Agenda
Page
2 97 107 112 124
Acronyms 125 Glossary 127 Abbreviations 128 Conversions 129 Metrics 130 Key websites 131 Bloomberg codes.. 132
124
Acronyms
AAU ACS AGR ARPU ARM BETTA BWR CCGT CCLEC CCS CDM CER CHP E&P ELV
AP P E N D I X
Assigned Allocation Unit average cold spell advanced gas cooled reactor average revenue per user adequacy reserve margin British electricity trading and transmission arrangements boiling water reactor combined cycle gas turbine climate change levy exemption certificate carbon capture and sequestration Clean Development Mechanism Certified Emission Reduction combined heat and power exploration and production emission limit value
EPR ERU ETS EUA GFR JI LCPD LDZ LFR LNG LRMC MSR NAP NETA
European pressurised reactor Emission Reduction Unit Emissions Trading Scheme EU Emission Allowance
gas fast breeder reactor
Joint Implementation large combustion plant directive local distribution zone

lead fast breeder reactor
liquified natural gas long run marginal cost

molten salt reactor
national allocation plan new electricity trading arrangements
125
Acronyms
NISM NOC OCGT OFGEM OFWAT PPA PSCs PSO PTC PV PWR RAB RAV notification of inadequate system margin national oil company open cycle gas turbine British electricity and gas regulator England and Wales water regulator power purchase agreement public service contracts public service obligation production tax credit photovoltaic pressurised water reactor regulated asset base regulated asset value RC RCV RD ROC RPS SCWR SFR SRMC SYS TPA UCTE UNFCCC VHTR remaining capacity regulated capital value royal decree (Spain) renewable obligation certificate renewable portfolio standard
super-critical water reactor sodium fast breeder reactor
short run marginal cost seven year statement third party access Union for the Co-ordination of Transmission of Electricity UN Framework Convention on Climate Control
very high temperature reactor
AP P E N D I X
126
Glossary
Adequacy reference margin = margin against the peak load +minimum reserve capacity British thermal unit a unit of heat equal to 252 calories, enough heat to raise the temperature of one pound of water 1F Load curve order in which different plants are called upon to run based on their variable operating cost Minimum reserve capacity = 5% of national generating capacity Margin against the peak load = peak load load at reference point Plant margin - amount by which the installed generation capacity exceeds the forecast peak demand Remaining capacity = reliably available capacity reference load Reliably available capacity = total generating capacity non-usable capacity maintenance and overhauls outages system services reserve Reserve margin amount of unused available capacity of an electric power system at peak load, expressed as a percentage of total capacity Tariff deficit the shortfall of regulated revenues from tariffs versus the revenues that would be realised by prevailing market prices Thermal efficiency - efficiency with which the energy content (measured in gross calorific value) of the input fuel is turned into electrical energy by the generating station
AP P E N D I X
Thermal generation electricity production using a steam-driven turbine Windfall profits additional profits due to free CO2 allocations
127
Abbreviations
b or bbl cf bcm t Mcf Mt boe kboe kb toe Mtoe Btoe or Gtoe Btu KW MW GW TW MWh /y or /a /d
AP P E N D I X
barrel cubic feet billion cubic metres metric tonne million cubic feet million tonnes barrel of oil equivalent thousand boe thousand barrels tonne of oil equivalent million tonnes of oil equivalent billion tonnes of oil equivalent British thermal unit kilowatt megawatt gigawatt terrawatt megawatt hours per year per day
128
Conversions
To: From: kWh MWh therm mmbtu kJ GJ kcal Gcal ft3 bcf m3 bcm boe mboe toe mtoe tce mtce tonne Power kWh MWh 1 0.001 1,000 1 29.31 0.0293 293.07 0.293 0.000278 2.778E-07 277.8 0.2778 0.00116 0.000001163 1163 1.163 0.3 0.0003 300,000,000 300,000 11.0 0.011 11,000,000,000 11,000,000 1,700 1.7 1,700,000,000 1,700,000 12,700 12.7 12,700,000,000 12,700,000 7,100 7.1 7,100,000,000 7,100,000 14,000 14 Therms therm mmbtu 0.0341 0.00341 34.12 3.412 1 0.1 10 1 0.00000948 9.478E-07 9.48 0.948 0.00003968 0.000003968 39.68 3.968 0.0104 0.00104 10,400,000 1,040,000 0.367 0.0367 3.67E+08 36,700,000 60 6 60,000,000 6,000,000 425 42.5 425,000,000 42,500,000 250 25 250,000,000 25,000,000 520 52 Joules kJ 3,600 3,600,000 105,506 1,055,060 1 1,000,000 4.19 4,186,800 1,097 1.09726E+12 38722 3.8722E+13 6,300,000 6.3E+12 45,000,000 4.5E+13 26,000,000 2.6E+13 55,000,000 GJ 0.0036 3.6 0.1055 1.0551 0.000001 1 4.1868E-06 4.19 0.00109726 1,097,260 0.0387 38,722,000 6.3 6,300,000 45 45,000,000 26 26,000,000 55 Calories kcal 860 859,845 25,200 252,000 0.2388 238,800 1 1,000,000 262 2.62E+11 9,249 9.249E+12 1,500,000 1.5E+12 11,000,000 1.1E+13 6,300,000 6.3E+12 13,000,000 Gcal ft3 0.00086 3.3 0.8598 3,300 0.0252 96.2 0.252 962 2.388E-07 0.0091 0.2388 9,100 0.000001 0.0038 1 3,800 0.00026 1 262,000 1,000,000,000 0.00925 35.29 9,249,000 35,290,000,000 1.5 5600 1,500,000 5,600,000,000 11 42000 11,000,000 42,000,000,000 6.3 24500 6,300,000 24,500,000,000 13 52,000 Natural gas bcf m3 3.3E-09 0.093 0.0000033 93 9.62E-08 2.72 0.000000962 27.2 9.1E-12 0.000026 0.0000091 26 3.8E-12 0.00011 0.0000038 110 0.000000001 0.0283 1 28,340,000 3.529E-08 1 35.29 1,000,000,000 0.0000056 160 5.6 160,000,000 0.000042 1200 42 1200000000 0.0000245 700 24.5 700,000,000 0.000052 1,400 bcm 9.3E-11 0.000000093 2.72E-09 2.72E-08 2.6E-14 0.000000026 1.1E-13 0.00000011 2.834E-11 0.0283 0.000000001 1 0.00000016 0.16 0.0000012 1.2 0.0000007 0.7 0.0000014 boe 0.00059 0.59 0.17 1.7 0.00000016 0.16 0.00000066 0.66 0.00017 170,000 0.0061 6,100,000 1 1,000,000 7.5 7,500,000 4.3 4,300,000 8.9 Oil mboe toe 5.9E-10 0.00008 0.00000059 0.08 0.00000017 0.0024 0.0000017 0.024 1.6E-13 0.00000016 0.00000016 0.16 6.6E-13 0.000000093 0.00000066 0.093 1.7E-10 0.000024 0.17 24,000 6.1E-09 0.00083 6.1 830,000 0.000001 0.14 1 140,000 0.0000075 1 7.5 1,000,000 0.0000043 0.6 4.3 600,000 0.0000089 1.2 mtoe 8E-11 0.00000008 2.4E-09 0.000000024 1.6E-13 0.00000016 9.3E-14 0.000000093 2.4E-11 0.024 8.3E-10 0.83 0.00000014 0.14 0.000001 1 0.0000006 0.6 0.0000012 Coal tce 0.00014 0.14 0.004 0.04 0.000000038 0.038 0.00000016 0.16 0.000042 42,000 0.0015 1,500,000 0.23 230,000 1.7 1,700,000 1 1,000,000 1.9 LNG mtce 1.4E-10 0.00000014 0.000000004 0.00000004 3.8E-14 0.000000038 1.6E-13 0.00000016 4.2E-11 0.042 1.5E-09 1.5 0.00000023 0.23 0.0000017 1.7 0.000001 1 0.0000019 tonne 0.000066 0.066 0.0019 0.019 0.000000018 0.018 0.000000076 0.076 0.00002 20,000 0.00071 710,000 0.1 100,000 0.8 800,000 0.5 500,000 1
1 TWh = 1,000 GWh = 1,000,000 MWh = 1,000,000,000 kWh

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129
Electricity margin metrics

Reserve margin (%) = capacity reserve / demand Capacity margin (%) = capacity reserve / available capacity
Output = Capacity x Time [kWh] = [kW] x [h]
Load factor =
Electricity generated Installed capacity
Load factor 100% Power plants sometimes have technical problems and have to shut down
AP P E N D I X
The wholesale price may be too low for it to be economical to run the plant
130
Key websites
www.Dti.gov.uk/energy/statistics/index.html www.Iea.org www.Eia.doe.gov
System adequacy
www.UCTE.org www.Nordel.org www.Nationalgrid.com/uk/Electricity/SYS/
Technology
www.Alstom.com www.Powergeneration.siemens.com www.Gepower.com www.Areva.com/servlet/finance/investorrelations/arevatechnicaldays-en.html www.Vestas.com
EU
http://ec.europa.eu/research/energy/index_en.htm http://ec.europa.eu/energy/electricity/benchmarking/index_en.htm http://epp.eurostat.ec.europa.eu http://ec.europa.eu/environment/climat/climate_action.htm
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Bloomberg codes
SX6P Index (Dow Jones Stoxx European Utilities index) ERIXP Index (renewable energy index)
EPWR (European electricity prices) PWNX (French electricity prices) ELEU (UK electricity prices) ELGE (German electricity prices) ELNF (Nordpool electricity prices)
EGAS (European gas prices) UGAS (UK gas prices) CLCL (global coal prices) EMIT (EU emission allowances)
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Jpmorgan Electricitygasindustryoverview

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1 OCTOBER 2008

christopher.g.rogers@jpmorgan.com sarah.l.laitung@jpmorgan.com javier.x.garrido@jpmorgan.com nathalie.x.casali@jpmorgan.com

Global utilities team

Chris Rogers - Germany, Nordic, France, UK, Renewables

Edmond Lee, CFA

Javier Garrido - Spain, Italy

Ajay Mirchandani Hong Kong, Philippines

Nathalie Casali UK power

Boris Kan China

Shilpa Krishnan India

Olek Keenan, CFA - Credit

Abid Jamal Pakistan

For Specialist Sales advice, please contact: Ian Mitchell

Lucius Chong Malaysia

Sukit Chawalitakul Thailand

Ami Tantri Indonesia

Lilyanna Yang, CFA

Anderson Frey, CFA

Ademar Souza Neto

The energy value chain

Climate change Renewables Valuation and drivers

Acronyms Glossary Abbreviations Conversions Metrics Key websites Bloomberg codes

The energy value chain

The energy value chain

Regulated networks Transmission & Distribution

Supply Dual-fuel contracts Supply

Trading Sourcing, despatch, management, proprietary

Upstream sourcing / E&P

Regulated networks Transmission & Distribution

NATURAL GAS Value chain

The energy value chain

Regulated networks Transmission & Distribution

Supply Dual-fuel contracts Supply

Trading Sourcing, despatch, management, proprietary

Upstream sourcing / E&P

Regulated networks Transmission & Distribution

NATURAL GAS Value chain

Solid fuel coal Gaseous fuel gas Liquid fuel oil

Nuclear 40 Renewables 49 Wind

Biomass & Biofuel Geothermal Solar Marine

Economics - the load curve

Economics - the merit order

merit order / load curve time (hours)

Source: J.P. Morgan

Which type of power plant will set the power price?

* Worked example: attractiveness of coal vs. gas *

UK UK Min Hourly demand Max

New hard coal

New hard coal

Large proportion of low SRMC plant

Large proportion of high SRMC plant

Economics - wholesale prices

UKPX (a subsidiary of APX) in the UK Nordpool in Scandanavia

Generators have contracts with the transmission grid for

* Worked example Central European spreads *

(price of 1t of coal + cost of shipping 1t)

-(140.3 + 7)/1.55 0.325

* Worked example Central European spreads *

UCTE system adequacy forecast

Updated annually at www.UCTE.org

19.2 17.5 16.2 16.5 16.3 14.0

Greece Bulgaria Serbia Hungary Slovakia Croatia

12.0 10.5 8.4 8.4 7.3 3.8