CCGT @52% CCGT @49% CCGT @47%

Sum15 Win15 Sum16

Win16 Sum17
10 80

52% CCGTs displacing 70

36% coal in Summers 60

European gas vs coal

8

gas [$/mmbtu]
50

gas [p/th]
40
plant switching 6
30
20
10
A Timera Energy briefing
4 0
May 2015 50 54 58 62 66 70
coal [$/t]
Headlines: Gas plant competitiveness increasing
Gas hub price weakness is supporting a recovery in gas plant competitiveness… & risk adjusted asset values

• Gas price slump: European hub prices are falling as a result of a growing UK coal vs gas generation costs (CDS – CSS)
30
global oversupply of LNG and weaker oil prices. Europe is absorbing higher recent fall in coal
25
plant competitive
volumes of LNG as a market of last resort. This may tip the gas market into 20
advantage
15
pronounced oversupply.

£/MWh
10

• Gas vs coal plant: Lower gas prices are reducing the gap in gas vs coal 5

0
plant competitiveness. Gas-fired power plants play an important role in
-5
absorbing surplus hub gas, meaning higher load factors and plant margins. -10
Source: Timera Energy

• UK first: Significant gas vs coal switching is already taking place in the UK

given the carbon price floor and this looks set to continue. This is starting to increase realised CCGT margins and load factors.

• Continent next: At current hub prices, Continental gas plants remain ‘out of the money’. But competitiveness is improving,
increasing peak margin capture opportunities in some markets (e.g. Belgium, France).

• Asset value: Falling gas prices increase the ‘in the moneyness’ of gas plant optionality. This means higher expected margins, more
value in the right tail of asset margin distributions (asymmetric upside) and higher risk adjusted asset values.

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Gas vs coal switching: UK
The UK is Europe’s ‘canary in the coal mine’ for gas displacement of coal plant… and it is already a reality
UK CCGT (49%) and coal (36%) plant generation margins Current UK gas vs coal (36%) switching dynamics
30 CCGT @52% CCGT @49% CCGT @47%
CDS CSS CDS falling Sum15 Win15 Sum16
25 Win16 Sum17
10 80
20
70
weak forward 52% CCGTs displacing
15 60
CDS & CSS
£/MWh

8 36% coal in Summers

gas [$/mmbtu]
10 50

gas [p/th]
40
5
30
6
0 20
some CSS recovery 10
-5

Jul-15
Jan-10

Jul-10

Jan-11

Jul-11

Jan-12

Jul-12

Jan-13

Jul-13

Jan-14

Jul-14

Jan-15

Jan-16

Jul-16

Jan-17

Jul-17
4 0
50 54 58 62 66 70
coal [$/t]
Source: Timera Energy
• Spreads: Realised UK spark spreads (CSS) have started to recover over the last year, although forward market pricing remains
weak. Dark spreads (CDS) have fallen as power prices drop (with gas hub prices) and the UK carbon price floor rises.
• Switching: At current NBP forward summer hub prices, newer CCGT (52%) are displacing older coal plants (36%).
• Margin capture: Once price shape & volatility are overlaid, the increase in CCGT competitiveness translates into a greater
ability to capture margin, i.e. the ‘in the moneyness’ of CCGT optionality increases.

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Gas vs coal switching: Continent
CCGT values have been deeply discounted by owners… but falling gas prices support peak margin capture

• Spreads: Continental spark spreads (CSS) remain negative, Current German gas vs coal (36%) switching dynamics
CCGT @52% CCGT @49% CCGT @47%
with coal plants dominating marginal setting of power prices. Win15 Sum16 Win16
Sum17 Sum15
10
• Role of gas: CCGTs have been relegated to a peaking role,
but this role is becoming increasingly important in some
8
markets over winter e.g. Belgium & France. Significant gas plant

gas [$/mmbtu]
competitiveness gap
• Switching: Gas hub prices need to fall from current levels remains in Germany
6
around 7 $/mmbtu to below 5 $/mmbtu to induce structural
(baseload) displacement of coal plants by CCGTs. But as hub
4
prices fall, CCGT load factors will increase in peak periods. 50 54 58 62 66 70
coal [$/t] Source: Timera Energy
• Margin capture: As gas prices fall, CCGT competitiveness is improving, albeit from a very weak starting point. In other words
the ‘out of the moneyness’ of CCGT optionality is falling and peak margin capture opportunities are increasing.
• Asset value: The challenge for Continental CCGTs is covering fixed costs, hence current low asset values. But capacity payments
are being progressed across NW Europe. And CCGT’s have asymmetric value upside as gas prices fall & power volatility rises.

1)4
European gas price dynamics
The global gas market is entering a new phase of oversupply... putting pressure on European hub prices

2014-15 gas price dynamics Gas price phases: Europe in a global context

• Slump in Asian LNG spot prices

• Sharp drop in oil-index contract prices

• Flexible LNG flowing back into European sharp decline and

convergence in
hubs as a market of last resort global gas prices
• Regional price convergence (Europe vs Asia)

Implications

• European hubs (NBP/TTF) are currently

acting as global gas price support/floor

• Hub prices may need to fall further, to a level

where power sector gas demand provides
support (via higher CCGT load factors)
Source: Timera Energy

1)5
Hub prices under pressure from rising LNG imports
Europe will need to absorb surplus flexible LNG as a market of last resort... but at what price?
Hub price tipping point BCMA EU demand
Europe vs global LNG market balance (2016)
600 recovery? 2016 Global LNG Balance 4
LNG to displace flex RU gas
• Surplus LNG volumes are flowing to Europe Uncertain
Chinese LNG
& displacing Russian contract volumes EU

Pipeline
Russian ToP Flex RU
demand

(ST/Spot)
500 LNG  LNG 3

Flex
Surplus
Req
• The European gas market is close to the
China
400 Can Europe soak- 2
‘tipping point’ where LNG surplus exceeds

Pipeline
up surplus LNG?

JP, TW, KO, Ind

contractual flex to reduce Russian volumes

LT/T Contract
300 1
Non RU
• Beyond this point, European hubs may fall pipeline

sharply (& disconnect from oil-indexation) Incremental

200 6
demand & supply Emerging

Dom prod
Gas-fired plant impact will dictate global market

pricing
100 -3
• Once the flexibility to reduce Russian
contract volumes is exhausted, power sector
0 -1
gas demand will become a primary factor EU demand Non flex EU flex supply LNG available Non EU LNG Global LNG
supply requirement for Europe demand supply
supporting European hub prices European Gas Global LNG
Source: Timera Energy

1)6
Gas plant switching support for hub prices
In an oversupplied European gas market, higher CCGT load factors provide key gas demand support
European supply and demand balance (2016)
• Russian oil-indexed contract prices (~ 7 $/mmbtu)
are currently driving marginal hub price dynamics

• But European LNG import volumes (green supply

tranche), may be close to the ‘tipping point’ where
oil-index contracts are pushed off the margin

• Gas vs coal plant switching then becomes a key higher gas demand at
source of incremental demand and price support lower prices as CCGT
load factors increase
• The UK provides initial switching support: ~ 20
bcma in a 5.50-7.00 $/mmbtu gas price range

• But more significant oversupply may also require

Continental switching to induce demand support:
~80bcma in a 4.00 to $6.00 $/mmbtu price range. Source: Timera Energy

1)7
UK case study: switching already a reality
UK gas vs coal switching is already acting to alleviate downward pressure on European hub prices

UK ‘canary in the coal mine’

UK Coal vs CCGT output 2014-15 (GW)
• UK is 1st European market to switch given: 25
o Carbon price floor (penalises coal)
o Gas dominance of marginal pricing 20
5-10GW of CCGT
displacement of coal
• So as NBP/TTF prices fall, it is UK CCGT gas 15 in summer 2014
demand that first supports NBP/TTF prices
10
Switching already a reality
5
• NBP/TTF price slump from surplus LNG flow
in Summer 2014 caused 5-10GW of coal to be
-
displaced by more efficient CCGTs (Jun-Sep)

• 2015 Summer gas vs coal prices are now

again at a level where switching will occur Coal CCGT Source: Timera Energy

1)8
 UK case study: current pricing
Forward UK CSS remains relatively weak… but gas vs coal switching is set to boost realised CCGT margins

• Switching: CCGTs displacing coal over summers. Further gas price falls will push more CCGTs into merit for longer periods.

• Realised margin: As plants move into merit, load factors and margin capture increase and running costs (e.g. starts) decrease.

• Non-linearity: margin recovery has a non-linear relationship to price, i.e. realised margin can increase quickly (ATM optionality).

70
Current vs historic (2010+) UK gas vs coal (36%) switching UK CCGT (52%) vs coal plant (36%) SRMC
60

65
CCGT @52% 50
60
CCGT @49%
55 40
CCGT @47% Transport cost
50 Historic Variable O&M

£/MWh
gas [p/th]

30
Sum15 UK Carbon cost
45
Win15 EU Carbon cost
40 20
Sum16 Fuel cost

35 Win16
10
30 Sum17
50 55 60 65 70 75 80 0
coal [$/t] Source: Timera Energy CCGT @52% Coal @36%

1)9
Quantifying gas asset margin & load factors
Robust valuation of European gas-fired plants requires quantification of asset risk/return distributions
Example modelled CCGT margin envelope (5%, 50%, 95%)
• Gas plant role: European gas plants are currently operating as 45
asymmetric
40
peaking and mid-merit capacity. This means a large portion of asset value upside
35
non-linear
value is being realised over the day-ahead and within-day horizon. 30
margin increase
25
• Shape & volatility: In this environment, the ability of assets to as gas prices fall
20
capture hourly price shape and respond to periods of price volatility 15
10
is a key driver of asset values.
5
• Valuing gas assets: Asset optionality (flexibility) in capturing margin 0
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
from price shape and volatility needs to be valued properly. A Base,
Example 2022 CCGT margin distribution
High & Low margin scenario approach does not do this justice.
• Capturing risk/return: A probabilistic (e.g. simulation) based
modelling approach is required to value this optionality. This asset value distribution
has ‘fat’ right tail which
generates asset risk/return distributions (see charts) which are as increases expected value
important as ‘expected’ (50%) margin in quantifying asset value.

1)10
Commercial implications
An increase in gas plant competitiveness should translate into higher risk adjusted asset values

• New reality: A structural oversupply of LNG and weaker oil prices are driving a downward trend in European gas hub prices.
This is increasing European gas plant competiveness i.e. the ‘out of the moneyness’ of gas plant optionality is decreasing.

• Margin impact: Realised CCGT margin capture in the UK has started to increase. Peak margin capture opportunities are
improving in some Continental markets. But forward CSS remain weak, although less negative now on the Continent.

• Market interest: Buyer interest in UK CCGTs has significantly increased over the last 12-18 months. But deep value
discounts remain for Continental gas plants given more challenging risk/return dynamics and bearish CSS sentiment.

• Value increase: There are two ways gas plant value can increase as a result of falling gas hub prices:

1. Higher peak margins, increasing the right tail of asset value distributions & peak insurance values

2. Structural recovery in gas plant competitiveness (e.g. hub prices reach the tipping point as LNG imports rise)

• Value quantification: In order to quantify the impact of 1. and 2. on risk adjusted asset value and asset risk/return
dynamics, it is important to use a probabilistic plant valuation model that generates asset margin distributions.

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Timera Energy & what we do
We offer expertise on value & risk in energy markets... and have a client base of leading companies

Service Description Our clients include

Valuation market analysis, value quantification and risk/return analysis for power
plants, gas storage assets and gas/LNG supply contracts.

Investment investment case development, entry/exit strategy, market value driver

analysis, portfolio structuring and transaction support.

Contracting contract sales strategy, negotiation, structuring and reopener support

for gas/LNG supply, gas storage & power offtake contracts.

Value Monetisation asset value maximisation, hedging strategy and commercial analytics
for flexible power, gas & LNG assets & portfolios.

Risk Management exposure definition, risk measurement, capital allocation, risk limits,
risk governance & controls.

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Timera Energy team
Our team members have extensive senior industry experience and practical commercial knowledge

Olly Spinks David Stokes

• 20 years energy industry experience • 20 years energy/commodity market experience
• Expert in commercial and risk analysis • Expert in value/risk management of flexible assets
• Ran BP’s gas & power commercial analytics function • Industry roles with Origin, Williams, JP Morgan

Nick Perry Howard Rogers

• 30 years industry experience (Amoco, Exxon, Enron) • 30 years gas industry experience (BP, OIES)
• Expert in commercial & risk management strategy • Expert in fundamental analysis of energy markets
• Board level experience (Director Enron Europe) • Director of Gas Research Programme at OIES

Diederick Tesselaar Emilio Viudez-Ruido

• Former Head of Trading at Petronas (UK) • 15 years experience in European gas and power markets
• 15 years structured gas and power trading experience • Strong expertise in valuation, hedging and risk analysis
• Head of Structured Trading EGL, Power Trader at Nuon • Expert in deconstruction & analysis of asset exposures

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Examples of recent client work
We deliver practical solutions adding tangible value to our clients… based on first hand experience

Project Client Summary

Gas plant Infrastructure • Advisory on CCGT and peaking plant investment opportunities across NW Europe
investment Fund
• Analysis of market evolution, asset margins and project risk/return dynamics
UK Capacity UK Generator • Analysis of capacity price evolution & margin impact for different asset classes
Market
• Impact of capacity/energy margin evolution on asset margin/investment strategy
CCGT Infrastructure • Analysis of practical constraints in monetising CCGT portfolio in prompt/fwd market
monetisation Fund
• Delivery of commercial/risk analytics capability to support asset monetisation
CCGT Infrastructure • Identification and analysis of specific CCGT investment opportunities
investment Fund
• Market analysis, asset risk/return analysis, offtake contract structuring
Centrica CCGT Infra fund • UK power market projections & asset margin analysis to feed DCF model
asset sales
• Advised on structuring & negotiation of tolling & energy management contracts

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Areas we could work with you
The following list covers some areas of potential collaboration

We have worked for with a number of large private equity and infrastructure funds in the following areas:

 Asset valuation - applying our in-house stochastic asset valuation modelling capability

 Market analysis - using our market models for European power & gas markets to analyse asset margins

 Investment case development – e.g. analysis of risk/return dynamics, monetisation strategy, business model

 Entry/exit strategy – defining target assets and investment lifecycle strategy

 Asset contracting – defining contracting, hedging and optimisation strategies (& asset value impact)

 Energy services contracting – structuring of pricing, exposure transfer, incentivisation & performance metrics

 Transaction support – e.g. bid advisory, due diligence

 Asset integration – post acquisition integration and business capability development

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