apresentação do powerpoint - brazil energy frontiers information is confidential and was prepared...

“The future of electricity” Julian Critchlow

SÃO PAULO | 19 DE AGOSTO DE 2015

This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent

“The future of electricity” Julian Critchlow

August 2015

This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 3 LON 150819-AT69-Brazil WEF Future ...

Objectives for today

•Share our perspective on the lessons learnt from the energy transition in developed markets

•Discuss potential implications for Brazil


Introduction: The Future of Electricity

•To evaluate how to make the electricity sector more sustainable for society by increasing “investability”

• Initial focus is on developed markets but understanding the lessons for developing markets

AIM AND SCOPE STEERING COMMITTEE

Steve Bolze (co-chair) CEO GE Power & Water

Ignacio S. Galán (co-chair) Chairman and CEO Iberdrola

Anders Runevad CEO Vestas

Joe Kaeser CEO Siemens

Alex Molinaroli CEO JCI

Eric Rondolat CEO Philips Lighting

Sam Laidlaw CEO Centrica

Gérard Méstrallet Chairman & CEO GDF

Peter Terium CEO RWE

Magnus Hall President & CEO Vattenfall

Christian Rynning-Tønnesen CEO Statkraft

José Manuel Entrecanales Chairman Acciona


Key questions that we are exploring

• How (un)investable is the electricity sector in developed markets?

• What are the key barriers to investability?

• What case studies illustrate enablers of “investability”?

Point of departure Choices

• What characteristics of a balanced energy policy framework and transition pathway are required to ensure investability of the electricity sector?

• What design of the market is required?

• What business and investor models could evolve to support this?


EU set aggressive targets for 2020 and beyond, known as ’20-20-20’

GOAL 1: REDUCE GREEN-HOUSE GAS LEVELS BY 20%

GOAL 2: INCREASE SHARE OF RENEWABLES TO 20%

GOAL 3: REDUCE ENERGY CONSUMPTION BY 20%

Aided by recession If investment continues Not currently on track

Source: European Commission “The 2020 climate and energy package”; Eurostat; European Commission “2030 framework for climate and energy policies”


Europe has been a “first mover” in the roll-out of non-hydro renewables

Japan

United States

OECD

European Union

Today

Brazil

Projected rollout based on current and planned policies

Source: IEA World Energy Outlook 2014


7_84

Since the peak some €½ trillion of value has been wiped off the European utilities industry

LARGE EUROPEAN INCUMBENTS …

… LOST SUBSTANTIAL VALUE

FROM 2008 TO TODAY

603 209

Source: Bloomberg; Datastream


…but EU markets have been impacted differently by the energy transition

Indexed to Jan 2007

2009: 20-20-20 targets adopted

Note: Indexed to 4 Jan 2007, 3 months moving average Source: Utility Indices from FTSE


Significant investment is still required in the electricity sector to complete the transition… how will it be funded?

Indicates the investment required to meet policy objectives

~$3TN ~$7.6T

Source: IEA World Energy Outlook 2014


But 100GW of new thermal capacity will also be required to maintain system adequacy through to 2035

Note: Reproduced from figure 3.17 in IEA World Energy Investment Outlook (2014) Source: IEA World Energy Investment Outlook (2014) – New Policies Outlook

150GW expected to come to end of its lifetime

between 2016 and 2025

Today’s excess capacity provides some ‘breathing space’ but then

reinvestment will be required


Declining returns for players across mature markets and asset classes cast doubt on investor appetite

EU Utilities

Indicative EU Utilities WACC (~7-8%)

Indicative US Utilities WACC (~4-8%)

U.S. Utilities

EU Renewables

Source: Bloomberg; Datastream


Decline in returns and load factors are driven by capacity growth outstripping demand in many countries

CAPACITY GROWTH POORLY MATCHED TO DEMAND CAPACITY GROWTH BETTER MATCHED

Italy

United Kingdom

USA

Denmark

Spain

Germany

Note: De-rated capacity calculated by multiplying nameplate capacity by common availability factors for all generation types except wind and solar PV. For wind and solar PV, capacity derated at the country specific 2012 average load factor for each country. Demand is total consumption. Both statistics indexed to 2006=100 Source: IEA, EIA, OFGEM

De-rated capacity Demand


In generation, thermal load factors declined by up to 30% since 2006 in Europe, US factors declined by 7%

Note: Combustible doesn’t include nuclear. Load factors calculated by dividing generation in a given year by the average of that year and the preceding year’s capacity Source: IEA Data Browser


In transmission and distribution, roll-out of solar is undermining economic models of incumbent operators

3. Customers switch to DG

Self-reinforcing

cycle

HOUSEHOLDS WITH D.E. DRAW LOWER ENERGY FROM GRID…

…WITH POTENTIAL TO REINFORCE GREATER D.E. UPTAKE

Curtailed output Distributed energy (solar)

Solar Wind

Natural gas Coal Geo / Bio Nuclear

Peak solar output (~3:00 pm)

Peak demand (~9:00 pm)

Utility “Death Spiral”


-50%

-59%

PRICES FOR INDUSTRIALS IN EUROPE SIGNIFICANTLY HIGHER THAN IN US

RESIDENTIAL CUSTOMERS FACING INCREASING ENERGY COSTS

Industrial and residential electricity prices in Europe ~50% more than in the US and rising faster

*2012 Prices Source: Global Trends in Renewable Energy Investment, 2014, Bloomberg New Energy Finance; Reuters


High industrial electricity prices in Europe and Japan will impact competitiveness of energy intensive industries

% Export market share for energy intensive goods

Source: IEA – World Energy Outlook (2013); IEA Amsterdam (2014)


Key questions the study is exploring

• How (un)investable is the electricity sector in developed markets?

• What are the key barriers to investability?

• What case studies illustrate enablers of “investability”?

Point of departure Choices

• What characteristics of a balanced energy policy framework and transition pathway are required to ensure investability of the electricity sector?

• What design of the market is required?

• What business and investor models could evolve to support this?


10%

US Forecast real rise in residential price by 2035

25%

Lack of public to willingness pay for decarbonisation could lead to policy instability, further reducing investability

Source: Swiss Re survey of 22,000 people in 19 countries (2013), IEA – World Energy Outlook 2013

Policy framework

EU Forecast real rise in residential price by 2035


The path taken is high cost: in the EU solar irradiation is mainly in the south and wind mainly in the north

Policy framework

WIND SPEED SOLAR IRRADIATION

Source: Bain analysis; Bloomberg New Energy Finance; EWEA: Energy production costs; EC - EU Energy in Figures: Statistical Pocketbook 2013; BP Statistical Review of World Energy – 2013; UK Energy Roadmap Update 2013-point 131


The path taken is high cost: EU invested ~$550B in solar and wind capacity between 2000 and 2014

WIND SPEED

GW de-rated capacity for major renewable states in EU XX Policy framework

SOLAR IRRADIATION

$550B



The path taken is high cost: If investments had been made optimally and shared, the EU would have saved ~$100B

SOLAR IRRADIATION

GW de-rated capacity for major renewable states in EU XX Policy framework

WIND SPEED

$450B



EU Emissions Trading System (ETS) failed to deliver a cost of carbon sufficient to drive adoption of renewables

• Recession led to surplus of carbon emission permits causing record low permit prices

• Carbon permit prices remain low, even after European Parliament restricted carbon auctions to support carbon prices in October 2013

• Even with coal plants requiring twice as many carbon permits as gas plants, low prices make it more economical to burn coal

Market design

Source: EIA, Reuters “Europe's coal power plants gain from rising Euro”; The Economist “The unwelcome renaissance”; Bloomberg “Europe gas carnage”


EU RENEWABLE INCENTIVE OPTIONS (2013)

Quota obligations

Tariff-based mechanism (Feed-in tariff and Feed-in premium)

EU CARBON PRICING MECHANISMS (2014)

ETS

Carbon tax

EU governments were forced to intervene directly to drive renewables growth

Market design

Note: The patterned colours represent a combination of instruments; Investments grants, tax exemptions, and fiscal incentives are not included Source: Fraunhofer ISI, Ecofys, EEG, World Bank, Environmental and Energy Study Institute

Both of the above Both of the above


The “guaranteed” returns on renewables attracted new investors – Germany example

Share of renewables installed capacity in Germany

Market design

*Largest four utility companies active in Germany Source: trend:research; unendlich-viel-energie.de; Company annual reports


Renewables installation volumes in the EU were much greater than targets and forecasts

INSTALLATIONS IN GERMANY WERE MUCH HIGHER THAN FORECASTED

Regulator Study, 2009*

EU OVER-BUILT VS. SELF-IMPOSED TARGETS

Market design

Actual

Note: * “Leitszenario 2009”, BMU (Aug 2009) Source: BMU, BEE, Lit search : IEA World Energy Investment Outlook, 2003 -2014; EIA “Tackling Investment”; European Commission


These policies added costs to the economy

Solar PV

Bioenergy

Wind onshore

Concentrating solar power

Other

Wind offshore

Market design

Note: Other includes geothermal, marine and small hydro Source: Recreated from IEA World Energy Outlook 2013


Policy support for renewables has waivered in some geographies due to these rising costs

RETROACTIVE CHANGE EXAMPLES Market design

Source: Literature search

United Kingdom

Date 2011

Proposal Reduction of solar

feed in tariffs with

proposal

overturned court

Outcome Change reversed

Spain

Date 2013

Proposal Subsidies for wind

installed pre-2005

removed. 2005-08

subsidies reduced

Outcome Change enacted

Portugal

Date 2012

Proposal Subsidies

reduced by €1.8

billion and end RE

guaranteed

purchase


Greece

Date 2014

Proposal Reduction of feed

in tariffs to PV by

30% with owners

funding deficit

reduction



Businesses and investor models

There is potential for a major change in the electricity sector toward customer-centricity

Current Model

Generation

and fuels Distribution Retailing Customer

Generation

and fuels Transmission Distribution

Future Model…?

Transmission

Meter

Meter

Retailing

Source: CSIRO (2013); E-lab – New Business Models for the Distribution Edge (2013); Bain Analysis


Example 1: Solar City provides a full end-to-end service for distributed solar generation

Source: Company webpage

• Provide upfront project financing

• Assess energy use and installation site

• Project energy savings over 20 years

• Design customised solar power system based on site audit and energy requirements

• Install system including permit applications, inspections and grid connection

• Monitor and manage system, including energy storage and demand response

Financing Consultation System design Installation Monitoring and

management



Example 2: Players have begun to enter the “connected home” partnering with utilities

1 HARDWARE &

PLATFORM

INFORMATION

PROVIDER

PARTNER WITH

UTILITIES

2 3

• Nest developed their

‘learning’ thermostat

hardware and platform

• Nest acquired

MyEnergy to provide

more detailed insights

into customer’s usage

• Partner with US

utilities for demand

response – Nest Rush

Hour

1 INFORMATION

PROVIDER

PARTNER WITH

HARDWARE

PARTNER WITH

UTILITIES

2 3

• Opower begun as an

information aggregator

and analysis company

for the energy sector

• Partner with

Honeywell to provide

analytics for wifi-

enabled thermostats

• Formed partnerships

with 75+ utilities

globally, helping to

provide demand

response and ToU

tariffs


Source: Company websites


Owned by EDF/Veolia GDF Suez

Services

• Energy infrastructure operation

• High-efficiency system design and management

- Heating and cooling systems

- Thermal services

- Industrial services

- Building management

• Energy consumption management

• Energy services

- Energy efficiency for homes and businesses

• Technical services

- Advisory services to ensure sustainability targets

- Assistance with CSR

• Facilities management

- Provide services like reception, catering, and housekeeping

• Business processes

Revenues €8.9B (2012) €14.7B (2013)

Source: Literature search

Example 3: Major utilities have developed strong energy services businesses via partly / fully owned sub-brands



Key investor profile shifts across value chain are in renewable generation and “beyond the meter”

Investment dynamics

Historically long-term, low-risk returns Nascent opportunities with higher risk profiles

due to uncertainty

Historical investors

• Generation – Utilities

• T&D – Utilities, Infrastructure, Pension and Sovereign Wealth Funds

• Retailing – Utilities

• Energy efficiency – Consumers (and government)

Emerging during transition

• Renewable generation - Utilities and developers with Infrastructure., Pension and Hedge Funds (direct exposure to assets)

• Flexibility (demand response) – Utilities, private equity (e.g. H.I.G. / CPower), others (e.g. Google / Nest)

• Distributed generation – Households (e.g. Germany), private equity and hedge funds (e.g. G.I.M / SolarCity)

• Energy Efficiency – Utilities (e.g. GDF / Cofely)

Generation

& fuels

Transmission &

Distribution (T&D)

“BEFORE THE METER” “BEYOND THE METER”

Retailing



Power sector is critical for economic development – as wealth rises so does electricity consumption per capita

R-Squared = 83% Slope = 91%

1% growth in GDP per capita translates in ~0.9% of electricity consumption

per capita growth

Source: EIA US, Economist Intelligence Unit, Bain analysis


Non-OECD markets will drive GDP and thus electricity demand in next decades

NON-OECD MARKETS WILL DRIVE GLOBAL GDP GROWTH

RESULTING IN SIGNIFICANT ELECTRICITY CONSUMPTION GROWTH

Source: Economist Intelligence Unit; IEA; Euromonitor; Bain analysis

3.4%

1.5% 0.4%

3.1%


To close demand gap in sustainable way non-OECD markets have to almost double their investments in coming years

~$3T ~$8T Source: IEA; Bain analysis

~$10T


Investment in the power sector of non-OECD countries has mainly come from government/public sector, reflecting the ownership structure of power companies

Heavy reliance on debt funding from state banks

OECD Non-OECD

Source: IEA


• Actively invest in education

and R&D to close knowledge

and human capital gap

Themes emerging from analysis of fast growing economies challenges and best practices

• Create effective public-private

partnerships to execute on

most efficient pathways - Be clear and consistent on the rules

and boundaries for public and

private participation (e.g. legal and

regulatory framework) to ensure

efficiency of Public-Private

Partnership

• Nurture favorable investment

environment - Align / commit on expectations

for profitability (investor returns) for power sector players

- Implement measures to reduce risk and decrease cost of capital

- Allocate residual risks to the most

appropriate market participants

- Develop innovative financing

schemes

• Provide level playing field for

technologies with adequate

recognition of their value - Ensure power markets are

technology agnostic, but adequately

reflect the full value of each

technology (e.g. carbon abatement,

flexibility, fast response).

- By exception, provide support to

nascent technologies that could

scale to be cost-competitive - but

with clear plan to phase out

subsidies once that is achieved

• Ensure seamless flow of

funds through value chain: - Reduce losses from non-metered

supply (e.g. China program on

smart metering)

- Commit to phasing out tariff subsidies and adopting cost-based approach (e.g. Brazil reform in 90s)

- Build societal support for investment in electricity system

• Set efficient, executable and

thus credible pathways to

policy objectives - Develop long-term roadmap to

ensure balance between renewable and conventional, centralized and distributed generation

- Policy maker should make ‘No

regret’ investments in infrastructure,

technologies, efficiency etc. (e.g.

Brazil Electricity for all program)

Policy framework Market structure Business and financing

• Create integrated policy framework to ensure balanced development of power value chain - Policies should be integrated across

power value chain that will secure

balanced development of

Upstream, Generation and T&D

(e.g. China’s focus on securing fuel

supply whilst simultaneously

developing power infrastructure to

generate and distribute electricity)

1

2

3

4

5

6

7

FOR DISCUSSION


Choices: Key questions for discussion

Policy framework Market design Businesses and investor models

How can we address the policy stability gap between

decarbonisation cost and public willingness to pay?

What design of the market is required to manage the

transition?

What are the options / potential outcomes for businesses and investors?

• How might the current roles of investors and market participants evolve along the value chain (e.g. innovative business / investment models)

• What choices can be made now that are most robust to uncertainty?

• What is the right balance of market mechanisms, direct interventions and regulation to manage the transition?

• Why has regional / global integration not occurred and how could the barriers be overcome?

• Is there a need for capacity remuneration in the US where intermittent renewable generation is increasing?

• Can we lower the cost?

• Can we gain societal alignment on incremental investments?

• Can we otherwise increase stability, e.g. using legal frameworks or autonomous institutions?

Policy framework Market design Businesses and investor models

How can we address the policy stability gap between

decarbonisation cost and public willingness to pay?

What design of the market is required to manage the

transition?

What are the options / potential outcomes for businesses and investors?

• How might the current roles of investors and market participants evolve along the value chain (e.g. innovative business / investment models)?

• What choices can be made now that are most robust to uncertainty?

• What is the right balance of market mechanisms, direct interventions and regulation to manage the transition?

• Why has regional / global integration not occurred and how could the barriers be overcome?

• Is there a need for flexability remuneration where intermittent renewable generation is increasing?

• Can we lower the cost?

• Can we gain societal alignment on incremental investments?

• Can we otherwise increase stability, e.g. using legal frameworks or autonomous institutions?


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apresentação do powerpoint - brazil energy frontiers information is confidential and was prepared...

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