the value of hydro - cmvmweb3.cmvm.pt/sdi2004/emitentes/docs/fr16634.pdf · 2020. 7. 8. · the...
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The Value of HydroAntónio Castro, EDP Produção Chief Development Officer
1
The Value of Hydro
• Hydro operating flexibility provides higher revenues per MWh than other technologies:
1. Capacity to concentrate output in periods of stronger demand
2. Major provider of ancillary services: gaining importance with wind power growth
3. Capacity to store energy through pumping (namely surplus/cheap wind power)
• Low operating costs: CO2 emissions free, zero marginal cost, low O&M costs;
• Long asset life: Low maintenance capex
The value of hydro assets is increasing and they are scarce:No significant greenfield growth opportunities in Europe and there are no assets for sale
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Hydro achieves higher prices than the remaining technologies
Realized Price: Hydro vs. Other Technologies (€/MWh)(Example Spain 2007E)
Capacity Charge
Ancillary Services
Pool
Higher price than average justified by (1) ability to concentrate sales in peak-hours (2) capacity to compensate sudden changes in system balance (3) energy storage capacity through pumping
Source: EDP
Index
100
89
119
95
108
0
20
40
60
80
100
120
Final Price Nuclear Hydro Coal CCGT
3
50
55
40
58
50
60
Hydro is able to concentrate electricity sales in peak hours, which have better prices
Pumping: Capacity to store cheap and/or surplus energy (eg. wind output at night) and to sell it at higher prices in peak hours.
Reservoir
Imports
Run of River
Fueloil
CCGT
Coal
SpecialReg.
Consumption
Avg. hourly pool price 2H07
Pool Prices and Market Output 14.7.2007(Portugal)
Hours
Pumping Hours
Three categories of hydro plants:
Reservoir: Storage capacity between 1 week and 4-6 months. Concentrates production in peak- hours over the year
Run of River: EDP has run of river plants (éclusees) have a storage capacity up to ~6 hours allowing to sell at peak hours over the day 1
€/MWh
Source: REN/OMEL 1 Excludes Mini-hydros
0
1000
2000
3000
4000
5000
6000
0 2 4 6 8 10 12 14 16 18 20 22
MW
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4
0
500
1000
1500
2000
2500
3000
3500
4000
4500
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
Hours
MW
Market Output by Technology at 14.7.2007 (PT)Portugal
Hydro is the main technology for ancillary services receiving revenues for assuring electricity system stability
Turbine start up time (min.)
Ancillary services market provides an important source of revenues: €375m in the Spanish market in 2007
Ancillary services market: balances electricity demand and supply close to real time, gaining relevant in moments of system instability
Cold Start
Reservoir
Run of River
Fueloil
CCGT
Coal
~450MW were suddenly out of
the system
180 360
60
600
90
15
3
15
Coal/Fueloil
CCGT
Gasoil
Hydro
Hydro and CCGTs are the key providers of ancillary services;
Hot StartSource: EDP
Warm Start
Extremely Expensive
Source: REN/OMEL Source: EDP
5
17%16%
19%
8%8%
4%
Portugal Spain Iberia Portugal Spain Iberia
2015E2007
Value of hydro rises with higher weight of wind in the system
Wind and Hydro Output (03.08.2007)Portugal
Hydro pumping storage: Matching intermittent wind output with demand needs*
Value of hydro increases with intermittent generation weight growth, namely wind
Source: REN/OMEL * Pumping price has to be 30% lower than selling price to compensate energy losses
Weight of wind in the Iberian Market (GWh)
Wind Output PriceHydro Output Hydro Pumping
Hours
Avg. Selling price: 82 €/MWh
Avg. Pumping price: 52 €/MWh
MW
-500
0
500
1000
1500
2000
2500
3000
1 3 5 7 9 11 13 15 17 19 21 23
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6
39
4
24
11
3
Fuel
Gasoil
CCGT
Coal
Hydro
Hydro plants in operation have a long expected useful life
In Portugal: “Lei da Água” Allows the extension of the concession period between 20-25 years
In Spain: “Ley de la Água” The concession can be extended for 10 years if a significant refurbishment is done.
Hydro has the longest useful life and potential to extend it
Remaining Expected Useful Life of EDP’s Generation Capacity in Iberia by technology
Source: EDP estimates
2007
7
0,2
0,6
1,0
1,4
1,8
2,2
Hydro Wind CCGT
0
20
40
60
80
100
Hydro Nuclear Wind Biomass Coal CCGT
Fixed O&M Costs (€/kw)
Investment (M€/MW)
CCGTCoalBiomassWindNuclearNewPlant
Repowering
Valuation (M€/MW)
Hydro plants’ deserve higher EV/MW multiple than other technologies
Higher revenues per MWh, lower operating costs and longer useful life period justifies a valuation premium in terms of multiples vs. other technologies
0,6-0,8
1,6-2,01,9-2,1
1,2-1,4
2,4-2,6
0,9-1,1
0,4-0,5
Source: EDP estimates. Valuation multiples based on recent transactions
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EDP’s Hydro Assets
9
45%
38% 37%31%
24%18%
edp Iberdrola ENEL (exc.Endesa)
Endesa PPC UnionFenosa
* **
* 2007E ** 2006
Hydro is key in EDP’s Generation Mix
Hydro Capacity in the Conventional Mix in Southern Europe Major Players in the Region (Sep-07)
EDP has the highest weight of hydro among major generation portfolios in Southern Europe
*** includes Alqueva
***
Source: EDP estimates and company reports
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Today 80% of EDP’s hydro assets In the Iberian market are remunerated by PPAs/CMECs
Annual Depreciation
ROA 8.5% real pre-tax
Contracted O&M
+
+
(Values updated to inflation)
EDP’s Hydro Inst. Cap. in Iberia
LT Contracted
Plants: PPA/CMEC
(80%)
Merchant Plants (18%)
Total (Iberia)
168
909
4095
2008
5172
Remuneration
Until the term of the former PPA contract if not before Jun-17:
PPA/CMEC
Energy sold in the market
Fixed Tariffs: In 2006 €85/MWh (updated to inflation)
Plant Type
Mini-Hydro* (2%)
Reservoir 30%
Run of River 49%
Reservoir/pumping
21%
Reservoir/pumping
41% Run of river 44%
Reservoir 15%
* Includes 100% of Pebble Hydro
Energy to be sold in the market
CONTRACTED GROSS MARGIN:
After the term dates of PPA/CMEC or after Jun-17:
11
The value of the extension of the hydro domain
In Feb-07 EDP reached an agreement with the Portuguese government to operate hydro plants that where under PPAs beyond the end of these contracts and until the end of their useful life (2047 in average);
Main assumptions in the agreement: electricity price at €50/MWh (real) and WACC of 7.8%: Cash payment to be done by EDP: €759m;
Concession of hydro plants (years)
The extension of the Hydro Domain allowed edp to relaunch its repowering program
9
39
30
AverageDuration of MW under
CMEC
Averageduration ofMW theMarket
AverageDuration of
HydroAssets
2008 2047
Source: EDP.
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Weight of EDP’s hydro capacity in the market will increase to 50% by 2015 and 100% by 2017
Hydro Installed Capacity Evolution in Iberia
EDP’s hydro assets retain the full upside of long term power prices
Hydro in Liberalised Market
Hydro with PPA/CMEC
MW
Liberalised Market
PPA/CMEC
Source: EDP.
6806
0
68066806680641423515312017931383909909909909
000266432913291409540954095409540954095
0
1000
2000
3000
4000
5000
6000
7000
8000
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
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Growing in Hydro
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Portugal has a high level of hydro potential undeveloped
Developed hydro potential in Europe
Hydro potential available
97%
86%
65%
France
86%Italy
Germany
78%Spain
Finland
Greece
PORTUGAL 46%
42%
Hydro potential developed
2020E
67%
-Why Portugal has lagged behind its Peers?
• System security reasons:
(1) High weight of hydro in Portuguese generation mix
(2) Low level of interconnection with Spain;
(3) volatility of annual hydro production in Iberia
• PPA term dates did not incentive repowering investments
• Ongoing 2x increase of interconnection capacity with Spain
• Start up of MIBEL
• Targets for renewables as a % of primary energy
• Increase, of oil, coal and CO2 prices
• Higher wind penetration increases the value of hydro due to:
(1) hydro’s storage capacity through pumping
(2) hydro’s ancillary services capability
-Growth drivers
Source: Ministry of Economy
15
5005
883
918234
Inst. Cap. in Iberia
Ongoing Investments
Repowering Projects
Potential Projects
18%
EDP expects to increase its hydro capacity by 36% until 2015 in the Iberian Market
Edp’s Investment Plans in Hydro
MW
36%
20202014/20152012/2013Dec-2007
Source: EDP.
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Construction to start in 2Q08New Plant2013369170Baixo Sabor
856883TOTAL
Construction to start in 2008Repowering2012150240Alqueva II
Construction to start in 1Q09New Plant20137241Ribeiradio (@55%)
Construction to start in 2Q08Repowering2012130191Bemposta II
Under construction Repowering2012135241Picote II
StatusTypeTo enter in Operation
CapexMWHydro Plans
EDP’s ongoing hydro investments in Portugal:883 MWs, accumulated capex of €856m
Ongoing Investments
Commissioning of ongoing hydro investments concentrated in 2012-2013
Source: EDP.
17
918TOTAL
2015310Paradela II
201585Cabril II
201488Salamonde II
2014435Venda Nova III
To enter in Operation
MWHydro Plant
Repowering Projects in Advanced Stage of Study
EDP has repowering projects in advanced stage of study, which totals 918MW and operating by 2015
Hydro Plan Repowering Project
Old PlantNew Plant
• Repowering is the refurbishment of a plant by including a
new generator group taking advantage from the existing
reservoir.
•EDP has exclusive rights on repowering of its plants
•Lower Capex/MW; lower environmental restrictions
The IRR of Repowering is in average higher than the
IRR of a New PlantReservoir
Source: EDP.
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Portuguese government announced intention to award 10 new hydro plants with a total of 1,096 MWs
EDP has a preference
rightHydro Plants Basin MW
To
be
Su
bje
ct t
o a
n in
tern
atio
nal
ten
der Fridão
Padroselos
Alvito
Gouvães
Foz Tua
Daivões
Girabolhos
Vidago
Almourol
Pinhosão
Douro
Douro
Tejo
Douro
Douro
Douro
Mondego
Douro
Tejo
Vouga
163
113
48
112
234
109
72
90
78
77
Total 1096
National Hydro Plant
• EDP already made a preliminary assessment of these projects and intends to compete for them in the international tender.
• EDP has a proven track-record on developing and operating hydro plants in Portugal.
• EDP will target attractive IRRs
EDP considers to be in a good position to be awarded a significant number of these projects
Source: EDP.
19
Hydro in Brazil
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Brazil: Strong demand growth, tight reserve margin and high level of undeveloped hydro
• Brazil has a stable and clear regulation with 75% of hydro power being sold through long term PPAs with distributors;
• New large hydro plants are contracted through auctions (2 auctions scheduled for 2008);
• Mini-Hydro plants & Repowering: More flexible and lighter environmental licensing process with shorter construction period (~2 years);
System’s reserve margin (GW)
Source: PDEE 2007; Energias do Brasil
1.1 1.6 1.4 0.3
-2.4-5.2
-8.2
-12.0
-16.5
2008 2009 2010 2011 2012 2013 2014 2015 2016
Needs of additional capacity
Electricity Demand (CAGR)
2007-2011 2012-2016
5.0%
5.2%
Source: EPE
• Brazil expects an increase in hydro generation capacity of approximately 60 GW from 2005 to 2020;
• Investments in electricity are set to rise in the next years.
• The main bottleneck to Brazil’s Hydro growth is environmental licenses;
Source: EDP.
21
Avg. Price’07 (R$MWh)
EDP’s hydro capacity in Brazil: 1,043 MW in operation, 1,589 MW projects under study
EDP has a proven track-record on developing and operating hydro
plants in Brazil
EDP Hydro Capacity In Brazil
1,043TOTAL 2007
105.9Avg. 2023PPA & Merchant
16112 Mini-Hydro
74.7*131MW until 2012
50MW until 2037PPA181Mascarenhas
86.32012PPA250Lajeado
132.32016PPA452Peixe Angical
MaturityContract
TypeMWHydro Plants
Avg. Life of PPAs: 10 years
MWHydro Plants
EDP Hydro Development Projects
1,589TOTAL
1,560Under Study
1,02212 Hydro Plants
53824 Mini-Hydro Plants
<30 MW
29Under Construction
Studies - Concessions to be awarded through competitive auctions.
Hydro Development Under Study
Santa Fé – PPA contracted until 2038 (124.99 R$/MWh);
Under Development analysis - concession can be directly attributed to EDP by the Brazilian regulator (main restriction: environmental licence)
* Average price from 2008 onwards - R$121,92/MWhSource: EDP.
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Conclusion: Hydro plays an important role in EDP’s generation portfolio and it should continue to increase
The value of hydro has been increasing in recent years, namely given the
increase of fossil fuels and CO2 prices and increasing penetration of wind
EDP has the highest weight of hydro in the generation mix in Southern Europe, 80%
of capacity is under PPA/CMEC but EDP retains full long-term market upside
Portugal has a 56% of undeveloped hydro power, which supports EDP’s unique
36% expected growth of hydro capacity in Iberian market in 2007-2015
In Brazil EDP is also looking for value enhancing growth opportunities in Hydro