ENERGY FORUM 2012 VZ_konf/06_Peter Mitka.pdf · KPMG International Cooperative ("KPMG...

ENERGY FORUM 2012

New energetics of Lithuania:

Opportunities for business

18th December 2012

Vilnius

Global Energy trends and figures

Nuclear energy

Renewable energy

Key headlines


Nuclear energy

Renewable energy

4 © 2012 "KPMG Baltics", UAB, a Lithuanian limited liability company and a member firm of the KPMG network of independent members firms affiliated with

KPMG International Cooperative ("KPMG International") a Swiss entity. All rights reserved.

Global Energy trends and figures (1)

Source: IEA, 2011 global energy outlook.

A sustainable electricity system is the sum of a portfolio of interdependent technological solutions including renewables

Globally, during the past 10 years, coal was the fuel of choice, for most of the power generation capacity deployed (driven manly by

BRIC and Asian economic development, which are largely not impacted by the Kyoto protocol agreements and not carrying the

additional CO2 costs associated to that

0

1000

2000

3000

4000

5000

Oil Coal Gas Renewables Nuclear

Mto

e

Additional to 2035

2010

World primary energy demand

Renewables & natural gas collectively meet almost two-thirds of incremental energy demand in 2010-2035



Global Energy trends and figures (2)

Source: IEA, World Energy Outlook 2010..

World energy demand is on the rise

EU energy consumption is expected to level out in future but world energy consumption will continue to grow due to global population

growth and economic catching up.

Overall, world energy demand may grow by 45% between 2006 and 2030. In China and India, demand will nearly double.


Nuclear energy

Renewable energy

Key headlines



New nuclear build – key challenges post-Fukushima

Fragmented support of the nuclear generation across globe –

is this interim “fashion” or end of story in some territories?

Financing of the new nuclear build – why it is controversial

to support the new nuclear build and not e.g. renewable

energy?

New nuclear build versus nuclear decommissioning – can

public (authorities) avoid stepping in?

Nuclear industry challenges

post-Fukushima



Some statistics 1/2

Source: World Nuclear Association

Number of reactors as at November 2012

Country Operable Under

construction Planned Proposed

Argentina 2 1 1 2

Armenia 1 0 1

Bangladesh 0 0 2 0

Belarus 0 0 2 2

Belgium 7 0 0 0

Brazil 2 1 0 4

Bulgaria 2 0 1 0

Canada 20 0 2 3

Chile 0 0 0 4

China 15 26 51 120 Czech

Republic 6 0 2 1

Egypt 0 0 1 1

Finland 4 1 0 2

France 58 1 1 1

Germany 9 0 0 0

Hungary 4 0 0 2

India 20 7 18 39 Indonesia 0 0 2 4

Iran 1 0 2 1

Israel 0 0 0 1

Italy * 0 0 0 10 Japan* 50 3 10 3

Jordan 0 0 1

Kazakhstan 0 0 2 2

Country Operable Under

construction Planned Proposed

Korea DPR

(North)

0 0 0 1

Korea RO

(South)

23 4 5 0

Lithuania 0 0 1 0

Malaysia 0 0 0 2

Mexico 2 0 0 2

Netherlands 1 0 0 1

Pakistan 3 2 0 2

Poland 0 0 6 0

Romania 2 0 2 1

Russia 33 10 24 20 Saudi Arabia 0 0 0 16

Slovakia 4 2 0 1

Slovenia 1 0 0 1

South Africa 2 0 0 6

Spain 8 0 0 0

Sweden 10 0 0 0

Switzerland 5 0 0 3

Thailand 0 0 0 5

Turkey 0 0 4 4

Ukraine 15 0 2 11

UAE 0 1 3 10 United

Kingdom

16 0 4 9

USA 104 1 13 13

Vietnam 0 0 4 6

World 436 62 167 317

*Impact of Fukushima probably not reflected



Some statistics 2/2

Number of new reactors under construction, planned or proposed suggests shift of activity to Asia (mainly China and

India), Russia and Middle East

New nuclear build in Europe seems to be diminishing

Existing reactors are aging and hence gradually approaching end of useful life and shut down/decommissioning stage

Source: European Nuclear Society

Number of nuclear reactors worldwide by age as of 2012-07-02 (IAEA 2012)

Approaching Decommissioning

New builds mainly in Asia and rapidly aging existing nuclear fleet



Europe – approach towards nuclear energy across Europe (1/2)

Finland

UK

Belgium

Switzerland

Italy

Romania, Holland, Czech Republic and

Slovakia

Lithuania

Poland

Sweden

France

Germany

Policies vary from unquestionable refusal to unquestionable support

There is no common policy against nuclear generation within the EU member states post-Fukushima

• 8 new NPPs under consideration but

plans may change

• Decision to extend life time of NPPs

delayed until stress tests completed

• First, licensing process for 3 new NPPs halted

• Later, no-go to a nuclear generation!

• First, consideration about cancellation of

moratorium on no-nuclear

• Later, no-go to nuclear generation on the back of

public pressure

• No change. Local governments ready to

progress with the construction of new NPPs

• No change. Progressing with plans to

build its first NPP

• No change. All NPPs will remain in

operation until the end of useful life

• No to nuclear generation

• All NPPs to be shut down

• No change. Construction of new NPP progressing

• Gradual decrease of nuclear

generation share from current 75%

to 50% by 2025 closing down 24

reactors

• Construction of Visaginas NPP still in

pipeline but national support questionable



Europe – complete phase out in Germany (2/2)

Political decision on pre-term nuclear phase out in Germany will have significant

negative impact on both national economy and energy sector

German pre-term phase out

17 reactors generated energy for some quarter of annual electricity supply. After

Fukushima accident, 8 reactors were shut down immediately

Post Fukushima, Germany’s gross electricity production equaled 614,5 bn kWh with

only 17% coming from nuclear energy. Complete nuclear phase out by 2022 was

approved by the government

In order to achieve above goal, Germany needs to install 3,800 km of new electrical

lines by 2022. The proposal is expected to cost ca EUR20bn over next 10 years

Expansion of wind power on the North and Baltic Seas is expected to cost another

EUR12bn

Additional 4,000 km of existing lines must be modernized

According to 2011 report by the German Ministry of Finance, estimated total funds

necessary to complete the plan are some EUR300bn

Germany Net Imports of Electricity

Projected German net available capacities

Source: Eurostat, EIU Viewsvire, IMF forecast, KPMG analysis

2035

2034

2033

2032

2031

2030

2029

2028

2027

2026

2025

2024

2023

2022

2021

2020

2019

2018

2017

2016

60

40

20

0

Net cap

acity [G

W]

120

100

80

2015

2014

2013

2012

SolarWindBiomassHydroNuclearLigniteCoalNatural GasPump-storagePeak Demand RenewableFossil Total Demand

SolarWindBiomassHydroNuclearLigniteCoalNatural GasPump-storagePeak Demand RenewableFossil Total Demand

Picture left on the top illustrates immediate

impact of moratorium on expert/import

structure

Picture left in the bottom suggests future mix

of generation sources after the planned

phase out of nuclear by 2022. It suggests

greater proportion of renewable energy

which, as stated above, will require

substantial investments in grid and grid

upgrade

New build



Financing - challenges C

hall

en

ges

P

oss

ible

so

luti

on

s

Strategy for construction projects for new nuclear power

plants:

Business decision vs

Financial markets situation vs

Political situation

Financing:

Optimisation of financing strategy under difficult conditions

(strategic alliances?) and

Regulatory support (?)

Sourcing:

Limited list of suppliers for key components

Finding local suppliers and service providers

Knowledge and experience

Project management

Risk/return analysis of new nuclear power plants

Detailed analysis of future expected earnings and cash flows

Required market-adjusted ROI

Government incentives and regulation

Expansion of shareholders and investors

Project management and controlling with focus on:

Strategy, organisation and permitting

Cost and procurement management

Project schedule management

Systematic procurement strategy and processes (preparation,

prequalification, negotiation and award) for lowering of cost and

limitation of risks

1. Planning

project 2. Planning

3. Construction/start-

up 4. Operations/maintenance

5. Post

operations/decomm

issioning

Cash flow positive

Cash flow negative

Equity Equity Equity

Bonds

Redeployment

Sh. loans Sh. loans Sh. loans

Bank financing

Vendor/export financing

Equity

Sh. loans

Bank financing


Structured financing

Pro

jec

t c

as

h f

low

pro

file

F

ina

nc

ing

so

urc

es

pro

file

40-60 years

nominal cash flows

(illustrative profile as

basis for discussions)

Optimisation of project financing

New nuclear build faces number of controversial challenges

Development of nuclear power financing over the entire

life-cycle



Financing – regulatory framework (case: Czech Republic and Slovakia)

Total power supply price

Nuclear fundLignite support

FIT and premium

Network fees,

power tax

and PX fee

End-user power price

Gross marginSchedule deviation

cost**

Diagram costWholesale price

104-209 EUR/MWh

Fully competitive pricing Regulated tariffs

CAPEX

OPEX

Fuel cost

Generation market players

(household end-user prices regulated)

Sales channels

Standard products

Structured products

SK CZ

54-72 EUR/MWh

44-58* EUR/MWh

Source: European Energy Exchange AG

ELIX Base

Power price development on EEX

150

100

50

EUR/MWh

ELIX Peak

Products of the Czech and Slovak generators

(sold to a wholesale market) are fully exposed

to a market price fluctuations

Only structured products allow to add on

additional margin

Current market price does not justify

investments into the new generation capacities

Questions:

o Future market price and justification of

investments into the new generation and

nuclear generation in particular

o Role of regulators

Note: All prices are illustrative. *Lower value indicates baseload prices while higher value indicates peak load prices, ** May not apply to all consumer segments. It depends on who is responsible for system imbalance costs

Source: OKTE, RONI, Key market player’s annual reports, KPMG analysis and insight

• Only marginal cost of nuclear

and lignite is covered

• New nuclear power plant

developments are not feasible

Nuclear cost structure in 2012

Nuclear

(70.2 EUR/MWh)

Decomissioning Fuel

OPEX CAPEX and financing cost

0

20

40

60

80

100

120

EUR/MWh

23.2

5.0 3.6 14.6

33.8

Nuclear

(57.0 EUR/MWh)

0

20

40

60

80

100

120

EUR/MWh

23.7

2.0

3.6

18.2 46.5



Financing – stress tests impact?

Several areas were identified were the highest international standards and best practices are not applied:

Earthquake risk

Flooding risk

Minimum seismic hazard level

Equipment to fight severe accidents

On-site seismic instruments

Station blackout

Emergency operating procedures

Severe accident management guidelines

Passive measures

Containment filtered venting systems

Backup emergency control room

EC has also reviewed existing legal framework for nuclear safety. Amendments will be proposed in 2013. Presentation of further proposal on nuclear insurance and liability is under consideration and will follow in 2013.

EC recommended number of improvements to NPPs which were under the review

Decommissioning and waste

management



Costs and funding

Future costs related to shut down, decommissioning and

waste management cannot be ignored

Nuclear power plants must generate enough revenues to

cover the future costs of the decommissioning and waste

management

Funds to cover the future decommissioning costs are

typically held on balance sheets of nuclear operators or are

channeled by nuclear operators to national

decommissioning funds

In case of an early shut down sufficient funds are not

created and the state or taxpayers must step in

1. Planning

project 2. Planning

3. Construction/start-

up 4. Operations/maintenance

5. Post

operations/decomm

issioning

Cash flow positive

Cash flow negative

Equity Equity Equity

Bonds

Redeployment

Sh. loans Sh. loans Sh. loans

Bank financing


Equity

Sh. loans

Bank financing


Structured financing

Pro

jec

t c

as

h f

low

pro

file

F

ina

nc

ing

so

urc

es

pro

file

40-60 years

nominal cash flows

(illustrative profile as

basis for discussions)

Development of nuclear power financing over the entire

life-cycle Site Country NPP Type Costs Period

Greiswald Germany

5x440 MW

WWER-

440/V213

EUR 3,2bn 18 years

Connecticut

Yankee US

560MW

PWR USD 850m 9 years

Maine

Yankee US

860MW


Yankee

Rowe US

165MW


Bohunice

V1 Slovakia

2x440 MW

WWER EUR1,146m

15 years

(est.)

Kozloduv Bulgaria 4x440 MW

WWER EUR1,243m

23 years

(est.)

Ignalina Lithuania 2x1250 MW

RBMK EUR2,290m

20 years

(est.)

Above case studies suggest costs of the decommissioning and

waste management vary heavily case by case

Equally to total costs, timetables also vary on case by case basis

Robust project management and early planning with regular

updates of financial plans is of essence

However, there is no best practice yet as the industry is still in

learning process

Note: Immediate decommissioning option was adopted in all cases

Nuclear generation -

Concluding questions




Is new nuclear build an “ok” solution only for regulated (non-liberalized) markets?

Is new nuclear build (including its future decommissioning and waste management costs)

financeable purely on market terms or is there a case for a regulatory support?

Can nuclear development avoid to be political?

Is question about future of the nuclear generation a question of political or rather

scientific, technical, financial and environmental considerations?

Does it help at all in light of the nuclear liabilities, environmental issues and

market forces?

Do future new nuclear builds require cooperation of strategic (equity) investors

and other stakeholders (off-takers, communities, etc)?

To what extent knowledge and capacities are transferable cross-border or

oversees?

Are nuclear knowledge, skills and experience as well as suppliers’ capacities

potentially at risk of being lost forever in countries where nuclear has been

abandoned?


Nuclear energy

Renewable energy



Global Renewable energy: trends and figures (1)

Source: REN21, 2012 report

Share of the renewable energy on global final energy consumption, 2010





By the end of 2011:

Share of operating renewable capacities

on the global power generation capacities

to stay at more than 25% (estimated at

5,360 GW by end-2011);

Share of renewable energy supply to stay

at estimated 20,3% of the global

electricity supply, with most of this

provided by hydropower.

Estimated share of renewable energy on global electricity supply, 2011





Renewable power capacities (ex-hydro), EU 27, BRICS, 2011

World’s renewable power capacity (ex-hydro) dominates by Wind power energy, contributing total 230GW.





Renewable power capacities (non-hydro) TOP7 countries, 2011

Including hydropower, China, the United States, Brazil, Canada, and Germany (followed closely by India) were the top countries

for total installed renewable electric capacity by the end of 2011.



EU Renewable energy: trends and figures


EU-27 region targets 20% renewables share on the final

energy generation at 2020

(2010 = 12,4%).

Lithuania target 23% (2010 =

21,1%).

EU share of renewables on final energy generation in 2005 and 2010, with targets for 2020



Some EU member states are

cutting support for renewables

(austerity)

This trend is also felt across the

Baltics

In spite of that, renewable energy

is still widely supported and is

seen as a major economic growth

engine on a global level.


Global Renewable energy: state support (1)



Global Renewable energy: state support (2)

Overall, European countries remain committed to renewable energy production:

Sweden have exceeded their regulatory requirements for CO2 emissions to be achieved in 2020.

In 2010, Germany doubled its solar photovoltaic (PV) generation capacity, and the rate of solar installations grew even

faster in 2011. Further expansion is expected as a result of nuclear phase out.

Renewable energy companies in France have outlined a plan that would increase the sector’s share of French energy

market to 25 percent by 2020.

However, persistent economic problems across the Eurozone have caused many governments to

reconsider their support for renewables:

The UK has reduced subsidies by 50 percent, and Italy has made similar cuts.

In Spain, some subsidies have been abandoned altogether, leading to a significant number of solar panel

manufacturing plants being shuttered and thousands of employees laid off.

Source: KPMG Taxes and incentives for renewable energy, June, 2012.

EU demand on electricity and supply on energy

Nuclear energy

Renewable energy

Conclusions




What is the right generation mix given:

a) national demand profile (base vs peak load) and its future outlook,

b) likely development of national unbundling across value chain, introduction of competition across the

value chain and resulting impact on prices,

c) likely development of interconnection of national power market with a wider region, and

d) likely development of generation capacities in the wider region and demand/supply model for the

region

What is the right regulatory framework to justify/support the development of the desired

generation mix (feed in tariffs and renewable?, contract for differences and nuclear?)

What are geopolitical and political considerations?

© 2012 "KPMG Baltics", UAB, a Lithuanian limited liability

company and a member firm of the KPMG network of

independent members firms affiliated with KPMG

International Cooperative ("KPMG International") a Swiss

entity. All rights reserved.

The KPMG name, logo and ‘cutting through complexity’ are

registered trademarks or trademarks of KPMG

International Cooperative (KPMG International).

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