Contact Energy Limited · NZX:CEN
Contact Energy — Investor Presentation (April 2008)
42 slides from Contact Energy's investor presentation, April 2008
Slide 1: Strategic Overview
Strategic Overview Presentation to Contact Energy Investors Queenstown April 2008
Slide 2: Disclaimer
Disclaimer This presentation may contain projections or forward looking statements regarding a variety of items. Such forward-looking statements are based upon current expectations and involve risks and uncertainties. Actual results may differ materially from those stated in any forward-looking stat
Slide 3: Overview of the past year
Overview of the past year • Over the past year Contact has made significant progress in its strategy development and execution • Contact has progressed various generation options: – Geothermal generation: 500 MW of new geothermal generation in various stages of development • Stage 1: 225 MW Te Mihi
Slide 4: Overview of the past year, contd
Overview of the past year, contd • Contact has also progressed its thermal portfolio – Gas-fired peaking plant: Up to 300 MW • First phase 2 x 100 MW units to be constructed adjacent to Contact’s CCGT at Stratford, Taranaki • In construction in 2008 and in operation by Winter 2010 – Baseload CCGT: E
Slide 5: Energy and climate change policy
Energy and climate change policy • At the heart of Contact’s strategy is the positioning around the Government’s policy framework • Two major planks of Government policy: – NZ Energy Strategy – 90% renewable energy by 2025 – Economy-wide Emissions Trading Scheme that sets a market price for carbon •
Slide 6: Political and regulatory update
Political and regulatory update • Climate Change legislation expected to pass before election – although now coming under more political pressure • Thermal moratorium will be contentious • National Party energy policy under development – Supportive of emissions trading – Questions over thermal morat
Slide 7: Contact's submission on Climate Change Bill
Contact’s submission on Climate Change Bill • Supportive of Emissions Trading Scheme • Uncertainty over importing of ‘hot air’ credits into NZ ETS needs to be addressed – Balance between short term cost minimisation and credibility of the ETS • 90% renewables target ‘ambitious but achievable’ • With
Slide 8: Prices are expected to rise
Prices are expected to rise • The policy environment is clearly guiding investment toward renewables • To realise the policy goals, wholesale prices are expected to trend toward the LRMC of wind • $85 -100 / MWh • Resulting in continued upward pressure on retail prices 120 Entry Limit Price $45/t Ca
Slide 9: A renewables scenario
A renewables scenario • Contact is supportive of the renewable target but it will be ambitious • Below is an illustration as to how this might be achieved – it is one scenario • Achieving this target depends heavily on wind, geothermal and from 2020, new hydro TWh Supply vs Demand: Mean Year Energy
Slide 10: A renewables scenario
A renewables scenario Supply vs Demand: Mean Year Energy TWh 90% Renewables 60 50 New Hydro New Peakers 40 New Wind 30 New Geothermal 20 Existing Gas 10 Existing Coal Existing Renewables 0 2008 2025 Note: one possible scenario only. 10
Slide 11: An alternative scenario
An alternative scenario • Under this scenario, gas becomes the marginal plant from around 2017 • This could be due to a number of factors: – Abandonment of the thermal moratorium – Capital costs of wind increasing relative to gas fired options – New gas finds coming to market at lower than expected
Slide 12: An alternative scenario
An alternative scenario • Under the gas world scenario new geothermal remains a key source of new generation • From about 2020 it is assumed that new hydro is built – this may however be substituted by further gas fired capacity Supply vs Demand: Mean Year Energy TWh Gas Future 60 New Gas 50 New Hyd
Slide 13: Implications for Contact
Implications for Contact • Contact believes that the broad structure of the energy industry will remain – namely vertically integrated generator/retailers • Increasing wind penetration will increase the volatility in the market – further reinforcing the value of having physical options to cover pric
Slide 14: Outlook
Outlook • Contact is very well positioned for a 90% renewable scenario – It has very good renewable options – Its thermal positioning supports these options • Contact also has options which could be exercised if the base load gas was required for any reason • In either case, Contact can seek to grow
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Slide 16: Overview of Gas Storage
Overview of Gas Storage Presentation to Contact Energy investors Contact Energy Offsite Queenstown, April 2008
Slide 17: Disclaimer
Disclaimer This presentation may contain projections or forward looking statements regarding a variety of items. Such forward-looking statements are based upon current expectations and involve risks and uncertainties. Actual results may differ materially from those stated in any forward-looking stat
Slide 18: Introduction
Introduction • In December 2007 Contact announced that it had acquired rights to develop a gas storage project in conjunction with Origin’s acquisition of the Swift Energy NZ assets • It is Contact’s current expectation that the transaction to acquire Swift’s assets will be completed during April •
Slide 19: Rationale for storage
Rationale for storage c& contact
Slide 20: Post Maui gas contracts
Post Maui gas contracts • Post Maui 367 gas, gas contracts are inflexible and far more expensive – Contact’s total annual gas cost is over $400m – Extracting an appropriate margin from each GJ of gas used is critical • There is little ability to bank gas under new contracts • There will be less gas
Slide 21: Gas Supply and Demand characteristics
Gas Supply and Demand characteristics • Gas demand reacts only partially to price signals – Residential and commercial customers are unable to switch easily to other fuels and they have limited on-site storage options – Generators and industrial customers are most able to switch to other fuel source
Slide 22: Changes in generation market will increase short term volatility
Changes in generation market will increase short term volatility • It is generally accepted that the increasing quantities of wind expected to be added to the electricity system will increase volatility • By 2014/15 close to 10% of all generation will be from wind; this is about 16% of installed cap
Slide 23: Example of market response to wind intermittency
Example of market response to wind intermittency Meridian wind generation and Haywards spot electricity price 3-5 February 08 1,200 120 1,000 100 Meridian’s wind 800 80 generation drops dramatically $/MWh MW 600 60 400 40 200 20 - - 03-Feb-08 04-Feb-08 05-Feb-08 Generation Price 8
Slide 24: How to approach valuation
How to approach valuation c contact
Slide 25: How does gas storage work
How does gas storage work • The gas storage project involves using a near depleted underground gas reservoir • Through an optimised combination of additional gas, compression and new wells the reservoir is repressured and able to store and then reproduce gas Observation Production & Observation Well
Slide 26: Sources of Potential Storage Value
Sources of Potential Storage Value • Replicate flexibility historically provided by production swing – In evaluating storage Contact has primarily focussed on the value in regaining the seasonal variation – a key value driver is the price differential to be gained between injection of the gas and ex
Slide 27: Optimise thermal generation
Optimise thermal generation • The charts to the right show: – the range of actual capacity factors for Contact’s thermal stations (excluding New Plymouth) over the last six calendar years – the historical price distribution curve for monthly HAY prices over the same period. • Over the total period,
Slide 28: Better efficiency in gas contracting
Better efficiency in gas contracting • Given the current gas portfolio thermal plants can back off in summer when prices are low and hydro volumes are slightly higher • Inflexible gas contracts require buyers to contract for maximum daily demand which can result in “over contracting”, whereas flexib
Slide 29: Managing short term volatility
Managing short term volatility • While wind may provide useful capacity additions over the long term, in the shorter term it is much less predictable. The “spaghetti” chart below shows the theoretical generation available from the Tararua wind farm for the years 1972 to 2005. There is no discernible
Slide 30: Hydro storage value as an analogy
Hydro storage value as an analogy • With 10PJ of storage and 170TJ/d of potential withdrawals, the gas storage at Ahuroa represents about a five-fold increase in Contact’s energy storage capacity • Contact’s gas storage will have the advantage of location in the North Island • Hydro inflows are unco
Slide 31: The increasing cost of pipeline balancing
The increasing cost of pipeline balancing • One of the key recent changes to the gas market is through the transmission regime • Since the introduction of open access to the Maui system there has been daily balancing – the actual application is muted at present due to the continued existence of the
Slide 32: Support for imported gas
Support for imported gas • Doubt still remains over whether indigenous Possible LNG gas can be found to replace reducing landing location supplies • It is apparent that LNG and CNG both require some form of storage – The most economic supply configurations seek to minimise time at the unloading bert
Slide 33: Australian third party access charges
Australian third party access charges • Transmission access: – Third Party access to gas transmission and distribution pipelines in Australia is governed by the National Third Party Access Code for Natural Gas Pipeline Systems (“the Code”) – This dictates principles for setting tariffs to allow acce
Slide 34: International examples
International examples • The proposed facility at Ahuroa would have around 10PJs (0.26bcm) of working capacity, roughly 4% of annual gas demand Total Gas Gas used Number of Working Peak output Storage Demand p.a. for storage capacity (mcm/day) capacity as (bcm) Generation facilities (mcm) % of (bcm
Slide 35: Why Ahuroa has been chosen
Why Ahuroa has been chosen c& contact
Slide 36: Why Ahuroa reservoir?
Why Ahuroa reservoir? • In coming to a conclusion to pursue storage in the Ahuroa reservoir Contact undertook a scan of all potential underground reservoirs. We also considered above the ground options • Most other underground options were rejected as not feasible for either technical or commercial
Slide 37: Ahuroa storage facility costs
Ahuroa storage facility costs • Indicative Costs and Economics – Expenditure • A total payment of about $54m to Origin covering: – purchase of rights relating to the storage project – the gas and LPG currently stored in the Ahuroa field to be used as part of the pad gas required • c$150m to develop
Slide 38: How the project will be developed
How the project will be developed • Under the arrangements agreed with Origin: – Contact will have beneficial ownership of the part of the mining permit to the extent of the areas covered by the Ahuroa gas reservoir – Contact will direct the activities to be carried out in that area including making
Slide 39: Timetable for development
Timetable for develooment c& contact
Slide 40: Project Phases
Project Phases • The storage project will be developed in two phases • Trial Phase – covering the next couple of years – Suspension of production from Ahuroa – Reinjection of Tariki gas upon approval of changes to the work programme – this requires the reversal of the compressor at the well site – E
Slide 41: Conclusion
Conclusion c& contact
Slide 42: Conclusion
Conclusion • Securing an option for gas storage is a key element in Contact’s strategy • It has been apparent for some time that new gas supply obligations are not consistent with the demand side requirements • This has been reinforced by the increasing focus on growth in renewables which tend to op