Electricity Markets A Consumer perspective Liechtenstein Palace conference, Prag September 2008.

Electricity MarketsElectricity Markets

A Consumer perspectiveA Consumer perspective

Liechtenstein Liechtenstein PalacePalace conference, Prag conference, Prag

September 2008September 2008

Liechtenstein conference 2

Contents

1. Global Electricity outlook

2. Overview of Europe situation

3. ArcelorMittal & electricity

4. Conclusion


Clear Shift towards much hardest times of Energy scarcity

The age of abundance is over : Competition for energy sources becomes fierce.

No more “easy” sources : Low hanging fruits are gone, we have to deal with huge investments to keep up with ever-growing demand and to cope with years of underinvestment.

Diversification of energy sources is becoming pivotal, both to guarantee energy security and to mitigate costs.

Need for consolidation to create entities with the necessary resources and clout to cope with the projects and investments needed.

Sources: IEA, GBN

Economy Supply /Demand Policies

?Environme

nt & Energy policies

Unsustainable shift towards developing nations.

More disruption in supplies.

Political conflicts increase and under-investment remains

Delayed shifts until weather-related and geo-political events take place.

Stringent regulations emerge to control investment and energy choices

$ ?

Prices fluctuate abnormally. Supply shocks cause price spikes and LT uncertainty

Energy prices

Cheap & abundant energy times are gone

With developing countries emergenceand older economiesrenewal needs

Energy complex isheading towardsthe « long road » scenario

Leading to long termuncertainty


On worldwide scale, a booming demand…

Electricity demand rises in every region, following population and economic growth Demand in developing countries grows twice as fast as in

developed ones In the long term, the developed world is no longer the driver of

power demand. Emerging economies take the lead and take part in key decisions such as technology choices

Sources: Exxon, IEA, Alstom

Exxon, 2007


… Which means big challenges ahead for supply : new capacity to be installed by 2030 > existing one

2010-2020 period will define the shape of the power industry for the decades ahead Especially in developing regions, where the sector is

expanding In industrialized regions, enormous replacement needs

for retiring plants

Enormous investments will be needed More capacities will be constructed in the 2005-2030

period than exist today, about 5 000 GW According to the graphs on the right, about 80% of the

capacities reaching 40years are being replaced. The rest accounts for long-life assets (hydro, nuclear)

Sources: Alstom, Exxon, IEA

New capacities by 2030 (GW)

4000

1200

5000

7800

0

1000

2000

3000

4000

5000

6000

7000

8000

2005 Retired New 2030

Capacity replacements and additions by region by 2030 (GW)

0

200

400

600

800

1000

1200

US

Eu

rop

e

Ru

ssia

Ch

ina

Ind

ia

Oth

er

Asi

a

ME

A

Afr

ica

La

tin A

m.

Oth

er

Additions Installed 2005

~1500 GW


Nuclear capacity outlook (GW)

365

2081

132

416519

0

100

200

300

400

500

600

700

Actual 2005 Underconstruction

Planned Proposed Retired IEA Refernce IEAAlternative

Interest in nuclear power is rising around the world Based on favorable economic and low CO2 impact Fuel resource is abundant when compared to fossil

fuels and accounts for a modest part of total cost (<10%)

Safety issues are a major concern. Come back of Nuclear Energy in the last years

Nuclear: A revival ahead?

Sources: IEA, Vattenfall, CitiGroup

Outlook: The IEA forecasts between 14% and 42% of nuclear capacity increase by 2030 More than 200 GW of NPPs could be built around the world in the study horizon The number of decommissioned reactors is difficult to quantify, due to the possibility of reconstruction Some countries have a stated policy for nuclear phase-out (Germany, Belgium…). However, worries about security

of energy supply lead to re-opening of the discussion on extension of nuclear use (UK)

+42%

(9% nuclear)

(11.5% nuclear)

50% of planned, not realized, 25% of actual, retired

NPPs are being built in many countries around the world During the last 20 years, expansion has been

concentrated in Southeast Asia (China, Taiwan, Japan, Korea, India)

In recent years preparations have been under way for extensive new construction also in the West

In many more countries, the discussion on nuclear is initiated: South Africa, North Africa, Middle East, Italy…


Contents




4. Conclusion


20

30

40

50

60

70

80

janv-03 mai-03 août-03 déc-03 avr-04 août-04 déc-04 avr-05 août-05 déc-05 avr-06 août-06 déc-06 avr-07 août-07 déc-07 avr-08

European electricity market openingResulted in rapidly increasing prices…

Upward convergence of overall wholesale electricity prices in Europe Disconnection between prices and economical fundamentals of electricity production Sudden increase in the margins of historical producers

+190%

Average long term price of the French park including investment needs = “Green Tariff”

Cost of development announced by EDF for its NPP

Historical operators argue having lost all their economic freedom.

Indeed, to avoid a cost based discussion, only the so-called “market price” is taken as a reference, bringing them advantages.

Evolution of year ahead base load price (€/MWh)


… due to market design change at the sole benefit of utilities Windfall profit has been further increased with EU-ETS

LT cost based system:

Electro intensive industries benefit from cost + long term prices

Tendency to over-investment ( “public service” constraints imposed to utilities + balanced tariffs)

€/MWh

TWh339 796924 305 218

Hydraulic CoalNuclear Gas* Fuel

Capacity 2001 indicative figures for EU 15(*): Gas used as main switching fuel

Different tariff levels

EbitdaCash cost

20

75

€/MWh

TWh339 796924 305 218Hydraulic Nuclear Gas* Fuel

Additional margin from market liberalization

« Market reference »

alignment

Short term Market based system:

Electro intensive industries do no longer get access to segmented cost-based prices

Power companies tend to limit their investments, therefore increasing market volatility

Increasing remuneration for interruptibility

12


Market organizations are more industryfriendly out of Europe

Australia:Pool is obligatory.Energy price: 20 to 40 €/MWhMaintain of regulated tariffs in some states.Lack of investments.

New-Zealand:Pool is obligatoryEnergy price + transport: 45 €/MWhMaintain of long term contracts for industrials.CO2: no market, ratified the Kyoto Protocol

South Africa:Failure of wholesale market > set up of a single-buyer systemEnergy price: 15 to 20 €/MWhRegulated tariffs will be maintained

Scandinavia:PoolEnergy price: 30 to 50 €/MWhLong term contracts + direct investments for industrials.Gradual disconnection between pool prices and fundamentals.

USA:Each state chooses its market organization18 are completely open to competition33 did not deregulate or interrupted the process (ex: California)CO2: local markets, did not ratify the Kyoto protocol

Canada:Each province chooses its market organization.Single buyer system in Quebec and British Colombia.CO2: No market, ratified the Kyoto protocol

United Kingdom:Failure of the pool > set up of pseudo bilateral systems with centralization and adjustment.Energy price: 50 to 80 €/MWh

Pool system« Power exchange » model« Single buyer » modelSystem depending on the States, no unique system

Continental Europe:Energy price: 65 to 75 €/MWhCO2 = EU-ETS


Contents




4. Conclusion


unit: TWh

(*) 2006 figures

Total Consumption 64.1 TWh

13.4

6.3

33.9

0.8

5.2

4,5

Electricity: with 64 TWh/yr(*), AM consumption exceeds the production of 5 nuclear reactors

With more than 50% of group consumption in Europe Electricity is key to our competitiveness


ArcelorMittal specificities…

Attractiveness for power plant projects On-site off gases project are big enough (up to 300 MW) Excess land on « brown field » is very attractive

Long term industrial visibility Blast Furnaces relining and re-investments, gives a 2025 - 2030 visibility

New Major steel projects in many countries New blast furnaces in existing plants will require additional power capacities Associated power plants to be built in real Greenfield projects (India, Africa)

Ability & willingness to invest whenever necessary & attractive Securing LT volume & cost


Temirtau

(Kazakhstan)

Kriviy Rih

Galati

Katowice

BremenEKO

Fos

Gent

(Cernavoda)

100 MW, 2013

2009-2028 (Exeltium)

Dunkirk

LT Contract – LT

Nuclear power plant – NPP

Sid Gas Plants

Thermal power plant – TPP

ArcelorMittal main integrated sites with off gases based assets or projects

Ostrava

Liege

On top of Off-gases power plants,AM developped thermal assets or participates to eitherVPP (exeltium) or real asset (Cernavoda) consortiums

Aviles Gijon


…Lead to specific opportunities

Synergies with on-site off gases power projects Meet both ArcelorMittal needs and new capacities search for Utilities

New projects co-invested with new entrants looking for brown field Joint administrative lobbying

Greenfield projects brings synergies for AM and Utilities From power plant fuel sourcing (mining…) to power production

Long term partnerships developed with utilities All potential opportunities assessed Appropriate means decided on a case by case basis (VPP, JV,

real asset offtake contracts…)


Contents




4. Conclusion


Global electricity market is heading towards higher & volatile prices scenario due to high growth in emerging markets & replacement needs in OECD

=>Utilities must face huge investments both in « home » country and in respective new markets

AM strategy is to reach long term self sufficiency to back its industrial activity (Cost + based on long term)

However, European market opening, is endangering industrial competitiveness On the short term, via price increases de-correlated from economic fundamentals

On the long term, by lack of new asset investments & impossibility to sign long term contracts

Clear Synergy for long term perspective between AM & utilities AM capability to invest or commit on the long term;

Attractiveness of off-gases based projects;

Brownfield lands availability.

Conclusion

Electricity Markets A Consumer perspective Liechtenstein Palace conference, Prag September 2008.

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Transcript of Electricity Markets A Consumer perspective Liechtenstein Palace conference, Prag September 2008.