Unlocking the Value of Flexible Generation PJM SUMMIT September 7 th 2016 Matti Rautkivi 1 Wärtsilä INTERNAL 9/8/2016
Project IRR Unleveraged project IRR in PJM with simple cycle machine! Project IRR PJM Market analysis 18% 16% 14% 12% 10% 8% 6% 4% 10.2% 13.5% 16.6% 2% 0% Day-Ahead Day-Ahead + Real-Time Day-Ahead + Real-Time + AS Project IRR -Wartsila 225 MW 2 Wärtsilä INTERNAL 8.9.2016 [Presentation name / Author]
MARKET Wärtsilä Doc.ID: Revision: Status:
The USA Volatility Map 4 The bubble size indicates the node volatility, the color average price Wärtsilä 08 September 2016 Energy Solutions 2015
Why volatility matters? Natural element of a well functioning market Will increase in future due to renewables and market design Flexible capacity able to extract value from volatility Value proposition Market players willing to hedge against volatility offtaker for flexiblity 5 Wärtsilä 08 September 2016 Energy Solutions 2015
Attractive market environment Affordable renewables Coal retirements Cheap gas FERC rule 825 Shorter settlement times Scarcity pricing New ramping products Renewables an attractive option Increasing volatility seen as an opportunity or risk? Renewables + Volatile market + Flexible Gas = The best investment case 6 Wärtsilä 08 September 2016 Energy Solutions 2015
BUILDING THE VALUE PROPOSITION Wärtsilä Doc.ID: Revision: Status:
2019 2019 2020 2020 2021 2021 2022 2023 2023 2024 2024 2025 2026 2026 2027 2027 2028 2028 2029 2030 2030 2031 2031 2032 2033 2033 2034 2034 2035 2035 2036 2037 2037 $/MWh Gas price [$/Mbtu] Forward electricity and gas price curves Monthly average electricity and gas forward prices were provided to Wartsila by a third party developer 100.00 90.00 80.00 70.00 60.00 50.00 40.00 30.00 20.00 10.00 6.00 5.00 4.00 3.00 2.00 1.00 - - Monthly average On-Peak price Monthly average off-peak price Natural Gas 8 Wärtsilä INTERNAL Day Month Year Presentation name / Author
Methodology to model hourly Real time and A/S prices Monthly forward curves Historical price patterns Future price curves Wartsila has generated hourly price patterns for day-ahead and realtime energy and ancillary services prices The hourly patterns are based on the historical prices from 2012, 2013, and 2014 The monthly average of modeled prices equals to monthly forward prices Gas prices were modeled on daily level by using the historical gas price volatility in Henry hub 9 Wärtsilä INTERNAL Day Month Year Presentation name / Author
Modeling approach Technical input Heat rates (GTPro) Variable O&M cost Capacity derating Start-up times Start-up costs Market input Future Day-ahead prices Future Real Time Market prices Future Ancillary service prices Future Daily gas price Modeling platform Dispatch tool for the future dispatch analysis 5 minute granularity to analyze the real time market Optimize the operation of asset against the LMP and offer capacity optimally between energy and A/S Assumes that capacity fits into the merit if it is feasible to operate the plant Takes into account temperature derating on hourly level Market model outputs Running hours and number of starts 5 minute dispatch profile Revenue per market Operating costs (fuel, VOM, start-up costs) Gross margin from the + market operations Investment inputs Investment cost Fixed Operation & Maintenance costs Financial model Project feasibility Project IRR Equity IRR Cash flows Capital structure Site input Elevation Price node information Hourly temperature data Cost of capital Capacity market income 10 Wärtsilä 08 September 2016 Energy Solutions 2015
THE SOLUTION Wärtsilä Doc.ID: Revision: Status:
WÄRTSILÄ STANDARD PLANT 225 MW SOLUTION 18V50SG-B Output Heat Rate* (HHV) Speed Dimensions (L/W/H) 18.81 MWe 8,104 Btu/kWh 514 rpm 63 x 18 x 21 391 US tons At generator terminals (pf 0.8, 0% tolerance) 12 Wärtsilä INTERNAL 8.9.2016 [Presentation name / Author]
FLEXIBILITY OF GAS ENGINES Load % Load % Min. up-time: 0 min 100 100 90 90 80 70 2 min to full load 1 min full unloading 80 70 60 60 50 50 40 40 30 30 20 20 10 0 0,5 min to synchronisation Min. down-time: 5 min Min. load per genset: 10 % 0 1 2 3 / 0 1 2 3 4 5 6 7 8 mins 10 0 Cycle #1 Cycle #2 Wärtsilä 34 gas power plant 13 Wärtsilä INTERNAL 8.9.2016 [Presentation name / Author]
THE BUSINESS CASE Wärtsilä Doc.ID: Revision: Status:
2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 2037 2038 Operating hours OPERATING PROFILES 7,000 6,000 5,000 4,000 3,000 2,000 1,000 - Full Optimization Day-ahead only Day-ahead and Real time 15 Wärtsilä INTERNAL 8.9.2016 [Presentation name / Author]
PROJECT FEASIBILITY 460 MW WARTSILA DAY-AHEAD ONLY ASSUMPTIONS Capacity [MW] 460 Overnight EPC cost [$/KW] 750 Equity share 30% Project lifetime [years] 30 Owner's cost [% of the EPC cost] 15% Debt share 70% Tax rate 37.5% Construction period [months] 18 Loan term [years] 20 Interest rate 5% Total investment cost [$ Mn] 407 Fixed O&M [$/KW] 5.7 Financial Model 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 Income Statement ($ Mn) Energy Revenue 98 100 102 104 107 110 113 117 120 123 126 130 Ancillary services Revenue 45 46 47 48 49 51 53 54 56 57 59 61 Capacity Revenue 27 27 27 27 27 27 27 27 27 27 27 27 Total Revenue 170 174 176 179 183 188 193 198 202 207 212 217 Fuel Cost 59 61 64 65 68 71 73 75 78 80 82 85 Variable O&M 16 15 15 15 15 15 15 15 15 16 16 16 Start-up O&M 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Start-up fuel 0.3 0.4 0.4 0.4 0.4 0.5 0.5 0.5 0.5 0.5 0.5 0.5 Market procurement 5 6 6 6 7 7 7 7 7 7 7 8 Gross Profit 90 91 92 92 93 95 97 100 102 103 106 109 Fixed O&M 3 3 3 3 3 3 3 3 3 3 3 3 EBITDA 87 88 89 89 90 92 94 96 98 100 103 105 D&A 14 14 14 14 14 14 14 14 14 14 14 14 EBIT 74 75 75 75 77 79 81 83 85 87 89 91 Interest 14 13 12 12 11 10 10 9 8 7 7 6 EBT 60 62 63 64 66 68 71 74 77 79 82 85 Taxes 22 23 24 24 25 26 27 28 29 30 31 32 Net Income 37 38 39 40 41 43 44 46 48 49 51 53 Free cash flow to project (407) 65 65 65 65 66 67 68 69 70 70 72 73 Project IRR 16.6% Free cash flow to equity (122) 37 38 39 39 40 42 44 46 47 49 51 53 Equity IRR 33.0% DSCR min 2.3 16 Wärtsilä INTERNAL 8.9.2016 [Presentation name / Author]
Project IRR Unleveraged project IRR in PJM with simple cycle machine! Project IRR PJM Market analysis 18% 16% 14% 12% 10% 8% 6% 4% 10.2% 13.5% 16.6% 2% 0% Day-Ahead Day-Ahead + Real-Time Day-Ahead + Real-Time + AS Project IRR -Wartsila 225 MW 17 Wärtsilä INTERNAL 8.9.2016 [Presentation name / Author]
A REAL BUSINESS CASE? Wärtsilä Doc.ID: Revision: Status:
Renewable Denton Plan Flexible gas generation 13% Market purchase 17% Renewables 70% 19 Wärtsilä 08 September 2016 Energy Solutions 2015
Portfolio highlights Renewables Main source of energy 52 % wind and 18 % Solar Affordable PPA contracts available Economic option Market Expose Expose procurement to market procurement prices to Extract market value prices from cheap Extract energy value Avoid from paying cheap risk premiums energy Avoid paying risk premiums Flexible gas Enable market procurement by hedging Optimal scheduling of capacity Extract value from volatility 20 Wärtsilä 08 September 2016 Energy Solutions 2015
$ Mn per annum Flexible gas capacity Does it make sense? Annual cost to serve load Savings over 20 years 200 180 160 140 Flexible vs Status quo Flexible vs Market 120 100 80 60 40 20 0 $ -750 Mn $ -975 Mn Status quo - Strategy Market Strategy Flexible gas Strategy 21 Wärtsilä 08 September 2016 Energy Solutions 2015
Wärtsilä Flexible Gas Plant The Best Investment Highest return on investment Favourable market conditions Real business case 22 Wärtsilä 08 September 2016 Energy Solutions 2015
Matti Rautkivi matti.rautkivi@wartsila.com www.smartpowergeneration.com