CCS Alliance for Risk-based Policy in collaboration with Hunton & Williams www.ccsalliance.net Presented by: Andrew Paterson CCSAlliance.net Washington, DC 571-308-5845 [email protected]Domestic and International Policy Dynamics for CCUS Deployment Factors Affecting Financing for Early Plants Bumingham, AL 8 June 2015 1
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Domestic and International Policy Dynamics for CCUS Deployment: Factors Affecting Financing for Early Plants
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CCS Alliance for Risk-based Policyin collaboration with Hunton & Williams
Moody's assigns A3 rating to China General Nuclear Power CoGlobal Credit Research - Singapore, October 18, 2012 -- Moody's Investors Service has assigned an issuer rating and senior
unsecured bond rating of A3 to China Guangdong Nuclear Power Holding Co. Ltd. (CGNPC). The rating outlook is stable.
RATINGS RATIONALE
CGNPC's A3 rating reflects it baseline credit assessment (BCA) of ba2, and a five-notch uplift, given the likelihood of very high support from the
Chinese government (Aa3 positive), under Moody's joint-default analysis approach for government-related issuers.
Moody's expectation of very high support is based on: 1) complete ownership of CGNPC
by the government; 2) CGNPC's strategic importance to China's economic development,
including advancement of clean energy; 3) the government's strong history of support."CGNPC's BCA of ba2 is underpinned by its dominant position in China's nuclear power industry, its large-scale and relatively low-cost power-
generation assets, stable cash flow, as well as its good access to capital markets and banking credit. It will also benefit from China's growing
economy and strong demand for power," says Ray Tay, Moody's Assistant Vice President and Analyst.
"The success of the nuclear power program is important to the Chinese government because of the reputational and political risks, and
importance to the country's energy strategy. The government has great incentive to ensure support for CGNPC, which is leading the
civilian nuclear power expansion program," adds Tay, who is also the Lead Analyst for CGNPC.
Under the country's current regulatory framework, CGNPC enjoys operation under a favorable tariff regime, in tandem with CGNPC's fuel security
through ownership of mines and CGNPC's base-load dispatch -- translate into strong profitability. CGNPC also benefits from China's robust nuclear
power sector regulatory framework, that has adopted international safety standards and closely monitors general operations and expansion progress
to ensure adherence to standards.
Despite these advantages, CGNPC faces certain challenges.
The company is currently expanding very aggressively, with installed nuclear capacity set to more than quadruple by year 2015 to 24 gigawatts
(GW) from 6 GW currently. This level of expansion requires a significant amount of capex, which we expect would result in high debt/book
capitalization in excess of 70% and low RCF/debt of below 5% for the next few years. In the absence of additional equity financing, we expect
FFO/debt will be under further stress and decline to around 4% in the next few years, while debt/capitalization will reach 75% in 2014.
As a nuclear power plant operator, CGNPC also faces inherent liabilities in relation to the disposal of spent fuel, decommissioning, and potential
incidents. In addition, the extent of its financial responsibility for these matters has been defined by the current policy framework, which provides a
degree of predictability. The Chinese government will also ultimately bear contingent liabilities, given its 100% ownership of CGNPC.
The standalone ba2 rating also reflects structural subordination at the holding company, as more debt is held at the operating subsidiaries.
CGNPC has a sound liquidity profile, supported by its RMB25.3 billion in cash holdings and RMB12.6 billion in cash flow from operations in 2011, as
well as its easy access to the domestic bond market and bank credit.
The rating outlook is stable, reflecting Moody's expectation that: 1) CGNPC's capacity expansion will progress without delay or significant cost
overruns; 2) the policy and regulatory environment will remain stable; and 3) the company will not undertake aggressive overseas acquisitions.
Perspective from Shell (CSLF Financing Roundtable)
Dr. Graeme Sweeney of Shell,
summarized a majority
viewpoint in the roundtable :
1) Fossil fuels will remain
dominant until at least 2050;
so CCS is vital.
2) There are physical limits to
the rate at which new energy
technologies can be deployed.
Structured government
intervention is needed to drive
technology change. Energy
infrastructure takes decades
to turnover: e.g., power plants,
energy-intensive industry,
transmission, buildings,
vehicles, transportation
patterns, city planning.
3) We need policies and
incentives targeted specifically
at CCS to accelerate
deployment, and these policies
and mechanisms need to
adapt as deployment unfolds.
19
Societe Generale: Financing Challenges
20
CCUS: Where are we ? What do we need ?
TECHNOLOGY
Technical performance of carbon capture; [getting there…] ? ?
Proven performance of a replicable energy system, CCS ? More
[Why are wind, solar easy to finance?: mass-production; failed units easily replaced]
China (using >50% of all coal) is building much more gasification than any other country.
Where are we with public acceptance ?
ECONOMICS
Natural gas above $8/mBtu, and volatile (like 2000-05) Nø Yes
Cheap coal prices (<$2-$3/mBtu) Yes Yes
Oil above $80 with steady outlook (like 2013-14) Was… EnSec*
Electricity prices (>12c/KWh) with incentive for CO2 savings Nø YesOr… make something of higher value than electricity from coal (fuels, chem)
* Energy Security in Asia means using domestic coal vs imported oil, gas
POLICY
A predictable value for CO2 savings >$40/ton (not volatile) Nø ?
State takes long-term (>30 years) liability for CO2 leakage ? Yes
21
N. Am Asia ?
SASOL: What’s up (down) with that?
22
S&P 500
CVX
SASOL
BTU
Observations: Markets & Finance… Policy
Market & Finance Context
Electric load growth is flat (since 2008)
Extended outlook for low N.gas
prices (<$6 for 20 yrs) kills a lot.
Lower oil prices since late 2014
also pose a big challenge (EOR)
Cost overruns on large plants
make financing more difficult
Little CO2 pipeline infrastructure
US RGGI prices <$3 / ton
Cheap, older units running
• Interest rates remain low globally;
lots of capital worldwide
• Growth is highest in large coal
users: China, India 23
Political / Policy Context
Chances for a climate bill vaporized
in Summer 2010 (despite oil spill !)
US States reliant on coal deter GHG
emission caps, regulations
Pro-fossil Republicans control a
majority of state legislatures
Consensus from UN COP is
flagging; dim funding prospects
EU ETS failed to provide adequate
pricing (< €10/ton)
• Expectations running low for COP21
• What could come of US-China
bilateral GHG accord?
• Whither EPA Clean Power Plan ?
EIA (AEO 2015): Oil Price Scenarios
24
In the AEO2015 Reference case,
continued growth in U.S. crude
oil production contributes to a
43% decrease in the Brent crude
oil price, to $56/bbl in 2015
(Figure ES1). Prices rise steadily
after 2015 in response to growth
in demand from countries outside
the OECD; however, downward
price pressure from continued
increases in U.S. crude oil
production keeps the Brent price
below $80/bbl through 2020.
$200
$70
EIA (AEO 2015): N.Gas Price Scenarios
25
Projections of natural gas prices
are influenced by assumptions
about oil prices, resource
availability, and natural gas
demand. In the Reference case,
the Henry Hub natural gas spot
price (in 2013 dollars) rises from
$3.69/million British thermal units
(Btu) in 2015 to $4.88/million Btu
in 2020 and to $7.85/million Btu
in 2040 (Figure ES2), as
increased demand in domestic
and international markets leads
to the production of increasingly
expensive resources.
$8
$4/mBtu
Sudden Oil Price Slump Strands Investments
26
Dec. 2014: Bankers See $1 Trillion of Zombie Investments Stranded in the Oil Fields
risks. Few owners want to finance early CCS demos and plants.
Respondents expect that CCS equipment will work, and do not see CO2 transport as
a showstopper issue, nor do they see a CCS site failure as likely.
Clarity is needed on CCS liability to close financing – perhaps a “showstopper”.
Increases in coal prices or transport costs were not rated high risks.
57
Current Landscape: Challenges to Financing
The credit crisis deeply damaged project finance (no balance sheet), but at
least interest rates are low… for now.
Imported energy aggravates trade deficits and currency instability.
The fossil price roller coaster in 2008 increases revenue uncertainties, and a
reversal in oil and gas investment could trigger more volatility.
Volatile revenues (market prices) make debt financing extremely difficult.(and carbon trading increases volatility of energy pricing, compared to more stable tax policies).
Many alternative technologies have not achieved scale yet.
Intermittent nature of some renewable energy options poses physical limits
Conventional fossil-based sources wield a vast, already depreciated capital
investment advantage – but face expansion problems.
Regional differences on energy are severe, further fragmenting markets
State budgets are in deficit and will not rebound soon, hampering options.
The depth of the federal deficit demands that some subsidies be repaid.
Financing domestic-based energy resources is one of the best hedges a
country can make.
58
Commercial Scale Projects with CCS: Key Elements
Risk Analysis rooted in Project Structure
59
Public Sector
Policies
Mitigation Mechanisms vs. Critical Commercial Risks
60
Governments wield a variety of tools or mechanisms for mitigating critical risks. Subsidies cost the treasury more,
whereas, permitting preferences or liability coverage may address other risks more directly. In North America some
mechanisms are carried out at the state level (e.g., rate boosts or permitting) more than at the federal level.
World Coal Reserves
End of Cheap Coal, Nature 18 Nov 2010
USA and Russia wield the greatest
reserves, followed by China. Those
three countries account for nearly
60% of total reserves, but China is
the leading producer and consumer,
by far now with > 3 billion tons a year.
Australia is the leading exporter,
primarily to Asia.
South America has minimal reserves.
Unlike oil and gas, no new
reserves of coal are expected
to be discovered… but we
know where the coal is.
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Current annual consumption
= 7 billion tonnes
Why Coal?: Reliable supply, we know where it is, high energy density, not explosive.