unlocking the value of flexible generationunlocking the value of flexible generation ... monthly...

© Wärtsilä INTERNAL

Unlocking the Value of Flexible GenerationPJM SUMMIT September 7th 2016

Matti Rautkivi

9/8/20161

© Wärtsilä INTERNAL 8.9.2016 [Presentation name / Author]2

Project IRR – PJM Market analysis

10.2%

13.5%

16.6%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Day-Ahead Day-Ahead + Real-Time Day-Ahead + Real-Time + AS

Pro

ject

IRR

Project IRR -Wartsila 225 MW

Unleveraged project IRR in PJM… with simple cycle machine!

Doc.ID: Revision: Status:© Wärtsilä

MARKET

© Wärtsilä 08 September 2016 Energy Solutions 20154

The USA Volatility Map

The bubble size indicates the node volatility, the color average price


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


Attractive market environment

• Affordable renewables

• Coal retirements

• Cheap gas

• Renewables an attractive option

• Increasing volatility seen as an opportunity or risk?

• Renewables + Volatile market + Flexible Gas =

The best investment case

• FERC rule 825

• Shorter settlement times

• Scarcity pricing

• New ramping products


BUILDING THE VALUE PROPOSITION

© Wärtsilä INTERNAL Day Month Year Presentation name / Author8

Monthly average electricity and gas forward prices were provided to Wartsila by a third party developer

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Gas

pri

ce [

$/M

btu

]

$/M

Wh

Monthly average On-Peak price Monthly average off-peak price Natural Gas

Forward electricity and gas price curves

© Wärtsilä INTERNAL Day Month Year Presentation name / Author9

Monthly forward curves

Historical price patterns

Future price curves

• Wartsila has generated hourly price patterns for day-ahead and real-time 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

Methodology to model hourly Real time and A/S prices


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

Site input• Elevation

• Price node information

• Hourly temperature data

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

• Capital structure

• Cost of capital

• Capacity market income

Financial model

• Project feasibility

• Project IRR

• Equity IRR

• Cash flows

+


THE SOLUTION


WÄRTSILÄ ‘STANDARD PLANT’ 225 MW SOLUTION

8.9.2016 [Presentation name / Author]12

18V50SG-B

Output 18.81 MWe

Heat Rate*

(HHV) 8,104 Btu/kWh

Speed 514 rpm

Dimensions

(L/W/H)

63’ x 18’ x 21’

391 US tons

•At generator terminals (pf 0.8, 0% tolerance)


FLEXIBILITY OF GAS ENGINES


0 1 2 3 / 0 1 2 3 4 5 6 7 mins

80

70

60

50

40

30

20

10

0

90

100

Load %

8

80

70

60

50

40

30

20

10

0

90

100

Load %

Wärtsilä 34 gas power plant

2 min to

full load

0,5 min to

synchronisation

Min. up-time: 0 min

1 min full

unloading

Min. down-time: 5 min

Cycle #1 Cycle #2

Min. load per genset: 10 %


THE BUSINESS CASE


OPERATING PROFILES


-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

20

34

2035

2036

2037

2038

Op

era

tin

g h

ou

rs

Full Optimization Day-ahead only Day-ahead and Real time


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

© Wärtsilä INTERNAL 8.9.2016 [Presentation name / Author]17

Project IRR – PJM Market analysis

10.2%

13.5%

16.6%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Day-Ahead Day-Ahead + Real-Time Day-Ahead + Real-Time + AS

Pro

ject

IRR

Project IRR -Wartsila 225 MW

Unleveraged project IRR in PJM… with simple cycle machine!


A REAL BUSINESS CASE?


Renewable Denton Plan

70%

17%

13%

Renewables

Market

purchase

Flexible gas

generation


Portfolio highlights

Renewables

• Main source of energy

• 52 % wind and 18 %

Solar

• Affordable PPA

contracts available

• Economic option

Market

• Expose

procurement to

market prices

• Extract value

from cheap

energy

• Avoid paying

risk premiums

Market

• Expose procurement

to market prices

• Extract value from

cheap energy

• Avoid paying risk

premiums

Flexible gas

• Enable market

procurement by

hedging

• Optimal scheduling of

capacity

• Extract value from

volatility


Flexible gas capacity – Does it make sense?

0

20

40

60

80

100

120

140

160

180

200

$ M

n p

er

an

nu

m

Status quo - Strategy Market Strategy Flexible gas Strategy

$ -750

Mn

$ -975

Mn

Annual cost to serve load Savings over 20 years

Flexible vs

Status quo

Flexible vs

Market


Highest return on investment

Wärtsilä Flexible Gas Plant – The Best Investment

Favourable market conditions

Real business case

Matti Rautkivi

[email protected]

www.smartpowergeneration.com

unlocking the value of flexible generationunlocking the value of flexible generation ... monthly...

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