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Update on the power situation in AsiaEdgar van der Meer Energy Analyst June 21, 2013117th World Chlor-Alkali Conference1

June 21, 201317th World Chlor-Alkali Conference2OutlineGeneration CapacityAsia and Selected CountriesGlobal Fuel CostsDemandAsian DemandWorldwide trendsEnergy ShortfallOutlookWhere are the tariffs headed?To look at where the electricity sector is headed, we must look at where it has come from. Not only in terms of past performance, but also, what sources are being used. The cost of energy, electricity in particular, is highly influenced by the cost of the fuel. Weve all seen the surge in oil prices recently, though its influence on the electricity market in Asia is not as profound as could be imagined. This first section of my presentation is about the installed MegaWatt Capacity of power plants in Asia with a close look at capacity in a few, selected countries. I will then look at the effects that certain fuel types and their use have on the price of electricity.

22013 Electricity Generation CapacityIn 2013, over half of Asias Electricity Generation Capacity is fueled by CoalOver of supply will come from only 3 sources: Coal, Hydro & GasJune 21, 201317th World Chlor-Alkali Conference3

This is the current situation in Asia. We see a clear major fuel source representing over half of the total installed generation capacity. This large influence of Coal is mainly due to China and India. These two countries are among the worlds largest consumers of the resource and the very scale of their energy consumption is a significant weight on the average. Recent trends in North America and Europe are showing a decline in the reliance on coal in favour of technologies such as Advanced Combined Cycle Gas power, and, an increasing share of renewable energy sources. Unfortunately for the environmentalists, with the exception of Hydro and until effective, large-scale methods of energy storage are developed, renewable sources arent (yet) up to the job of supplying a sufficient base-load of power to the grid. 32020 Electricity Generation Capacity

While lower, Coal will still be the major source for installed capacity in 2020Hydro and Gas remain in the number 2 and 3 spots but theres an increasing mixJune 21, 201317th World Chlor-Alkali Conference4In 7 years time, we forecast that the regions dominant electricity source, when it comes to installed capacity at least, will still be coal. Hydro and Gas remain in the top three, helped largely by an increase in gas powered plants in Japan and Indonesia. 42020 Comparison Asia vs. World

June 21, 201317th World Chlor-Alkali Conference5If we look at the mix and compare the region to the rest of the world, we see the same top three, however, there is far less coal capacity coal and a wider mix of power generation capacity fuel sources on a global scale. Just over of the worlds installed capacity are power plants using Coal, Gas, Hydro and Nuclear power.

What will happen to nuclear in North America and Europe is still very much uncertain at this stage. What is certain is that in the longer run, unless new capacity is developed or planned to replace the end-of-life nuclear plants, beyond 2035 we will start to see an increasing shortfall in our energy supply capacities.

Asian countries have in recent years, and certainly before the incidents in Japan, been planning and building new nuclear power plants. China and South-Korea have been putting forward plans for much-needed new nuclear capacity.

The effect that this will have on the price of electricity should be minimal. Nuclear energy competes well with other sources and it has been a reliable source of energy for many countries for many years. It is a very clean source of energy in terms of carbon emissions and though the costs of maintenance and security are likely to rise in the wake of the events of recent years; the price will remain steady and be a stabilizing force in the region.

5Generation Capacity (MW) China

June 21, 201317th World Chlor-Alkali Conference6Chinas need for electricity is staggering. With major electricity infrastructure being planned and rolled out; the priority is for quick-easy power sources.

Despite goals to achieve a reduction in carbon emissions; the ever increasing need for electricity is forcing China to look at the more polluting sources of energy.

The wind-energy sector in China is set to grow rapidly, however, with a capacity factor of only 25-30%, wind energy can only do very little to offset the electricity generated by conventional thermal sources whose capacity factors range between 80% and over 90%. 6Generation Capacity (MW) India

June 21, 201317th World Chlor-Alkali Conference7India has a Cleaner, Cheaper mix of energy with a large hydro-electric power capacity. Urbanization and the great peak vs. base load variances in the Indian power market mean that many fossil fuel energy sources are needed to supply the demand. 7Generation Capacity (MW) IndonesiaJune 21, 201317th World Chlor-Alkali Conference8

Indonesias capacity rests largely on coal, but also with an increasing trend towards gas powered plants. With an increasing domestic production of Coal and Gas, the fuel is readily available. India, on the other hand, has to rely heavily on imports from the Middle-East for Gas. 8Generation Capacity (MW) JapanJune 21, 201317th World Chlor-Alkali Conference9

Japan, of course as we all know, has in the past been a large consumer of electricity generated by nuclear power. Because of the immediate shortfall, the capacity of other sources of electricity has been utilized to the fullest extent. With the growing uncertainty of the future of existing plants and the almost certainty that there will be little to no new-nuclear coming online very soon; japan has to resort to gas.

Japans demand for LNG is driving up the price for this commodity in the entire region. This trend, also means that conversion of coal powered plants to gas fired plants is not happening in other countries as expected.

With many new LNG tankers being commissioned, and the cheap North-American price of exports, were likely to see a stable movement of the price of electricity as we reach a new equilibrium. 9Generation Capacity (MW) Korea - SouthJune 21, 201317th World Chlor-Alkali Conference10

South Korea is a major exception. With the capacity of Gas set to remain stable, nuclear and coal are on the increase. Though slowed down by the events of two years ago, its likely that the plants already planned will see commissioning and start supplying to the grid only a few years behind schedule. Able to provide a solid base load and high peak capacities, Korea is well positioned for industrial growth and is forecast to see very stable prices going forward. 10Price Effects of Coal-Fuelled Electricity GenerationPositivesWide AvailabilityEasy TransportHigh Energy ValueNegativesCarbon TaxationHigh Capital CostEnvironmental Cost RecoveryJune 21, 201317th World Chlor-Alkali Conference11The raw material costs of coal have shown relative stability in price over the last 20 years and I will come back to that in a later slide. There is, however much volatility in the sector with regards to emissions and other environmental costs. Because of its wide availability and relative ease of use; coal fired electricity generation has been the staple source worldwide for power generation. With growing concern worldwide about the effects and the high level of pollution associated with coal, the costs of managing this are what will drive up the price of electricity from a coal powered plant. This volatility leaves Asia, and China and India in particular very exposed. Chinas own targets of reducing greenhouse gasses are ambitious to say the least; however, in comparing the progress to other countries; chinas environmental standards are very relaxed. For the price of electricity this is, of course, very good and it does offer some stability. However, with the increasing demand for electricity and a more prominent exposure to the negative effects (smog, respiratory illness, etc.) its likely that the government will reach a point where it will have to toughen up on the legislation which will increase the costs of power significantly. One of the major benefits of the existing, and new coal infrastructure, is that the plants can easily and quickly be converted to natural gas or biomass which can help reduce emissions to meet any new standards, at minimal cost to the generators. Carbon capture and so-called clean-coal technologies are also measures which can be implemented but will ultimately press on the price both in the short and long terms. 11Price Effects of Gas-Fuelled Electricity GenerationPositivesHigh Energy ValueNew Reserves Increasing SupplyEfficiencies in use of Technology (CC / ACT)NegativesDifficult TransportCentralized AvailabilityJune 21, 201317th World Chlor-Alkali Conference12Gas, gaining in popularity because it is a cleaner technology than coal with the added benefit of combined cycle operation resulting in a higher output. Due to the nature of the plants, gas is a good source for peak load production, supplemented using renewables to help mitigate costs. 12Generation Capacity ConclusionsAsian Electricity Sector has a heavy reliance on CoalDisproportionate to the Rest of the WorldGas influence RisingHigh Oil Prices Pushing Diversification

June 21, 201317th World Chlor-Alkali Conference1313Price Developments of FuelJune 21, 201317th World Chlor-Alkali Conference14

The average global price of Barrels of Oil vs Million BTU of Gas vs Tonnes Coal. Real $, not corrected for inflation.

In terms of immediate price stability, we definitely see that Coal has not increased as much as Oil or Gas in price over the last 20 years. With large reserves and increased production to offset the high price of oil, its likely that coal will remain at a stable price point and help keep electricity costs low. Gas, traditionally a follower of oil is becoming ever more decoupled. Shale reserves in North America and Europe are being explored. Russia, which holds the largest natural gas reserves, is increasing its throughput to Asian economies via pipeline. Other countries and areas are also relying on a growing liquefaction capacity to export their gas resources as LNG. As production and transport costs go down, the high demand for gas in Asia is helping boost the price in these markets making it attractive for countries further afield to supply to this market. 14Raw Fuel Costs per kWhJune 21, 201317th World Chlor-Alkali Conference15Source: BP/EIA

Source and assumptions: http://www.eia.gov/tools/faqs/faq.cfm?id=667&t=2 based on annual averages.

We can see that the cost of non-oil fuels follows the trend of the cost of oil and petroleum based products. They are complementary and the electricity futures markets will reflect shifts in the price of oil. The OPEC cartel is doing its best to keep the price of oil above $100/bbl which does help non OPEC oil producers, however the biggest winners are the gas and coal suppliers who present themselves as viable oil alternatives for the industry. Shale Gas is set to flood the market with cheap fuel and lower transport are set to benefit Asia most helping to bring down the price of Natural Gas and LNG at the Asian hubs. Currently we are seeing a 500% premium in certain markets on the price of gas when comparing North America to Asia. With Korean shipyards building more tankers than bulk carriers, the industry is betting on a shift away from coal and towards gas. A wider Panama Canal and new facilities along the western coasts of Mexico, the United States and Canada will help facilitate the transport from the North American producers to markets in Asia and new pipelines connecting India to the Middle East will help supply meet demand there.

There will certainly be pressure on the price of Gas in these markets and its likely that though the costs will go down in Asia, the price will increase in other markets with prices of electricity increasing in these markets. 15What was your share?17,691,480,000,000 kWhJune 21, 201317th World Chlor-Alkali Conference16$4,560,834,057,610This is the total amount of electricity generated last year.

Taking a global average price, Ive done a quick calculation and the dollar figure you see below is an non-weighted total energy bill. 16Net Generation and Net ConsumptionJune 21, 201317th World Chlor-Alkali Conference17

Now that weve seen the sources of electricity, lets take a closer look at the consumption. The chart I have here shows the last 20 odd years and a projection of the net generation to 2020. This is on a global level. Ive also added a linear trendline showing the consumption forecast, should demand continue to grow at the same rate as it has in the past 22 years.

If that were to hold true, wed be starting to see some major problems in our electricity supply in the years ahead. Thankfully, though, the rate at which our electricity consumption is growing is slowing down. One of the striking features of this graph, however, is the efficiency of generation vs consumption. The wider the lines are apart, the less efficient the power supply is. With a sharp increase in the rollout of renewable electricity sources and their low capacity factors, its likely that these inefficiencies are likely to continue to grow.

Until we see a fully-integrated smart grid with better load management and load balancing, this increase will continue. The effect that this will have on prices is negligible, though. Much of these grid inefficiencies are the result of increased usage of renewable power sources such as wind and solar electricity. 17June 21, 201317th World Chlor-Alkali Conference18

The chart for Asia shows some differences in what were predicting for the rest of the world. Despite a general slowdown as consumption patterns change, Asia is forecast to show strong increases in the supply thanks to great increases in Generation Capacity.

Ive highlighted a general shortfall in my previous slide. The scenario discussed is not as likely to occur in Asia thanks to the construction boom. However, access to electricity remains a key factor and the consumption figures are not to be confused with Demand. Many Asian countries are lacking key infrastructure to provide energy to a larger percentage of their population. It will only be in the years to come and with much investment that this percentage will increase and the Electricity supply in many economies can be seen as reliable18So where are we headed?June 21, 201317th World Chlor-Alkali Conference19ConclusionsDependency on CoalHigh oil pricesLower cost of GasMore grid interconnectionsMiddle East Stability

June 21, 201317th World Chlor-Alkali Conference20Energy tariffs are set to show growth and it is our belief that, contingent on the price of oil remaining steady; we wont see too many rollercoaster rides. The price of gas and coal will help mitigate any fluctuations, but as weve seen these prices follow oil quite closely. Increasing grid harmonization and trade between countries will also help keep the prices down in the sector. Unfortunately for Japan, this wont be enough to help their energy shortfall and unless more nuclear plants are declared safe to operate, or serious replacement capacity comes online; the prices here are set to increase further.

In the short-term, electricity tariffs may even come down in certain economies. South Korea is still set to apply a lot of nuclear capacity which will help stabilize their energy costs.

One big spanner in the works, because of the regions dependence on coal could be environmental costs. With increasing global pressure to reduce the emissions of GHGs costs associates with any of these measures will be passed on to the consumers.

For India and Pakistan; Stability in the Middle East is paramount. European and American Sanctions have started to reach further than just Iran and threaten to cut off energy supplies and kill much needed projects for the growth in these economies. It is of course to be hoped that the situation improves however, there are alternatives and this has already been priced in the market. 20Thank youJune 21, 201317th World Chlor-Alkali Conference21Receive a Free ReportJune 21, 201317th World Chlor-Alkali Conference22

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