rwe’s perspective on the wood pellets market · – wood pellets: 2.5 million tonnes. rwe supply...

RWE Supply & Trading 17/11/2013

RWE’s perspective on the wood pellets marketA utility and trader’s perspectiveJorrit HachmerWPAC ConferenceVancouver, November 2013

RWE Supply & Trading 17/11/2013 PAGE 1

Agenda

> RWE – Introduction

> Why the long term market is fundamentally balanced

> Upstream concentration risks

> Downstream concentration risks + the Tilbury case

> Midstream market is underdeveloped

> Interaction Residential – Industrial Markets

> Future development in trading?


RWE is one of Europe’s top five integrated energy companies

Key figures for the RWE Group: 2012

> External revenue € 53 billion

> Operating result € 6.4 billion

> Cash flow from operating activities € 4.4 billion

> Credit rating Baa1 stable* Moody’s, BBB+ stable S&P

> Electricity production 156 TWh

> Gas procurement 38 bcm

> Gas reserves 100 bcm

> Gas production 2.6 bcm

> Workforce +70,000

Source: RWE 2012 Annual Report* Update 2013


Total power plant capacity

51,977 MW

RWE’s generation capacity

RWE has the largest portfolio in Germany and is a major player in Northwest Europe.

RWE Supply & Trading manages full power plant optionality.

Hard coal 12,090 MWLignite 11,111 MWGas 15,596 MWNuclear 3,901 MWRenewable energy 4,133 MWPumped storage, oil, other 5,146 MWUnder construction

Note: Only power plants with a capacity of >200 MW in October 2013 are displayed on the map. Numbers taken from annual report 2012


RWE Supply & Trading (RWEST) is the commercial centre

> RWEST is a key component of an integrated business model for the entire energy value chain

> RWEST is leading by example with an open and progressive business –firmly committed to liberalised, transparent and competitive markets


1 TSO = Transmission System Operator

The interface between the RWE Group and global wholesale energy markets

RWEST

Transfer of commercial responsibility

RWE’s generating companies

RWE’s sales companies

Sale of power and gas

Sale of fuels and emission certificates

Sale of power

Sale of options and emission certificates


Sale of power, gas, emission certificates

Trading

Sales & Origination

Commercial Asset Optimisation

Retail, small/medium sized industrials, municipals

Industrial customers

> Investment decisions

> Technical optimisation to increase value of assets

> Operation and maintenance of generation assets

> Face to the wholesale market

> Trading activities

> Physical and financial customer business, principal investments, complex illiquid transactions and services

> Internal/external back-to-back procurement

> Commercial optimisation of assets, fuel supply and asset hedging on behalf of generating companies

> Asset-backed trading activities

> Reserve & balancing, ancillary services, face to TSOs1

> Sale to customers (power, gas)

> Back-to-back procurement

> Lock-in sales margin

> Bear volume and credit risk


Embedded lignite supply

Emission/Green certificatesCoalPower Gas Oil BiomassFreight Weather


Trading: The interface to the world’s wholesaleenergy markets

> Some 35 analysts, including six meteorologists, ensure that our traders have a broad and fundamental understanding of the markets

> We translate our market perspective into our trading strategies, our investment portfolio and our asset optimisation business

> 2012 trading volumes included:

– Power: 1,177 terawatt hours (TWh)

– Gas: 377 billion cubic metres (bcm)

– Coal: 562 million metric tonnes

– Oil: 263 million barrels

– CO2 certificates: 1,064 million

– Wood pellets: 2.5 million tonnes


Producer, trader, end user of wood pellets

Upstream750,000 tonnes capacity

Midstream Covers the full interface for trading

Downstream2 - 3 mil. tonnes portfolio in 2013

> 170 mil. $ investment into a pellet mill in Waycross, GA

> 750,000 tonnes of pellets annually from 2012

> Industrial and domestic quality

Present

> EPZ & Amer 8/9 in the Netherlands

> Tilbury in the UK

> 3rd party business

Future:

> Lynemouth, Aberthaw,

> Amer, Eemshaven

> 3rd party business

> Wood pellet trading –physical and financial

> Integrated freight and logistics team

> Risk and credit management

> Optimization of

– Freight / logistics

– Storage / working capital

– Quality


Georgia Biomass, the world’s largest wood pellets plant


Pellets are shipped by rail to the Savannah port and by ship to the European market


UK conversions of RWE: Tilbury & LynemouthTHE PAST Tilbury Power Station

> Last generation at Tilbury was in August 2013 and the station was officially shut at the end of October 2013

> Did not qualify for Final Investment Decision (FID) Enabling for Renewables as Tilbury had already full converted to biomass (under ROC regime)

> Significant business risk from ongoing UK electricity market reform (EMR) without a CfD

> Because Tilbury was opted-out of the LCPD, it required a new permit to continue operation. This required significant additional cost that not all other conversions face

THE FUTURE Lynemouth Power Station

> Acquired by RWEST in December 2012 from Rio Tinto Alcan

– Currently running on coal into 2015

> Conversion to biomass in final stages of development

– Wood pellet demand ~1.5 million tonnes per year

– Applied for the FID enabling CfD (‘Investment Contract’)


2013 2014 2015 2016 2017 2018 2019 2020

Why the long term market is fundamentally balanced> UK conversions are the

largest demand driver that make the market short……

> … except that a utility only converts when the fuel is contracted long term

> This ‘demand pull’ triggers new build, bringing the market into long term equilibrium

demand pulled new build – maybe

demand pulled new build - likely

existing + de-bottlenecking


What do long term contracts look like?

Largest challenge is on the credit side. For some on tenor and cost pass-throughs

Producer’s dream deal Utility’s dream deal

Tenor > 10 year tenor > Some want 5 years, some want 10 years

Credit > Investment grade off-taker

> Producer not providing credit support or agree to credit covenants

> Strong credit support on Seller’s side in place

Price Structure

> Pass-through of raw material cost, US inflation, diesel and power

> Fixed price , fixed escalators preferred

Incoterms > FOB in US$ or CAD$

> Some prefer CIF to better control their port

> Some prefer FOB, same CIF


Upstream concentration risk is low> Many players, no single producer is projected to have more than 15%

market share

> Many plants, most large producers will operate multiple plants

> Each of the top loading ports are likely to have <15% market share

– Savannah*

– Chesepeak

– Mobile

– Price Rupert

– Vancouver

> High geographical concentration on USA, which is mostly a regulatory risk concentration

* Multiple terminals (ECT, GKT, Metro)


Downstream concentration risk is high

Possible 2020 scenario on discharge ports – Europe only

* This is a rough estimate only and utilities may shift volumes from one port to the other in a later stage (or in the spot)

Immingham

Tyne

ARAG

Other (UK, DK, other)

> Obvious geographical concentration in Europe, especially the UK, which brings regulatory risk (and FX risk)

> Top 2 power plants (Drax and Eggborough) could each be ~25% of the industrial European market

> Top 2 ports could each be ~25%* of the industrial market


The Tilbury fire in 2012> February 2012 a smouldering bunker rapidly escalated into a

serious fire

> Tilbury was brought back into service by the end of August 2012

> RWEST was asked to manage approximately 1 million tonnes that Tilbury did not take over

– Sales to third parties

– Time swaps

– Storage

– RWE took every single tonne as per contractual obligation

> RWEST views its ability to manage this as unique:

– Biomass managed through trading desk

– Diversified portfolio

• Internal customers in UK and Holland

• Third party business

– Partners in domestic and industrial markets

> If the future is like the past, RWEST expects to manage third party supply / demand disruptions as it has managed the Tilbury one

After the fire After repairs


The midstream part of the market is partly intrinsically limited and partly underdeveloped> Limited flexibility and contingency planning in production and contracts (incl.

freight)

Note; even a well developed midstream market can clearly not completely solve a major market disruption, but it can ease the pain.

> Limited merchant storage and contingency storage in logical locations

> Limited players / traders who maximize the markets ability to handle the imbalances

> Still lack of standardization, hindering trades and swaps

– Contracts – EFET contract is a good step forward

– Specs + sampling – Sampling practices differ too much globally still

– Sustainability – SBP is expected to resolve this in 2014 (former “IWPB”)


Midstream trading

Facilities to store / sieve

/ bag / re-load

Single or multiple

customers

Credit: Payment +

working capital

Ability to manage quality

Experience with the product

Ability to contract

long term

Will we see midstream traders in the supply chain?


How do we see the interaction with the residential / commercial heating market develop?

> The European heating market has grown consistently over the past five years

> 2013 has seen more active sourcing from the traditional industrial suppliers

> The industrial market was long in 2013 due to one plant in the UK. Some of this length has gone into the domestic market

> Going forward, the resi-I2 interaction is expected to develop into a midstream market. However:

– The opportunity may always depend on relative supply demands balances in each market

– When both markets are on the same side (both long or both short), there will be no interaction

European wood pellet demand from the heating market

Source: Christian Rakos, European Pellet Council

Thou

sand

tonn

es


Parting words> While the vast majority of the industry players are “one trick pony’s”, it is

important for the industry as a whole that the traded market develops further

> All players should welcome trading and remove barriers where ever possible. It is needed to have a robust market that can help sort out it problem as and when they occur

> RWE is committed to its role in this market as producer, trader and end user


DisclaimerThe information herein is made available solely for informational purposes. Nothing in this presentation, either express or implied, shall, or shall be construed to, create any legally binding obligation or is to be construed as investment advice, asolicitation or an offer to buy or sell any securities or related physical or financial commodities or to otherwise make any investment.

All information is believed to be reliable but is not guaranteed as being accurate, current, complete or error free. Neither RWESupply & Trading GmbH nor the RWE Group may be held liable for any direct, indirect, consequential or other losses or damages arising out of or in connection with the use of information or quotations. Any liability in cases of wilful misconduct or gross negligent acting remains unaffected. This presentation may contain forward-looking statements regarding the future development of the RWE Group and its companies as well as economic and political developments. These statements are assessments that RWE has made based on information available to the company at the time this document was prepared. In the event that the underlying assumptions do not materialise or additional risks arise, actual performance can deviate from the performance expected at present. Therefore, RWE cannot, and does not intend to, assume any responsibility for the accuracy of these statements.

The information herein is subject to copyright laws and may not be reproduced, distributed or otherwise commercially exploited in any manner without the permission of RWE Supply & Trading GmbH.

RWE Supply & Trading 17/11/2013

Thank you for your attention

Jorrit HachmerRWE Supply & Trading – Biomass Trading [email protected]

rwe’s perspective on the wood pellets market · – wood pellets: 2.5 million tonnes. rwe supply...

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