This presentation is dedicated to construction of new unit (called K7) of power plant in Kladno – approx. 20km NW from Prague (capital of The Czech republic). Author of this presentation was involved in the construction since early strategic considerations in 2008 almost to finishing of the new unit in the spring of 2013.

1. by Miroslav Šebek
Former Strategy & Trade Manager of the plant
June 2013

2. About this presentation
This presentation is dedicated to construction of new unit (called K7) of power
plant in Kladno – approx. 20km NW from Prague (capital of The Czech republic).
Author of this presentation was involved in the construction since early strategic
considerations in 2008 almost to finishing of the new unit in the spring of 2013.
This presentation neither contains any sensitive data nor reveals business strategy
of author’s former employer – it presents only public photos, public results of
Czech Grid operator’s tenders and general strategic principles (also public yet
frequently ignored).

3. In 2008 power plant in Kladno consisted of two major lignite units (each
135MWe) build in 90’s, old hardcoal unit (34MWe) from 70’s and two quick
start gas unit (45MWe and 60MWe). Its operations were scattered among
four companies (ECKG was the most important one), all owned by Swiss
power company ATEL Holding. Following merger at 1 January 2009 all the
subsidiaries became unitary company Alpiq Generation (CZ) on 1 November
2009.
There have been long evident necessity to deal somehow with looming
decommissioning of plant’s oldest hardcoal unit. To terminate without
replacement or to build expensive new (and bigger) unit? First part of this
presentation is about it.
Convention for this presentation: prices in orange fields means prices of year’s
baseload futures at PXE (Power Exchange Central Europe) for next year (so it depends
on time context of particular slide).

4. During the year 2008 European power futures for years 2009, 2010 and 2011 followed rally
in oil prices and their subsequent fall too. Futures’ prices were already decreasing when
Lehman Brohters’s bakruptcy started world financial crisis.
This bubble hasn’t inspired decision on K7 in any way – even
preliminary analyses didn’t take place before middle of 2009.

5. Swiss owner of ECKG merged : Alpiq Group was established in 2009 in
Neuchatel Switzerland after the merger of two Swiss energy
companies Aare-Tessin Ltd. for Electricity (Atel) and Energie Ouest
Suisse (EOS).
Manufacturers of power technology (of boilers and turbines) were
invited to provide ECKG’s management team with their preliminary
offers which were subsequently compared and analysed.
At the end of 2009 final decision on K7 construction wasn’t made yet.

6. In March 2010 Board of Alpiq Holding reluctantly approved construction of new unit K7
(135MWe) of power plant in Kladno. The basis for the decision was not of a „bubble growing
forever“ character but of an incremental forecasting (see below). Subsequently some
negotiations with state and city authorities, power distribution company and grid operator
could have begun. Immediate impact on power plant site was zero. Not surprisingly, stream of
financial analyses, forecasts and model outputs demanded by Alpiq top management became
even more massive after the decision.
Power future’s prices remained almost steady throughout all year 2010 at the level
approximately 51 €/MWh.

7. June 2010June 2007
14,3%12,54%
In June 2010 took place major tender of Czech Grid operator on Ancillary services for years 2011 and 2012.
While power prices were continuously falling, success in this tender became a matter of survival. Czech
dominant player (ČEZ) bought market share by undercutting of its bid prices as much as 40% in some
services. ALPIQ was the only competitor of ČEZ who resisted such brutal move owing to its broadly
diversified portfolio of services. Obviously such success gave support to fresh (and still revocable) decision
on K7 building.
for year 2010 (in MWh) for year 2011 (in MWh)
Relative market share of companies in AnS market Relative market share of companies in AnS market

8. 10.3.2011 31.3.2011
51 €/MWh 57 €/MWh
In the wake of Fukushima disaster Germany immediately terminated operations
of its 6 NPP’s. The decision caused immediate sharp rise in European power
prices. It’s needless to explain how this surge had added to non-cancellation of
K7 project in critical time just before ground breaking. Nonetheless, the impact
of Fukushima was temporary – it died out before the end of 2011 year.

9. 2.5.2011
57 €/MWh
Groundbreaking Ceremony of K7 unit took place on 2 May 2011. After the
event was Cornerstone placed in entrance of the power plant in Kladno.
Nonetheless, factual building was still a few months in uncertain future.

10. Construction works on site were launched in August 2011 – at first took place
construction of new unit’s smokestack. All the construction was in very cramped
conditions – not only new unit was under construction but buildings of discharged
units had to be demolished and (almost) normal operations of power plant had to be
secured at the same time. E.g. company’s parking lot had to became workers’
conveniences and temporary depot of construction machinery and material in one.
13.8.2011 13.9.2011
55 €/MWh 56 €/MWh

11. At 30 September 2011, soon after beginning of K7 construction, Alpiq
CEO suddenly quitted. Thus, Alpiq became headless chicken for as long
as 15 months. In this time, retired power plant’s buildings were
demolished in order to give space for new boiler building and machine
hall.
13.9.2011 17.10.2011
56 €/MWh 54 €/MWh

12. In the winter of 2011-12 first structures of new boiler building altered skyline. At the
same time falling power prices made Alpiq top management anxious again… At this
time a cancellation of K7 project would have been very expensive, but the loss still
would have been far from total… At 1 November 2011 Alpiq Generation (CZ) merged
with its smaller sister company Alpiq Zlín, remaining its name unchanged.
17.10.2011 27.1.2012
54 €/MWh 50 €/MWh

13. Throughout this period of late winter of 2011-12 construction of boiler building made
substantial progress.
27.1.2012 27.3.2012
50 €/MWh 50 €/MWh

14. In the spring of 2012 cooling tower of new unit began to rise behind boiler building.
The frame of the boiler building was finished in May and parts of actual boiler were
begun to be installed inside. Power prices restored their downward direction that
time.
27.3.2012 29.5.2012
50 €/MWh 48 €/MWh

15. K7 cooling tower was completed in August 2012. Also all large parts of the boiler had
already been installed in boiler building by the end of August 2012. Finally, first beams
of K7’s turbine hall emerged that time.
29.5.2012 18.8.2012
48 €/MWh 48 €/MWh
First beam of K7’s
turbine hall

16. In June 2012 took place next major Grid operator’s tender on Ancillary services for years
2013 and 2014. Our competitors were probably so busy with their backstage arrangement on
the tender that they totally overlooked K7 construction (with its 150m smokestack and 100m
cooling tower!) posing big threat for them. Thus, Alpiq strenghten again its position at the
market. It was already too late to do anything with K7 even if we would have failed in the
tender but good news are always welcome...
June 2012June 2010
14,3%
18,42%
for year 2011 (in MWh)
for year 2014 (in MWh)
Relative market share of companies in AnS market Relative market share of companies in AnS market

17. In September of 2012 sheathing works on boiler building began. Main frame of
turbine hall was constructed before the end of October. Shocking news came in
October to Kladno from provisional Alpiq top management : “We are going to try
to sell you for the best price”. Thinking behind is unknown for author, if any have
ever been... See pictures below. Would you give a fortune for a power plant under
construction when many others (in operation!) would be for sale and power prices
would go from bad to worse?
18.8.2012 25.10.2012
48 €/MWh 47 €/MWh

18. In November and December of 2012 sheathing works on boiler building and turbine
hall were underway. Also some inner equipment of turbine hall was installed (not
turbine yet). Looming end of the 2012 caused next drop in power prices which was
driven by expected overcapacity of CO2 allowances in new period of Kyoto’s Protocol –
NAP III (2013-2020).
25.10.2012 27.12.2012
47 €/MWh 44 €/MWh

19. On 1st January began tenure of new regular CEO of Alpiq Holding with no immediate
impact on power plant in Kladno. All the company lived with preparation of its sale,
vendors due dilligence, data room preparation for investors etc...
27.12.2013 3.3.2013
44 €/MWh 41 €/MWh

20. When author quitted in Alpiq (at 31 March 2013) only finishing works on sheating
were still underway. Turbine was installed in April and start-up test were subsequently
launched. Mind boogling attempt to sell unfinished power plant for good price in
unfavourable market situation faded out with no comment from Alpiq top
management…
3.3.2013 1.5.2013
41 €/MWh 38 €/MWh

21. Current power price at level 38 €/MWh really doesn’t look very nice for future
profitability of new unit. Would be 90 €/MWh better?
No, because there is NO direct link between past and future prices of any
commodity ! So called “technical analysis” is just an astrology of modern times. So
called “forecasting” is usually no more than lengthening of lines.
Note: Such ghostly data structures on future also constituted substantial part of vendors due dilligence
(carried out by Ernst&Young) for potential investors during the attempt (mentioned few slides before) to sell
the power plant in Kladno.
Nobody has never even analysed or asked whether the new unit (and whole power
plant too) is technically good fit for future shape of European power industry.
Small, flexible, modern, lignite-burning, CO2producing, relatively simple, close to
Czech capital, with medium variable costs, experienced&relatively stable crew –
what does it mean for its future value?

22. Reputable Professor Richard P. Rumelt promotes his view of strategy creation as
surfing waves of change.
Take a look at some of these waves advancing now through European power industry on next
slides...
A wave is same for all surfers but what it actually does with a particular surfer
depends totally on his/her weight, experience, equipment, exhaustion, readiness,
prescience etc. Some surfers may enjoy white-knuckle ride, others may have
embarassing bath and the biggest losers may even be drown. Surfers trying to ignore
a particular wave or changes in its behavior will also probably miss happy end...

23. So called „Green energy“ is just a tick
on the body of classic power
industry. It can’t survive without
controllable and stable (=classic)
sources, but at the same time it may
kill them. Frequenly omitted point:
Europeans vitally need power, so
they MUST eventually kill the tick.
Such subsidized green tick does principally two bad things:
1) It devours investment which would otherwise go to classic sources.
2) Huge amount of subsidised energy presses down wholesales prices of power.
Second order effects of the two bad things above are following:
1) Investors are deterred from investment into classic power industry, so existing
classical sources became rare and indispensable.
2) Growing unpredictability of green sources demands growing flexibility of remanining
classic sources.
It results in one third order effect: big and insufficiently flexible sources will die first – even
if they have low variable costs.

24. Statistical analysis of grid frequency in The Czech Republic – normal month
Statistical analysis of grid frequency in The Czech Republic – anomal month
Source: Czech Grid Operator
Growing number of
unregulated sources
in Europe makes
power grid instable
and hard to keep its
standard frequency
50Hz. Major blackout
is looming… You can
imagine value of
small but quick start
power plant close to
capital city in this
dark case...

25. • Customers have improved in financial crisis their power management a great
deal!
• They are no more willing to pay big penalties for missing or untaken power.
• Naturally, they are also no more willing to share fruits of their careful planning
with a cascade of middlemen.
Source: Czech electricity market operator

26. No matter how is it called or veiled, quality of technical graduates in Europe
decreases rapidly. Causes of this state are not so much important for this
presentation as its impacts which are (at least) following:
1) Sophisticated power facilities can be still constructed, but not operated in
conscious mode. So they have to be operated in ‘trained apes’ mode with
major forfeiting of value added in favour of servicing companies or
individuals possessing the necessary high skills. Sometimes power company
even becomes real hostage of its high skilled partners.
2) Experience in company can’t be transferred from senior workers to their
junior colleagues – the gap is too large for non-pedagogues.
3) Very low rate of innovations and initiatives in such company – it’s hard to
improve a machinery which is in fact unfamiliar to me...

27. Power companies have always been harassed by politicians. This is neither new nor wave.
In fact, this wave should be rather called
However, since the start of world financial crisis in 2008, power companies have
become (for politicians) :
1) Scapegoats. Simply, voters are poor, because power companies are allegedly rich.
2) Substitute targets (instead of banks which are feared by politicians).
3) Opportunities to present bold action – like Germany’s nuclear shut.
4) Subjects of new and strange taxes – like gift tax on free Kyoto’s CO2 allowances
5) Feeding-racks – Boards and some parts of top management of power companies
are infested with retired politicians, family members of active politicians or their
puppets. With no expertise in the industry, they inflict big damages on the firms.

28. SHALE GAS
Nord Stream
TRANSGAS
NABUCCO
South Stream (Failed)
Nord Stream
South Stream
NABUCCO (failed)
TRANSGAS
Outline of gas sourcing of CEE region as it
was expected few years ago. Everybody
who has betted on such development
(even in COAL plant’s strategic
considerations), is now in nasty troubles .
Outline of gas sourcing of CEE region as it
it expected now. Russian dominance in
CEE is now obvious.

29. Surfers or alpinists frequently use phrases like „conquer a wave“ or „battle
with a mountain“. It’s harmless in their case.
On opposite, attempts of business leaders to battle with a wave of change are
not such innocent. To make matters worse, such attempts are usually
accompanied by unineterest in competitors. Ultimately, their company is
drowned.

30. All my presentations on strategy and corporate
culture
Personal planning of strategist http://www.slideshare.net/kerimek/personnal-planning-of-
strategist
My glosses to famous Sun Tzu’s The Art of War http://www.slideshare.net/kerimek/the-art-of-war-glosses
Surprising roots of bad organizational culture http://www.slideshare.net/kerimek/roots-of-badculture
Surprising roots of bad organizational culture – shortened version http://www.slideshare.net/kerimek/roots-of-bad-culture-
shortened-version
Strategic management as group of human beings http://www.slideshare.net/kerimek/strategic-management-
as-group-of-human-beings
Enlargement of a small power plant http://www.slideshare.net/kerimek/enlargement-of-a-
small-power-plant-project-and-strategy

31. Thank you for your attention!
Looking forward to your feedback, you can use my e-mail
miroslav.sebek@seznam.cz
or send me message at LinkedIn