Capacity Remuneration Mechanisms Investor lunch London, 21 October 2014 Volker Stehmann Corporate Affairs, RWE AG
Forward Looking Statement This presentation contains certain forward-looking statements within the meaning of the US federal securities laws. Especially all of the following statements » Projections of revenues, income, earnings per share, capital expenditures, dividends, capital structure or other financial items » Statements of plans or objectives for future operations or of future competitive position » Expectations of future economic performance; and » Statements of assumptions underlying several of the foregoing types of statements are forward-looking statements. Also words such as “anticipate”, “believe”, “estimate”, “intend”, “may”, “will”, “expect”, “plan”, “project”, “should” and similar expressions are intended to identify forward-looking statements. The forward-looking statements reflect the judgment of RWE’s management based on factors currently known to it. No assurances can be given that these forward-looking statements will prove accurate and correct, or that anticipated, projected future results will be achieved. All forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. Such risks and uncertainties include, but are not limited to, changes in general economic and social environment, business, political and legal conditions, fluctuating currency exchange rates and interest rates, price and sales risks associated with a market environment in the throes of deregulation and subject to intense competition, changes in the price and availability of raw materials, risks associated with energy trading (e.g. risks of loss in the case of unexpected, extreme market price fluctuations and credit risks resulting in the event that trading partners do not meet their contractual obligations), actions by competitors, application of new or changed accounting standards or other government agency regulations, changes in, or the failure to comply with, laws or regulations, particularly those affecting the environment and water quality (e.g. introduction of a price regulation system for the use of power grid, creating a regulation agency for electricity and gas or introduction of trading in greenhouse gas emissions), changing governmental policies and regulatory actions with respect to the acquisition, disposal, depreciation and amortisation of assets and facilities, operation and construction of plant facilities, production disruption or interruption due to accidents or other unforeseen events, delays in the construction of facilities, the inability to obtain or to obtain on acceptable terms necessary regulatory approvals regarding future transactions, the inability to integrate successfully new companies within the RWE Group to realise synergies from such integration and finally potential liability for remedial actions under existing or future environmental regulations and potential liability resulting from pending or future litigation. Any forward-looking statement speaks only as of the date on which it is made. RWE neither intends to nor assumes any obligation to update these forward-looking statements. For additional information regarding risks, investors are referred to RWE’s latest annual report and to other most recent reports filed with Frankfurt Stock Exchange and to all additional information published on RWE’s Internet Web site RWE Investor Lunch I RWE AG I London, 21 October 2014 Page 2
Agenda 1. Why a CRM in Germany? 2. The BDEW concept of decentralised capacity market 3. CRMs in neighbouring markets 4. Options discussed in Germany 5. Current government activities in Germany with respect to market design RWE Investor Lunch I RWE AG I London, 21 October 2014 Page 3
Capacity market – what is the issue? What happens in the Central-Western What do we know for sure? European electricity market? > Renewables (RES) are reducing the capacity utilisation of conventional power stations Photovoltaics/Wind > Overcapacity in conventional power plant park and renewables are lowering wholesale prices and thus revenues for conventional power stations > Renewables cannot provide guaranteed capacity, there is a lack of storage capacity German electricity > On a cool, windless evening, the system is under stress market comes under > The current electricity market does not provide enough pressure financing for a reserve margin > The electricity market is European. The capacity market which has been introduced in France, for understandable reasons, will place additional pressure on conventional generation in Germany, without being able to replace German power stations Neighbouring > If power station capacity is in short supply, the network capacity markets connections from France (2.5 GW) will not be sufficient The current electricity market design will provide a low level of security of supply due to the development of renewable energy and in light of the implementation of the French capacity market. The question is: is that politically acceptable? RWE Investor Lunch I RWE AG I London, 21 October 2014 Page 4
Growing uncertainty as to whether sufficient secure capacity will be available Development of secure capacity in Germany, 2012 – 2022 [GW] 2 5 6 88 12 0–10 0–10 69–79 5 3 5–15 5–15 Secure Addition of Secure Closures Phase-out Plant Secure Balancing Demand side Shortfall of capacity thermal capacity due to Large of nuclear closures for capacity energy management secure end 2012 power plants from Combustion energy economic end 2022 capacity at by 2015 renewables Plant reasons end 2022 Directive Source: AGORA RWE Investor Lunch I RWE AG I London, 21 October 2014 Page 5
Can renewables replace conventional capacities? 2012 2030 2012: BDEW, Entsoe DENA RES 135 TWh RES 308 TWh 315 TWh 85 GW 85 GW 480 TWh Firm Generated Firm Generated Capacity Electricity Capacity Electricity Needed Needed Today, 480 TWhs are financing 85 GW capacity. In 2030, only 315 TWhs need to finance the same 85 GW RWE Investor Lunch I RWE AG I London, 21 October 2014 Page 6
Rights, obligations and responsibilities in a capacity certificate system Monitoring (TSO & Certificate Registry) Capacity certificates are recorded in a central registry (issuer and current holder). In times of shortage in the Seller Purchaser system, compliance with obligations will be checked, (voluntary) (obligated) penalties will be imposed for violations Certificate Issuer Product Balancing group manager The issuer of capacity Capacity certificate (MW) Every balancing group certificates is obliged to manager must hold capacity produce electricity in times of certificates which amount to Obligation to Right to shortage or to offer electricity his energy supply to end produce draw power no higher than the scarcity customers at a time of electricity in for end price shortage in the system times of customers in shortage in times of the system shortage in the system To be stipulated by the state: Monitoring period/system shortage (BDEW proposal €300/MWh on the day-ahead market) Amount of penalty (BDEW proposal, 3 to 4 times the price of capacity certificates) RWE Investor Lunch I RWE AG I London, 21 October 2014 Page 7
The capacity market complements the energy market: Required power plants receive two sources of income The following costs of plant operators have to be Supply behaviour in electricity covered in the long term and capacity market Electricity market EUR/MWh A power plant operator offers power in a Demand competitive market on the basis of its Cost of Cost of Cost of capital short term marginal costs . i.e. the capital capital Fixed costs Fixed costs revenue must cover at least the variable Full costs costs of the electricity production (fuel, Marginal Marginal Fixed costs carbon certificates, etc.) Unit costs costs Marginal price MW costs + Capacity market EUR/MW The operator requires additional income Demand through higher electricity prices firstly to cover his fixed costs (costs for operating staff, running repairs and Full costs maintenance) Unit + price MW In the long term, the revenue > The energy market will continue to exist in its current form should cover the investment costs to > In the competitive capacity market, operators will offer just stipulate new builds enough capacity to compensate the revenue short-fall from (= cost of capital) the energy market required to cover fixed costs > In case of excess capacity, the capacity price tends to zero RWE Investor Lunch I RWE AG I London, 21 October 2014 Page 8
New responsibilities of the suppliers/ balancing group managers Responsibilities of suppliers Estimation of own load at times of shortage 1. Estimation of own load at times Load Load of Times of shortage in supplier of system shortage the whole system relevant for 2. Utilisation of opportunities for load capacity reduction by customers certificate 3. Incentivising customers to reduce Σ Load profile load at times of shortage (e.g. load related tariffs) Load profile 4. Commercial decision as to how many Customer 1 capacity certificates to purchase or be substituted by other measures Load profile Customer 2 Time Suppliers contribute together with their customers to the reduction of the required volume of firm capacity RWE Investor Lunch I RWE AG I London, 21 October 2014 Page 9
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