powerpoint presentation title in arial, 40 pt, blue

Trading / Gas Midstream

Investor Lunch

Dr. Markus Krebber

CEO, RWE Supply & Trading

14 April 2015

RWE Supply & Trading | 14 April 2015

Overview of RWE Supply & Trading

RWE Supply & Trading | 14 April 2015 PAGE 2

Trading / Gas Midstream comprises five business

lines – not all results are shown in the segment

> Global energy and commodity trading

> Origination deals related to energy & commodities

> Organic expansion into new markets and commodities, e.g.

US Power & Gas, Metals

Trading &

Origination

> Supply of European industrial customers with power & gas, as

well as providing commodity risk management solutions Commodity

Solutions

> Equity/equity-like investments in companies and assets

related to energy & commodities

Principal

Investments

> Commercial asset optimisation of RWE Group‘s power and

gas positions (Generation, Innogy, Retail)

> Result fully transferred to sister companies

Commercial

Asset

Optimisation

Legacy

portfolio gas

midstream

> Long-term gas supply contracts

> Storage and transport capacity contracts

> Management of Gate position


900

600

-600

-300

300

Stable operating result (excl. legacy effects) while

funding requirement significantly reduced

Tangible Asset Base

(Working Capital,

Investments)

€ millions

2,600 1,100 100

2012 2013 2014

IAS Operating result

Thereof Legacy portfolio

gas midstream

IAS Operating result (excl.

legacy effects)

0


Focus Topic: Principal Investments targets capital-light

high return investments across commodity markets

Description Status Selected Projects

> Financial investment in the Conergy Group,

a global photovoltaic EPC/O&M provider

and developer

> Completion of minority share acquisition

in March 2015

> Purchase of a UK coal-fired power station

and conversion to biomass using RWE

engineering knowledge

Lynemouth Power > Technical conversion project is in

progress

> Awaiting EU State Aid approval for

Investment Contract

> Acquisition, construction, and financing of a

UK ground-mounted photovoltaic project (37

MWp) and post-construction sale on pre-

agreed terms

> Kencot Hill was acquired in April 2014 and

constructed successfully

> Exit to end-investor Foresight was

completed in March 2015

> Focus: Private equity-type investments with attractive returns and fast capital recycling in combination with

leveraging RWE’s energy commodity expertise and market access

> Main investment themes: Renewable investments, arbitrage opportunities (e.g. shale gas/LNG) and commodity price

recovery plays

Kencot Hill

Blackhawk

Conergy

> 25 % participation in US Central

Appalachian coal mining company, including

exclusive coal marketing rights and coal

offtake options

> Although coal price remains at low levels,

investment is attractive due to embedded

commodity trades


Back-up: RWE’s forward hedging of conventional

electricity production (German, Dutch and UK portfolio)

Outright (GER nuclear and lignite based power generation) Spread (GER, UK and NL/B hard coal and gas based power generation)

2016 forw

ard

>30% >20%

-24 -21 -18 -15 -12 -9 -6 -3

Months before delivery of forward contract

-0

As of 31 December 2014

>40% >10%

2015 forw

ard

>30% >10% >40% >10% >40% >20% >50% >30% >60% >40% >60% >50% >80% >60%

>40% >10%

>90% >70%

>60% >10%

2017

forw

ard

>30% <10%

>90% >70%

>60% >20%

RWE Supply & Trading | 14 April 2015

Energy Wholesale Market Update


Various fundamental factors influence power prices

on the long-term forward market

Reservoir

level Power plant

new build

Marginal costs of

thermal plants

Power plant

closures

Available

capacity

Wind capacity

growth Subsidies &

technical

progress

Seasonal

temperature

forecast

Residential

demand

Air conditioning /

Electric heating

Industrial demand

Reservoir hydro plants

Supply

Demand

Power

price Cross-border

exchange balance

PV capacity

growth

CO2 prices Gas prices Crude prices Coal prices

Fuel forward curves

Weather impacts

Thermal power

generation

Comfort of

living

Energy

efficiency

Macro

cycle

Renewable

power

generation

A

B

C

D


A: German Power Demand:

Power demand is stabilising on low level

> Efficiency measures continue to weigh on power consumption, with the EU proposing an energy efficiency

target of 30% until 2030.

> Demand destruction prevails since the post-crisis recovery in 2010. However, it was slowing down in the

recent months.

> Data quality issues are increasing as the growing residential self-consumption of PV is based on estimates.

-20%

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-10%

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n 0

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Average Load YoY Change

Demand declined

sharply in the wake

of the financial crisis

Post-crisis

recovery

Demand destruction

ongoing but slowing down


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Ins

talle

d G

W

Total Installed PV and Wind Capacity

Wind Onshore Wind Offshore Solar

0

2

4

6

8

10

2014 2015 2016 2017

Ne

w in

sta

lle

d G

W p

.a.

PV and Wind Capacity Growth

Wind Onshore Wind Offshore Solar> Solar installation growth was relatively low with

only about 1.9 GW installed until the end of

2014.

> Our 2015 capacity expansion forecast for PV is

set at 1.8 GW, but may vary depending on the

success of the newly introduced tender process

for ground-mounted PV. However, we do not

expect the official target of 2.5 GW to be

reached.

> On the other hand, German onshore wind

installations surprised to the upside in 2014,

partly as producers accelerated their projects in

anticipation of the EEG reform. In total 4.1 GW

were installed from January to December 2014.

> The wind capacity growth forecast is set at

4.7 GW for 2015, thereof 1.9 GW wind offshore

capacity.

B: German Power Supply (I):

Higher renewables growth in 2015 due to offshore wind

Installed Capacity (Dec 14):

- PV 37.89 GW

- Wind 38.85 GW

(thereof 0.95 GW offshore)


-6000

-4000

-2000

0

2000

4000

6000

2014 2015 2016 2017

New-build vs. mothballed/closed fossil generation capacity

Hard Coal Lignite

Natural Gas Nuclear

-1.7

GW

-1.0

GW -0.8

GW

-1.2

GW

C: German Power Supply (II):

Balance of capacity closures and new-builds tightens

> Taking into account recent updates, closures

planned for 2014-2017 exceed new builds by 4.7

GW.

> The hard coal unit Mannheim 9 with a capacity of

845 MW will be commissioned in June 2015.

Additionally, Vattenfall’s coal unit Moorburg A with

800 MW capacity will commence operations this

summer.

> Europe’s most efficient gas plant units, Irsching 4

and 5, with capacities of 550 MW and 846 MW,

have been scheduled to be decommissioned on

1st April 2016 as operations are not profitable.

> If a capacity market will not be implemented,

further gas and coal closures are expected.

Moreover, additional lignite closures are

anticipated in the long-term, if the extra climate

levy (proposal from economics minister Gabriel)

for old lignite plants is realised.

Moth

balle

d/c

losed N

ew

build


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€/E

UA

EUA Y1

D: Emission Allowances:

Trilogue discussions supportive

> Trilogue* discussions about the implementation of the Market Stability Reserve (MSR) started. The next

meeting is scheduled for 5 May.

> Controversial topics remain the start date and the amount of unallocated allowances in the MSR.

> A compromise solution would suggest a start date in 2019 or 2020 in return for less unallocated

allowances to be placed in the MSR.

* Trilateral meeting with EU Council, Parliament and Commission


D: European Gas Calendar Spread:

TTF curve flattens as prompt supply gets tighter

> An unexpected production cut of the Dutch Groningen field by 4.4 bcm in Q2 led to an extreme short

squeeze in February. In July 2015, the government will decide whether to cut the yearly target of 39.4 bcm

to 35 bcm or whether to catch up on the production backlog in H2’15.

> An unexpected jump in Russian gas exports by ca. 100 mcm/d in March led to an abrupt stop to the rally.

> A technical problem at the UK Rough storage results in 1 bcm less storage capacity increasing the UK

sum/win spread.

> The forward curve could flip further into backwardation due to more LNG supply and storage capacities.

-3

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r 14

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y 1

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Jan

15

Ma

r 15

Sp

rea

d [

€/M

Wh

]

TT

F [

€/M

Wh

]

TTF Gas Front Year (FY1) vs. Second Front Year (FY2)

Spread

TTF FY1

TTF FY2


D: European Coal:

API#2 remains weak after a rebound from the 5y low

> The strong USD increases the margins for coal mining companies in their domestic currency. This implies

more downside potential in USD terms as effectively the marginal costs measured in USD dropped.

> The Columbian railway company Fenoco is not allowed to transport coal at night from the mines to the

harbour anymore. Since this was already the bottleneck of Columbian exports, the market will receive 1-

1.5 m tonnes less coal per month until the noise pollution problem is solved.

> Glencore contemplates shutting down some South African mines, potentially decreasing supply by 5

mt/year. It also outlined vague plans for mine closures in Australia. However, after the Japanese

negotiations where finished coal prices collapsed, unmasking all supply cut attempts as useless so far.

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$/t

Month Ahead Coal Prices

ARA DES (Columbia sets price)

South Africa DES

USA DES


D: European Coal Calendar Spread:

API#2 contango stable

> Despite dropping prices the contango did not steepen again between FY1 and FY2, implying that the

current oversupply situation is expected to be a long-term issue. Only minor improvements are priced in.

> However, due to seasonally weak demand the current prompt strength seems overdone. If the Fenoco

problem is solved and the current oversupply situations worsens, a higher contango in API#2 could be

re-established on the front end of the curve.

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Sp

rea

d [

$/t

]

$/t

API#2 Front Year (FY1) vs. Second Front Year (FY2)

Spread

API#2 FY1

API#2 FY2


D: Oil Calendar Spread:

Contango declining while prices rebound

> During the last 9 months, oil prices dropped significantly as the global oversupply became more imminent.

Main factors are the declining power of the OPEC and the increasing US shale gas production.

> Oil rebounded sharply in Jan/Feb 2015 when the attention shifted towards the rig count decline in the US,

as a result of lower oil prices. However, as storage levels kept increasing prices eased again. Currently,

worries about the Saudi intervention in Yemen were quickly compensated by hopes on a resolution of the

Iranian sanctions.

> From a fundamental point of view oil prices could drop more before a sufficient supply cut takes place.

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rea

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$/b

bl]

$/b

bl

Brent Front Month (FM1) vs. Front Year (FM12)

SpreadFM1FM12


German merit order in 2014: prices and volatilities for

different hours of the year

1 Excluding nuclear fuel tax 1 Source: RWE

A sunny and

windy hour

A sunny hour

with high intraday volatility

A average hour

with low intraday volatility

A cold winter hour

with low intraday volatility

A winter hour

with high intraday volatility

Announced for closure

or closure candidates

Marg

inal co

st

(€/M

Wh

)

Renewables

Nuclear1

Lignite

Coal

Gas

Oil

Others

System

services

Capacity (GW)


European Power Overview:

European power prices falter

> The recent price hike, which was caused by a price recovery across coal, gas, oil and carbon, has stopped.

> Belgian power prices decoupled again due to uncertainty about the return of the damaged nukes.

> UK power prices had been pushed up by gas prices as Norwegian outages and Dutch supply cuts for H1 have

resulted in below seasonal gas storage levels. However, increased Russian flows helped prices down again.

> German power prices have mostly decreased due to “shut-in renewable feed-in”*. Nevertheless, flow-based

market coupling and more fossil closures provide some medium-term upside potential for German power.

UK: Coal to gas switch, coal plant

reliability very high this winter, all

nukes back online

BE: 2 GW nukes (Tihange-2 and

Doel-3) still closed due to serious

safety concerns and respective repairs

NL: Gas dependent, hard coal plants

finally commissioned

FR: ARENH decision postponed

DE: Renewables feed-in,

fossil mothballing

NP: Improved hydro balance

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14

Ma

r 14

Ma

y 1

4

Jul 1

4

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14

Nov 1

4

Jan

15

Ma

r 15

Pri

ce

[€

/MW

h]

Cal16 Baseload Prices

DE Cal16 FR Cal16 NL Cal16 BE Cal16 UK Cal16 NP Cal16

* In times of high renewables generation, cross-border constraints limit exports


German Power Calendar Spread:

Forward curve backwardation decline continued

> In the beginning of 2015 the backwardation in the forward curve decreased, as the extra climate levy

(proposal from economics minister Gabriel) for old lignite plants is planned to come into effect in 2017.

> Ongoing fossil plant closures and returning risk premiums (as a result of increasing volatility in the

prompt) should lead to further relative strength in the back of the German forward curve.

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Sp

rea

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€/M

Wh

]

DE

Ba

se

[€

/MW

h]

German Power Baseload Front Year(FY1) vs. Second Front Year (FY2) vs. Third Front Year (FY3)

Y3-Y1

Front Year (FY1)

Second Front Year (FY2)

Third Front Year (FY3)


Generation margin for hard coal plants surged

reflecting plant closures in 2016/17

> German clean dark spreads increased further while the backwardation is flattening. The recent rise was

caused by Gabriel’s proposal, as it would curtail power supply while decreasing coal demand.

> Tightening supply/demand balance is getting priced into Cal’16 and even more into Cal’17.

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Dif

fere

nc

e C

al'1

6 -

Ca

l'1

7 D

ark

s [

€/M

Wh

]

Cle

an

Da

rk S

pre

ad

[€

/MW

h]

Clean Dark Spreads Germany

Cal'16 - Cal'17 Cal'15 Cal'16 Cal'17


Summary & Conclusion

What are the

power

fundamentals

telling us?

> Electricity demand stabilised on a low level.

> Despite reduction in subsidies, solar and wind generation will continue to grow in Germany.

> From 2015 onwards, plant closures will reduce the current generous capacity margin. Gabriel’s

proposal for an extra climate levy might trigger additional lignite plant closures.

> Carbon markets are supported by MSR discussions and the Gabriel proposal.

> The global hard coal markets continue to suffer from oversupply. Bullish news in the prompt were

shrugged off quickly.

> The Groningen production cut and less UK storage capacity tightened European gas prices, but were

partly offset by high Russian nominations.

> Crude oil markets remain fragile despite recent rebounds.

> Outright front-year power prices moved sideways. Additional plant closures and the introduction of

flow-based market coupling are supportive for German power prices.

> The backwardation on the power forward curve declined inducing a higher risk premium.

> Clean dark spreads in the back end of the forward curve are further increasing due to the

tightening fundamental picture.

> Fossil plant closures overcompensating renewable capacity additions support outright prices.

> Power prices outperforming coal prices drive dark spreads up.

> Gabriel’s proposal for an extra climate levy might further tighten the supply-demand balance and

introduce more risk premium.

What are the

primary fuel

markets telling

us?

What can we

observe in the

power and fuel

spreads

markets?

Conclusions

1

2

3

4

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