RWE AG CA-AP En, 30.10.2008 SEITE 1

Mitigating effects of „phasing in“ the auctioning of CO2-emission allowances after 2012

RWE AG CA-AP En 30.10.2008 Page 2

Summary

> Factoring the value of CO2 certificates into electricity prices promotes investment in greenhouse gas efficient, best available power plant technology

> New plant projects’ value even exceeded the value generators cashed in from grandfathering in NAP 1

> Investments in new power plants promote growth and employment (the economic boost in connection with current and projected power plant building programs is valued at > 50 billion EUR) and helps stabilise electricity prices.

> A number of power plant building programs have been cancelled due, amongst other things, to the uncertainties surrounding the future direction of European emission trading. Building projects with an investment volume of 20 billion EUR are at risk

> Full auctioning countervails power plant investment because it drives up new plants’ full costs (esp. for coal fired plants). Delays in investment will drive up electricity prices beyond the levels required for cost efficient climate protection

> Phasing in the auctioning of emission allowances in the 3rd trading period after 2012 can mitigate this effect at the consumer’s benefit.

RWE AG, CA-AP En, 05.11.08 SEITE 3

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1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Emission trading led to electricity prices at which new power plants became economically viable

1 1999, 2000: Spot prices; 2001 - 2008: Forwards for the following calendar year

€/MWh

Base load 1

Development of wholesale electricity prices since deregulation

1. Trading Period

Full costs of new coal-fired power

plants

CO2-Effect

> CO2 began affecting prices in the German electricity market during the 1st European emission trading period (2005-07).

> Pricing CO2 into the electricity price played a major role in making investments in new power plants economically viable

> This resulted in German electricity producers starting major power plant building programs

> Factoring CO2 into electricity prices promotes investment in green house gas efficient, best available power plant technology

RWE AG CA-AP En 30.10.2008 Page 4

New plant projects’ values even exceed the value cashed in from grandfathering

2005 2006 2007 2005 2006 2007

~ 16 billion €

German electricity suppliers‘ estimated financial benefit from the

allocation of free allowances

Value of German power plant projects started during the 1st emission trading

period (2005-07)

In the 1st emission trading period (2005-07) some 16 billion € in financial benefits through free CO2 emission allowances accrued to German electricity producers

Free allocation led to a favourable investment climate. The value of power plant projects started during the 1st trading period exceeds the value of the free allowances

2008 ff.

~ 19 billion € power plant projects started in the 1st trading period

Further projects worth some 20 billion. €

dependent on the post-2012

direction of emission trading

Source: BDEW, RWE

Project cancellations!

Uncertainty about post-2012 emission trading, local resistance, high fuel and commodity prices, put the investment boost at risk!

RWE AG CA-AP En 30.10.2008 Page 5

Power plant building programs = economic recovery plan without state aids

> New coal-fired power plants are among Germany‘s biggest investment projects

> Power plant building programs have a high multiplicator effect, with a great number of companies from different branches involved

> Example: RWE‘s 2.2 billion EUR investment in the BoA 2&3 power plant project generates a growth effect totalling more than 3 billion EUR.

> Current and currently foreseen power plant building projects amount to a 50 billion EUR boost to the economy

Building new power plants: involvement by sector

(indicative)

EngineeringBuilding and services

Other

Source: RWI

RWE AG CA-AP En 30.10.2008 Page 6

Full auctioning of CO2 emission allowances drives up new plant costs, delays investment, inflates electricity prices

Other costs

Fuel costs

Investment costs

CO2 costs

Change in the economic viability threshold as illustrated by the example of a new coal-fired power plant

Economic viability threshold with 100% auctioning

Economic viability threshold with „phasing in“

Source: Carbon Emissions – Emissions in remission?, Deutsche Bank, London, October 2008; RWE-EstmatesAssumption: 30 €/t CO2

Full costs of a coal-fired power plant

[1.000 MW]

> With 100% auctioning, suppliers have to spend more on CO2. The economic viability threshold rises significantly

> Investment projects for new power plants get delayed. They are only started when resulting capacity bottlenecks drive up prices to levels covering increased full costs

> Result: 100% auctioning causes a major increase in electricity prices

> “Phasing in“ the 100% auctioning can significantly mitigate this effect, as the price-driving effect of CO2 costs is incurred gradually.

„phasing in“ 2013-20

In 2008-12: ~ 50% non-free allocation!

Effect of electricity prices: ~2,50 €/MWh

RWE AG CA-AP En 30.10.2008 Page 7

The economy benefits from “phasing in”

> “Phasing in” mitigates rises in electricity prices related to CO2

> Half of the mitigating effects of “phasing in” benefit electricity customers,the other half electricity suppliers

> The mitigating effect leads to domestic customers consuming more and industrial customers having lower production costs

> Electricity producers have a greater incentive to invest more

“Phasing in“ has positive economic effects due to multiplicator effects

~ 20 billion €

Mitigated effect due to „phasing in“ (via lower electricity prices

and CO2 costs vis-a-vis 100% auctioning)

Effect of “phasing in“ 2013-20

Source: RWE estimates bases on external studies (Öko-Institut, WWF, EWI)Assumption: 30 €/t CO2

11 billion €

9 billion €

10 - 20 billion €

investments

Consumption, cheaper

production

Suppliers

CustomersEconomic

boosts