RWE Generation PAGE 1

Managing Germany’s Energiewende

Ulrich Hartmann RWE Generation SE

5/11/2016

RWE Generation PAGE 2

“We will fail if we rely on economic planning regulations alone. (...) There is no better breeding ground for our ideas and solutions than our open society with open markets and free, fair competition.”

5/11/2016

German President Joachim Gauck at the opening of Environment Week, 5 June 2012

Source: http://www.bundespraesident.de/SharedDocs/Reden/DE/Joachim-Gauck/Reden/2012/06/120605-Woche-Umwelt.html

RWE Generation PAGE 3

But what’s the reality?

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Source: http://de.toonpool.com/cartoons/Marktst%C3%BCtze_170958

I have to support the markets!

Where are you going with all of

those bars?

RWE Generation PAGE 4

The transmission network operators must increasingly intervene in the market

0

1000

2000

3000

4000

5000

6000

7000

2000 2005 2010 2015 2020

Grid

inte

rven

tion

Year

0

200

400

600

800

1000

1200

0 2 4 6 8 10 12

Grid

inte

rven

tion

Month

2013 2014 2015

Power-related redispatch measures: 92.97%

Section 13 of the German Energy Industry Act (EnWG) Network-related measures, particularly through network switching and Market-related measures, such as the use of control energy, contractually agreed interruptible load, information about congestions and congestion management and

mobilisation of additional reserves. Section 11 of the German Renewable Energy Sources Act (EEG) In the case of grid overload, regulate directly or indirectly connected plants and cogeneration plants that are equipped with a mechanism for remote-controlled reduction of the

feed-in power

Network stabilisation interventions increase Probability of major network disruptions

increases *Source: http://www.netztransparenz.de/

No. of events Year *2015 *2014 *2013 2012 2010 2003

6324 3454 2687 1000 290 2

Redispatch measures throughout Germany*

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RWE Generation PAGE 5

Claims for compensation for feed-in management greatly increase

276

443333106

2010 2012 2011

73%

2009

+4.475%

83

2013 Q1–Q3 2015

201

2014

Total claims for compensation according to Section 15 of the EEG Compensation payment for wind (onshore)

Source: German Federal Network Agency

Compensation for feed-in management according to Sections 14 and 15 of the EEG

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€ million > Feed-in management:

reduction of feed-in from renewable energy, mine gas and combined heat and power (CHP) installations

> The operators of regulated facilities are entitled to a compensation of the incurred loss

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The free play of market forces is permanently disturbed by EEG subsidies

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22

107

154

89

Conventional generation

Photovoltaic Offshore wind Onshore wind

1 Compensation rates for 2016 | 2 Forward Prices Electricity Base load Cal-2017, Trade Date 1 April 2016 Sources: German Renewable Energy Sources Act 2014, BMWi, German Federal Network Agency, www.netztransparenz.de, EEX, AG Energiebilanzen e.V.

German Renewable Energy Sources1

Revenues for different energy sources

€/MWh

EEX base load2

Estimated market volume for 2016

€ billion

11 (73%)

4 (27%)

Subsidised Renewable

Conventional

Market volumes according to EEX base load price2

11 (32%)

23 (68%)

Subsidised Renewable

Conventional

Actual market volume according to EEX base load price2 and EEG remuneration

RWE Generation PAGE 7

Current decline in electricity prices puts pressure on conventional electricity generation

0

20

40

60

80

02.01.2013 02.01.2014 02.01.2015 02.01.2016

Cal17Cal18Cal19

> 50

< 25

Electricity base load price development in Germany

Lignite Hard Coal

Source: EEX, Fraunhofer ISE 2013

€/MWh

Full costs of new build plants 2013

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State-induced interventions are steadily increasing, no change through EOM 2.0 is expected

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> Rationale: Climate protection > 2.7 GW lignite from RWE, Vattenfall and Mibrag > Time horizon: 2016–2022, plant remains in the reserve for four years > Closed position > Reduces the demand for capacity reserve until the end of 2023

Security standby

Grid reserve*

New gas

plants for grid reserve

> Rationale: Security of supply > In total, ~4.4 GW is planned (in addition to security standby) > Time horizon: From October 2017, with the first auction in March/April

2017 > Contracted capacities in the south reduce demand for grid reserve to be

contracted. > No option to return to market

> Rationale: Grid stability > ~ 2 GW > Time horizon: from 2017,

after capacity reserve auction

> Access for European plants > No option to return to market

> Rationale: Grid stability > Tender for up to 2 GW of new

gas capacities in southern Germany Announcement in 2016, first auction in April 2017

> Only if new grid capacities are not available in time

Capacity reserve

* Grid reserve already exists in accordance with the German Reserve Power Plants Regulation (ReskV). New tender from 2017 based on EnWG.

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The crucial question of the electricity market

vs. progressive nationalisation Market solution

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Market solution: Decentralised capacity market by BDEW and VKU

Decentralised capacity market characteristics: > The electricity market is supplemented by a market for secured capacity. > Retailers (decentralized) determine how much secured capacity they need and buy this from the generator.

Generators are obliged to provide the secured capacity when the market is tight. > If customers do not need a secure supply, they don’t have to buy any performance certificates.

€ / megawatt-hour

Retail Renewables

€ / megawatt secured capacity

€ / megawatt-hour

DRM1

1 Demand Response Management

New markt design

Generation Stock exchange

Grid Customers

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France and UK have already decided to implement a capacity market Capacity market in UK und France

> Centralised capacity market > technologically independent, but

differentiate between new and old plants

> First auction on 12/2014

UK

> Decentralised capacity market, similar to the one of BDEW & VKU

> no discrimination and technology neutral

> Start in 2017

France

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“We will fail if we rely on economic planning regulations alone. (...) There is no better breeding ground for our ideas and solutions than our open society with open markets and free, fair competition.”

5/11/2016

German President Joachim Gauck at the opening of Environment Week, 5 June 2012

Source: http://www.bundespraesident.de/SharedDocs/Reden/DE/Joachim-Gauck/Reden/2012/06/120605-Woche-Umwelt.html

RWE Generation PAGE 13

A balanced power plant portfolio is one of the strengths of the German energy market

Hard coal

Nuclear energy

24%

9%

14%

Lignite

18% Gas

Water

32% Renewable

energy

Other

5%

3%

Gross power generation 2015

Source: AG Energiebilanzen e.V.

Other

Water

Gas

Renewable energy

Hard coal

6%

21%

5%

Lignite

27%

23%

7% 11%

Nuclear energy

Secured capacity 2015*

Source: Report from the German transmission network operators on the 2015 capacity balance (30 September 2015)

* Forecast value; last updated 30 September 2015, distribution over fuels without considering revisions, grid reserve power plants and reserves for system services

More than one in every three kWh is generated in hard coal and lignite power plants in Germany.

Coal power plants make up around 50 per cent of the plants that are reliably available, even when the wind isn’t blowing and the sun isn’t shining.

100% = 651.8 TWh 100% = 96.7 GW

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Agora‘s German coal phase-out proposal has significant consequences for Germany

Agora1 proposal: decommissioning of the German coal-fired power plants until 2040

Economic evaluation of EWI2:

No effect on CO2 emissions in Europe unless a retirement of emission allowance is politically feasible in Europe

Companies with coal-fired power plants would have an economic disadvantage of € 23 bn

Additional costs of € 72 bn for the European electricity market from 2020 until 2045, mainly paid by German consumers

Average abatement costs: 113 € / t CO2 for the period from 2020 to 2045

11.05.2016

1 ThinTank Agora Energiewende | 2 ewi Energy Research & Scenarios gGmbH | 3 European emissions trading system

Source: ewi, May 2016

Coal phase-out is obviously not the cheapest abatement option

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The greenhouse gas reduction target of 40% will be achieved in the power sector

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400

500

1990 2000 2010 2020

OthersWasteConverter gasNatural gasRefinery gasOilHard CoalLignite

- 43%

Source: Öko-Institut / Fraunhofer ISI (2015): climate protection scenario 2050, KS 80 scenario

Greenhouse gas emissions from power plants by fuel

Mio. t CO2 equivalent

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Conclusion

> Performance must be worthwhile again! (Leistung muss sich wieder lohnen!) • Conventional power plants deliver an extremely important contribution to

the German economy by securing the energy system.

• This task is too important to organize it “voluntarily”.

• Market solutions are more efficient than state interventions.

Coal is still important in the future! • Reducing electricity costs.

• Ensuring security of supply.

• CO2 emission reduction targets are achievable with coal.

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RWE Generation PAGE 17

THANK YOU VERY MUCH FOR YOUR ATTENTION.

5/11/2016