Power Trading

2RWE Trading

RWE Trading as operating company withinthe RWE Group

RWE AG (Group Center)

Upstream (Production)

Electricitygeneration

Gas and oilproduction

Supraregionaland regional electricity and gas networks

Gas Midstream(commercial optimisation of procurement, transport, storage)

Continental Europe

UK

RWEPower

RWEDea

RWEGas Midstream

RWETrading

Energy trading Electricity and gas supply

RWEEnergy

RWEnpower

RWEPower

RWEGas Midstream

RWEEnergy

RWEnpower

RWESystems

RWEDea

RWETrading

RWEnpower

3RWE Trading

The power wholesale market

Forwards / options /

structured products

Settlement: physical and

financial

Physical

Futures / options

Settlement: mainly financialPhysical

Trading

"Wholesale" market

OTC market

Spot market Futures market

Exchange

Spot market Futures market

4RWE Trading

Four core statements by RWE Trading on power wholesale markets

Functioning wholesale markets are the prerequisite for competition and the ensuing economic benefits for the European industry

The European wholesale market for electric power has shown a very positive development: Just look at the growth rate for traded volumes or the increasing number of market participants

RWE Trading is one of the leading market participants in Europe and plays an active part in shaping the wholesale markets

Markets require a framework and regulation, but overregulation stifles trust in the markets! Regulation should always focus on supporting competition

5RWE Trading

European power markets with outstanding development

More than sufficient liquidity in the core markets

Diversified and numerous market participants

High correlation between futures and spot market prices

Convergence of power prices in Europe

Price peaks are also a European phenomenon

Market position of individual producers effectively limited in the European market

6RWE Trading

Power trading volumes in Continental Europe: Increasing liquidity*

2002 2003 2004 2005 20061,000,000,000

2,000,000,000

3,000,000,000

4,000,000,000

5,000,000,000

6,000,000,000

2001

Scandinavia

Netherlands OTC

Netherlands

France OTC

France

Germany OTC

Germany

Spain

*(in bn kWh; measurable trading volume at exchanges and via electronic broker platforms OTC )

7RWE Trading

Deregulation has separated the different value-added levels -that is why the power price forms on different markets

Competition Competition

Regulation of network access and network

access charges (Federal Network Agency)

End-customer

priceGeneration

ExchangeTrading

OTCTransmission Distribution Sales &

servicesTaxes &levies

8RWE Trading

Major fundamental factors influencing power priceson the wholesale market

Futures markets reflect theexpectations of market participants

regarding future fundamental factorsof influence

Power Price

Precipitation

RevisionsThermal power stations

Technical outages

Power stations / grids

School holidays

Wind-powered devicesWind

Temperature

Public holidays

Consumer lighting usage

Lighting

Air conditioning Electric heating

Time of day

Cloud

Long-term influencesChanges relating to market conditionsPolitical decisionsChanges in capacity

Storage & run-of river hydro-

electric power

CO2 price Gas price Oil price Coal price Uranium price

9RWE Trading

"Marginal power plant" principle: Decisive for price formation on the wholesale market

The daily demand on the EEX is countered by a multitude of offers for electricity from different generation sources. Each power plant type (nuclear, gas, coal, etc.) has marginal costs for its utilisation.

Marginal costs are mainly determined by "variable costs" for fuels (incl. CO2) and operating resources -costs that are incurred during power plant operation and have to be earned as a minimum.

Starting with the most favourable offer, power plants are successively called upon on the EEX until demand is met.

The offer price of the last power plant needed to meet this demand ("marginal power plant") determines the market price for all other power plants.

The power price thus results from the intersection of supply and demand. That is why in case of high demand prices will be rather determined by a gas-fired power plant with relatively high marginal costs whereas in case of low demand they will be rather determined by a lower-cost coal-fired power plant.

€/MWh

Power supply in MW (graded by offer prices)

Offer price

Market price

Power demand

K2 K3 K4 K5

Full costs

K1

variable costs + capital costs

Short-term variable costs per power plant type (fuel + operating resources) + CO2

10RWE Trading

Forward price development in Europe

Marked price increase throughout Europe in 2005 and 2006. Since mid-2006, stable price level for Germany at around 55 €/MWh.

25

30

35

40

45

50

55

60

65

70

01.0

1.05

01.0

3.05

01.0

5.05

01.0

7.05

01.0

9.05

01.1

1.05

01.0

1.06

01.0

3.06

01.0

5.06

01.0

7.06

01.0

9.06

01.1

1.06

01.0

1.07

01.0

3.07

01.0

5.07

01.0

7.07

€/M

Wh

DeutschlandFrankreichNiederlandeSkandinavien

Germany

Netherlands

France

Scandinavia

11RWE Trading

Price increase for 2008 since 2005

Germany shows the slightest price increase by European comparison at 48 %.

90%

100%

110%

120%

130%

140%

150%

160%

170%

180%

190%

01.0

1.05

01.0

3.05

01.0

5.05

01.0

7.05

01.0

9.05

01.1

1.05

01.0

1.06

01.0

3.06

01.0

5.06

01.0

7.06

01.0

9.06

01.1

1.06

01.0

1.07

01.0

3.07

01.0

5.07

01.0

7.07

€/M

Wh

DeutschlandFrankreichNiederlandeSkandinavien

Germany

Netherlands

France

Scandinavia

12RWE Trading

European networking effectively limits the market position of individual producers

Relevant production for Germany is 192 GW.

Conclusion of the "EU Sector Inquiry" regarding networking*:

"Pivotal Supplier Index (PSI) for Germany is small"Share of the

"large four": 43 %

30 % Cross-border

capacities(58 GW)

17 %Others (33 GW)

10 %Inst. windpower plants(20 GW)

17 %RWE

(32 GW)

12 %E.ON

(23 GW)

7 %EnBW

(13 GW)

7 %Vattenfall(13 GW)

0.0 %UK

0.0 %DE

0.0 %NL

8.2 %E

97.2 %BE

100.0 %F

* Source: EU Sector Inquiry 2005/2006, study by LE-GED

13RWE Trading

Power price effects on new power plant construction

"Spark" and "Dark Spread" products for 2007 traded in 2006

-10 €

-5 €

0 €

5 €

10 €

15 €

20 €

25 €

30 €

35 €

Jan

06

Feb

06

Mrz

06

Apr

06

Mai

06

Jun

06

Jul 0

6

Aug

06

Sep

06

Okt

06

Nov

06

Dez

06

€/M

Wh

Clean Dark Spread Clean Spark Spread

Jan

06

Feb

06

Mar

06

Apr

06

May

06

June

06

July

06

Aug

06

Sep

06

Oct

06

Nov

06

Dec

06

14RWE Trading

Economic reality:High market price level needed for investment

Free market price formation ensures that electricity supply and demand are always balanced.

Growing shortages on the market lead to higher prices; higher prices provide incentives for corporate investments in new power plant capacities. Construction of new capacities will result in price competition and will thus have a price-curbing effect in the future.

The current power price level is necessary for investors to build the new power plantsrequired.

Only when prices exceed full costs, there is an incentive for investors to build new power plants. If prices are lower, there will be no new plant construction. (Full costs of a hard coal-fired power plant: 50-60 €/MWh; current wholesale price: 57 €/MWh).

In a normal market cycle, profits are also countered by bad times with low proceeds or losses.

Shutdown of non-profitable power plants -decreasing capacities

Rising prices

Shortage

Price competition,falling prices

Constructionof new power

plant capacities

Incentive forinvestments

Higheroffer

"Pig cycle"

Competition regulates itself

Profits must always reflect the risk involved in such long-term investments.

15RWE Trading

Europe's power market is growing together

Price level regularly higher than in GermanyPrice level regularly lower than in Germany

Northern EuropeStrongly dependent on hydropower and thus largely influenced by other fundamental influencing factors than other European regions

Presently "normal" water levels

Southern EuropeIncreased use of air conditioning and electric heating

Failing hydropower production

Generally increasing demand due to economic development

Eastern EuropePartly subsidised cheaper electricity

No open wholesale markets

CO2 not as fungible as in open energy markets

Rising exports are a sign for functioning competition: Electric power also "looks for" a way to the highest price, where possible. If a trader can sell electricity at a higher price in a neighbouring European country than at home, he will try to use this opportunity. Different production structures and different fundamental influences result in growing cross-border trading (but not necessarily to growing physical electricity flows)

16RWE Trading

Power wholesale markets and market deregulation -status quo regarding cross-border network capacities

Germany already complies with all requirements for cross-border network capacities.

Compliant

Compliant with most requirements

Non-compliant

Long-term agreements are available (no publicly accessible information)

Last amended: April 2006

17RWE Trading

European external power trade 2006

Source: VDN, Feb. 2007.

France16.2

0.9

2.9 13.7Switzerland

Luxembourg0.85.1

Netherlands0.3

22.3

Sweden2.0 1.5

Poland0.72.6

Czech Republic0.612.1

5.8 14.8Austria

Denmark5.8 4.0

Import*: 46.1Export : 66.0

The cross-border trade with electric power aligns European wholesale prices and balances insufficient and excess capacities

Figures in TWh

*physical

RWE has increased the capacity of its connections to the Netherlands and France by 40 % since 2000.

There are plans for a further extension of the RWE network; long-winded licensing procedures, however, require a lot of time.

Back-up

19RWE Trading

RWE Trading is „the eye on the market“

RWE Trading functions as the wholesale-driven benchmark for the generation and supply sides of the RWE Group.

RWE traders not only deal with commodities such as power, gas, coal and oil, they also actively trade physical and financial derivatives as well as environmental certificates.

The asset based commodity positions of RWE Group are sold to or bought from RWE Trading at wholesale market prices. We consolidate these positions through proprietary trading. This hedging helps us to manage the risks of having very large open positions in each of the physical commodity markets.

This business model unites the natural focus on obtaining the best potential value from the RWE Group´s physical assets with the benefits of financial (proprietary) trading.

* STPM = Short-Term Position Management

RWE Energy/ npower

STPM*

RWE Power/ RWE npower

RWE Trading

Retail Customers/Industrial Customers

Market

buy/sell

Trading Customers

sell

buy sell

Proprietary Trading

20RWE Trading

RWE Trading – Key Figures (I)

RWE Trading is one of the largest and most important European energy commodity traders.

With a workforce of over 500 employees, RWE Trading operates trading floors in Essen, Swindon and London, as well as representative and agency offices across Europe.

RWE Trading is active on leading international exchanges. Besides our activities in Europe, RWE Trading actively trades at the NYMEX and in the global commodity marketsOil: USA, Europe, Asia, Middle EastCoal: ARA, Newcastle, Richards Bay

RWE Trading currently forms the backbone of the European OTC power and gas trading business.

RWE Trading in Europe

Oslo

Essen

Amsterdam

Paris

Madrid

Leipzig

London

SwindonWarsaw

Trading Floor

Representative/Agency Office

Traded Markets

Energy Exchange

PragueKosice

Graz

Brüssel

Ljubljana Bucharest

21RWE Trading

RWE Trading – Facts and Figures

Our power trading volumes have seen consistent growth in recent years. This is just one indication of RWE Trading’s successful market approach. Slight decline in 2006 was due to politically influenced market distortions in France and Spain.

Where we trade powerRWE Trading: power trading volumes

TWh

Trend

power trading CE and power trading UK

799

1055

1316

1315

1250

0

200

400

600

800

1000

1200

1400

2002 2003 2004 2005 2006

22RWE Trading

RWE Trading also has a great number of trading partners - "strategic behaviour"?

The wholesale market in Germany is not a "private function".

In the first 8 months of 2006, for instance, the share in the trading volume of RWE Trading with the "3 large Germans"* accounted for only 6 % of the total volume traded by RWE.

The wholesale market has an international focus and - with the exception of industrial customers which still "abstain" - is a cross-industry market.

* e.on, Vattenfall, ENBW

Proprietary traders5.2%

Oil corporations5.2%

Industry0.1%

Municipal utilities3.7%

German utilities 6.3%

Banks16.2%

European energy utilities

(without Germany)48.8%

Spot exchanges14.1%