CLIENT

CONFIDENTIAL AND PROPRIETARY

Any use of this material without specific permission of McKinsey & Company is strictly prohibited

Industrial Power Prices in Europe

Conference | June, 2019

2SOURCE: European Commission

Tariff design for industrials across Europe follows a similar structure

composed by energy, network fees and taxes

Energy

▪ Liberalized competitive market across EU

countries

▪ Increased interconnection between

countries promotes competition and price

convergence

Networks

▪ T&D activities are regulated monopolies

with fixed tariffs for typically 4-5 year

periods

Taxes and

other levies

▪ Many different levies, country specific

▪ Climate related levies have been

historically increasing to support energy

transition

▪ Tariff structure depends on

consumption level

▪ Energy intense industries are

usually directly connected to the

transmission grid and face lower

network charges

▪ For competitiveness reasons,

large consumers are often exempt

from or face lower electricity

taxes and levies

▪ Industrial consumers are usually

very exposed to the spot price

volatility due to the higher

energy share on the tariff (~70%)

3

In most EU countries several exemptions1 exist for energy intensive industries

Not exhaustive

France

Networks

▪ Transport tariff reduction

between 10% to 85%

Taxes & Levies

▪ Surcharge for energy sector

pensions (> 50% discount)

United Kingdom

Taxes & Levies

▪ Climate Change

Levy - discount of

90%

Germany

Networks

▪ Transport tariff discount of ~85%

Taxes & Levies

▪ Offshore liability overload and support

measures for RES – discount of ~80%

▪ Electricity tax (20.5 €/MWh) – from

25% discount up to total exemption

Netherlands

Networks

▪ Transport tariff reduction of

~45%

Taxes & Levies

▪ Energy tax and levy for

renewable support have

~100% discount

Belgium

Public service obligations

exemptions:

▪ Support measures for RES

▪ Financing regional energy policies

Taxes & Levies

▪ Energy contribution (1,9 €/MWh)

SOURCE: CREG April 2019

1 Exemptions for consumers with a consumption between 100-500 GWh per year

4SOURCE: Eurostat

Prices have been fairly flat over last 10 years

162008 1210 140

1

4

2018

2

3

5

6

7

8

9

1.2

4.8

2.0

8.0

Power price evolution for industrials in EU28

Energy and Supply

Network Costs Total

Taxes & Levies1

1 Excluding VAT. Taxes and levies include renewable taxes, capacity taxes, nuclear taxes, environmental taxes and other not detailed.

2 Corresponds to Band IF from Eurostat

3 Corresponds to Band IG from Eurostat

1

162008 1210 14 20180

2

3

4

5

6

7

8

9

5.1

1.8

1.0

7.8

Annual consumption between 70 GWh and 150 GWh2

EUR cents/kWh

Annual consumption > 150 GWh3

EUR cents/kWh

5

Electricity prices driven by marginal supplier and often linked to

commodity prices

Marginalist

market, where

all market

participants

are payed the

clearing price

Supply and

demand

dynamic sets

the price for

every hour

10

50

0

20

30

40

60

Gas CCGT

Capacity, MW

Short-run marginal cost1

EUR/MWh

Renewables and

Hydro run-of-river Nuclear

Hydro2

Coal

Renewables Nuclear CoalHydro Gas

1 Includes only variable costs, operational, maintenance and fuel costs 2 Hydro price reflects opportunity cost

Demand

Electricity

demand

Commodity

prices

Capital cost

projections

RES

development

Market

regulations

Key price drivers

1

2

3

4

5

2

53 4

CONCEPTUAL

For this demand level, clearing

price is 50 EUR/MWh

2

Power market merit order curve

1

6SOURCE: MONTEL

Wholesale power prices across EU countries have decreased and converged

due to increased interconnection

Wholesale power prices, EUR/MWh 2008-2018

80

100

40

0

50

30

60

70

90

142008 10 12 16 2018

Germany Spain

France PolandItaly

UK Czech Republic

Nordpool

Netherlands

7

179 213 238 271 314 375 433 497 539 604 612 684

0

3.000

200

3.400

400

2.600

3.200

600

2.800

2006

3.246

11

3.1663.067

07 08 10 12 13 201714 15 16

2.482

09

~500

-0.2%

+12.1%

2006-17 CAGR

-1.9%

Demand for merchant generation has been decreasing at ~2% per

annum, driving price decreaseEU power demand and RES generation, TWh

1 Electricity final consumption + own use of energy industries for EU28, Norway and Switzerland

2 Total demand excluding renewable generation

3 Includes solar, wind, biomass and excludes hydro

SOURCE: Enerdata

Net demand2Total demand1 RES production3

8

Exchange between EU countries has been increasing

Cross-border EU exchanges1, TWh

347371

398 387424

447424 435

20172010 1211 13 1614 15

+3% p.a.

1 Exchanges between ENTSO-E member TSOs' countries

SOURCE: ENTSO-E Statistics

9

Going forward power price dynamics depend on three main areas of

uncertainty

▪ Uncertainty over future economic growth in Europe, and possible recession

▪ High uncertainty on commodity price evolution

▪ Interest rate evolution

▪ Speed of cost decrease for renewable technology, esp. solar PV & offshore

wind

▪ Continuous technological progress on downstream technology and storage

▪ Cost decline of hydrogen value chain

▪ Cost of flexibility

▪ Policies to accelerate decarbonization agenda – including transport and heat

▪ Long-term RES development market mechanism unclear (auctions vs. market)

▪ Market mechanisms and split of systems costs between user types

Macro-

economics

Technology

Policy/

regulation

SOURCE: Team analysis

10

35

0

55

15

5

10

30

20

25

40

45

50

60

65

SOURCE: Carbon Pulse

Range of price forecasts1

1 Includes Berenberg, ClearBlue, Commerzbank, Energy Aspects, Engie Global Mkts, ICIS, MOL, Refinitiv, SocGen, Vertis, Wattsight

CO2 historical prices and forecasts as of April 2019, EUR/ton

2006 121007 1108 09 1713 End

2021

14 15 16 End

2025

18 End

2019

End

2020

End

2030

Forcast

Historical

CO2 price is expected to increase

11

EU Power generation is becoming cleaner on large scale build out of solar

and wind, with gas as marginal fossil fuel

Key insights

▪ RES generation increases to 60%

share in 2030, driven technology

decreasing costs and higher

national renewable ambitions

▪ Gas generation is declining, but

less then coal/lignite that decline by

~40% due to regulatory phase

outs

▪ Demand increase results from the

compound effect of gradual

electrification and increased

energy efficiency

3,210

16%

13%

5%4%

23%

22%

27%

2%

18%

2010

10%

16%

26%

16%

1%

16%

14%

20

15%

29%

16%

1%

8%

3,389

2030

3,388

SOURCE: ENERDATA for historical data, McKinsey Power model, McKinsey Energy Insights

xx RES share

60%52%25%

1 Net generation EU28 + Norway and Switzerland

Solar & Biomass

Wind

Hydro Gas

Oil & Other Coal & Lignite

Nuclear

Power mix outlook for Europe1 2010-2030, TWh

12

Interconnection capacity evolution in Europe

GW

Interconnection between European countries is increasing

0

2

4

6

8

FR-DE DE-DK1ES-FR FR-UK DE-NL

2005 2010 2020 2030

SOURCE: ENTSO-E; European Commission

▪ In Europe, interconnector

capacities are increasing

and the trend is expected

to continue

▪ EU targets set an

interconnection level2 for

each EU member of

– At least 10% by 2020

– At least 15% by 2030

1 West & East DK 2 Interconnector capacity has to be sufficient be able to transport at least 10% of generated electricity to neighboring countries

13

Wholesale prices are expected to decrease in the long-run mostly due to

increasing cheaper renewable generation

Wholesale baseload price outlook for selected countries, EUR/MWh (real)

68

5353 51 50 49 49 464641 37 36 33

0

20

60

40

80

-11% p.a.-3% p.a.

-6% p.a.

SOURCE: EU McKinsey Power Model, April 2019

United

Kingdom

514444 45 4747 45 44 45 42 41 41 40

0

20

40

80

60

20 212019 22 2723 2524 26 28 29 2030

-7% p.a. +4% p.a. -2% p.a.

Nuclear

phase outGradual increase of RESGermany

Increase of nuclear and RES,

removal of carbon price floor

Increase of

import capacity Gradual increase of RES

CONFIDENTIAL AND PROPRIETARY

Any use of this material without specific permission of McKinsey & Company

is strictly prohibited

Sébastien Léger

Sebastien_leger@mckinsey.com

+33 6 72 86 87 30

15

BACKUP

16SOURCE: Montel; McKinsey

20

0

10

5

15

25

2520 20302019 210

20

40

60

80

10

30

50

70

90

202019 21 25 2030

Forward Long term outlook

Gas price evolution, EUR/MWh (real) Coal price evolution, USD/t (real)

Assumptions page – McKinsey Power Model

CO2 price evolution, EUR/t (real)

25

5

0

15

10

20

30

252019 20 21 2030