Portugal’s success stories in renewables deployment - the business case

João Manso Neto

EDP Renewables, CEO

Lisbon, 11 October 2014

Agenda

1

The progress so far

The way forward

Conclusions

2

EU Energy Policy is based on 3 key pillars that materialized into 3 specific targets for 2020 adopted in 2008 (20/20/20 package)

-20% CO2 emissions

Sustainability

Competitiveness Security of

Supply

20% renewables

Policy objectives 2020 targets

-20% consumption

bin

din

g

Under the Renewable Energy Directive, Portugal has a binding national target for raising the share of renewable energy to 31% by 2020

Mature renewables

Modernization of the thermoelectric

park

Ambitious hydro program

Ambitious wind program

Under these circumstances, the energy policy adopted in Portugal prompted a very significant change in the electricity mix

• Decommissioning of fueloil and gasoil plants

• ~3 GW of new CCGT (Ribatejo, Lares e Pego)

• Environmental improvements in coal plants (deSOx and deNOx)

Main priorities of the Portuguese energy policy in the last decade

• ~4 GW of new hydro plants (~50% already in operation or under construction)

• Investment of 5 €B up to 2020

• >30,000 jobs associated with EDP’s projects alone

• ~4,500 MW of new wind power (reaching 5,300 MW in 2000)

• Government organized tenders to award 1800 MW of installed capacity

• Associated with the bids, 2 industrial clusters linked to wind power were set-up (Eneop and Ventinveste), creating ~2,500 direct jobs

3

4

Source: REN

Today, more than half of the electricity generated in Portugal comes from hydro and wind

Installed capacity by technology GW

Electricity generation by technology TWh

Fueloil

Solar, CHP and others

CCGT

18

Coal

2004

Wind

2013

12

Hydro

48

Wind

Solar, CHP and others

39

Coal

2004

Hydro

Fueloil

CCGT

2013

52%

Since 2005, renewables have significantly reduced our energy dependence and improved the country’s balance of payments

Evolution of energy dependence 2000-2012P, corrected for hydro capacity factor

National energy bill savings due to electricity production from renewable sources1 MEur, excludes large hydro

Sources: DGEG, “Energy Balance” (yearly data), REN, EDP analysis

764728674652380452

229

4,500

1,500

1,000

500

0

2,000

2,500

4,000

3,500

3,000

2009 2013P

4,325

2012 2011 2010 2008 2006 2007 2005

180 264

Yearly savings

Cumulative savings

1. Assumes renewables substitution by CCGT (60%), Coal (30%) and electricity imports (10%). Includes savings from CO2 avoided costs.

77.6% 78.0%

2012P

-10.8%

2010

76.0%

80.7%

2008 2009

78.7%

2011P 2007

82.4%

2006

83.7%

2005

85.1%

2004

85.3%

2003

85.1%

2002

85.6%

2001

85.4%

2000

85.3%

With large hydro, savings surpass 8 B€

5

6

Emissions dropped and detached from GDP, while preserving the competitiveness of Portuguese industries related to EU average

Carbon intensity and emission factor 2000-2010, index 2000 = 100

Electricity prices for industrial cconsumers1

€/kWh, excludes recoverable taxes

1. Prices for Ic band (annual consumption between 500 and 2,000 MWh) Sources: BNEF, FMI, Eurostat

70

75

80

85

90

95

100

105

2004 2003 2002 2000 2001 2006 2007 2008 2010 2009 2005

CO2/GDP

CO2/Primary energy

70

75

80

85

90

95

100

105

110

115

120

2H12 2H11 2H10 2H13 2H08 2H07 2H09

Portugal

EU27

Portugal invested in mature renewables (hydro and wind), which are the most competitive techs, despite their apparent overcosts

7

Cost of electricity generation for different technologies €2014/MWh

110

85 95

CCGT

110-170

Solar PV Onshore wind

Coal Nuclear

50-85

150-180

Offshore wind

Hydro

65-80

Fixed

Variable

Pool price

• The perception of renewables’ overcost come from a biased comparison with pool prices, which are not adequately remunerating the full costs of any tech

• Low wholesale prices in Europe are a consequence of a generalized overcapacity and are not sustainable in the long-run

• In addition, renewables themselves push pool prices down, emphasizing the overcost notion

• Early investment in non mature techs created overcosts in some countries

Comments

0

5

10

15

20

25

30

0 10 20 30 40 50 60 70 80 90 100 110 120 130

RO

PT

NO

NE

LU

IT

HU

DE

FR FI

EE

CZ BE

AT

ES

Average

GB

SE

SI

Overcost per unit of RES production (€/MWhRES)

Shar

e o

f R

ES in

co

nsu

mp

tio

n (

%)

As a result, RES overcosts in PT are below the EU average, despite being the country with the largest share of renewables in the system

8

Source: CEER, Status Review of Renewable and Energy Efficiency Support Schemes in Europe, June 2013

Share of renewables (excluding large hydro) in consumption and respective overcosts in EU countries 2010

Additionally, as the share of renewables increases, the wholesale price drops, rising the apparent notion of overcosts

Source: Reuters, REN, OMEL, EDP analysis

Portuguese pool prices vs. share of renewables in national electricity consumption €/MWh vs. %, weekly data, Jan 2012-Sep 2014

R² = 0,67

0

10

20

30

40

50

60

70

80

90

20% 30% 40% 50% 60% 70% 80% 90% 100%

9

.

Impact of onshore wind on the Iberian pool price M€, 2013

Overcost of onshore wind in Iberia M€, 2013

In Iberia, onshore wind has had a net positive cost impact on the power system of an estimated 2.3 B€ in 2013 alone

Sources: ERSE, CNMC, OMIE, CEER, EDP analysis

100

80

60

40

20

0

€/MWh

2394

Demand w/o wind (229 TWh)

Wind realized pool price

FIT ES

FIT PT

Wind PT (12 TWh)

659

Wind ES (54 TWh)

Wind overcost

20

100

80

60

40

0

€/MWh

Demand PT (49 TWh)

18 894

Demand ES (246 TWh)

4475

Effect of rising price if there was no wind power

• The Iberian system without wind would have been 2,300 M€ more expensive in 2013 • Likewise, in 2013, Germany had an estimated net benefit of 2,663 M€ because of wind power

10

Renewables in Europe are not the cause of rising EU prices neither of the widening gap between the US and European energy prices

“EU industrial electricity prices ...are more than twice those in the US and Russia... Here again, lower US and Russian gas prices … have helped bring down those countries' electricity prices”

– EC, Energy prices and costs in Europe, Q&A memo

Shale gas developments in the US are the main cause of the energy price gap

“The development of US shale gas is likely to be at the root of this widening gap…”

– EC, Energy Economic Developments in Europe

“…the increasing EU-US energy price gap due to the development of shale gas and oil production in the US”

– EC, Energy Economic Developments in Europe

Europeans pay 56% more taxes than levies on their electricity bills

“… taxes still make up the bulk of the taxes & levies component. In 2012, average household consumer across the reporting countries paid 25 EUR/MWh in levies1, but 39 EUR/MWh in taxes2.”

– Eurelectric, What really drives your bill up?

In the US, renewables are mainly supported through fiscal incentives

• The major incentives for renewables in the US are Federal investment/production tax credits and other public financial schemes (Federal/State grants, loans, rebates, etc.)

• In Europe, renewables are mainly supported through the electricity bill

2

3

1

1. Policy support costs (RES, CHP, others); 2. VAT, excise tax and other taxes

11

Agenda

12

The progress so far

The way forward

Conclusions

Although renewables are competitive, the energy-only market design is not adequate for massive decarbonization

• Low-C technologies and thermal backup units are all highly capex-intensive

- Most renewable techs and nuclear have virtually zero marginal costs

- Thermal backup generators are idle for the vast majority of the time

• Long-term stability and visibility are key to promote such capex-intensive investments

- Low cost of capital is main source of cost competitiveness

• In the energy-only market, renewables are exposed to risks that they cannot manage, increasing risk premia at the expense of consumers

Even in countries where generation adequacy is an issue (e.g., UK), pool prices are not signaling the need for investments

13

The market design needs to change and adapt to the new reality

14

Key elements of the new market design

• Ex-ante competition for long-term contracting (e.g., auctions, preferably EU-wide, which implies increased interconnections) to lower risk premium

• Countries such as USA, UK, Brazil or South Africa do that

• Implement competitive CRM to adequately value firm back-up capacity

• CRM being introduced in several EU countries (UK, FR, DE, IT)

• Keep spot price for short-term optimization and dispatch signal

• Strengthen the CO2 price signal by rebalancing the EU-ETS

• Backloading is an important step but does not avoid the need of a structural reform (dynamic supply)

• Retroactive applications are not acceptable and should be condemned

• Regulatory stability is key

Ex-ante competition +

long-term contracting

Capacity mechanisms

Spot market

Applicability

ETS

15

What principles should drive the auctions of long-term contracts?

Brief considerations

• FiT and CfD preferred over fixed premium

• Fixed premium exposes RES to risks that they cannot manage

• Different technologies offer different products (e.g., firm thermal capacity addressing back-up needs)

• Other policy objectives besides competitiveness may require that at least some auctions be tech-specific

• RES should assume responsibilities for deviations from schedule, provided that rules are clear and set from the beginning

• RES can provide regulation down, on a voluntary basis

• Requires: (i) strengthening of interconnections

supported by CBA, and (ii) EC capability to influence national plans and/or implement auctions at EU level

Designed to reduce risk premium

Preference for technology neutrality

Induce efficient operations

Tendentially, EU-wide

• Auctions of moderate amounts of RES should begin now

• Waiting for demand to recover and overcapacity to vanish would:

- Risk European leadership role in RES

- Penalize our external dependency

Non-mature technologies should be promoted in moderate amounts and under R&D frameworks

16

Brief considerations

• Distributed generation (DG) costs fell 70% in the past 7 years and are reaching grid parity soon

• DG customers do not avoid back-up costs, but with volumetric retail charges they do not pay for them, benefitting from hidden subsidies

• The regulatory framework for DG needs to take this into account, avoiding putting the sustainability of the system at risk

• Utility scale solar PV facilities are on its way to become cost competitive by the end of this decade

• Promote these techs in moderate amounts and assuming they contribute to develop national industrial clusters that will drive exports when costs decrease

• Big opportunity facing important challenges: site availability, grid, regulatory framework

• R&D improvements and deployment should be facilitated

Decentralized solar PV

Centralized solar PV

Offshore wind

Co

min

g to

mat

uri

ty

Infa

nt CSP, wave,

floating offshore wind, etc.

Portugal must actively engage in this European debate, while promoting the needed adjustments to the national policy

Short-term adjustments to the Portuguese energy strategy

• Meet 20/20/20 targets will require less RES capacity than initially thought: - Proceed with the already licensed wind - Conclude hydro plants under construction and the ones awarded under

public tenders which are economically viable from a private investment point of view

• No new conventional thermal capacity required until 2020

• Energy efficiency should remain a priority in the national energy policy - Support the roll-out of smartgrids - Promote the ESCO business, soft loans, etc. - Adopt a green fiscal reform that motivates EE investments (families and

companies)

• Key sector (37% of final consumption, vs. 25% of electricity) • Foster electric and natural gas mobility

Renewables

Thermal plants

Energy efficiency

Transports

Portugal will only benefit from an adequate market design, as well as strengthened interconnections (e.g., electricity exports under a EU framework of auctions to promote RES)

17

Agenda

18

The progress so far

The way forward

Conclusions

Conclusions

19

• In the last decade, Portuguese energy policy has ensured a competitive and cleaner energy mix, while contributing to decrease our external dependency and reduce our energy bill

- Modernization of the thermoelectric generation fleet

- Ambitious hydro and wind programs

• Renewables are becoming increasingly competitive, but some misconceptions and market failures are leading to erroneous assessments about their role

- Renewables overcost perception is biased, because of the dampening effect that renewables themselves have on the reference pool price

- Wind is actually responsible for a net benefit in both the Iberian and German cases

• Market arrangements need to be revised and delaying the implementation of an adequate market redesign has severe consequences for Europe

- Key elements of the new market design: long-term contracts, ex-ante competition (auctions), CRM, spot market for short-term optimization

- Increased interconnections and a strengthen CO2 price are crucial

- Delaying would penalize European external dependency and leadership role in renewables