Q4 2015 Notes on energy and environmental markets€¦ · • After the oil price crash LNG long...

Milan, April 2016

Notes on energy andenvironmental marketsat 31 12 2015

Overview of Italy and bordering

countries

This information was prepared by A2A and it is not to be relied on by any 3rd party without A2A’s prior written consent.

Summary – Year 2015 – Power and environmental markets

2

• In 2015 there was a +1.5% increase in Italian electricity demand: the rise, relevant in Q3 (+6.7%) thanks to the high Julytemperatures, halted in Q4 (-0.1%), casting doubt on future increases. In the first two months of 2016 the demanddecreased by -0.8%.

• Italian hydroelectric production decreased by –24.9%, due to the strong reduction in rainfalls. In Q4, hydro productiondecreased by -29.7% y-o-y.

• The higher demand and lower hydro production brought to a +8.3% thermoelectric production increase (7.5% in Q42015). Photovoltaic production increased as well (+13%), while wind production fell in the second part of the year (-3.3% in2015, -18.4 % in Q4).

• In 2015 PUN base load was at the same level as in 2014 (+0.2 €/MWh). In Q4 the decrease (-6 €/MWh) was due to thefall in fuel prices. Clean Spark Spreads and Clean Dark Spreads increased (Clean Peakload Spark Spread +3.1 €/MWhand Clean Dark Spread +2.8 €/MWh) due to the relatively high power prices compared to the low fuel prices.

• The correlation between PSV and PUN is steady (CCGTs are still marginal plants in the Italian market), while thecorrelation between PUN and Brent is low (and declining) due to fewer gas supplies linked to oil formulas.

• Temperatures in 2015 were significantly higher than the 10YR average. Precipitations were low compared both to 2014and to the 105Y average.

• EUA prices collapsed in December, after an increasing trend begun in 2014, once the positive sentiment connected toregulatory and political events was over.

DISCLAIMER - This document has been prepared by A2A for convenience purposes only and for the benefit of investors and analysts solely and is based on public information. However this document shall not giverise to any liability of A2A or any of its subsidiaries, directors, officers, employees or consultants as per the truthfulness, accuracy, completeness and updating of such information. This document does not constitutean offer or invitation to purchase or subscribe any shares or other securities and neither it nor any part of it shall form the basis of or be relied upon in connection with any contract or commitment whatsoever.

This information was prepared by A2A and it is not to be relied on by any 3rd party without A2A’s prior written consent. 3

Summary – Q3 2015 – Gas Markets

• Gas demand marked a +9.9% increase in Q4 2015 (year-on-year basis), connected with lower temperatures.

• Imports through Tarvisio in Q4 2015 were higher year-on-year after the low imports levels recorded in the same periodof 2014.

• After the oil price crash LNG long term contract prices (oil-linked) were affected. This brought to an increase in LNGimports into Italy, with a +31.1%.

• Short system prevailed in 2015 on the Italian Gas Balancing System, particularly in Q3-15 and Q4-15.

• PSV prices decreased (-1.1 €/MWh on a year-on-year basis), mainly due to the collapse in Q4-15. Spreads with theAustrian VTP and Peg Nord increased (year-on-year basis). The PSV-TTF spread was in line with 2014.

• The PSV-Brent correlation shows a historical decline (fewer gas supplies linked to oil formulas; different internationalfactors, as the Ukranian crisis affecting gas prices), but recovering in the second part of 2015.

• Growing correlation between coal and Brent oil.

Summary – Year 2015 – Gas markets


1. Power Market• Supply and Demand

• Spot markets

2. Gas Market• Supply and Demand

• Spot markets

3. Cross commodities

4. Environmental Markets: EUA

Contents

4


Source: Terna - Monthly Report on the Electricity System.

5

• In 2015 there was a 1.5% increase in electricity demand.

• Hydroelectric production decreased by -24.9%, due to a strong reduction in rainfalls compared to the very rainy 2014. Therainfalls were particularly low in November and December (historical minimum).

• Thermoelectric production increased by 8.3%, due to the above mentioned reduction in hydro production and to theextraordinary temperatures in July and August, which pushed up power demand. Also photovoltaic production continued toincrease (+13%).

• There was also an increase in the import-export balance (+6.1%) driven by new rules in market coupling.

Italian Electricity Supply– breakdown by sources

The drop in hydroelectric production led to an increase in thermal production

Q4 2015 Q4 2014Var. %

2015/20142015 2014

Var. %

2015/2014

8.755 12.445 -29,7% 44.751 59.575 -24,9%

47.694 44.366 7,5% 180.871 167.080 8,3%

1.498 1.416 5,8% 5.816 5.566 4,5%

2.991 3.664 -18,4% 14.589 15.089 -3,3%

3.531 3.224 9,5% 24.676 21.838 13,0%

64.469 65.115 -1,0% 270.703 269.148 0,6%

14.260 13.794 3,4% 50.846 46.747 8,8%

785 876 -10,4% 4.465 3.031 47,3%

13.475 12.918 4,3% 46.381 43.716 6,1%

544 529 2,8% 1.850 2.329 -20,6%

77.400 77.504 -0,1% 315.234 310.535 1,5%

Solar

Total net production

Import

Export

Foreign balance

Pump storage

Demand

GWh

Net Production

Hydroelectric

Thermal

Geothermal

Wind


Source: Terna - Monthly Report on the Electricity System

6

• Rise in thermal production (at the 2013 level) after along decline.

• Steady increase in new renewables during the lastyears: in 2015 the increase was due to the solarproduction, while the wind production was lower thanin 2014 due to meteorological conditions (especially inthe second half of the year).

• Hydro production at a very low level in 2015, wellbelow the 10-year average (50.4 TWh).

• +1.5% year-on-year increase (+1.3% seasonally adjusted)in the Italian power demand (315 TWh in 2015) after along decline, yet demand still lower than 2013.

• Q4 demand decreased year-on-year, despite theeconomic recovery.

• Strong increase in Q3 demand (higher than 2013 as well),boosted by the high July temperatures.

• First half demand decreased on a year-on-year basis.

Italian Electricity Supply and Demand – historical trends

+1.7% increase in demand (seasonally adjusted)

43 54 60 45

3236 37

39

207 183 167 181

43 42 44 46

-

50

100

150

200

250

300

350

2012 2013 2014 2015

TWh

Italian Power Production

Foreign Balance

Thermal

Solar+Wind

Hydro

328 318 311 315

80 79 78 77

0

50

100

150

200

250

300

350

2012 2013 2014 2015

TWh

Italian Power Demand

CAL

Q4


€/MWh PUN BL PUN PL PL - BL

2014 Q1 52,5 62,8 10,3

Q2 46,5 49,8 3,3

Q3 50,4 53,5 3,0

Q4 58,8 69,8 10,9

CAL14 52,1 59,0 6,9

2015 Q1 51,8 59,0 7,3

Q2 47,9 50,3 2,3

Q3 56,7 62,3 5,6

Q4 52,8 63,4 10,6

CAL15 52,3 58,8 6,5

CAL 2015 vs 2014 0,2 -0,2 -0,4

Source: Gestore Mercato Elettrico (GME)

7

• In Q4, the decrease in PUN prices was also due to the gas prices slump. The decrease was particularly strong in October,

while PUN prices were relatively high in November and December (also due to the lack of hydro production).

• PUN prices were basically stable in 2015 compared to 2014: high price levels in Q3 (due to the heat wave which boosted

demand for air conditioning) were balanced by lower prices in Q4.

Italian Electricity Spot PricesPUN prices decreased in Q4-15

30

50

70

90

110

130

Jan

Feb

Ma

r

Ap

r

Ma

y

Jun

Jul

Au

g

Sep

Oct

No

v

De

c

€/M

Wh

PUN Baseload

2012

2013

2014

2015

30

50

70

90

110

130

Jan

Feb

Ma

r

Ap

r

Ma

y

Jun

Jul

Au

g

Sep

Oct

No

v

De

c

€/M

Wh

PUN Peakload

2012

2013

2014

2015


Source: MPF (on GME data). The data are calculated as weighted averages for the six zones (North, South, CSouth, CNorth, Sardinia, Sicily)

8

• CCGTs were the main marginal technology, with a peak in July and August (at the expense of the coal marginality) due to thedemand increase.

• In Q4 the CCGTs contribution to the marginal price was at average levels in November and December; it was very low inOctober due to the strong market-coupling contribution.

• The technology which set the highest prices was hydro, with very high levels in November and December. It is followed byCCGTs.

Italian Electricity Spot Prices: marginal technology on MGP and relative prices

CCGTs as the main marginal technology, hydro set the highest marginal prices


• Decrease in the number of 0-price hours in 2015 compared to 2014. In the second half of 2015 no 0-price hour was

registered.

• The number of 0-price hours in Sicily is the highest, mainly due to peaks in wind production.

9

Italian Electricity Market: zonal hours at zero price

Decrease in 0-price hours


• Increase in CSS and CDS, year-on-year basis.

• In Q4, strong increase in CSS and CDS, due to the relatively high powerprices compared to the low fuel prices.

Italian Electricity Clean Spark and Dark Spreads (CSS and CDS)Improvement in CSS and CDS due to low fuel prices

Clean Spark Spread: PUN (BL/PL) – gas PSV cost (eff. 51%) – EUA cost – CV cost (up to 2014)- variable transport costsClean Dark Spread PUN BL –coal cost (API2 + spread MED + variable transport costs - eff. 35%) – EUA cost – CV cost (up to 2014)

GWh

clean baseload

spark spread -

51% efficiency

clean peakload

spark spread -

51% efficiency

clean dark

spread -

35% efficiency

2014 Q1 -8,6 1,7 13,1

Q2 -4,5 -1,3 8,7

Q3 -0,0 2,9 10,9

Q4 -3,1 7,8 18,1

CAL -4,0 2,8 12,7

2015 Q1 -4,4 2,9 14,5

Q2 -5,6 -3,2 10,5

Q3 4,0 9,6 19,9

Q4 3,5 14,1 17,0

CAL -0,6 5,9 15,5

2015 vs 2014 3,5 3,1 2,8

12

,8

1,2 2

,8

5,96,3

3,7

7,8

14

,1

0

5

10

15

20

25

30

2012 2013 2014 2015

€/M

Wh

Clean Peakload Spark Spread

CAL

Q4

25

,0

21

,2

12

,7 15

,5

16

,7

22

,9

18

,1

17

,0

0

5

10

15

20

25

30

2012 2013 2014 2015€

/MW

h

Clean Dark Spread

CAL

Q4



• Spot markets


• Spot markets



Contents

11


Italian Gas Supply - breakdown by sources

Increase in Russian flows and LNG import, decrease in domestic production

Source: Snam Rete Gas, PCS correction by Snam Rete Gas during 2016

12

• +8.9% in gas demand during 2015 (year-on-year basis)

• +31.1% in LNG imports in 2015 after the oil price collapse (year-on-year basis)

• Higher imports through Tarvisio in Q4 2015 after the low imports levels recorded in the same period of 2014

Q4 2015 Q4 2014 ∆% 2015/2014 2015 2014 ∆% 2015/2014

1.857 1.040 78,6% 7.244 6.774 6,9%

1.485 1.823 -18,5% 7.107 6.512 9,1%

7.403 5.254 40,9% 29.898 26.148 14,3%

2 0 - 17 0 -

3.529 3.956 -10,8% 10.634 11.432 -7,0%

14.276 12.074 18,2% 54.900 50.866 7,9%

1.446 1.307 10,6% 5.797 4.469 29,7%

28 12 - 54 22 -

8 2 - 39 2 -

1.482 1.320 12,2% 5.890 4.493 31,1%

15.758 13.394 17,6% 60.790 55.359 9,8%

1.594 1.749 -8,9% 6.418 6.917 -7,2%

2.303 2.731 -15,7% 310- 863- -64,1%

19.648 17.875 9,9% 66.906 61.413 8,9%

Total Pipeline

Delta Stock

Demand

Rovigo (Cavarziere)

Panigaglia

Livorno (OLT)

Total LNG

Total Import

Domestic Production

mcm

Import

Mazara del Vallo

Gela

Tarvisio

Gorizia

Passo Gries


• Year-on-year slight decline in industrial consumption

• Increased thermal consumption particularly due to exceptionally high temperatures in July/August (+30% yoy)

• Higher domestic consumption due to colder temperatures in Q1-15 vs. Q1-14

Italian Gas ConsumptionDecline in industrial consumption, increase in thermal use.

Source: Snam Rete Gas, PCS correction by Snam Rete Gas during 2016

Industry ThermalDistribution

Network

Other

networksTotal

2014 Q1 3.537 4.592 12.715 552 21.396

Q2 3.168 3.775 4.013 300 11.256

Q3 3.091 4.559 2.908 328 10.886

Q4 3.364 4.785 9.149 576 17.875

Year 13.161 17.710 28.785 1.756 61.413

2015 Q1 3.519 5.113 14.403 612 23.647

Q2 3.104 4.074 4.097 326 11.600

Q3 2.896 5.983 2.783 348 12.011

Q4 3.239 5.451 10.238 720 19.648

Year 12.758 20.622 31.521 2.006 66.906

403- 2.911 2.736 250 5.494

mcm

2015 vs 2014


• Gas price decline in 2015 vs. 2014 on the PSV, particularly due to the prices in Q4.

• Spreads with the Austrian VTP and Peg Nord increased (year-on-year basis). The PSV-TTF spread basically in line.

Italian Gas Spot Prices – PSV and main hubs spread

Yearly contraction in PSV prices

Source: ICE-Endex, CEGH, Powernext

PSV PSV-TTF PSV-VTPPSV-PEG

NORD

Q1 31,8 7,9 6,6 7,3

Q2 28,4 4,1 2,0 3,9

Q3 27,0 2,3 1,2 1,9

Q4 27,9 0,8 0,9 0,6

Year 28,8 3,8 2,7 3,4

Q1 27,1 1,0- 0,3 1,8-

Q2 28,4 1,2 0,9 0,5

Q3 27,7 1,8 0,8 1,2

Q4 28,5 1,7 1,1 1,2

Year 27,9 0,9 0,8 0,3

Q1 25,5 1,2 0,5 1,1

Q2 20,8 1,9 0,6 1,2

Q3 20,5 2,4 0,8 1,7

Q4 25,7 3,6 1,7 3,2

Year 23,1 2,3 0,9 1,8

Q1 24,1 2,8 1,7 2,2

Q2 22,5 1,5 1,0 1,4

Q3 22,0 2,2 1,2 2,2

Q4 19,4 2,4 1,4 2,1

Year 22,0 2,2 1,3 2,0

1,1- 0,1- 0,5 0,2

€/MWh

2015 vs. 2014

2012

2013

2014

2015


• In 2015 (compared to previous years) persistingconvergence between Asian LNG prices andEuropean gas hub prices after the oil price crashin 2014

• Substantial convergence among European gashub prices

Global Gas Outlook – near month

Convergence in prices

Source: Argus, Thomson Reuters


• Short system prevailed in 2015, particularly in Q3-15 and Q4-15.

Italian Gas Balancing SystemShort system in Q3 and Q4

Source: Gestore Mercato Elettrico (GME)

Long

System

Short

SystemTotal

2014 Q1 484 206 277-

Q2 449 149 300-

Q3 159 371 212

Q4 356 492 136

Year 1.091 726 365-

2015 Q1 382 405 23

Q2 234 283 49

Q3 180 416 236

Q4 321 441 121

Year 796 1.104 308

296- 377 673

mcm

2015 vs. 2014


• Lower Heating Degree Days vs. Median Degree Days during Q4 2015

• Higher Heating Degree Days on a year-on-year basis in 2015

Italian Heating Degree Days – Q4 2015

Source: Bloomberg – Heating Degree Day calculation method: HDD = Y – AVG, Y = 18 ºC, HDD = Mean, if HDD<0 then HDD=0.



• Spot markets


• Spot markets



Contents

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Correlation among commoditiesHistorically declining Brent oil effect on the Italian energy market

• Steady correlation between PSV and PUN(CCGTs still marginal plants in the Italian market)

• Low correlation between PUN and Brent oil(fewer gas supplies linked to oil formulas)

• Historical decline in the PSV-Brent correlation(fewer gas supplies linked to oil formulas; differentinternational factors, as the Ukranian crisisaffecting gas prices), but recovering in the secondpart of 2015

• Growing correlation between coal and Brentoil

Source: GME, Thomson Reuters, Bloomberg

PSV-PUNPSV-

BRENTPSV-COAL

PUN-

BRENTPUN-COAL

BRENT-

COAL

MAX 86% 82% 81% 72% 87% 85%

MIN 52% 0% -2% 22% 19% 0%

AVG. 12-

1572% 42% 50% 40% 57% 44%


Italian temperatures, precipitations and windHigh temperatures in Q3-15, low precipitations in 2015

Source: Bloomberg. Temperatures are the average temperature (usually of the high and low) that was observed between 7am and 7pm local. Precipitations include rainfall and theliquid equivalent of snow and sleet (measurement: Integer in 100th millimeters). Wind Speed is the average sustained winds which does not include wind gust

20

• Temperatures in 2015 significantly higher than the 10YR average. High temperatures in Q3 2015 compared both to Q32014 and the 10Y average. Earth’s 2015 surface temperatures were the warmest since modern record keeping beganin 1880, according to independent analyses by NASA and the National Oceanic and Atmospheric Administration (NOAA).

• Very low levels of precipitations in 2015 compared both to 2014 and to the 10Y average.

• Wind significantly lower than the 10YR average in Q4 2015.

Temperature Precipitations WindTemp. 15 vs.

14

Prec. 15 vs.

14

Wind 15 vs.

14

Temp. 15 vs.

10-YR Avg.

Prec. 15 vs.

10-YR Avg.

Wind 15 vs.

10-YR Avg.

Q1 10-YR Average 7,6 186,8 6,6

Q2 10-YR Average 17,2 165,5 6,2

Q3 10-YR Average 22,7 136,5 5,8

Q4 10-YR Average 11,6 221,9 6,0

10-YR Average 14,8 177,7 6,2

Q1 2014 9,4 204,2 6,6

Q2 2014 17,1 157,5 6,2

Q3 2014 21,9 158,5 5,9

Q4 2014 13,2 181,7 5,9

2014 15,4 175,5 6,2

Q1 2015 8,0 162,8 7,1 -14% -20% 8% 6% -13% 7%

Q2 2015 17,5 107,4 6,2 3% -32% -1% 2% -35% 0%

Q3 2015 23,9 110,1 5,7 9% -31% -4% 5% -19% -2%

Q4 2015 12,2 119,3 5,0 -7% -34% -15% 5% -46% -17%

2015 15,4 124,9 6,0 0% -29% -3% 4% -30% -2%



• Spot markets


• Spot markets



Contents

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During 2015 EUA prices kept their increasing trend due to the positive sentiment connected to the Market Stability Reserve Adoption

(it will operate from 2019) and to the expectations related to the COP 21 (at the beginning of December).

In December 2015, once the sentiment connected to regulatory and political events was over, prices began to collapse until the

beginning of February, when they stabilized at around 5 €/ton. The fall is due to:

• slump in oil prices until mid January 2016,

• weak demand, due to the energy efficiency, to the increase in renewables production, to coal to gas switching in some countries(mainly UK) and to the mild weather. The market is oversupplied (see the cumulative position on the right graph).

EUA MarketCollapse in EUA prices since the end of 2015

Reuters. The figure shows year-by-year Emissions-to-Cap estimate. The individual years are shown (left axis) as well as the cumulative numbers (right axis). The annual balance equals to thedifference between cap and emissions, where cap includes credits and emissions include power and heat sector, industry and aviation.

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