European energy markets observatory findings edition #15

European Energy Markets Observatory (EEMO) 2012 & Winter 2012/2013

15th edition

2Copyright © Capgemini 2012. All Rights Reserved

European Energy Markets Observatory

An overview of the European Energy Markets

Energy consumption is stagnating but oil prices remain high

Energy efficiency is a strategic key factor

Unconventional gas production continues to develop

Renewable energies development is slowed down by subsidies decreases linked to public deficits

Energy transitions: German and French examples

Chaotic electricity and gas markets are threatening security of supply

Utilities’ financial situation is still difficult

Conclusions



In Europe, the economic crisis worsened during 2012 impacting both electricity and gas consumptions

In 2012, Europe witnessed a Gross Domestic Product negative (GDP) growth of -0.4% and a forecasted zero GDP growth for 2013

While the US have started to recover (with a 2.2% GDP growth in 2012 and a 2.4% growth in Q1 2013), the BRICS growth, still significantly higher than in advanced countries, has slowed down

Economic slowdown and energy efficiency measures are limiting the energy consumption. New electricity usages are fueling electricity consumption (e.g. ITC needs that account for ~10% of the global electricity consumption)

Gas consumption is correlated to direct usages and to gas-fired generation plants needs; the latter represents 27% of the total consumption. This share that had increased in the past should start to decrease

The hope for a strong recovery has vanished and forecasts on global and European

economies are prudent

Correlation between EU-27 electricity and gas consumptions* and GDP

Source: ENTSO-E, Eurogas, IMF – Capgemini analysis, EEMO15

*Non weather corrected

-0.2%

-2.2%

-10

-8

-6

-4

-2

0

2

4

6

8

10

3,000

3,500

4,000

4,500

5,000

5,500

%

TW

h

Gas consumption

Electricity consumption

GDP change



Oil prices remain high due to Arab countries (notably Syria) instability and Iran’s situation

Summer 2013 saw missing supplies in the Middle East and North Africa (up to 3 mb/d, i.e. about 3.5% of global demand)

At the beginning of September 2013, oil prices climbed again on the markets due to concerns over military retaliations in Syria by Western countries

And they are currently on a decreasing trend for several reasons: In November 2013, Iran agreed a deal to

curb some of its nuclear activities in return for easing of international sanctions against it

In January 2014, protests in Libya halted for two weeks

China’s manufacturing index barely grew in December 2013

The US market is well supplied

Source: BP

Crude oil spot – Brent in US dollars and in Euros

Analysts views on oil pricesmid-term evolution are not aligned

0

20

40

60

80

100

120

140

160

Oil

pri

ce

USD

EUR



European gas prices are much higher than in the US but below gas-hungry Asia

Thanks to shale gas, gas prices are low in the US

In Japan, the Fukushima accident resulted into increased gas importations and high prices. In December 2013, these prices were more than four times the US price

European Utilities are supplied mainly through long-term contracts indexed on oil prices. As the oil price has remained high, the European gas prices are about three times more than in the US. However, Utilities have successfully obtained a share of around 40%-50% of spot price in the long-term contracts indexation

Gas prices

Source: Focus gaz

Spot price share in gas long-term contracts indexation should continue to increase

Monthly average priceEurope US Japan

LT indexed + spot 46%Germany import average priceNBPJapan - monthlyHenry Hub











Conclusions



Energy efficiency measures are difficult to implement

A Capgemini Consulting’s* study shows that peak shaving potential is significant (12-14%) as customers are ready to differ their electricity devices usage from peak to non-peak hours while electricity savings potential in absolute terms, is more limited (2-3%)

Successful energy efficiency programs leverage passive and active actions: Passive measures include: home insulation,

improved energy efficient appliances, stand-by modes reduction and eco-designed construction & equipments

Some active measures aim to increase the financial benefit of energy savings through dynamic tariffs and higher energy prices. Other active measures are designed to increase customer awareness (campaigns, more accurate information through smart meters,…)

Source: Eurostat, BP statistical report 2013 – Capgemini analysis, EEMO15

While energy efficiency is satisfactory in the industrial sector, the problems lie in the

transportation and buildings sectors

1,450

1,500

1,550

1,600

1,650

1,700

1,750

1,800

1,850

1990 1995 2000 2005 2010 2015 2020

EU

-27

Prim

ary

ene

rgy

cons

umpt

ion

[Mto

e]

Historical evolution of primary energy consumptionPath to reach 2020 target2020 target for EU-27Projection with current measures in place(as per the March 2011 EU Energy Efficiency Plan)New objective defined in the October 2012 EU Energy Efficiency Directive -20%

-17%

-9%

EU-27 primary energy consumption

*Demand Response study – Capgemini Consulting, VaasaETT and Enerdata, 2012



Customers information and education is a key element for successful energy efficiency programs

In Japan, after March 2011 tsunami, a target energy savings of 15% was set for summer 2011. Large electricity users were ordered to restrict their consumption

Summer 2010(result )

16.58Million kW

5/8/201013.03

Million kW

9/8/2011

Supply Demand

Summer 2011(result)

12.46Million kW

9/8/2011

Summer 2011(result)

Consumption restrictions for large users (Art. 27 of Law on the electricity sector): 550 hours between July 1 and September 9.

Implementation of projects to support energy conservation and information meetings for small users.

Help for the installation of new and additional private power generation

Lower temperatures compared to the previous yearDecline in demand following the earthquakeEnergy conservation efforts

Decreased hydro capacity following damage caused by torrential rains

Decommissioned sites following the earthquake

15.57 million kW

Peak In summer 2010

(5 /8/2010)

Peak In summer 2011

(9 /8/2011)

Demand decreased by more than 4 GW (from 16.58 GW in the summer 2010 to 12.46 GW in the summer 2011), thus avoiding blackout



Various devices should contribute to energy efficiency: smart meters, demand side management, curtailment or remote controls

Smart meters deployment status in Europe (as of July 2013)

Source: Various industry sources – Capgemini analysis, EEMO15

Many Nordic countries, Spain and the UK have started to deploy smart meters Finland should complete its 5.1

million smart meters deployment by end-2013, becoming thus the 3rd European country, after Italy and Sweden, to finalize the mass roll-out

In France, the decision to deploy electrical smart meters (cost estimated between €5 and 7 billion for the 35 million meters) was taken early July 2013 with a first phase of 3 million meters to be installed by 2016

In August 2013, the French government approved the 11 million gas smart meters deployment to take place on the 2016-2022 period

Future capacity markets will include a regulated reward of curtailment

IE

NL

CH

SE

DK

NO

FI

EE

LT

LV

PL

SK

ROSI

UK

PT

ES IT

GR

FR

BE

HU

DE

AT

BG

CZLU

NorwayE Law adopted in July 2011: mandatory

roll-out of automated reading. To be deployed by end-2016

FinlandE 86% meters allowing hourly

reading deployed by end-2012. To be finalized end-2013

EstoniaE Deployment scheduled between 2013 and 2017

SwedenE 100% smart meters

rolled-out in 2009

DenmarkE Strategy defined in 2012.

52% smart meters or alternative solutions deployed by several DSOs by end-2012

GermanyE Large scale pilots underway (~0.5 m meters by mid-

2012). Government decision expected in 2013 following B-case publication

G Several thousands meters deployed. Other pilots in 2013. Roll-out scheduled in 2014

PolandE+G

Pilots underway. Mass roll-out and planning not decided yet

Czech RepublicE CEZ’s pilot ended in 2011. Roll-

out rejected.

AustriaE Legislation adopted in April 2012:

2015: 10% deployed2017: 70% deployed2019: 95% deployed

BelgiumE+G

Wallonia: Roll-out over 30 years preferredFlanders: pilot underway, B-case re-evaluation by end-2013France

E Roll-out of the 35 m smart meters decided in July 2013

G Roll-out of the 11 m smart meters scheduled during the same period as for electricity (2016-2022)

GreeceE Roll-out underway for

60,000 B2C large clientsG Project to extend roll-out to

gas and water meters in Athens

ItalyE 100% smart meters rolled-out

in 2009G 80% smart meters to be

installed in 2016. Renegotiation of concessions underway

HungaryE Pilots underway. Waiting for

B-case conclusions in 2013G Multi-fluids pilots underway

(elec, gas, water) at RWE

UKE + G

B-case re-examined end-2012.Roll-out to start in Autumn 2015 until end-2020.53 m electricity and gas smart meters to be installed. Extensive government intervention.

NetherlandsE+G

Several pilots underway.Legislation adopted in 2011. Voluntary installations. Roll-out from 2014 to 2020 (about 500,000 smart meters installed by end-2013)

PortugalE No specific legislation nor B-case.

Pilots underway.

SpainE Roll-out underway, to be finalized by 2018.

Regulation on data access and protection underway. Pilots end-2012 and 2013 to test demand response

G Roll-out not decided yet

IrelandE + G

2008-2011: Studies and pilots2012-2014: Requirements definition2014-2015: Build & tests2015-2019: National roll-out

I

I DF

DF

Mass roll-out finalized

Mass roll-out by 2020 well-engaged

Debate in progress

Mass roll-out rejected

DSO not in the lead of deployment

Dual fuel deployment

I

DF

DF

LithuaniaE B-case negative. Roll-out rejected

DF











Conclusions



100

100

250

50

60200-

70

Unconventional oil and gas development is changing the paradigm

Major unconventional natural gas resources

Source: IEA, Golden Rules for a Golden Age of Gas, May 2012

Sou

rce:

IF

P E

N,

IEA

Reserves (in years of consumption) when taking into account unconventional resources



Shale gas development consequences in the US

In 2012, shale gas accounted for 34% of total gas production in the US vs. 25% in 2010.This share should grow to 50% in 2040*

Four exports terminals got authorizations(out of the 26 applications) and others should follow: Freeport in Texas Cheniere Energy’s Sabine Pass in Louisiana Lake Charles Exports in Louisiana Lusby in Maryland

These unconventional gas development, that are exploited at very competitive costs, favored the repatriation in the US of energy-intensive industries and created about industrial 600,000 jobs (in addition to numerous direct jobs)

The replacement of coal by gas in fossil-fueled generation plants has decreased US greenhouse gas emissions (-2.4% in 2011vs. 2010 and -1.6% in 2012 vs. 2011)

The debate on US unconventional gas

exportation is progressing

Total gas production per type of source – in Tcf

Source: EIA

*EIA (Energy Information Administration) estimation



By 2030, thanks to unconventional gas exploitation, Europe’s dependency to gas imports could be reduced to 60% instead of the projected 80%*

Sou

rce:

IE

A,

EIA

, va

rious

indu

stry

-spe

cific

new

slet

ters

– C

apge

min

i ana

lysi

s, E

EM

O15

*Report from the European Commission

Shale gas development status in Europe (as of September 2013)

France is increasingly isolated in Europe on its decision to ban fracking

• Nov. 2011: moratorium on fracking in N. Rhine Westphalia• June 2012: between 700 and 2,300 bcm of recoverable

reserves estimated by the German General Institute for Geosciences and Natural Resources

• February 2013: draft law to forbid fracking in areas with groundwater tables and to make impact assessments before permits issuance more systematic – under discussion until September 2013 legislative elections

• H2 2012: publication of the results of a study launched in July 2011 on the potential risks of shale gas exploration

• December 2012: suspension of drilling• August 2013: government report concluding environmental

risks from fracking would be manageable• August 2013: reserves estimated between 2,400 to 11,000

bcm by TNO (independent research)

• December 2012: lifting of the moratorium on fracking• June 2013: new shale gas study from the British Geological

Survey raises the potential volume of shale gas in the Bowland Basin and beyond to 40,000 bcm

• July 2013: introduction of incentive fiscal measures (30% tax rate on shale gas production vs. 62% for conventional oil and gas production)

• June 2011: introduction of a moratorium on fracking• October 2011: all exploration permits removed• September 2012: government confirms its

opposition to fracking and engages a revision of the mining code

• June 2013: parliamentary report recommends to ease the fracking ban to assess reserves

• January 2012: government revokes Chevron’s exploration permit and parliament introduces a moratorium on fracking

• June 2012: parliament eases certain restrictions but fracking remains forbidden

BG

• May 2012: government imposes a moratorium on fracking

• April 2013: Lifting of the moratorium but public pressure to maintain it

RO

• June 2012: ExxonMobil abandons its Polish exploration program due to weak flow rates from its first well

• July 2012: Five state-controlled companies launch a €408 million exploration program

• January 2013: Law to regulate the market under preparation

• August 2013: 8,000 m3/d of gas (2.9 mcm/y) extracted since end-July 2013

PL

• June 2012: 50 bcm of recoverable reserves estimated by the Lithuanian State Geological Service

• April 2013: Revision of the law to toughen environmental constraints

LT

LV

EE

DK

DE

NL

BE

FR

UK

NO

SE

ESPT

HU

SI

SK

• March 2013: 1,415 bcm of recoverable reserves estimated by the Spanish Council of Mining Engineers

• April 2013: introduction of a moratorium on fracking in Cantabria

• July 2013: government approves shale gas exploration

Germany

UK

Netherlands

SpainFrance

Bulgaria

Romania

Poland

Lithuania

Fracking ban Fracking ban in one region or under discussion



US unconventional gas development consequences in Europe

US gas exportations scenarios – projected price impact from 2016 to 2030

($/MMBtu, real 2012 $) Unconventional gas development in

Europe would endanger Gazprom and other exporters position (Algeria, Qatar)

Russia has significant gas reserves and if infrastructures were available, it could flood Europe with gas, triggering a price war

But Russia has increasing domestic energy needs to satisfy

It is also probable that US unconventional gas producers will obtain more authorizations to export

In both cases, a low gas price would have a positive impact on industrial development

If some nuclear plants were given the authorization to restart in Japan, the

impact of US unconventional gas exportations would be more

important for Europe











Conclusions



0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

110%

120%

0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180 190 200 210

Gro

wth

rat

e [%

]

Electricity production [TWh]

2011

2010

2009

2008

2007

2006

2005

2011

201020092008

2007

20062005

Solar PV

Capacity Growth (abs.) Growth (%)

DE DE DK

IT IT BG

ES FR GR

Wind

Capacity Growth (abs.) Growth (%)

DE DE RO

ES UK PL

UK IT EE

Biomass

DE PL

FI UK

SE DE

Geothermal

IT -

PT -

FR -

Urban waste

DE NL

FR BE

IT DE

Biogas

DE DE

UK IT

IT CZ

Small hydro

IT IT

FR RO

ES BG

Top 3 countries ranked by:

1 In MW net for wind, solar PV, small hydro and geothermal and in TWh for biogas, urban waste and biomass

2 Relative growth additionally displayed for solar PV and wind

Installed capacity1 Growth2 (absolute)

DE DE

UK IT

IT FR

20112012

2012

2011

2011

20112011

The quick development of renewable energies has created power overcapacities and further complicates grid management

Sou

rce:

Eur

’Obs

erve

r ba

rom

eter

s –

Cap

gem

ini a

naly

sis,

EE

MO

15

Growth rate of renewable energy sources

Installed capacity of renewable energies is continuing to grow

However, the numerous regulatory changes have led to a decrease in investments end-2012 (-29% year-on-year in Europe, reaching $79.9 billion)

Despite solar and wind energy growth and due to subsidies decrease, the European objective will probably not be met

European solar panels manufacturing companiesare suffering from China competition

It is forecasted that in theshort term at least halfof them could be taken over or go bankrupted*

* Ernst & Young et BNEF, Mai 2012

Renewable energies (wind and solar) have grown fast over the last years with a stronger (and poorly planned) increase of

solar energy



In Germany, all scenarios for solar energy development were underestimated, increasing power generation overcapacities

Successive forecasts of installed solar capacities in Germany (MW)

Source: RWE

Thermal capacity additions in Germany (GW)

Renewables installed capacity projection in Germany (GW)

Source: Statkraft

The current electrical overcapacity situation is likely to continue



In Germany, renewables extra costs account for 18% in residential customers electricity prices while it is only 10% in France

In Germany, the renewables tax is supported by customers (€23.6 billion in 2014) while in France, the full level of tax is not passed on to customers (~€5 billion

cumulated supported by EDF, to be repaid by the State)

Evolution of a typical residential bill in France (8.5 MWh/year – electric heating)

Source: CRE

CSPE: Contribution au Service Public de l’Electricité

437530 585

361

43052377

(9%)

165(15%)

199(15%)

875

1,125

1,307

0

200

400

600

800

1,000

1,200

1,400

0

200

400

600

800

1,000

1,200

1,400

2011 2016 2020

Cur

rent

eur

os

–ta

x ex

clud

ed

Supply Network charges CSPE

+30%

+15%

112.2 117.2 121.9 129.9 141.2 138.9 138 141.7 143.2

1.69(4%)

1.64(5%)

1.02(5%)

1.16(5%)

1.31(6%)

2.05(9%)

3.53(14%)

3.592(14%)

5.277(18%)

0.410.58

0.680.88

1.02 1.121.13 2.05

3.53

186.6194.6

206.4216.5

232.1 236.9252.3 258.9

287.3

0

50

100

150

200

250

300

350

2005 2006 2007 2008 2009 2010 2011 2012 2013

€/M

Wh

Other taxes

EEG-Umlage

Supply and grid charges

Source: BDEW

Evolution of the residential electricity price in Germany (3.5 MWh/year – typical household comprising 3 people)

6.24

2014

i.e. 19% increase



Smart grid pilots are developing rapidly but industrial deployment is late

Smart grid pilots development is accelerating (so far €18 billion investments worldwide)

The smart grid industrial deployment is not as rapid as one expected, mainly due to the volume of investments required and the “not-yet-fit-for-purpose” regulatory and market frameworks (especially in Europe)

Furthermore, there is no one-size-fits-all technical solution slowing down the speed of learning from existing pilots

Despite the particularities of each network and customer bases, return of experience from pilots is useful: Storage, real time data management and load balancing are

among the killer applications to answer two major energy issues: peak demand curtailment and overall energy losses

Sustainable Demand Side Management could only be reached by a holistic approach targeting customer behaviors, relying on tariffs and incentives and facilitated by technologies and automation

Norms, standards, regulatory frameworks and market mechanisms need to be enhanced, clarified and implemented rapidly with a long term vision

Improvement in the quality of

customer services

Decrease in operating

costs of the network

Secure and safe operation of

grids

Decrease in greenhouse

gas emissions

Renewable energy

integration

Improvement of the energy

market operations

Energy efficiency

3X20

3X20 3X20

Smart grid benefits



The market should blossom: a huge worldwide smart grid market is expected in the 10 to 20 next years

Overview of smart grid investments estimates (€ billion)

Sources: Edison, E&Y, GTM, Innovation Observatory, ISGF, JRC, Zpryme

Brazil

EuropeChina

India

Implementation of fully functional smart grid (excl.

investments needed to maintain existing system &

meet load growth)

Smart grid investments (incl. Smart meters, transmission system

upgrades, DA, SA, EV mgmt systems…)

Development of nationwide transmission

network

WAM, DLR, AMI,

microgrids, trainings, etc.

smart grid investment

Update T&D grids (incl. traditional investments)

Include T&D network modernization and expansion,

new generation sources to meet the objectives of some nuclear

phase out policies

JRC 2010-2020 for Europe2011-2030 for the US (high and low scenarios)

Innov. Obs. 2010-2030 Intelligent smart grid infrastructure (grid automation, comm. Infra, IT

systems and hard, syst. Integration, HAN equipment, smart meters)Edison 2008-2030CC est. Capgemini Consulting estimation incl. all investments

required for the modernization of T&D networkE&Y 2010-2020ISGF 2012-2017Zpryme 2010-2020

USA

JRC Edison Innov. Obs.

358

677

45

254

Innov. Obs.

14

JRC Innov.Obs.

CC est.

56

110

250

E&Y Innov.Obs.

Zpryme

498

74 76

Japan

Innov.Obs.

15

Innov.Obs.

ISGF

275











Conclusions



Despite the Fukushima accident, new nuclear is still developing, mainly in Asia

Among the 71 nuclear reactors under construction around the world, 50 are being built in Asia: China (29) Russia (10)

New projects are also emerging in Middle East (Emirates, Saudi Arabia), Turkey and South Africa.

No existing nuclear plants were stopped except in Germany (for political reasons) and in Japan

In December 2013 in Japan, applications have been submitted to the country’s Nuclear Regulation Authority for the restart of 16 nuclear power reactors

As a consequence of the very long new nuclear reactors construction freeze in Europe, human competencies are missing including the ability to master very large projects

In the UK, the nuclear rebuild program has started to materialize (however the deal is currently under scrutiny by the EC): Two EPR reactors (3.2 GW) at Hinkley Point C Investors: EDF Energy (45-50%), CGNPC and CNNC (30-40%), Areva (10%) and other

investors for up to 15% Strike price set at £92.5/MWh in a 35-year “Contract for Difference” (estimated to provide around

10% rate of return)

Other European countries, especially in Eastern Europe, are building new plants

Additional safety CAPEX and OPEX are pushing

nuclear electricity costs up but existing nuclear

energy remains competitive. However, there is a real need to

master new nuclear plants construction delay and

costs

India (6) South Korea (5)



0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

BE BG CH CZ DE ES FI FR UK HU IT LT NL PL RO SE SI SK EU 27

Solar + Biomass

Wind

Hydro

Other fossil

Gas

Lignite + Coal

Nuclear

2013 mix: lef t-hand side bar

2020 mix1: middle bar

2030 mix2: right-hand side bar

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Solar + Biomass

Wind

Hydro

Other fossil

Gas

Lignite + Coal

Nuclear




0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Solar + Biomass

Wind

Hydro

Other fossil

Gas

Lignite + Coal

Nuclear




0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Solar + Biomass

Wind

Hydro

Other fossil

Gas

Lignite + Coal

Nuclear




0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Solar + Biomass

Wind

Hydro

Other fossil

Gas

Lignite + Coal

Nuclear




Energy transitions will lead to increased electricity costs

Following the Fukushima accident and the shale gas expansion, European electricity mix (installed capacity) should evolve towards*: Stability of gas (at the best) More coal (in certain countries) More renewables: the renewables

share (excluding hydro) should increase from 22% in 2013 to 36% in 2030

Less nuclear: the nuclear share in the European electricity mix is projected to decrease from 13% in 2013 to 10% in 2030

2013, 2020 and 2030 electricity mix – installed capacity (as of June 2013)

Sou

rce:

EN

TS

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– C

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s, E

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O15

Two cases in point: Germany and France

*ENTSO-E

Notes: 1: 2020 projection based on a ‘best estimate’ scenario, 2: 2030 projection based on a ‘slow progress’ scenario towards 2050 decarbonisation goals



In Germany, the energy transition ("Energiewende") implementation faces grid issues

German energy transition objectives require to redesign the whole grid and build more generation capacity: Total nuclear phase-out by 2022 Greenhouse gas emissions reduction by 80-95% before 2050 80% electricity production from renewables before 2050

In 2013, there are significant deviations to this plan: Mothballed coal and lignite plants were re-opened to face

electricity demand. leading to a 2% CO2 emissions increase in 2012

New grid constructions are late (local public opinion opposition.)

Former minister Peter Altmaier admitted that the energy transition would cost around €1,300 billion from now to 2040.

Large customers prices could increase by as much as 70% by 2025** threatening their competitiveness. Residential electricity prices will increase also

The new coalition government has expressed worries on electricity prices increases and should adjust the

renewable expansion objectives

Source: Bundesnetzagentur

Network projects development status (as of August 2012)

Procedure not openedRegional planning procedureAuthorization procedureAuthorized / being builtConstruction completed

Delayed projectProject on schedule

*High Voltage Direct Current**Study on the German energy transition, CAS



In France, energy transition (50% nuclear energy in the mix by 2025) costs are estimated at €592 billion

Energy efficiency investments are estimated at €170 billion €422 billion have to be invested in the electrical system (these infrastructures – wind mills, high

voltage lines construction – require social acceptance; it currently takes at least 10 years to put a new line in service, including 9 years of procedures): €262 billion in generation (mainly in renewables)

€50 billion in the transmission grid

€110 billion in the distribution grid

The electricity cost would increase by €30-40/MWh in addition to a similar increase linked to Grenelle’s commitments

In 2013, many official instances called the government to delay its planned phase-out of nuclear energy and to decrease the renewables growth pace

Energy transition will

increase electricity costs

and thus will impact

negatively companies

competitiveness

Investments in the electrical system

Investments in generation

2030 Grenelle 2030

Energy transition 2030

Spread Fr/Ger 2011

Increase of electricity costs per MWh

Source: UFE











Conclusions



Questions on the present European energy markets models and functioning

The European Commission seems to ignore its single market policy results However on January 22, 2014, the EU proposed new energy and climate objectives to be met by

2030 (in order to cut its greenhouse gas emissions by 80-95% by 2050): One compulsory objective: 40% greenhouse gas emissions reduction (compared to 1990 levels) At least 27% of renewable energy consumption (non compulsory) Improving energy efficiency (no specific target at this point)

The European energy market design faces several problems The electric systems are deeply disturbed by the development of renewables

Prices are meaningless on the European carbon market and this reduces the EU CO2 policy effects

The present markets functioning does not promote the needed huge investments and has limited benefits for consumers and climate policy

The European Utilities alarm over the sustainability of their business in Europe and the absence of positive long-term signals Twelve European energy Utilities CEOs are ringing the alarm bells: they insist on the lack of positive signals

for investors, especially in peak power plants, they warn on the consequences of blind subsidies to renewables, and they lament the low prices of carbon, that lead them to close or mothball efficient gas power plants .

The Energy-Climate package impact on a deregulating market in an economic crisis environment has resulted in chaotic markets



Renewable energies development has heavily modified the power plants merit order

While renewable energies are heavily subsidized, their operational costs are

almost zero. Therefore they are used as base load.

Gas plants utilization rates are dramatically decreasing, leading to their

partial closure.

€/M

Wh

€/M

Wh

Merit order (German case 2012 – with renewables)

Merit order (German case 2009 – without renewables)

Source: RWE

Source: RWE



The low level of CO2 certificates prices and low coal prices, have made coal-fired plants more competitive than gas-fired plants

Renewable energy development reduces the gas plants utilization, jeopardizing their profitability

The IEA believes that gas plants require a utilization rate of 57% (i.e. around 5,000 hours/year) to be profitable

Thanks to shale gas, the low gas spot price in the US created coal oversupplies. European coal prices dropped by 30% between January 2012 and June 2013

Coal plants utilization rate is higher than gas plants’: in Germany, coal-fired plants utilization rate was in the 43-71% range in 2012 while gas-fired plants was utilized less than 21% in average

Very low CO2 certificates prices are also favoring coal-fired plants

Gas plants are closing in Europe

Around 60% of the European total installed gas-fired generation (130 GW) are currently not recovering their fixed

costs and are at a risk of closure by 2016*

*Estimation IHS CERA

Italy

Belgium

Spain

Germany

0

5

10

15

20

25

30

35

01/0

1/20

08

01/0

4/20

08

01/0

7/20

08

01/1

0/20

08

01/0

1/20

09

01/0

4/20

09

01/0

7/20

09

01/1

0/20

09

01/0

1/20

10

01/0

4/20

10

01/0

7/20

10

01/1

0/20

10

01/0

1/20

11

01/0

4/20

11

01/0

7/20

11

01/1

0/20

11

01/0

1/20

12

01/0

4/20

12

01/0

7/20

12

01/1

0/20

12

01/0

1/20

13

01/0

4/20

13

01/0

7/20

13

CO2 spot EUA 2nd period 2008-2012 (€/t)

CO2 spot EUA 3rd period 2013-2020 (€/t)

CO2 certificates prices evolution

Sou

rce:

EE

X –

Cap

gem

ini a

naly

sis,

EE

MO

15

hours Utilization rate of CCGTs in Europe

Sou

rce:

CE

RA



The price difference between “peak hours” and “off peak hours” has considerably flattened

With growing renewable production and relatively low consumption, there is presently an overcapacity situation

Renewables massive development has led to a decrease of the peak/off-peak price ratio

Positive price spikes (in winter for example) have nearly disappeared and new type of negative prices spikes have appeared during some hours interval (in 2012 there were more than 70 hours during which wholesale European prices were negative)

There are not enough incentives to invest in peak power capacities nor hydraulic storage

In the present market conditions, very high consumption on cold, dry and dark days with no wind could lead to supply disruptions

European security of supply is threatenedSource: APX, Belpex, EPEX, Statkraft

Number of hours with price spikes

Number of hours with negative prices











Conclusions



050,000

100,000150,000200,000250,000300,000350,000400,000

0%

5%

10%

15%

20%

25%

30%

Debt stable at a high level, and persisting pressure on margins mainly due to rising overcapacity

EBITDA* margins under pressure Further deterioration of power generation margins

• Rising overcapacity due to stagnating consumption, growing renewables

• EBITDA margins declined from 19.4% to 18.7%

Negatively impacted by CO2 cost increase, and by lower prices, as hedging rolls off

Deterioration in power generation margins more than offsets improvement in gas midstream (E.ON) and increasing focus on cost control program

While debt remains a significant burden Consequences are:

Tougher stance from credit rating agencies CAPEX cut across the board Operational excellence efforts accelerated Dividends at risk

Source: Exane BNP Paribas – Capgemini analysis, EEMO15

Persistent high debt (€ million)

EBITDA margin (% of revenue)

* Earnings Before Interest, Tax, Depreciation and Amortization











Conclusions



The present chaotic situation on the electricity markets is threatening security of supply

• Slow economies leading to electricity and gas consumption stagnation

• Energy-Climate Package implementation leading to uncontrolled and expensive renewable energies growth

• Renewables development threatening gas-fired plants profitability

• US shale gas revolution pushing coal prices down and adding pressure on gas plants utilization

• Gas-fired plants are closing• Subsidies to renewables are

reaching non sustained high levels

• Too low CO2 emission rights prices to trigger low carbon investments

• Erratic prices are appearing on the electricity markets

• Electricity or gas storage investments are less competitive

• Utilities are loosing large shares of their revenues

• Needed infrastructure investments are not implemented at the right pace

• Short term:o The gas-fired plants enabling to cover the

peak load needs are closingo Buffers, as gas stored for the winter are

significantly lower than in the past years

• Long term:o Need for new infrastructures to:

- Cover the consumption increase,

- Replace aging conventional plants,

- Increase fluidity of energy exchanges,

- Cover the grids overhaul triggered by energy transition

- Diversify gas supply routes

o The lack of visibility on the markets combined with the difficult Utilities financial situation are leading to a deficit of needed investments

Main root causes of this chaotic situation Consequences Security of supply concerns



Energy markets have to be rethought

The ETS market has to be reformed and allocation levels adapted to the economic situation

Capacity markets should be created quickly in a coordinated manner at the European level

A new retail market design has to be rethought and implemented to enable the smart grids financing and deployment

A more reasonable renewable energies capacity growth pace has to be established in order to curb the related subsidies growth

Aggressive and efficient energy savings policy has to be implemented

If the right reforms are not implemented timely, the physical electricity and gas systems will deteriorate and when the economy and the consumption grow again, energy security of supply will be under

pressure

“In order to avoid wholesale markets destabilization linked to growingshares from subsidized renewables, France has to reconcile its renewables subsidies policy with price markets fluctuations.”

From the State Auditor report on the development strategy of renewable energy sources, published on July 25, 2013

The information contained in this presentation is proprietary.Rightshore® is a trademark belonging to Capgemini.

© 2012 Capgemini. All rights reserved.

www.capgemini.com

About Capgemini

With around 120,000 people in 40 countries, Capgemini is one of the world's foremost providers of consulting, technology and outsourcing services. The Group reported 2011 global revenues of EUR 9.7 billion.

Together with its clients, Capgemini creates and delivers business and technology solutions that fit their needs and drive the results they want. A deeply multicultural organization, Capgemini has developed its own way of working, the Collaborative Business Experience™, and draws on Rightshore®, its worldwide delivery model.

With EUR 670 million revenue in 2011 and 8,400 dedicated consultants engaged in Utilities projects across Europe, North & South America and Asia Pacific, Capgemini's Global Utilities Sector serves the business consulting and information technology needs of many of the world’s largest players of this industry.

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European energy markets observatory findings edition #15

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