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November 2003

Pan-European Utility Research. Chris Rowland Dresdner Kleinwort Wasserstein. Generating in a CO 2 constrained world. Europe to be CO 2 constrained => €15/tonne & risk on upside Value-creation opportunity => Power prices @ cash costs = no longer sustainable.

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November 2003

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  1. Pan-European Utility Research Chris Rowland Dresdner Kleinwort Wasserstein Generating in a CO2 constrained world Europe to be CO2 constrained => €15/tonne & risk on upside Value-creation opportunity => Power prices @ cash costs = no longer sustainable November 2003

  2. How can Europe abate CO2? • Power sector provide CO2 abatement 125 100 75 CO2 abatement (t) 50 25 0 1 5 8 12 16 20 24 28 Cost per tonne CO2 (€) Ferrous metals Materials Pulp & other industry Steam raising Coal-CCGT switching Coal-CCGT new build

  3. How can Europe abate CO2? • Power sector provide CO2 abatement • In underutilised CCGT capacity Scope to switch fuel mix for generation in existing gas-fired CCGTs ... ... saves 50-55mln tonnes of CO2 125 100 75 CO2 abatement (t) 50 25 0 1 5 8 12 16 20 24 28 Cost per tonne CO2 (€) Ferrous metals Materials Pulp & other industry Steam raising Coal-CCGT switching Coal-CCGT new build

  4. How can Europe abate CO2? • Power sector provide CO2 abatement • In new CCGT capacity Scope to switch fuel mix for generation in existing gas-fired CCGTs ... ... saves 50-55mln tonnes of CO2 ... ... but for greater savings need new build

  5. How CO2 constrained will Europe be? • How aggressive will “environmentally-concerned” countries be? Germany and UK both have targets under National Climate Change programmes EC will limit surplus Shortfall could be greater • Germany & UK could have 85mln shortfall alone

  6. How CO2 constrained will Europe be? • How aggressive will “environmentally-concerned” countries be? • How flexible can “environmentally-stretched” countries be? Most of existing EU likely to be “imaginative” in interpreting EU rules EC will limit surplus Shortfall could be greater • Existing EU likely to face a shortfall of 100-110mln tonnes

  7. How CO2 constrained will Europe be? • How aggressive will “environmentally-concerned” countries be? • How flexible can “environmentally-stretched” countries be? • How much flexibility will there be in Accession Countries? Just 3-4% shortfall seen for 2005-2007 EC will limit surplus Shortfall could be greater • Shortfall of 60-65mln tonnes CO2 per year over 2005-2007

  8. Value of CO2 allowances • Power sector provide CO2 abatement • In underutilised CCGT capacity CO2 allowances have to be priced to offset higher costs of running cleaner plant ... ... will push CO2 allowances to €15/tonne 60-65mln t abatement

  9. Prices for CO2 likely to be volatile • Incentive to switch from coal to gas changes with fuel prices • Economic growth could tighten CO2 constraint Fuel prices could reduce CO2 emissions if coal too dear … … but economic growth could add to CO2 emissions We assume prices of: $25/bbl oil price $40/tonne coal price

  10. Boost to electricity prices • Wholesale power prices Gradual increase would have been expected for wholesale power prices Wholesale power prices - €/MWh 55.0 With CO2 Without CO2 50.0 45.0 40.0 35.0 30.0 25.0 20.0 UK - ytd Italy - ytd Spain - ytd UK 2005-2007 UK 2008-2012 Germany -ytd Italy 2005-2007 Italy 2008-2012 2007 2012 Germany 2005- Germany 2008- Spain 2005-2007 Spain 2008-2012

  11. Boost to electricity prices • Wholesale power prices Gradual increase would have been expected for wholesale power prices Wholesale power prices - €/MWh

  12. Boost to electricity prices • Wholesale power prices Germany and UK wholesale power prices starting to rise Wholesale power prices - €/MWh 55.0 With CO2 Without CO2 50.0 45.0 40.0 35.0 30.0 25.0 20.0 UK - ytd Italy - ytd Spain - ytd UK 2005-2007 UK 2008-2012 Germany -ytd Italy 2005-2007 Italy 2008-2012 2007 2012 Germany 2005- Germany 2008- Spain 2005-2007 Spain 2008-2012

  13. Boost to electricity prices • Wholesale power prices Germany and UK could see 70%+ increases in wholesale power prices Wholesale power prices - €/MWh 55.0 With CO2 Without CO2 50.0 45.0 40.0 35.0 30.0 25.0 20.0 UK - ytd Italy - ytd Spain - ytd UK 2005-2007 UK 2008-2012 Germany -ytd Italy 2005-2007 Italy 2008-2012 2007 2012 Germany 2005- Germany 2008- Spain 2005-2007 Spain 2008-2012 35% up(75% from start year) 45% up(70% from start year)

  14. Boost to electricity prices • Wholesale power prices Wholesale power price increases less dramatic in southern Europe Wholesale power prices - €/MWh 35% up(75% from start year) 45% up(70% from start year) Moderates pace of decline Modest increase related to new entrant prices

  15. CO2 Constraint tightens by 2008-2012 • Carbon constraint won’t go away! • By 2008-2012, likely to need 10% cuts By 2008-2012, flexibility in individual country allocations recedes Accession Members surplus dwindles Go beyond Kyoto?

  16. CO2 Constraint tightens by 2008-2012 • Carbon constraint won’t go away! • By 2008-2012, likely to need 10% cuts By 2008-2012, flexibility in individual country allocations recedes Accession Members surplus dwindles Kyoto tough target Go beyond Kyoto?

  17. CO2 Constraint tightens by 2008-2012 • Power sector provide CO2 abatement • New build required to meet Kyoto target More abatement likely to be possible in industry ... ... but without new build CCGTs, Kyoto target will be missed 220mln t abatement

  18. CO2 Constraint tightens by 2008-2012 • Power sector provide CO2 abatement • New build required to meet Kyoto target • CO2 constraint is here to stay! More abatement likely to be posible in industry ... ... but without new build CCGTs, Kyoto target will be missed 220mln t abatement

  19. Pan-European Utility Research Chris Rowland Dresdner Kleinwort Wassersteinchris.rowland@drkw.com +44 20 7475 7489 Generating in a CO2 constrained world Europe to be CO2 constrained => €15/tonne & risk on upside Value-creation opportunity => Power prices @ cash costs = no longer sustainable CO2 constraint is here to stay! November 2003

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