Global Energy Market Trends and Learnings from German Energiewende Dr Global Energy Market Trends and Learnings from German Energiewende Dr. Peter Kluesener, Senior Strategist Siemens Power Generation, Erlangen, Germany Restricted © Siemens AG 2016 siemens.com

Energy Policy: Balance affordability, sustainability and security of power supply 117_84 9_84 The challenges of power generation … … solved by renewables/gas power plants LCoE 1 Affordable power – low LCoE, low Capex -x% Time 2 Low emissions and high efficiency η > 62% <330 gCO2/kWh Renewables Affordability Sustainability 3 Generation flexibility to complement renewables Plant Load Time 4 Switch from Coal/Oil to Gas η<40% >0.9 kg/kWh η >60% <0.35 kg/kWh Installed Capacity 5 Reserve Margin Reliable power supply Peak Load Efficiency Energy Security Firm Capacity

COP21 put new pressure on nations to reduce their GHG emissions, still gap between INDC vs. 2°C target Greenhouse gas (GHG) emission projections until 2050 The emission gap Current policy trajectory INDC case As major CO2 emitting countries are going to sign the COP21 agreement (e.g. US, China, India, EU, Australia) the threshold value of 55% of global emissions is reached and the commitment is going to come into force. But nevertheless there will still remain a huge gap in emission reduction to reach the 2° or even 1.5° C targets. Source: UNEP; INDC: Intended Nationally Determined Contributions

Current trajectory: power generation is shifting towards Renewables and Gas, but not enough Power Generation 2015 and 2030 (TWh) Power Plant Capacity Balance 2015 and 2030 (GW) Share of RE: 24% 31% CO2 from Power Gener. 3,984 9,434 11.5 Gt 13.6 Gt 38 39 Battery Storage 117 Renew.: 2200 GW Conv.: 1800 GW 241 Other RE 34,361 1,097 Solar +2.5% 920 (3%) Other renewables 1,575 (5%) Solar 1,161 Wind 2,996 (9%) Wind 69 194 6,325 874 4,935 (14%) Hydro 215 133 145 1,569 Hydro 23,896 222 829 236 3,551 (10%) Nuclear 1,202 Nuclear 3,900 Oil 2,552 8,360 (24%) Natural gas 2,204 Gas 5,488 (23%) 853 (2%) Oil 1,605 1,044 10,983 (32%) 9,162 (38%) Coal still 32% 2,269 Coal 1,936 2015 2030 Cap2015 Retirements 16-30 Additions 16-30 Cap2030 Source: IHS Energy, Global Energy Scenarios, Rivalry scenario July 2016

Investment in Renewables on record level globally due to lower cost, with regional investment cycles Global average investment cost for wind and solar PV Wind Solar PV -55% Significant cost reduction for Solar PV of about 55% over the last 5 years, but cost decrease becoming more moderate in the recent past Cost reduction for Wind Onshore less steep as technology is already in a mature development phase, but still a decrease of about 25% over the last 5 years Wind Offshore still challenged by requirement of cost reduction to get competitive to other renewables in a more market based environment Nevertheless Renewables still dependent on financial support schemes Investment in Renewables is cycling regionally with Europe currently with a moderate investment level, while China is booming so far -25% Investment in RE-based power by technologies and regions Source: IEA, World Energy Investment Outlook 2016

Coal-to-Gas switch would reduce CO2 emissions by half, but requires carbon price of more than 25 €/t Marginal power generation cost Specific CO2 emissions by power plant type (variable costs only) gCO2/kWh -63% €ct/kWh Generation cost position in Europe (Jan 2016) CCPP: 61.5% efficiency, gas price 5.8 €/GJ SPP: 38.0% efficiency, coal price 1.9 €/GJ Gas Price high 9.0 €/GJ Coal Price high 3.0 €/GJ (38% eff.) (45% eff.) (61% eff.) Coal Price low 1.8 €/GJ Gas Price low 5.0 €/GJ Energy mix and impact on CO2 emissions In 1,000 TWh and Gt CO2 -42% 16.1 TWh 16.1 TWh Assumptions Net Efficiency Existing Coal SPP: 38.0% CCPP new build: 61.5% Gas 12.3 Gt 5.7 Oil 0.9 7.1 Gt 7 €/t 25 €/t Coal 9.5 CO2 €/t CO2 Status quo Only Gas 2015

Global LNG supply improves competitiveness of power generation by gas and supply security Global LNG liquefaction capacity Global LNG liquefaction capacity grows faster than demand US just entered global LNG trade and will significantly expand exports in the future Gas markets are getting more global through LNG supply options Gas price is under pressure through LNG import options Enhanced global gas trade improved competitiveness and supply security LNG-to-Power project Delimara in Malta 200 MW combined cycle power plant (3 Siemens SGT-800) Gas turbines feature an inlet air cooling system to absorb the required chilling power from the regasification of the LNG Inlet air cooling improves power output and power plant efficiency Commissioning in August 2016 Symbiosis of LNG regasification and combined cycle power plant offers substantial options for improved power output and efficiency Sources: IGU, IHS

Increasing implementation pressure after COP21 Power generation from Renewables already >30%, but reduction of CO2 emissions stagnating Targets of German ‚Energiewende’ … … and Status of Implementation Share of Renewables in gross power generation growing Ongoing strong generation from Coal in % of total generation in TWh Renew- ables 607 624 628 646 610 527 20% 23% 24% Renewables 3% 26% 30% 29% 18% 16% Nuclear 15% 16% 14%  7% Fossil 14% 12% 11% 10% 9% Gas Oil/Other 59% 43% 44% 46% 44% 42% Coal Nuclear 5% 2015 2020 2030 2050 1990 2011 2012 2013 2014 2015 Reduction of GHG Emissions GHG Emissions and Reduction Targets Increasing implementation pressure after COP21 in Mt CO2e 1.247 in Mt CO2e -27% -40% 1,247 -55% Other GHG -1% Other (non-CO2 + CO2 from non-power) 750 -80% 922 927 946 902 908 565  Other 250 -1% Power Sector Power 73 1990 2020 2030 2050 1990 2011 2012 2013 2014 2015

Renewables generation varying between 10 and 50 GW 1H2016: Renewables power generation reached new record levels challenging conventional plants Energy Mix in Power Generation in Germany (1H2016) Renewables generation varying between 10 and 50 GW 40 GW difference between maximum and minimum power generation for intermittent renewables 50 GW 10 GW Conv. Power Plants Solar Wind Onshore Wind Offshore Hydro Power Biomass Power Demand Power Generation by Conventional Power Plants (1H2016) Up to 45 GW cycling, requirements for conventional power even impacting baseload power plants such as Nuclear and Lignite, Gas acting in mid- and peak load operation Maximum ramp-rate: 8-10 GW/h Residual load for conventional power plants vary from 15 to 60 GW (∆= 45GW!) 60 GW 15 GW Hard Coal Lignite Nuclear Hydro Pump Nat. Gas Other Source: Agora Energiewende

Wholesale baseload electricity price varying between -15 and 52 €/MWh 1H2016: Limited flexibility of coal/ nuclear power caused high price fluctuations and need for exports Power Generation, Demand and Electricity Price (1H2016) Wholesale baseload electricity price (€/MWh) Wholesale baseload electricity price varying between -15 and 52 €/MWh Ø 45-50 €/MWh in 2009-13 +52 €/MWh <30 €/MWh Ø27 €/MWh Q1 2008Q1 2008 Q1 2009Q1 2009 Q1 2010Q1 2010 Q1 2011Q1 2011 Q1 2012Q1 2012 Q1 2013Q1 2013 Q1 2014Q1 2014 Q1 2015Q1 2015 Q1 2016Q1 2016 -15 €/MWh Conv. Generation Renewables Generation Price Demand Wholesale price (EPEX Spot) at a very low level: 2015: 31.2 €/MWh, H1-2016: <30 €/MWh Power Exchange of Germany with other Countries (1H2016) Max. 13 GW export Ø7 GW export Power export to neighboring countries is used to balance the German power system with a high share of fluctuating renewables Export at low, even negative power prices Subsidized by German consumers as they pay the EEG allocation Export >40 TWh in 1H2016 (~15% of consumption) Source: Agora Energiewende; FhG-ISE

Moderate fuel and carbon prices ahead Despite greatly low gas prices, clean spark spread still negative – no investment stimulus Wholesale prices in Germany(real 2014€/MWh) Clean Spark/Clean Dark Spreads in Germany (real 2014€/MWh) Statistic Projection Clean Spark Spread Gas CCPP 54.5 % efficiency, incl. CO2-tax Continuing low power prices Disappearing spread between Base and Peak load Slightly positive clean spark spread not sufficient to stimulate CCPP new build Peakload Baseload 2009 2011 2013 2015 2017 2019 2021 2008 2010 2012 2014 2016 2018 2020 2021 Fuel/ Carbon Prices for Continental Europe) (2014 €/MWh/€/t) Clean Dark Spread From 2017 Gas more competitive than Coal due to extraordinary low gas price, shifting back by 2021 in case CO2 price remains at low level Coal SPP 37.8 % efficiency, incl. CO2-tax -60% Moderate fuel and carbon prices ahead Gas (EU) CO2 ETS Coal (ARA) 2009 2011 2013 2015 2017 2019 2021 Source: IHS Energy, August 2016

>25 bn € EEG budget per year Retail electricity prices in Germany at the upper end in comparison to other countries, driven by levies Retail Electricity Price Development and Price Structure in Germany (€/kWh) 2016 Electricity Price Structure +21% 28.7 >25 bn € EEG budget per year Tax 2.1 0.9 Other Levies +28% 6.4 EEG Levy concession levy 6.2 15.0 0.5 1.5 Households Grid 7.1 6.4 Industry 0.1 Households 3,500 kWh/a, Industry: 160,000..20 million kWh/a & Grid Generation 6.1 6.5 Households Industry Comparison of 2015 Retail Electricity Prices by Countries (€ct/kWh) 28.7 30.7 21.5 20.8 21.3 24.5 x3 16.2 14.4 Households 8.5 9.2 10.8 x1.5 x3 14.4 15.0 15.2 16.0 11.1 6.5 8.5 9.5 8.6 9.1 Industry 5.6 x1.3 Japan China India USA Germany EU28 France Poland UK Italy Den- mark

Dispatchable capacity balance 2015 to 2022 Dispatchable capacity 2015 Gap in dispatchable capacity after 2020 endangering supply security as not sufficient new plants are built 272_84 281_84 Power generation capacity (GW, net), status Sep 2015 – Germany in total 191 Dispatchable capacity balance 2015 to 2022 Hydro PS Geothermal Grid peak load (85 GW) plus 15% reserve margin Gap of ~10 GW! Biomass Solar PV 106 -17% Wind Offshore 3 5 13 Wind Onshore 8 2 98 3 6 5 10 1 3 7 88 Hydro 7 2 2 1 6 2 5 8 1 Nuclear 3 8 3 10 e.g. CCPP Lichterfelde (Berlin) Nuclaer Phase-out Lignite plants retirement Plants older than 45 years in 2022 e.g. CCPP Marzahn 8 Other Fossil 3 3 1 Gas 22 28 3 Oil 3 4 Hard Coal 24 23 Lignite 19 14 Installed capacity Sep 2015 Dispatchable capacity 2015 Special operations (seasonal closures) Additions firm (under construction) Retirements firm (regulated) Retirements planned (as anounced to BNetzA) Retirements likely (plant lifetime) Additions planned 2022 Source: BNetzA Kraftwerksliste, Sep 2015; own analysis

Lessons learned from German 'Energiewende' + High renewable installations supported by effective subsidy schemes However, CO2 emissions in Power Sector stagnating since years High amount of levies pushing electricity retail prices (households: ~30 €ct/kWh) Low wholesale price (~30 €/MWh) not providing sufficient revenue inflow for power plant operators – no incentives for investment in required new thermal power plant capacity Security of Supply at risk, at least at a national level for Germany with need to rely on power plant capacity from neighboring countries after 2020 - - - -

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