2007 APEX Conference Paris, October 16, 2007 SESSION 3: How to integrate renewable energy in the markets Wind power Maria-Luisa Huidobro President

TABLE OF CONTENTS 1.Wind power and energy evolution in the world and in Spain 2.Spanish regulation on power production in the special regime 3.Wind power participating in the day ahead and intra-day market 4.Relevant market data 5.Conclusions

1.Wind power and energy evolution in the world and in Spain.

WORLD INSTALLED WIND POWER (GW) Source: GWEC, EWEA and AEE

ALLOCATION BY COUNTRIES. INSTALLED WIND POWER IN 2006 (GW) Source: GWEC, EWEA and AEE

INSTALLED POWER IN THE SPECIAL REGIME IN SPAIN AND FORECAST UNTIL 2010 (MW) Source: Renewable Energy Plan

RECENT FORECASTS FROM THE MINISTRY OF INDUSTRY, TOURISM AND COMMERCE èThe forecasts of the Secretary General of Energy, aim at: l 35,000 MW in 2020 and l 44,000 MW in èIn addition, “during the following 10-years period, the renewable energy will be able to compete without premium”.

2.Spanish regulation on power production in the special regime.

èCogeneration and waste energy. èRenewable energy: Group b.2Wind power. Group b.2.1Windmills onshore. Group b.2.2Windmills offshore. èWaste energy with energy value. èInstalled power per unit must be < 50 MW. KINDS OF FACILITIES

èInstallation licence corresponds to regional authorities. èNevertheless, this competence is of the State Government when: The installed power is > 50 MW. Its location affects more than one Region. It is located offshore. èRegulated price corresponds to the State Government: Fix price applied to wind energy. Premium over the market price:  Wind power onshore: Fixed by the Government.  Wind power offshore: Established by auction. ADMINISTRATIVE COMPETENCES

ACCESSING THE NETWORKS èPriority for accessing the transmission and distribution network. èMandatory guarantee to be applied when accessing the transmission and distribution network: 20 €/kW for wind power facilities. èOnce the wind power facility starts up, the guarantee is cancelled.

èAdscription to a generation control centre, as a dispatch centre connected to the system operator: Producer. Special dispatch in the system operator.  All the facilities with capacity > 10 MW should be connected to a control centre or establish by itself a control centre. Information will be transmitted to the system operator and instructions to control centre will be executed in real time. This obligation will be a necessary condition for the perception of the tariff or the premium. REQUIREMENTS APPLIED TO WIND POWER FACILITIES (I)

èThe wind facilities will have to fulfil certain response requirements when a voltage dip. This requirement will be a necessary condition for the perception of the tariff or the premium:  A transitory period is established until the 1 st of January of 2010 without penalty, for the existing facilities before the Royal Decree is in force.  A transitory period is established for the facilities previous to 1 of January of 2008, during a maximum term of 5 years, for maintaining the continuity of supply, receiving a complementary income of 0.38 c€/kWh. REQUIREMENTS APPLIED TO WIND POWER FACILITIES (II)

SELLING THE WIND ENERGY  The wind energy producer has two options: To sell the wind energy at a fix regulated tariff equal for all the hours (option a). To bid in the organized market, through the system of auctions managed by the market operator, to establish a bilateral contract, or a forward contract (option b).

OPTION A: TO SELL AT A REGULATED TARIFF èThe wind power producer communicates the day ahead schedule to the market operator: l The auction system managed by the market operator considers this schedule as a bid at null price. l The schedule can be communicated directly or through a representative. èProducers can send bids also to the intra-day market èThe wind power producer is paid by: l The market operator for the amount that corresponds to daily and intra-day market. l The system operator by the amount that corresponds to the ancillary services and deviations. l The Energy Regulatory Commission for the rest of the fix price of the tariff. This part of the retribution is paid until 2009 by the distributors.

OPTION B: TO SELL IN THE MARKET (I) èThe wind power producer send the bids for the day ahead market to the market operator: l The bid can be sent directly or through a representative. èProducers can also send bids to the intra-day market. èThe price is paid to the wind power producer by: l The market operator for the amount that corresponds to daily and intra-day market. l The system operator by the amount that corresponds to the ancillary services and the deviations. l The Energy Regulatory Commission for the premium. This part of the retribution is paid until 2009 by the distributors. èAlternatively the power producer can sign a bilateral contract or operate through the forwards market.

OPTION B: TO SELL IN THE MARKET (II) Negotiated price + Premium + Reactive energy complement - Deviations + Complement to help voltage dip problems (applicable to wind facilities previous to 1/1/2008 and maximum 31/12/2013, that support voltage dip)

REQUIREMENTS THAT THE WIND PRODUCERS SHOULD COMPLY èIn case the entity accessing the market on behalf of the wind producer is not a market agent, then the wind producer should be a market agent. èThe entity accessing the market on behalf of the wind producer can send several bids for the set of facilities of the wind producer. èThe dominant operators will only be able to act as representatives of their own facilities when their participation is greater than 50%. èThe non dominant operators, will be able to act as representatives, until they reach a maximum of 5% of all the suppliers.

REGULATED TARIFF AND PREMIUM GroupTerm Regulated tariff c€/kWh Reference premium c€/kWh Upper limit c€/kWh Lower limit c€/kWh Onshore wind facilities First 20 years After 20 years Offshore wind facilities The maximum and minimum reference premium

LOWER AND UPPER PRICE LIMITS TO BE PERCEIVED BY WIND FACILITIES Market price Price to receive Upper limit = Lower limit = Premium = If the price of the market plus the premium is below the lower limit, this limit will be received

THE REGULATED TARIFF AND THE PREMIUMS (I) èParameters for establishing: Regulated tariff option: IRR of 7% Market option:  Lower and upper limits IRR of 7%, with a minimum of 5% and a maximum of 9% are the limits of the band.

èUpdates: Renewable: annual based on the RPI – 0.25 up to 31/12/2012 and from then RPI – èRevisions. Every 4-years period: Costs associated to each of the technologies. Degree of participation of the special regime in the demand coverage. Incidence in the technical and economic management of the system. THE REGULATED TARIFF AND THE PREMIUMS (II)

ROYAL DECREE 1028/2007 WIND FACILITIES OFFSHORE èThe construction or extension of the electrical systems for wind generation offshore requires: l The production licence given by the Ministry of Industry regulated in the Royal Decree 1955/2000. l The licence to set the installation on the sea as public dominion by the Ministry of Environment (Law 22/1988, of 28 of July, relative to coasts). l The auction result licence that grants the applicant the zone reserve, regulated in the Royal Decree 1028/2007.

3.Wind power participating in the day ahead and intra-day market.

Current (MW) In the market (%) CCGT 16, Cogeneration 5, Windmills 12, Installed capacity in CCGT, cogeneration and windmills INSTALLED CAPACITY IN CCGT, COGENERATION AND WINDMILLS (*)6,000 MW more are in testing period and will be in commercial operation in last quarter of 2007 and first quarter of (*)

INSTALLED POWER IN SPECIAL REGIME AND ORDINARY REGIME WITH PREMIUM BIDDING IN THE MARKET ON SEPTEMBER 16 th, 2007 TECHNOLOGY Special regime (MW) Ordinary regime with incentives (MW) Gas Oil or gas Cogeneration2, Wind11, Oil Natural gas Hydro1, Total15,

DAILY ENERGY BY PRODUCTION TECHNOLOGIES JANUARY 2004 – 10 th OCTOBER 2007

èBid at 0 €/MWh to be matched. èBid at a price different from 0 €/MWh with risk of none being matched TYPICAL BID OF A WIND POWER PRODUCER

èPower producers in the Spanish power production market: l On October 11, 507 power producers are participating in the dayly and intraday markets.  Number of wind power producer facility owners than ere selling in the daily market: 3  Number of wind power producer facility owners that are selling in the daily market through units managed by other kind of agents (representative or seller agent): 212  Number of power producer agents without wind power facilities: 292 NUMBER OF MARKET PARTICIPANTS

PRICES AND ENERGY IN THE DAILY MARKET 1 st January 2004 – 10 th October 2007 c€/kWh MWh

PRICES IN THE SPANISH SYSTEM IN THE DAILY MARKET 1 st January 2004 – 10 th October 2007 c€/kWh

THE WIND ENERGY PRICE IN 2006 èThis participation of the wind energy in the electric market diminishes the price of the electricity due to: l The incorporation of the wind energy moves the market supply curve causing a lower price. l In addition, the wind production is greater in periods of low/medium prices, because the local winds take place in the periods of diurnal transition that in many cases does not correspond with the highest demand. èWind price in the daily market: €/MWh, is lower 4.96% to the arithmetic average price of the daily market (50.52 €/MWh) èWind Price in regulated tariff: €/MWh

AVERAGE PRICE COMPONENETS OF WIND ENERGY IN 2006 (€/MWh) Source: REE and AEE Market price components €/MWh

WIND ENERGY MATCHED AND MARGINAL PRICE 2004

WIND ENERGY MATCHED AND MARGINAL PRICE 2005

WIND ENERGY MATCHED IN THE DAILY MARKET AND MARGINAL PRICE IN 2006

SPECIAL REGIME ENERGY MATCHED IN THE DAILY MARKET AND MARGINAL PRICE IN 2007

MARKET ENERGY OF POWER STATION UNDER THE SPECIAL REGIME

WIND PRODUCERS ACTING IN THE INTRA-DAY MARKET èThe wind producers are very active in the intra-day market: l As weather forecast is close to real time, the producers modify schedules to more accurate figures. l To solve the power production unavailability.

THE FORWARD CONTRACTS AND THE DAILY MARKET èThe participation of the wind power producers in the daily market serves to them as a base to be able to take part in the CESUR (last resort supply), VPP auctions and the forward organized market, buying or selling the necessary amounts of energy to fulfil their compromises.

INCORPORATING OFFERS INTO DAILY MARKET OMEL

4.Relevant market data.

INSTALLED POWER BY TECHNOLOGIES IN 2006 (%)

ENERGY PRODUCED BY TECHNOLOGIES IN 2006 (%) Wind power production reached 8.5% in 2006 of the demand coverage. In 2007 a 12% is expected to be reached.

ENERGY PRODUCED IN SEPTEMBER 2006 & 2007 (%)

INSTALLED POWER IN THE SPECIAL REGIME IN 2006 (%)

ENERGY PRODUCED IN THE SPECIAL REGIME IN 2006 (%)

DAILY WIND GENERATION IN 2006 (MWh) Source: REE and AEE On December 8 th, 2006, a maximum in wind power production was achieved with an average daily energy of 159,291 MWh and an hourly energy of 8,010 MWh at 15:00 hours. This wind power production covered 23.3 % of the domestic demand

DAILY ENERGY PRODUCED BY WIND POWER IN 2006 (%) Source: REE and AEE

WIND ENERGY SOLD AT REGULATED TARIFF AND IN THE MARKET (GWh)

5.Conclusions.

CONCLUSIONS èFrom 1994 to now, wind energy production have been growing in an uninterrupted way. èThe price of the market plus the premium has been attractive enough to build 12,900 MW of installed wind power. èThe management of the electric system has changed to integrate many small producers whose production will increase or diminish based on the wind regime. èMost of the wind energy producers have chosen the option of bidding into the market instead of the option of the fix price.

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