November 2003 Generating in a CO 2 constrained world Pan-European Utility Research Europe to be CO 2 constrained => €15/tonne & risk on upside Value-creation opportunity => Power cash costs = no longer sustainable Europe to be CO 2 constrained => €15/tonne & risk on upside Value-creation opportunity => Power cash costs = no longer sustainable Chris RowlandDresdner Kleinwort Wasserstein

Utilities Pan-European Research Utilities Pan-European Research Slide 2  Power sector provide CO 2 abatement How can Europe abate CO 2 ? Cost per tonne CO2 (€) CO2 abatement (t) Ferrous metalsMaterialsPulp & other industry Steam raisingCoal-CCGT switchingCoal-CCGT new build

Utilities Pan-European Research Utilities Pan-European Research Slide 3 Scope to switch fuel mix for generation in existing gas-fired CCGTs saves 50-55mln tonnes of CO 2 How can Europe abate CO 2 ? Cost per tonne CO2 (€) CO2 abatement (t) Ferrous metalsMaterialsPulp & other industry Steam raisingCoal-CCGT switchingCoal-CCGT new build  Power sector provide CO 2 abatement  In underutilised CCGT capacity

Utilities Pan-European Research Utilities Pan-European Research Slide 4  Power sector provide CO 2 abatement  In new CCGT capacity Scope to switch fuel mix for generation in existing gas-fired CCGTs saves 50-55mln tonnes of CO but for greater savings need new build How can Europe abate CO 2 ?

Utilities Pan-European Research Utilities Pan-European Research Slide 5 Germany and UK both have targets under National Climate Change programmes How CO 2 constrained will Europe be?  Germany & UK could have 85mln shortfall alone Shortfall could be greater EC will limit surplus 1)How aggressive will “environmentally-concerned” countries be?

Utilities Pan-European Research Utilities Pan-European Research Slide 6 Most of existing EU likely to be “imaginative” in interpreting EU rules How CO 2 constrained will Europe be?  Existing EU likely to face a shortfall of mln tonnes Shortfall could be greater EC will limit surplus 1)How aggressive will “environmentally-concerned” countries be? 2)How flexible can “environmentally-stretched” countries be?

Utilities Pan-European Research Utilities Pan-European Research Slide 7 Just 3-4% shortfall seen for How CO 2 constrained will Europe be?  Shortfall of 60-65mln tonnes CO 2 per year over Shortfall could be greater EC will limit surplus 1)How aggressive will “environmentally-concerned” countries be? 2)How flexible can “environmentally-stretched” countries be? 3)How much flexibility will there be in Accession Countries?

Utilities Pan-European Research Utilities Pan-European Research Slide 8  Power sector provide CO 2 abatement  In underutilised CCGT capacity CO 2 allowances have to be priced to offset higher costs of running cleaner plant will push CO2 allowances to €15/tonne Value of CO 2 allowances 60-65mln t abatement

Utilities Pan-European Research Utilities Pan-European Research Slide 9  Incentive to switch from coal to gas changes with fuel prices  Economic growth could tighten CO 2 constraint Fuel prices could reduce CO 2 emissions if coal too dear … … but economic growth could add to CO 2 emissions Prices for CO 2 likely to be volatile We assume prices of: $25/bbl oil price $40/tonne coal price

Utilities Pan-European Research Utilities Pan-European Research Slide 10  Wholesale power prices Gradual increase would have been expected for wholesale power prices Boost to electricity prices Wholesale power prices - €/MWh Germany -ytd Germany Germany UK - ytd UK UK Spain - ytd Spain Spain Italy - ytd Italy Italy With CO2Without CO2

Utilities Pan-European Research Utilities Pan-European Research Slide 11  Wholesale power prices Gradual increase would have been expected for wholesale power prices Boost to electricity prices Wholesale power prices - €/MWh

Utilities Pan-European Research Utilities Pan-European Research Slide Germany -ytd Germany Germany UK - ytd UK UK Spain - ytd Spain Spain Italy - ytd Italy Italy With CO2Without CO2  Wholesale power prices Germany and UK wholesale power prices starting to rise Boost to electricity prices Wholesale power prices - €/MWh

Utilities Pan-European Research Utilities Pan-European Research Slide Germany -ytd Germany Germany UK - ytd UK UK Spain - ytd Spain Spain Italy - ytd Italy Italy With CO2Without CO2  Wholesale power prices Germany and UK could see 70%+ increases in wholesale power prices Boost to electricity prices Wholesale power prices - €/MWh 45% up (70% from start year) 35% up (75% from start year)

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

Utilities Pan-European Research Utilities Pan-European Research Slide 15  Carbon constraint won’t go away!  By , likely to need 10% cuts By , flexibility in individual country allocations recedes CO 2 Constraint tightens by Accession Members surplus dwindles Go beyond Kyoto?

Utilities Pan-European Research Utilities Pan-European Research Slide 16  Carbon constraint won’t go away!  By , likely to need 10% cuts By , flexibility in individual country allocations recedes CO 2 Constraint tightens by Accession Members surplus dwindles Kyoto tough target Go beyond Kyoto?

Utilities Pan-European Research Utilities Pan-European Research Slide 17  Power sector provide CO 2 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 CO 2 Constraint tightens by

Utilities Pan-European Research Utilities Pan-European Research Slide 18  Power sector provide CO 2 abatement  New build required to meet Kyoto target  CO 2 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 CO 2 Constraint tightens by

November 2003 Generating in a CO 2 constrained world Pan-European Utility Research Europe to be CO 2 constrained => €15/tonne & risk on upside Value-creation opportunity => Power cash costs = no longer sustainable Europe to be CO 2 constrained => €15/tonne & risk on upside Value-creation opportunity => Power cash costs = no longer sustainable Chris RowlandDresdner Kleinwort Wasserstein CO 2 constraint is here to stay!