SESSION 4: Renewable producers participating in the electricity market María-Luisa Huidobro President 2008 APEX Conference Sydney, October 14 th, 2008

INDEX 1.European Union electricity targets from renewable sources. 2.Relevant market data. 3.Spanish regulation on power production from renewable sources according to Royal Decrees 661/2007 and 1578/ Wind power participating in the day ahead and intra-day market. 5.Conclusions.

1.European Union electricity targets from renewable sources.

PROPOSAL FOR A DIRECTIVE ON THE PROMOTION OF THE USE OF ENERGY FROM RENEWABLE SOURCES èIncrease interconnection among countries. èThe biofuels and other bioliquids, will not encourage the destruction of bio- diverse lands. èMeasures that constitute State aid in the sense of Article 87 of the Treaty have to be notified to and approved by the Commission before their implementation. èThis Directive establishes: l A common framework for the promotion of energy from renewable sources. l Sets mandatory targets for the overall share of energy from renewable sources in energy consumption l Sets the share of energy from renewable sources in transport. èLays down rules relating to: guarantees of origin, administrative procedures and TPA. èEstablishes environmental sustainability criteria for biofuels and bioliquids. è“Guarantee of origin” means an electronic document which has the function of providing proof that a given quantity of energy was produced from renewable sources. è“Support scheme” means a scheme, originating from a market intervention by a Member State that helps energy from renewable sources to find a market by reducing the cost of production of this energy. Includes: l Green certificates. l Investment aid. l Tax exemptions, reductions or refunds. l Renewable energy obligation support schemes. l Direct price support schemes: feed-in tariffs & premium payments.

PROPOSAL FOR A DIRECTIVE ON THE PROMOTION OF THE USE OF ENERGY FROM RENEWABLE SOURCES èThe Directive lays down the principles according to which Member States need to ensure that the share of renewable energy in the EU final energy consumption reaches at least 20% by 2020, and establishes national overall targets for each Member State. è3 sectors are concerned: electricity, heating and cooling and transport. èThe overall approach is for Member States to retain discretion as to the mix of these sectors in reaching their national target. However, it is proposed that each Member State shall achieve at least a 10% share of renewable energy in the transport sector by 2020.

MANDATORY TARGETS FOR THE SHARE OF ENERGY FROM RENEWABLE SOURCES IN FINAL CONSUMPTION OF ENERGY IN 2020 S 20xx = K x (S 2020 – S 2005 ) where:K = 0.25 for the two-year period 2011 to 2012 K = 0.35 for the two-year period 2013 to 2014 K = 0.45 for the two-year period 2015 to 2016 K = 0.65 for the two-year period 2017 to 2018 S 2020 = The share for the MS in 2020 S 2005 = The share for the MS in 2005

TOTAL INSTALLED WIND POWER Source: World Wind Energy Association Worldwide Capacity at 93,8 GW – 19,7 GW added in Wind energy is used in more than 70 countries – USA, Spain and China take the worldwide lead.

ALLOCATION BY COUNTRIES. INSTALLED WIND POWER IN 2007 (MW) Source: World Wind Energy Association

WIND ENERGY WORLDWIDE AVERAGE ANNUAL GROWTH RATES (%) Source: World Wind Energy Association

2.Relevant market data.

RENEWABLES IN THE SPANISH MARKET èVery significant grow in the last 5 years of the installed wind capacity. èMost of the wind producers are selling their electricity production in the daily market and they also bid in the intraday market. èPhotovoltaic energy: l At present, installed capacity is more than 1,000 MW. l Projections: s 3,000 MW in 2010 s 10,000 MW in 2020

INSTALLED POWER FROM RENEWABLE SOURCES IN SPAIN AND FORECAST UNTIL 2010 (MW) Source: REE, PER & Government preview

INSTALLED POWER BY TECHNOLOGIES ON DECEMBER 2007 Source: REE Total installed capacity: 85.7 GW

Wind power production reached 9.5% in 2007 of the demand coverage. In 2008 a 12% is expected to be reached. ENERGY PRODUCED BY TECHNOLOGIES IN 2007 (%) Source: REE and AEE Total production: 261,273 GWh

INSTALLED POWER FROM RENEWABLE SOURCES IN 2007 (%) Source: REE Total installed capacity: 24.2 GW

ENERGY PRODUCED IN THE SPECIAL REGIME IN 2007 (%) Source: REE Total production: 56,302 GWh

3.Spanish regulation on power production from renewable sources according to Royal Decrees 661/2007 and 1578/2008.

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: If producer bids to the market then in the same conditions that all producers. Mandatory guarantee to be applied when accessing the transmission and distribution network: 20 €/kW for wind power facilities. 500 €/kW for solar 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 (around 20%). REQUIREMENTS APPLIED TO WIND POWER FACILITIES (II)

SELLING THE WIND ENERGY èThe wind energy producer has two options: l To sell the wind energy at a fix regulated tariff equal for all the hours (option a). l 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 distributor: 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 FOR WIND POWER FACILITIES (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 from renewable sources in the demand coverage. Incidence in the technical and economic management of the system. THE REGULATED TARIFF AND THE PREMIUMS FOR WIND POWER FACILITIES (II)

RETRIBUTION OF PHOTOVOLTAIC ENERGY (I) èThe present regulated tariffs fix the following values: l Royal Decree 661/2007 and ITC 3860/2007 s Installed Capacity ≤ 100 kW: €/MWh s Installed Capacity > 100 kW and ≤ 10 MW: c€/MWh s Installed Capacity > 10 MW : €/MWh l Royal Decree 1578/2008, first quarter call in January 2009: s On the building roof or in the wall, installed capacity ≤ 20 kW: 340 €/MWh s On the building roof or in the wall, installed capacity > 20kW: 320 €/MWh s Based on ground: 320 €/MWh

RETRIBUTION OF PHOTOVOLTAIC ENERGY (II) èThe regulated tariff l Evolution of the regulated tariff in each quarter call depends on the capacity grow of the previous quarter: s If call was fully covered then regulated tariff diminish with the following formula: 100 * (1 – 0.9 1/4 ) = 2.6% s If call covered more than 75% and less than full, new tariff will be obtained multiplying previous tariff value by the following factor: [(1 – 0.9 1/4 ) * (P 0 – P) / (0.25 * P 0 ] + 0,9 1/4 Being:P 0 the power quota of the previous call and P the assigned power in the previous call. s If previous call covered ≤ 75% then regulated tariff remains invariable. s If during two consecutive calls, power contracted cover was < 50%, then regulated tariff increases by 100 * (1 – 0.9 1/4 ) = 2.6% l Updating yearly regulated tariff from the second January 1 st after the date of the corresponding call: s Regulated tariff increases in RPI – 0.25 until s Regulated tariff increases in RPI – 0.5 after èThe market price

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.

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

Current (MW) In the market (%) CCGT 21, Cogeneration 6, Windmills 15, Installed capacity in CCGT, cogeneration and windmills INSTALLED CAPACITY IN CCGT, COGENERATION AND WINDMILLS Source: OMEL. Sept. ‘08

DAILY ENERGY BY PRODUCTION TECHNOLOGIES WIND ENERGYOTHER RENEWABLENUCLEAR IMPORTHYDROCOAL COMBINED CYCLEFUEL-GAS SEPTEMBER 99 – AUGUST 00SEPTEMBER 07 – AUGUST 08

DAILY ENERGY BY PRODUCTION TECHNOLOGIES 1 Aug Sep 08 WIND ENERGYOTHER RENEWABLENUCLEAR IMPORTHYDROCOAL COMBINED CYCLEFUEL-GAS

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

èPower producers in the Spanish power production market: l On September, 671 power producers are participating in the daily and intraday markets.  Number of wind power producer facility owners that are selling directly in the daily market: 46  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): 563  Number of power producer agents without wind power facilities: 62 NUMBER OF MARKET PARTICIPANTS

PRICES AND ENERGY IN THE DAILY MARKET 1 st October 2005 – 21 st September 2008 MWh c€/kWh

PRICES IN THE SPANISH SYSTEM IN THE DAILY MARKET 1 st August 2008 – 21 st September 2008 MWh

THE WIND ENERGY PRICE IN 2007 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 3.53% to the arithmetic average price of the daily market (39.35 €/MWh) èWind Price in regulated tariff: €/MWh

AVERAGE PRICE OF WIND ENERGY IN THE DAILY MARKET (2005 – 21 Sep 2008) Source: OMEL Year€/MWh

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

Source: OMEL WIND ENERGY MATCHED IN THE DAILY MARKET AND MARGINAL PRICE IN 2007

Source: OMEL WIND ENERGY MATCHED IN THE DAILY MARKET AND MARGINAL PRICE IN 2008

MARKET ENERGY OF POWER UNITS FROM RENEWABLE SOURCES (2006-Sept 08)

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

Source: REE DAILY WIND GENERATION (GWh) IN 2007

Source: REE On April 18 th, 2008, a maximum in wind power production was achieved with an average daily energy of 213,169 MWh and an hourly energy of 10,727 MWh. DAILY WIND GENERATION (GWh) (January 1 st — September 24 th, 2008) Jan-08Feb-08Mar-08Apr-08May-08Jun-08Jul-08Aug-08Sep-08

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

5.Conclusions.

WWEA Secretary General Stefan Gsänger Rising oil, gas, coal and uranium prices, increasing awareness of the threats of climate change, irresolvable difficulties surrounding nuclear energy, as well as increasing energy demand from emerging and developing countries are only some of the myriad reasons the world is looking into alternative energy solutions. Renewable energies are shifting toward the centre of such deliberations, but in order for them to meet rising demand, they will need to be harvested in a decentralized manner. Moving away from a centralized model will benefit everyone from small communities to sovereign nations. Countries such as Denmark and Germany are already reaping rewards and it's not too far-fetched to think that the United States could share in the success as well. Source: WWEA

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 15,500 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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