1. The Dutch Electricity/Heat sector in the battle between Economy, Environment and Security of Supply in the liberalized European market drs. ing. Teus van Eck T.U. Berlin, 19 Jan. 2004, Fac. Economics and Management

2. Market situation Economy Environment Security of supply Regulation Behavior of stakeholders Recommendations Contents

3. Market situation

4. Generating Capacity Netherlands

5. The Dutch High Voltage Grid

6. The most important marketplayers Essent: 25% production capacity+ 30% grids +Supplier Nuon: 21% production capacity + 30% grids + Supplier Electrabel: 21% production capacity + Supplier Eon: 9% production capacity + Supplier. Eneco: 1% production capacity + 25%grids + Supplier TenneT: T.S.O. + owner of the 150(partly)/220/380 kV grids Gasunion: Gassupplier and owner of the gastransportgrid. APX: The Electricity Exchange, owned by TenneT

7. Other market parties Regulatory Dte: The Dutch Regulator for gas and electricity. The Ministry of Economic Affairs for the Energy Strategy The Ministry of Environment for permits E.U Directives. NGO’s and interest groups as EnergieNed, VEMW, VNO/NCW, Cogen

8. Fuel situation Natural gas: Own resources + import from Norway and Russia and exporter/balancing supplier Coal: 100% import world market coal., perfect logistic harbor facilities Biomass: Partly imported by governmental incentive policy 15% of electricity consumption is imported. Nuclear is marginal

9. Facts Total electricity consumption is 110 TWh/yr. ~15% is traded by the APX Off Peak electricity price €15 - €20/MWh based on marginal cost op coal fired power plants Peak electricity price the last 2 years rising from €40 - €60/MWh and strongly fluctuating. Reserve capacity only a few % Import/export capacity ~3500MW. 100% unbundling of the grids 01-07-2004 liberalisation completed

10. Dutch and E.U. Energy Policy Energy production and supply should be as clean as possible, as cheap as possible and with nearly 100% security of supply. The implementation will be done by the free market But we have no clear common objectives and operational strategy

11. The actual situation Traders DGO’s Consumers ProducersGrid Operators Regulators Government CHP / DH

12. “ Economy ” The long en short term values??? Environment Security of supply The Balance

13. Reality T.V. Low prices High earnings Low risks Market power The future of our children Environment Politicians Free market

14. Dream versus Reality Prosperity/W elfare? Dream: No coal and nuclear and efficient gas CHP in the transition period to 100% sustainability Reality:Growing demand, gas CHP nearly in bankruptcy and only 2% of total production is renewables

15. Economy

17. Heat Consumption Curves

18. Use of fuelCO2 Costprice kJ/kWhg/kWhbaseload €ct/kWh Renewables002 - ….. COGEN (gas)50002803,5 - 5 CCGT67003753,5 Coal unit90008303,5

19. Fuel Costs for different Power Units

20. Consequences Gas CHP too expensive in night and weekend. Environment is not an item. Bad investment climate for CHP. Bad investment climate for coal and nuclear by uncertainty concerning future environmental regulation Prices too low for renewables

21. The Netherlands: structural importer or exporter of electricity? In a European level playing field the Netherlands should be an exporter because we have: Strong position in sourcing and transport of natural gas High experience in CHP and gas turbine technology Sea harbor facilities for import of world market coal Cooling water facilities Strong connections with the European E-grid Etc.

22. Environment

23. Availability of heat excluding industrial heat 100% fuel for electricityproduction 43% electricity 4% E grid losses 9% useful heat by CHP 44% is waste heat = 13 billion m 3 natural gas= 23,4Mton CO2

24. Waste heat % of power plants Lignite >60% Coal fired > 55% Conventional gas > 55% Hot Windbox > 50% CCGT > 45% Incinerator > 70% Nuclear > 60%

25. Priorities? Only promoting Renewables vs. the lowest level of fossil fuel consumption and emissions for the total energy demand? Energy savings vs. the fossil fuel use/emission level per unit electricity/heat? Clear physical CHP electricity definition vs. lowest level of fossil fuel consumption

26. The environmental ranking on base of CO2 emissions Quality Renewables Good gas CHP CCGT Bad gas CHP Hot Windbox Good coal CHP Modern coal units Bad coal CHP Ranking on base of operational results and not on design efficiency

27. COGEN Methodology Fuel ReferenceBoiler Reference Epowerplant CHP Part CO 2 or Fossil fuel free electricity Fuel CO 2 2 2 E- COGEN E-Powerplant H Href = E = E CHP+EGrey Cogeneration SeparateProductionE + H Energy savings CHP

28. Investment Opportunities/Risks of CHP Opportunities: Energy/emissions savings, proven technology, grid cost savings Risks: Continuity of heat demand and or heat source, economy of scale, weak and uncertain position in electricity and fuel market, level playing field?, no structural financial valuation of environmental aspects

29. CHP Renewables wind and sun Grey electricity CO2 free~25%100%0 Investment>€700/kW>€1000/kW>€650/kW Security of supply >95%<25%>95% Market position UncertainGovernment supported Strong position, gas price?

30. District Heating in The Netherlands Only 3% of the heat market Big opportunities for energy savings but bad investment climate (very unclear regulation) For producers the electricity market is the first priority The heat market is not a free market

31. Risks of District Heating IncomeCosts It is never in balance >80% variable without influence > 80% fixed costs

32. Heat Distribution CHP Back- up/peak Storage GridConsumer Alternative Consumer F F E EEE H F H H E= Electricity F= Fuel H= Heat Energy savings for the total chain between +90% and –40%

33. Some figures 100 km by car –15 kg CO2 1 Dutch family with DH saves 1500 kg CO2/yr 1 Windmill of 1 MW saves 700 ton CO2/yr 1 MWth CHP saves 700 ton CO2/yr

34. Security of Supply

35. CHP (Security of Supply)

36. Security of supply Technical, availability fuels, the environment Separate electricity production results in 45-75% waste heat Political risks Distributed vs. centralized generation Grid capacity and load flows

37. Regulation

38. Dutch Regulation MEP for renewables. A price guarantee for 10 years for different types of renewables. CO2 index for CHP Energy tax exemption for District Heating Different convenants between government and “industry” Different Codes from the Dte Consumers of green electricity have partly exemption of energy tax. Export of tax money.

39. E.U and international Regulation There is no level playing field in the E.U. Every country has its own fuel position and own regulation Big energy flows all over Europe are structural not economical. Kyoto. The Netherlands have a bad starting position, but a lot of clean technology The Netherlands is now in a bad position, their interest is a real level playing field and a consequent energy policy

40. The unworkable Regulation for CHP CHP / DH Regulator DGO’s Consumer Organisations Convenants between government/market parties National support Local Governments E.U. directive CO 2 trading Fuel markets Traders/producers E.U. directive CHP

41. Behaviour of stakeholders Nobody is responsible for security of supply Short term behavior A natural urge to monopoly No money for research The market is too risky for new entrance Many legal conflicts Loans become expensive Nobody has the long term overview Short term money is leading

42. Recommandations Formulate a clear long term energy policy in a formulate balance between economy, environment and security of supply on base of the available alternatives Make that policy operational with a mix of the advantages of the utility and the free market. We will present our proposals mid 2004.

43. First impression of our Recommendations We define a number of possible market structures from 100% utility to 100% free market We define a number of possible scenario´s for the balance between economy, environment and security of supply We present the consequences, opportunities and risks of the different possible combinations of market structures and scenario´s including regulation and behavior of market parties The final choice is a political choice

44. Recommendation Translate our smile in market power. Result: a structural, payable big smile. Smile for the environment Power of the market