1. Financing challenges facing Europe’s TSOs World Forum on Energy Regulation V Session “The role of investment in enhancing security of supply” Quebec City, 15 May 2012 Konstantin Staschus, Ph.D. Secretary-General, ENTSO-E

2. Overview An introduction to European electricity markets and ENTSO-E. Europe’s energy policy objectives & ENTSO-E’s role in delivering them. The scale of the investment need – Ten-Year Network Development Plan. The challenges in delivering that investment. The need for action on permitting & finance. Concluding remarks. Financing challenges facing Europe‘s TSOs| K. Staschus | 15 May 2012 | Page 2 of 17

3. Lisbon Treaty 2008: TITLE XXI – ENERGY - Article 194 1.…Union policy on energy shall aim, in a spirit of solidarity between Member States, to: EU energy policy and challenges for TSOs – in a nutshell European energy policy (b) Ensure security of supply in the Union (a) Ensure the functioning of the energy market (c) Promote energy efficiency and saving and the development of new and renewable forms of energy (d) Promote the interconnection of energy networks Financing challenges facing Europe‘s TSOs| K. Staschus | 15 May 2012 | Page 3 of 17

4. Market opening electricity and gas: –3 Internal Energy Market legislative packages 1996, 2003, 2009 ̶ 3 rd party access, national regulators, cross-border trading, non-discriminatory TSOs ̶ TSO unbundling, ACER, common rules (network codes) –Europe-wide wholesale electricity market well established but hampered by congestion and insufficient infrastructure (2014 goals; Infrastructure Package) –From the outset, (staged) retail market opening part of the packages –Cross-border M&A and also increasingly direct sales in other countries Climate action: –Emissions trading but also: –20-20-20 goals for energy efficiency, greenhouse gases, renewable energy –2009 RES Directive and National Renewable Energy Action Plans foresee 35 to 38% RES in electricity in 2020 (dominated by wind, solar, hydro) Variable RES create even bigger challenges for TSOs (balancing) than markets EU energy policy and challenges for TSOs (2) Financing challenges facing Europe‘s TSOs| K. Staschus | 15 May 2012 | Page 4 of 17

5. Key activities set out in Regulation 714/2009 (on cross-border electricity trade, part of the 3 rd IEM Package) Deliver network codes binding to all network users (through ‘Comitology’) Deliver network plans European / regional view of system needs (“TYNDP”) Deliver crucial aspects of market integration (“market coupling”) R&D Plan (fully included in EEGI – European Electricity Grid Initiative, part of the SET Plan) Through its members deliver the infrastructure to: enable markets to function, secure energy supply, meet climate change objectives through connecting RES ENTSO-E has significant role in delivering European energy and climate change objectives 41 TSOs from 34 countries 530 million people, 910 GW gen., 300 000 km transm. 41 TSOs from 34 countries 530 million people, 910 GW gen., 300 000 km transm. Financing challenges facing Europe‘s TSOs| K. Staschus | 15 May 2012 | Page 5 of 17

6. Huge flows all over Europe 2000 2010 2020 From a few large plants Thousands of small units Network planning while Europe experiences a paradigm shift Financing challenges facing Europe‘s TSOs| K. Staschus | 15 May 2012 | Page 6 of 17

7. And renewable energy booms, as the 2012 ENTSO-E Ten-Year Network Development Plan shows Peak load grows by about 8% by 2020 energy efficiency, economic crisis… switch from fossil fuels to electricity Renewable energy provides by 2020 38% of the electricity demand CO2 emissions of the power sector sink by 26 to 57% Drivers for grid development RES effects on investment need Financing challenges facing Europe‘s TSOs| K. Staschus | 15 May 2012 | Page 7 of 17

8. Which requires huge investment over the next 10 years Total investments costs for transmission projects of pan-European significance: € 104 billion until 2022, of which € 23 billion is for subsea cables. Financing challenges facing Europe‘s TSOs| K. Staschus | 15 May 2012 | Page 8 of 17

9. The challenges in delivering infrastructure today Lengthy planning processes Social acceptance concerns Attracting sufficient investment An absence of incentives Coordination challenges The Energy Infrastructure legislative package proposed by the European Commission in Oct 2011 and now debated in Council and Parliament represents a key opportunity to address these issues Financing challenges facing Europe‘s TSOs| K. Staschus | 15 May 2012 | Page 9 of 17

10. Financing issues - The basic TSO business model build and operate grid infrastructure attract investors charge all customers rates approved by the regulator The TSO business model Increasing demand for (long-distance) transmission - Technological challenges - Permitting and authorization Increasing demand for (long-distance) transmission - Technological challenges - Permitting and authorization Capital Acquisition - Investor confidence - Regulatory framework Capital Acquisition - Investor confidence - Regulatory framework Financing challenges facing Europe‘s TSOs| K. Staschus | 15 May 2012 | Page 10 of 17

11. But regulatory regimes differ, and asset base expansions cannot be part of normal incentive regulation Period 1 Time Period 2Period 3 Revenue Return Cost Revenue Cost based regulation € Time Incentive regulation Efficiency targets Cost - + Incentive: Cost reduction - € Expansions of the asset base must be regulated outside the classic incentives ! Financing challenges facing Europe‘s TSOs| K. Staschus | 15 May 2012 | Page 11 of 17

12. Regulation is exceptionally important to attracting investment: e.g. institutional investors looking for low risk and long-term. Broad Rating FactorsWeightRating sub-factorWeight Regulatory Environment & Asset Ownership Model 40%Stability & predictability of regulatory regime15 Asset Ownership Model10 Cost & investment recovery10 Revenue Risk5 Efficiency & Execution Risk 10%Cost Efficiency6 Scale & Efficiency of capital program4 Stability of business model & financial structure. 10%Ability & willingness to pursue opportunistic corporate activity 3.33 Ability & willingness to increase leverage3.33 Targeted Proportion of Operating Profit Outside Core Regulated Activities 3.33 Key Credit Metrics40%Adjusted ICR (or FFO Interest Cover)15 Net Debt/RAV (or Fixed Assets)15 FFO/Net Debt5 RCF/CAPEX5 Source: Moody’s global infrastructure finance Financing challenges facing Europe‘s TSOs| K. Staschus | 15 May 2012 | Page 12 of 17

13. The TSO financing challenges in Europe today Debt – Possible if equity increase). Countries w/ sovereign debt problems? Equity – Needs to increase to maintain gearing. Investment must be attractive & investors can’t be elsewhere in the sector. Regulation – Key driver of financeability, investor confidence. Incentives – Determine willingness to take risks. Little used in EU. Unstable regulatory regimes can deter investor confidence. Large investment need, risks increasing, competition for funds: finding the volume of investment needed to meet Europe’s needs is a real challenge. Financing challenges facing Europe‘s TSOs| K. Staschus | 15 May 2012 | Page 13 of 17

14. Some recent developments address these concerns Great Britain: review of the regulatory mechanism (RIIO Revenue = Incentives + Innovation + Outputs) Italy: Additional rewards for delivering investments more quickly. USA: inter state investment incentives based on “Adders” European Commission: European Infrastructure Package (?) Financing challenges facing Europe‘s TSOs| K. Staschus | 15 May 2012 | Page 14 of 17

15. The Priority Premium concept Investment [Mio. €] Impact in Italy Investment [Mio. €] Impact in the US (1 ISO) Introduction Announcement Goal: incentivise TSOs to push Projects of Common Interest forward (attract investors) Possible implementation: establish a non deductible return premium Effect: similar schemes have kick- started investment internationally Leverage effect: moderate premiums can incentivise relatively large investments Source: Roland Berger study commissioned by the EC http://ec.europa.eu/energy/infrastructure/studies/doc/2011_ten_e_financing_report.pdf Financing challenges facing Europe‘s TSOs| K. Staschus | 15 May 2012 | Page 15 of 17

16. How EU regulation could support investment Risks can be decreased through increasing regulatory stability, making allowances for riskier projects, increasing transparency. By creating incentives to focus attention. By specifying a consistent framework to align domestic regulation and EU policy objectives via the Energy Infrastructure Package. –Example: Common description of risk – priority premium relationship. By making financing contributions to target specific risks. Financing challenges facing Europe‘s TSOs| K. Staschus | 15 May 2012 | Page 16 of 17

17. Concluding remarks The European energy sector is changing very fast. ENTSO-E is at the heart of that change. But significant challenges remain and need to be addressed. In too many cases important projects are delayed by fragmented or overly complex planning processes. Regulatory regimes need to adapt to deliver what Europe‘s customers require. And ensure that the huge investment volumes can be financed. In order to ensure security of supply, creating genuinely competitive markets and decarbonise the sector. Decisive action from the EU and from regulators is needed. Infrastructure Package (3-year time limit, incentives) + regulatory stability. Financing challenges facing Europe‘s TSOs| K. Staschus | 15 May 2012 | Page 17 of 17