1. IBERDROLA RENEWABLE ENERGIES Large-scale integration - toward 12% penetration in Europe - A reality? Athens, February 26, 2006 Pedro Barriuso Otaola General Director Renewable Energies, Engineering and Construction

2. IBERDROLA RENEWABLE ENERGIES2 Index Contents: 1.Renewable energies key aspects: environment, energy security and economic efficiency 2.Renewable support systems 3.Analysis of wind energy payment scheme 4.Other factors to consider for future wind development 5.Iberdrola at the renewable business 6.Main conclusions

3. IBERDROLA RENEWABLE ENERGIES3 Renewable energies key aspects Sustainable power development Essential for competitiveness and performance in the global economy EU Green Paper on environmental issues Energy dependency in the EU has reached 50-60% (Spain at 78%) Limit climate change (Kyoto commitments) Sustainable use of natural resources ECONOMIC EFFICIENCY ENERGY SECURITY ENVIRONMENT In order to achieve competitive and sustainable energy development, there are three basic pillars to be considered: the environment (sustainable use of natural resources), energy dependency (diversification of sources) and economic efficiency (competitiveness and technological development) Kyoto Protocol 5.2% reduction in CO 2 emissions by 2010 with respect to 1990 total emissions. Basic role of wind energy. Renewable Energies EU Directive 12% of primary energy set to come from renewable sources in 2010. 22.1% of electricity demand to be met by renewable energy sources by 2010 (versus 13.9% in 1997) Last September, the European Parliament agreed on new proposal for binding target of 20% regarding renewable energies in the total energy consuption by 2020 (equivalent to 33% electricity in 2020) EU countries All EU countries have defined public targets for the development of renewable energies and support systems for their development

4. IBERDROLA RENEWABLE ENERGIES4 Portugal Greece Spain Ireland Sweden Finland France Holand Italy Belgium UK Austria Denmark Germany Luxemburg EU Emissions reduction effort distribution amongst EU countries. 2008-2012 average, compared to 1990 emissions (Burden Sharing Agreement) Renewable energies key aspects Environment: Kyoto commitment

5. IBERDROLA RENEWABLE ENERGIES5 “If no measures are taken, in the next 20 or 30 years 70% of the Union's energy requirements, as opposed to the current 52%, will be accounted for imported products” This foreign dependency will affect every sector of the economy Renewable energies key aspects Energy security: EU dependency Source: Green Paper “Towards a European strategy for the security of energy suppy”, European Commission

6. IBERDROLA RENEWABLE ENERGIES6 1. Profitability: investments must offer sufficient profitability, allowing for the investments to deliver expected results 2. Stability: As industry grows and markets evolve, support systems can be reviewed, but should only apply to new assets 3. Predictability: remuneration must be defined for the entire life of the asset An effective support system must consider three basic premises: Renewable energies key aspects Economic efficiency The selection of an adequate economic support system is KEY

7. IBERDROLA RENEWABLE ENERGIES7 According to official EU data, the most effective countries delivering wind energy are Denmark, Germany, Spain and Greece, not surprisingly using feed-in tariffs. “For wind energy, countries with an effectiveness higher than the EU average use feed-in tariff systems. This type of system currently has the best performance for wind energy” (page 6 of the EU document*) Feed-in tariffs vs. green certificates Feed-in tariffs are more effective. Green certificate systems now present significantly higher cost levels than feed- in tariffs. This is explained by the higher risk premium demanded by investors, administrative costs, together with an immature green certificate market Effectiveness indicator for wind onshore electricity in the period 1998-2004 * Source: Communication from the Commission of the European Communities: “The support of electricity from renewable energy sources” (Brussels, 07-12-2005) Renewable support systems

8. IBERDROLA RENEWABLE ENERGIES8 Renewable energy regulation Spain has the second-highest accumulated installed capacity in the world MW Installed wind capacity evolution in Spain - Feed-in tariffs have proven to be the successful system - Spain today has an excellent track record Basic systemsComplementary systems Wind support systems in the EU December 2005 Renewable support systems

9. IBERDROLA RENEWABLE ENERGIES9 Together with a stable and predictable support system, a rigorous analysis is essential to figure out the real yield of wind power production Analysis of wind energy payment scheme 1.It is true that energy prices in 2005 were high. Nevertheless, a long term perspective is required in this business. Wind is a capital-intensive activity, taking up to 20 years to attain a reasonable IRR. In addition, some agents are discounting energy price level reductions in the years to come 2.In most countries, deviations of production over prediction mean lower income than expected 3.Investment costs, far from diminishing, have increased due to the larger size of wind turbines, meeting environmental requirements. These costs range today from 1,100 to 1,150 €/KW. Also, high demand for machines in international markets actually means that price tensions will remain for a while

10. IBERDROLA RENEWABLE ENERGIES10 Analysis of wind energy payment scheme Negative correlation between wind power production and market prices Given high wind production, the role played by traditional technologies is significantly smaller, since wind generation has guaranteed access to the grid. Therefore, the price of energy dramatically diminishes (up to 25%) in the markets. This effect will continue to grow since wind energy will account for a larger share of all energy produced in the future In addition, in some countries, wind energy participates in hourly output prediction, which may produce a further 5 - 10% income reduction

11. IBERDROLA RENEWABLE ENERGIES11 Negative correlation between wind power production and market prices: Spain as a showcase (I)

12. IBERDROLA RENEWABLE ENERGIES12 Negative correlation between wind power production and market prices: Spain as a showcase (II) 14-feb15-feb16-feb Demand (MWh)770.200772.300767.400 Total wind production (MW)14.50278.180141.310 Average price weighed demand (€/MWh) 86,575,466,3 Wind weighed average price (€/MWh) 81,474,465,4 Wind weighed average priceAverage price weighed demand

13. IBERDROLA RENEWABLE ENERGIES13 Apart from economic efficiency, there are different determining factors required to achieve EU objectives - Improved management and integration of wind energy in the operation systems and transport networks should not be a limiting factor. Therefore, it is necessary to work on three main issues: Other factors 1. Contribution of wind generation to network stability. –Management through control centres*, ready to follow intructions from system operators* –Other technical improvements: voltage dips and reactive power 2. Operation on real time. –Wind generation management on a real-time basis is required in order to reduce unnecessary and excessive safety margins 3. Infrastructures improvements. 1.Improvement of electricity transport system and significant increase in interconnections between all EU members and border countries 2.Improve integration and cooperation between different players (producers, transporters and distribution agents) and system operators* in the EU. - Coherence and coordination is essential between implied administrations. At a European, national, and particulary regional level. * Where existing

14. IBERDROLA RENEWABLE ENERGIES14 Iberdrola at the renewable business

15. IBERDROLA RENEWABLE ENERGIES15 Evolution of installed capacity and objective (MW) Iberdrola is one of the world´s leading operators in renewable energies with 3,810 MW (3,494 wind) and with a target of 6,200 MW for 2008 Capacity breakdown (MW), Dec 2005 x 12,2 6.200 3.810 3.200 1.414 507 2000 … 2002 … 2004 … 2005 (1) … 2008E (2) (1) Includes stakes in Rokas Group (2) Latest forecast 91%9%100% 3,810 3,494 316 WindMinihydroTOTAL 5.000 MW national 1.200 of international development Iberdrola at the renewable business

16. IBERDROLA RENEWABLE ENERGIES16 * Dec. 2005 Iberdrola: World leader in installed capacity in wind MW Renewable energies 3,494 3,193 1,694

17. IBERDROLA RENEWABLE ENERGIES17 Iberdrola´s presence and development worldwide Countries with an Iberdrola presence Germany Brazil Spain France Greece Italy Mexico Poland United Kingdom Countries with Iberdrola offices

18. IBERDROLA RENEWABLE ENERGIES18 Iberdrola´s Renewable Energies Operations Centre, in Toledo, is designed to help bring these energies onto the electricity grid and to improve their efficiency Iberdrolas´s renewable energy operations centre (CORE) is a pioneer initiative in the industry due to its technology and scope. As mentioned before, it allows Iberdrola to improve the management and operation of renewable energy installations. The centre helps to bring these energies into the system and to eliminate possible obstacles to their development

19. IBERDROLA RENEWABLE ENERGIES19 Main conclusions A sustainable energy model requires fulfilment of three basic pillars: environment safety, energy dependency and economic efficiency The EU believes in renewable energies and defines ambitious objectives, with a basic role for wind energy Feed-in tariffs have proved to be the successful system, more efficient and effective than green certificates To meet targets, together with a stable and predictable support system, it is necessary to analize other factors that affect wind activity yield –Investment costs have increased, reaching 1,100 to 1,150 €/KW –High wind energy production levels may cause energy prices in the market to drop by up to 25% Management and technical issues: –It is necessary to advance toward an integrated and agile management system, taking into account wind energy, together with infrastructure improvement. Administrative issues: –The role of the UE is increasingly important, and it will have to take a proactive approach to the promotion of renewable energies: · From the regulatory point of view; through the approval of Directives that guarantee economic and technical support · From the political point of view; generating a climate of economic and environmental awareness –Further national involvement is required and, specifically, cooperation and coordination of regional and local governments

20. IBERDROLA RENEWABLE ENERGIES Large-scale integration - toward 12% penetration in Europe - A reality? Athens, February 26, 2006 Pedro Barriuso Otaola General Director Renewable Energies, Engineering and Construction