Long Term Analysis for the German Power Market Olav Johan Botnen, Senior Analyst, Markedskraft ASA

1. Long term Analysis for the German Power
Market
18th German Norwegian Energy Forum, Berlin
23rd of October 2014
A presentation from
Olav Johan Botnen
Senior Analyst, Nordic Analysis
ojb@mkonline.com
+47 37 00 97 61
1

2. Long Term Price Forecast for German Power
2014-2035, update to be published in late
October 2014
• Focus on German energy policy,
Energiewende
• Discussions and tables on power
balance, fuel/CO2 scenarios
• Power price forecasts
• Discussion of security of
supply/capacity markets
This presentation is a part of a the analysis service from MKonline

3. “Energiewende”: Major targets
Until 2020:
• Power consumption: 10% reduction from 2008 to 2020, from 618 to 556
TWh
• Renewable electricity: 35% of power consumption in 2020, 192 TWh
(2013: 25% reached, 148 TWh)
• Ghg emission target: 40% cut in emissions from 1990 to 2020.
• CHP law: 25% of power generation in 2020
• Renewable energy: 18% of final energy consumption in 2020 is to stem
from renewable energy
Beyond 2020:
• Total nuclear phase-out in 2022
• Renewable electricity: 40-45% in 2025, 50% in 2030
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4. Energiewende target: 40% ghg reduction
in 2020 compared to 1990 levels
• Approx. 750 Mt CO2eq to
be reached in 2020
• Structural progress of
significance not occurring
in power and heat sectors
• Small reduction potential in
other ghg sectors than
power and heat
Development in ghg emissions vs. 2020 target of
40% ghg cut
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[Mt CO2]
1 200
1 100
1 000
900
800
700
600
1990 1995 2000 2005 2010 2015 2020
Ghg emissions actual 2020 target of 30% ghg cut
Kyoto target

5. Major German power balance
developments the next couple of years
• Strong expansion in wind power, as offshore projects are gradually
coming online
• 10 new hard coal power plants are coming online (including some
plants having been commissioned already)
• Increasing integration with neighboring countries, more than double
power import/export capacities in sight from 2023 on
• Decreasing electricity consumption

6. Annual wind power output to increase
considerably
• Many offshore projects are
coming online the next 12
months, we expect
offshore wind power in
2015 to constitute 6 TWh/y
• Continued strong growth of
onshore wind power the
next couple of years
[TWh/y] German wind power generation
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80
70
60
50
40
30
20
development
2010 2011 2012 2013 2014 2015 2016 2017
Actual Prognosis

7. New generation of 46% efficient coal-fired
plants to come online
Hard coal plants to be commissioned 2013-15
Plant Output [MW] Start of operation
Lünen (Trianel) 750 December 2013
Duisburg-Walsum 10 (Steag) 725 December 2013
RDK8 Karlsruhe (EnBW) 874 May 2014
Westfalen Hamm E (RWE) 764 July 2014
Wilhelmshaven (GDF Suez) 731 December 2014
Moorburg B (Vattenfall) 840 January 2015
Moorburg A (Vattenfall) 840 June 2015
Datteln 4 (EON) 1052 Mid of 2015
Mannheim 9 (GKM) 843 Under 2015
Westfalen Hamm D (RWE) 764 Unknown
Total 2016 8183 Until 2016

8. New and efficient hard coal plants to be
commissioned
• Ten new hard coal plants
will be commissioned
towards 2017
• The development of new
hard coal plants has the
last year been
characterized by delays
• Efficiencies of 46%, rather
than the 37% historical
average, and hence lower
SRMC
• Challenging economy with
too low profit margins
Historical Phelix vs SRMCs hard coal
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[€/MWh]
55
50
45
40
35
30
25
Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014 Q1 2015 Q1 2016
SRMC hard coal for old condense power plants, assuming calculated average efficiency €/MWh
SRMC hard coal for old condense power plants, assuming fixed 37% plant efficiency €/MWh
Phelix, historical prices and traded fwd prices 13. October 2014 €/MWh

9. External transmission grid expansions in Germany
Table 5.8:Transnational grid expansion projects
Year Transmission links
Import
Capacity
(GW)
Export
Capacity
(GW)
2014 Existing capacity 17,0 14,0
2016 Germany-Netherlands 2,0 2,0
2018 Germany-Norway 1,4 1,4
2018 Germany-Jutland 1,5 1,5
2018 Germany-Zealand 0,4 0,4
2018 Germany-Belgium 1,1 1,1
2018 Germany-Switzerland 3,3 3,3
2018 Germany-Sweden 0,7 0,7
2022 Germany-Poland 3,3 3,3
2022 Germany-Poland 3,6 3,6
2022 Total capacity 34,3 31,3

10. Power consumption to decrease, amid energy
efficiency efforts and weak industry outlooks
• Stable industrial power
consumption the last
couple of years, H1 power
consumption up some 3
TWh y-o-y
• German industrial outlooks
have recently proved
pessimistic, and some
preliminary August/Sept.
output figures are weak
Total estimated and forecasted quarterly industrial power
consumption for Germany
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70
65
60
55
50
45
Q1
2007
Q1
2008
Q1
2009
Q1
2010
Q1
2011
Q1
2012
Q1
2013
Q1
2014
TWh
Estimated power consumption Forecasted power consumption

11. Economical outlooks for rest of 2014 seem
rather grim
• Russia/Ukraine crisis to hamper European industrial activity:
- EU sanctions against Russia to hurt EU economic growth rate
- German industrial performance faces downside risk, based on
national indicators for business climate and industrial orders
• Possibly weaker external demand from China:
- China face risk for slightly falling GDP growth rate, based on
falling home prices and on reduced activity for investments and
retail sales
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12. German power balance development
from our LTP Germany March 2014 edition (TWh/y)
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Hydro
Power Nuclear Wind
power
Solar
power
Bio-electricity
Hard coal Lignite Gas
Other
production,
including
oil
Net
exchange
Consump-tion
2008 20 149 41 4 28 125 151 89 34 -23 618
2009 19 135 39 7 31 108 146 81 32 -14 581
2010 21 141 38 12 34 117 146 89 35 -18 615
2011 18 108 49 20 38 112 150 86 33 -6 607
2012 22 100 51 26 45 116 161 76 33 -23 607
2013 21 97 51 28 48 123 162 66 33 -33 596
2014 20 96 57 30 49 127 162 69 35 -47 598
2015 20 96 59 32 50 123 161 69 35 -47 598
2016 20 93 62 35 52 116 156 67 36 -41 596
2017 20 92 65 38 53 114 155 71 37 -53 591
2018 20 82 67 40 54 115 153 71 37 -51 589
2019 20 82 68 43 55 119 151 76 37 -66 585
2020 20 70 70 46 57 112 158 74 38 -63 583
2021 20 69 72 47 57 105 159 74 39 -60 582
2022 20 35 74 48 57 112 157 77 39 -40 580
2023 20 0 76 49 57 144 153 94 35 -49 578
2024 20 0 78 50 57 141 151 92 34 -47 576
2025 20 0 80 51 57 146 139 95 33 -47 574

13. 13
MK Coal price scenarios March 2013
• Base prognosis based
on Perret Associates
«Long Term Price
Forecast 2014-30,
February 2014
• Slightly lowered global
perspectives for
fundamental balance in
the coal market
• Base scenario to be
lowered in our October
Coal price development applied in our analysis, CIF ARA
$(2014)/
ton
180
160
140
120
100
80
60
40 2014 edition
2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035
High March '14 Base March '14
Low March '14 Base Dec '13

14. Our EUA 2014-2035 price forecast
• Prices will remain low for
a few more years
• We expect EUAs at 10 €/t
as an average over the
2014-2035 period
• If cement and steel do not
recover towards 2020
from recent years’ output
levels, and lawmakers fail
to cut supply, carbon
prices could drop towards
0-1 €/t
25
20
15
10
5
0
2014 2016 2018 2020 2022 2024 2026 2028 2030 2032 2034
[€/t]
MK low scenario MK high scenario
Base case scenario Market prices 14th of March 2014

15. Base spot market scenario incl. capacity market.
German SRMC and power prices. Real Euros
65
60
55
50
45
40
35
30
25
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[2014 €/MWh]
[2014 €/MWh]
65
65
60
60
55
55
50
50
45
45
40
40
35
35
30
30
25
25
20
2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035
SRMC coal 46%
SRMC coal, avg. efficiency
SRMC coal 37%
SRMC gas 50%
20
2013 2018 2023 2028
Spot+Capacity price
Spot price
20
2013 2018 2023 2028 2033
SRMC coal 46%
SRMC coal, avg. efficiency
SRMC coal 37%
SRMC gas 50%

16. Three scenarios for German spot power price – real Euros
Forecasted German spot price of base load
power, in real 2014 euros
Forecasted German spot price of peak load
power, in real 2014 euros
€/MWh
70
60
50
40
30
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€/MWh
70
60
50
40
30
20
2013 2018 2023 2028
High Feb '14 Base Feb '14 Low Feb '14
20
2013 2018 2023 2028
High Feb '14 Base Feb '14 Low Feb '14

17. Three scenarios for German spot power price – nominal Euros
Forecasted German spot price of base load
power, in nominal 2014 euros
Forecasted German spot price of peak load
power, in nominal 2014 euros
€/MWh
100
90
80
70
60
50
40
30
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€/MWh
100
90
80
70
60
50
40
30
20
2008 2013 2018 2023 2028
High Feb '14 Actual EEX spot
Base Feb '14 Low Feb '14
20
2008 2013 2018 2023 2028
High Feb '14 Actual EEX spot
Base Feb '14 Low Feb '14

18. “Energiewende”: Capacity market probably necessary
• “Energy-only” market (spot market) is perfect for optimization of generation
• Spot price level now and for coming years represents non-sustainable
income for several power utilities, for thermal generation plants in
particular. New thermal investments are nearly impossible to introduce
• Phase-out of 11 GW large share of thermal generation is in the pipeline,
partly reaching end of lifetime, partly to save costs. More decommissioning
in the pipeline? 8 GW new thermal generation capacity entering
• Some thermal plants will be needed for security of supply, either now in
south of Germany or later on at national level with 100% nuclear phase-out
• Strategic reserves will be a cost-efficient capacity mechanism for
consumers. Spot price when strategic reserves activated: 3000 €/MWh
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19. “Energiewende”: Capacity market price mechanisms
• Some struggling power utilities want to go for capacity market solution
to increase profit margins
• More renewable generation to enter (40-45% in 2025, 50% in 2030)
give nearly no incentives for owners of thermal generation capacity to
upgrade existing or invest in new plants without a capacity market
• Illustration of a potential capacity market price first years (2016-2019):
4-7 €/MWh for keeping some old coal-fired plants available
• Gas-fired CCGT plants need a price to fill the gap of the costs of
negative clean spark spread (2021-2024). Indication: 7-14 €/MWh
• After 2024: investment costs for new capacity, probably 15-25 €/MWh
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20. Status for introduction of capacity markets in the
EU countries: France
• Decentralized capacity auction scheme: Reserve obligation put on each supplier.
Volumes defined by TSO based on Loss of Load Expectation (LOLE) of 3 hours after
forecasting demand levels at the peaking months in the delivery period. Thermo-sensitivity
in demand included when calculating suppliers reserve obligation.
• First delivery period: winter of 2016-2017. All capacity providers (generators and
demand side resources) obliged to bid, receive certification and commitment to provide
MWs. After delivery TSO will check compliance for all suppliers, penalty for shortfall
• Standard delivery period: one year
• Interconnected capacity: imports included when calculating suppliers reserve
obligation (factor 0.93 for imports at peak hours)

21. Status for introduction of capacity markets in the
EU countries: UK
• Centralized capacity auction scheme. Volumes defined by TSO based on Loss of
Load Expectation (LOLE) of 3 hours after forecasting demand levels, 4.5 years ahead of
delivery.
• First auction: December 2014. First delivery period: winter of 2018-2019.
• Participation in auctions will be voluntary and only for generation facilities not receiving
some level of support such as via Renewables Obligation scheme. Providers of capacity
divided in two groups: Price takers (existing plants) and price makers (new capacity and
demand response resources)
• Standard delivery period: one year. New projects: up to ten years
• Interconnected capacity: possibly to be included later on, but not in the first capacity
auction

22. Status for introduction of capacity markets in the
EU countries: Italy
• Centralized capacity auction scheme: Zonal volumes defined by TSO based on
variable adequancy targets for coming ten years period.
• First auction: probably 2014. First delivery period: at earliest 2017. Participation in
auctions will be voluntary. Generators will receive an annual premium (EUR/MW) – the
clearing price at the auction for the actual zone (subject to a cap and a floor) – with an
ex-post adjustment equal to the difference between reference price and a strike price
each time the reference price rises above the strike price.
• Standard delivery period: 3 year. Forward horizon: 4 years
• Interconnected capacity: not included

23. You have watched a presentation
from MKonline
Thank you for your attention
Olav Johan Botnen
Senior Analyst Nordic Analysis
ojb@mkonline.com
+47 37 00 97 61
Espen Andreassen
Senior Analyst, Continental Analysis
ean@mkonline.com
+47 37 00 97 71
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