European EnergyMarkets Observatory

2008 and Winter 2008/2009 Data SetEleventh Edition, November 2009

the way we see itEnergy, Utilities and Chemicals

In collaboration with

A strategic overview of the European energy markets 4

Competitive Power 12Generation 12Electricity Wholesale Markets 22Electricity Retail Markets 28

Competitive Gas 34Upstream 34LNG 39Gas Wholesale Markets 42Gas Retail Markets 47

Infrastructures and Regulated Activities 52Electricity Transmission 52Electricity Distribution 59Gas Transmission 64Gas Storage 68Gas Distribution 72

Sustainable Energy and Climate Change 75

Finance and Valuation 85

Glossary 92

Country Abbreviations and Energy Authorities 96

Team and Authors 97

Contents

©2009 Capgemini.Reproduction in part or in whole is strictly prohibited.

Table 1.1 Peak load, generation capacityand electricity mix (2008) . . . . . . . . . . . . . . . . .12

Table 1.2 Real margin versus theoreticalmargin (2008) . . . . . . . . . . . . . . . . . . . . . . . . . .14

Table 1.3 Map of generation capacityprojects (MW), as of July 15, 2009 . . . . . . . . . .16

Table 1.4 Generation market concentration(2008) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19

Table 2.1 Commodity prices(2008 and H1 2009) . . . . . . . . . . . . . . . . . . . . .22

Table 2.2 Yearly (2008 and 2007) and winter(07/08 and 08/09) average electricity spot prices . .23

Table 2.3 Electricity spot prices on themain European markets (2008 and H1 2009) . .23

Table 2.4 Electricity futures prices (year ahead) onthe main European markets (2008 and H1 2009) .24

Table 2.5 Map of electricity trading (2008) . . . . .25

Table 3.1 Total electricity consumption andsize of I&C and residential markets (2008) . . . . .28

Table 3.2 I&C electricity prices (H2 2008and % change with H2 2007) . . . . . . . . . . . . . .29

Table 3.3 Residential electricity prices (H2 2008and % change with H2 2007) . . . . . . . . . . . . . .30

Table 3.4 Status of electricity price regimes(as of July 2009) . . . . . . . . . . . . . . . . . . . . . . . .30

Table 3.5 Electricity retail marketconcentration (2008) . . . . . . . . . . . . . . . . . . . . .32

Table 4.1 Domestic gas productionversus imports (2008) . . . . . . . . . . . . . . . . . . . .34

Table 4.2 Gas production and share ofEuropean proved reserves by company (2008) . . .35

Table 4.3 Proved gas reserves (2008) . . . . . . . .35

Table 4.4 Map of gas imports throughpipelines and pipelines projects (2008) . . . . . . .36

Table 5.1 Map of LNG terminalsand flows (2008) . . . . . . . . . . . . . . . . . . . . . . . .39

Table 5.2 LNG imports to Europe (2008) . . . . . .40

Table 6.1 Gas spot prices (2008 and H1 2009) .42

Table 6.2 Gas futures prices (summer 2010and winter 2010) . . . . . . . . . . . . . . . . . . . . . . . .43

Table 6.3 Map of gas trading (2008) . . . . . . . . .44

Table 7.1 Total gas consumption and sizeof I&C and residential gas markets (2008) . . . . .47

Tables 7.2 I&C gas prices (H2 2008 and% change with H2 2007) . . . . . . . . . . . . . . . . .49

Table 7.3 Residential gas prices (H2 2008and % change with H2 2007) . . . . . . . . . . . . . .50

Table 7.4 Status of gas price regimes(as of July 2009) . . . . . . . . . . . . . . . . . . . . . . . .50

Table 7.5 Gas retail market concentration (2008) . .51

Table 8.1 Status of ownership unbundling ofelectricity TSOs (as of July 2009) . . . . . . . . . . .52

Table 8.2 Map of interconnections levels,bottlenecks and priority interconnections (2008) . .54

Table 8.3 Projects of electricityinterconnections (2008) . . . . . . . . . . . . . . . . . . .55

Table 8.4 Map of electricity TSOs and congestionmethods (2008) . . . . . . . . . . . . . . . . . . . . . . . . .56

Table 8.5 Electricity TSOs investments in thenational grid as a % of their revenues (2008) . . .57

Table 9.1 Map of electricity DNOs (2008) . . . . .59

Table 9.2 Electricity DNOs investments asa % of their revenues (2008) . . . . . . . . . . . . . . .61

Table 9.3 Electricity distribution regulatoryregime (2008) . . . . . . . . . . . . . . . . . . . . . . . . . .63

European Energy Markets Observatory 3

Energy, Utilities and Chemicals the way we see it

Tables Country Focus

Key issues in the United Kingdom . . . . . . . . . . .27

Key issues in Switzerland . . . . . . . . . . . . . . . . .37

Key issues in Portugal . . . . . . . . . . . . . . . . . . . .41

Key issues in Sweden . . . . . . . . . . . . . . . . . . . .45

Key issues in Belgium . . . . . . . . . . . . . . . . . . . .53

Key issues in Spain . . . . . . . . . . . . . . . . . . . . . .55

Key issues in Norway . . . . . . . . . . . . . . . . . . . .57

Key issues in Italy . . . . . . . . . . . . . . . . . . . . . . .58

Key issues in The Netherlands . . . . . . . . . . . . .63

Key issues in France . . . . . . . . . . . . . . . . . . . . .67

Key issues in Slovakia . . . . . . . . . . . . . . . . . . . .71

Key issues in Germany . . . . . . . . . . . . . . . . . . .83

Key issues in Denmark . . . . . . . . . . . . . . . . . . .85

Topic Focus

Operational Excellence programs are not onlyabout cost cutting . . . . . . . . . . . . . . . . . . . . . . .13

Carbon Capture and Storage (CCS): betterbut still not enough . . . . . . . . . . . . . . . . . . . . . .15

Towards a better integration of wind poweron transmission grids . . . . . . . . . . . . . . . . . . . .17

Energy storage, a key piece to smart gridsand flexibility . . . . . . . . . . . . . . . . . . . . . . . . . . .18

Customer switching still increasing buta two-tier Europe emerges . . . . . . . . . . . . . . . .31

Sustainable tariffs: a good marketing toolto support energy conservation . . . . . . . . . . . . .33

Cost to Serve: a crucial indicator for retailers . .48

Smart meter projects: a small stepfor Utilities, a big step towards Smart Grid . . . .52

Incentive quality based regulation for DNOsis becoming popular . . . . . . . . . . . . . . . . . . . . .60

What kind of regulation will reduce electricalnetworks losses? . . . . . . . . . . . . . . . . . . . . . . .62

Third Legislative Package: A Three Set Match? 64

Capgemini capabilities in leading benchmarks:an example with the gas DNO benchmark . . . .74

Copenhagen: a useless meeting? . . . . . . . . . . .76

European Energy Policy: a matter of necessity .77

How to make energy savings smart, fun andattractive? . . . . . . . . . . . . . . . . . . . . . . . . . . . . .81

What are the pre-requisites for electric vehiclesdevelopment? . . . . . . . . . . . . . . . . . . . . . . . . . .82

Table 10.1 Status of ownership unbundlingof gas TSOs (as of July 2009) . . . . . . . . . . . . . .64

Table 10.2 Map of physical congestionson gas infrastructures (2008) . . . . . . . . . . . . . . .65

Table 10.3 Gas TSOs investments in thenational grid as a % of their revenues (2008) . . .66

Table 10.4 Cost of capital for gas TSOs (2008) . . .67

Table 11.1 Map of gas storage (2008) . . . . . . . .68

Table 11.2 Gas storage capacities (2008) . . . . .69

Table 11.3 Gas storage facilities projects (2008) . .71

Table 12.1 Map of gas DNOs (2008) . . . . . . . . .72

Table 12.2 Gas DNOs investments as a %of their revenues (2008) . . . . . . . . . . . . . . . . . . .73

Table 12.3 Gas distribution regulatory regime(2008) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .74

Tables 13.1 3x20 EU climate change objectives(status as of 2008 with provisional data) . . . . . .75

Table 13.2 CO2 prices (2008 and H1 2009) . . .78

Table 13.3 Growth rate of electricitygenerated from RES (2007 and 2008) . . . . . . . .80

Table 14.1 Companies on the panel andtheir main characteristics (2008) . . . . . . . . . . . .86

Table 14.2 Electricity Utilities' revenuegrowth (unit for every €100m in revenues)and volumes sold (TWh) . . . . . . . . . . . . . . . . . .87

Table 14.3 EBITDA margin evolution . . . . . . . . .87

Table 14.4 Breakdown of investmentsby segment in 2008 . . . . . . . . . . . . . . . . . . . . .88

Table 14.5 Capex to revenues ratio (1990-2008) . .88

Table 14.6 Utilities sector performance versusDJ EuroStoxx 50 (base 1 on January 1, 1995) . . .88

Table 14.7 Utilities sector performance versusDJ EuroStoxx 50 (base 1 on January 1, 2008) . . .89

Table 14.8 Utilities sector P/E (2001-2011e) . .89

Table 14.9 Change in net debt for the ten largestEuropean companies in the eurozone (net debt) . .90

Table 14.10 Eurozone ten-year bondsversus European market risk premium . . . . . . .90

Table 14.11 Amount issued in bonds,by company from January 1, 2008to date (in € billion) . . . . . . . . . . . . . . . . . . . . . .91

Table 14.12 The eight largest capital increases(in € million) . . . . . . . . . . . . . . . . . . . . . . . . . . .91

A strategic overview of the Europeanenergy marketsEditorial by Colette Lewiner

increased at a much lower pace (2%) thanduring the previous five years when thecompound annual growth rate (CAGR)reached 56%2.

Oil price reached a peak of aroundUS$150 per barrel in July 2008. Gas, coaland electricity prices increased also withpeaks between the summer of 2008 andthe beginning of winter 2008/2009.During the summer of 2008 the rise in oiland gasoline prices pushed the US toreduce its oil consumption. Thisunprecedented demand elasticity to pricetriggered a decrease in oil prices that wasfollowed by a fall in all energy prices.

The crisis has positive and negativeimpacts on these challengesOn the positive side

� A fall in demand: During the autumn of2008 the economic recession triggered adecrease in oil prices and demand. TheInternational Energy Agency (IEA)anticipates for 2009 the highest fall inglobal oil demand since 1982, to 84.6millions barrels per day (bpd), adecrease of 1.9% compared to 20083. InH1 2009, the electricity and gasconsumption of the industrial sectordeclined significantly everywhere inEurope by 10 to 20% on a monthly basis(compared to the same months in 2008).However, the tertiary sector, where themain energy consumption is linked tobuildings and the residential sectorwhere energy is a vital need, have beenresilient to the crisis. For the residentialsector a small consumption increase(when corrected by temperature factors)was even observed in some Europeancountries.

For the first time since World War II,electricity total consumption is expectedto drop worldwide by 3.5% and gas

consumption by a similar amount in2009. In H1 2009 the aggregated overallelectricity consumption for the mainEuropean countries fell by about 5% andthe gas consumption by 9% compared toH1 2008. In H2 2009, thanks to the(limited) recovery of certain industries,we should witness a lower decrease ofthe industrial sector consumption andthus a slow down of the overallconsumption decrease compared to thesame period in 2008 (where declinestarted). In 2010, if this trend continuesand if the tertiary and residential sectorsare not really impacted by the forecastedgrowing unemployment, we couldwitness a small growth in consumptioncompared to a dull 2009 year. However,with the slow and probably smalleconomy recovery in Europe, it is hardto predict when the 2008 levels ofenergy consumption will be reachedagain.

� A drop in CO2 emissions, mainly resultingfrom the fall in energy consumption. In2008, the drop for the ETS sectorsemissions in Europe was around 3.7%(compared to 2007) and the totalEuropean CO2 emissions should havedropped by around 1.5%4.With theeconomic recession, a further drop for2009 is anticipated. This explains whythe CO2 prices have dropped on theexchange markets (€13 per ton ofcarbon equivalent in September 2009, oralmost a 60% decline since the 2008summer peaks). This market move wasprobably amplified by the credit crunch,as companies which received theseemissions rights free of charge, wereinclined to sell some of them, even atlow prices, in order to generate cash.These relatively low ETS prices providelittle incentive for generators to switchfrom coal to gas generation or torenewable energies.

Welcome to the 11th edition of theEuropean Energy Markets Observatory(EEMO), covering 2008 and the early2009 period.

On top of summarizing the Observatory’skey findings, this editorial analyzes thecrisis’ effect on the electricity, gas andenvironment sectors in Europe; gives anupdate on security of electricity and gassupply; and discusses the evolution of theenergy’s sector impact on the environmentin the light of the European Union (EU)“Climate-Energy” Package.

The key challenges in the first half of2008 were still about responding tothe growing energy demand whiledecreasing CO2 emissions

In 2008, the energy demand increasecombined with the necessity of replacingageing infrastructures, led to extremelyhigh investments requirements: the EUestimated that for electricity and gas,€1,600 billion investments were neededby 20301. Building these infrastructureswithin these timeframes constituted initself a considerable challenge. Theobligation to reduce CO2 emissions tocombat global warming made thischallenge even more complex.

As we analyze in this EEMO edition, theUtilities investments have continued togrow; in 2008 the total investmentsamounted to €120 billion with the largestshare (53%) for electricity generation(including renewables) and 24% for theelectricity grids and gas pipelines.

However, the energy mix choice continuesto pose a problem: three quarters of thepower stations under construction will besupplied by fossil fuels and therefore emitCO2. In 2008, investments in sustainableenergy (renewables and energy efficiency)

4

1 Inter-connecting Europe - New perspectives for trans-European energy networks, EC DG-Tren, 2008

2 Global Trends in Sustainable Energy Investment 2009, UNEP/SEFI/New Energy Finance

3 Oil Market Report, IEA, October 10, 2009

4 Provisional data issued by the European Environment Agency, September 2009

manufacturers’ competition. One caneasily predict that this competition willbecome tougher in the future. China, forexample, has ambitious targets for itsown wind energy development and hasadopted a national preference forChinese manufacturers thus boosting itsindustry that should become, in 2009,the world’s leading exporter of windturbines.

One can wonder if this downward trend willcontinue.

On the one hand, the current economicsignals don’t give incentives to invest inrenewable energies. The prices of fossilfuels (and especially in Q2 2009 withthe very low gas price) make suchinvestments even less profitable thanbefore the crisis. In addition, at theircurrent low price, CO2 emissionsrepresent only a small burden for gas orcoal fired plants and, therefore, do nothelp to close the economic gap with therenewable energies.

But on the other hand, legislation andstimulus plans will push up investmentsin renewable energies:

• In Europe the “Climate-Energy”Package aims at increasing the share ofrenewables in final energyconsumption to 20% by 2020. Meetingthis objective would mean a significantboost from the present levels. In May2009, the €4 billion energyinfrastructure investment plan wasadopted by the EU Member States;€565 million is earmarked for specificoffshore wind projects; and €910million for electricity interconnectors(helping the integration of renewableenergy into the grid);

• In the US: the Obama plan aims, inparticular, to double the proportion ofrenewable energies in the energy mixin three years (from 7 to 14%);

Germany, E.ON has revised itsinvestment plan for 2009-2011, from€36 to 30 billion. In Italy, Enel intendsto reduce its 2009-2013 investment planby €12 billion (from €44 to 32 billion),in Spain, Iberdrola has announced 2009investments of only €4.5 billion downfrom the €13 billion initially plannedand Gas Natural-Union Fenosa will slashinvestments from the previouslyannounced €21 billion to €11-13billion.Fortunately, many stimulus plans containincentives to investments:

• In Europe, a €4 billion energyinfrastructure investment plan wasvoted in May 2009 by the EU MemberStates and the European Parliament;

• President Obama’s “Stimulus Plan”allows for investments of US$45 billionin new energy-related expenditure,US$20 billion in new tax cuts forenergy and US$4.5 billion in the smartelectrical grid.

However, because of administrativedelays, the stimulus packages will onlystart to be implemented at the end of2009 and early 2010 and could havetangible effects on investment levels nextyear and onwards.

� Renewable energies are significantlyimpacted: After significant growth in thepast years, European investments inrenewable energies fell by 14% in thesecond half of 2008 (compared to H22007) to US$21.2 billion5. In the US,there was a 50% reduction to US$10.7billion. The IEA forecasts a global dropof about 38% in 20096. The good newsis that Q2 showed a recovery ininvestments compared to Q1 but still adecrease year-on-year. Wind turbine andsolar panel manufacturers have sufferedat the end 2008 and in Q1 2009 withsome of them further impacted by Asian

A Strategic Overview of the European Energy Markets 5

Energy, Utilities and Chemicals the way we see it

� A supply and demand balance improvementfor electricity and gas excludingexceptional events such as the cold spellin Europe in the beginning of January2009 and the gas crisis between Russiaand Ukraine (see below).

� Falling prices: The oil price fell fromaround US$150 per barrel during thesummer of 2008 to around US$70 at theend of September 2009. According tosome economists this price drop createda bigger relief in the present economicrecession than the cumulatedgovernmental stimulus plans. At thepresent stage governments will try toavoid a significant oil price increase thatwould jeopardize the recovery.Therefore, the UK and the US regulatorshave decided to strengthen theircollaboration on oil related markets inorder to limit speculation and increasetransparency. The gas price whichpeaked at €32/MWh for a delivery inZeebrugge (Belgium hub) in September2008 reached the very low price of€7/MWh in September 2009. Coal pricehas also decreased from a peak of €216per ton in July 2008 to about €70 perton in September 2009. The same isobserved for electricity prices on thewholesale market – EPEX Spot France –which, after peaking at €117/MWh inmid October 2008 reached €23/MWh inSeptember 2009.

On the negative side

� Investments are impacted: The creditcrunch combined with lower demandand lower Return on Investments(ROI)has pushed down the investments in theenergy sector. These investments are,however, badly needed for long termenergy security of supply. In Europe, themajor Utilities, which recently spenttheir war chests for acquisitions, haveannounced postponed investments. In

5 New Energy Finance

6 The impact of the financial and economic crisis on global energy investment - IEA background paper for the G8 Energy Ministers’ Meeting, May 24-25, 2009

6

MW of additional electricity generationinvestment needed to maintain security ofsupply. This forecast assumes that currentplanned investments are not cancelled(which is challenging) and does not takeinto account additional plant closures(estimated at 8,000 MW of generatingcapacity by 2016) linked to earlydecommissioning triggered by theIntegrated Pollution Prevention andControl Directive and the LargeCombustion Plant Directive which wereadopted in December 2008.

An upturn in investments after the crisis isanything but sure and could beinsufficient as consumption restarts.

As a conclusion, we believe that, without afocus on investments now, the after crisis“wake- up” could be difficult.

The crisis has challenged the resilientcharacter attributed to the Utilitiessector

In previous years, Utilities have investedlarge amounts in cross border acquisitionsthus decreasing their (previously large)war chests and increasing their gearingratio. The combination of these financialfactors with lower revenues linked toconsumption and prices decreases hascreated a perception of financial risk andled to a drop in rating ratios.

To restore the situation, Utilities haveannounced large divestment plans:

� E.ON has a €10 billion divestment planof which part will be in the high voltageelectrical grid;

� ENEL has a €10 billion divestment plan.It has already sold its high-voltage powergrid to Terna for €1.15 billion and plansto divest from “Green Power”;

� EDF has announced a €5 billion plan. Ithas sold 20% of British Energy shares toCentrica, and is looking at divestingsome of its grid activities.

Other Utilities will bid for these assets butalso new actors such as private equityfunds, pension funds or sovereign fundswill manifest themselves, especially in theinfrastructure part of the value chain.

However, this winter’s Gazprom gassupply disruption made them realizetheir Russian gas dependency andresulted in strengthening their resolveto build new nuclear power stations.The financial and economic crisis hasalso been severely felt in Russia andwill probably have the effect of slowingdown their ambitious nuclear program;

• In Western Europe, there are twoparticularly interesting cases. The UK isprobably the European country whichis going to build the largest number ofnuclear reactors. On the one hand, ithas to replace its old nuclear powerstations and on the other to maintainits energy independence in spite ofgradually depleting North Sea naturalgas deposits. The country hasembarked on the process ofauthorizing and building these reactorsin a very detailed and democraticmanner, which should result in thefirst reactor connected to the gridaround 2018. And in Germany, theCDU/CSU-FDP coalition wonSeptember elections, which is favorableto the extension of nuclear plants lifetime. However, a decision to build newreactors in the immediate future isunlikely;

• With the US Administration focusedon renewable energies, the currentambition of building more than 30reactors should be cut down. The 2005Energy Bill Act included US$18 billionguaranteed loans for the first three orfour reactors. These selected reactorprojects will go ahead, but it will bemuch more difficult for the others, asUS Utilities – that are relatively smalland now have difficulties to get loans –will hesitate in taking the risk offinancing the large investmentsrequired.

In summary, the crisis has hit the plannedinvestments in energy and, according toexperts the signs remain alarming for thefuture. Certainly, the presentunprecedented crisis, a slow post crisisgrowth in Europe, and the energy savingsregulation impact should lead to lowerneeds. The UCTE revised down itsprospects from 50,000 MW to 20,000

• In China: the €400 billion two-yearstimulus plan announced by Beijing inNovember 2008 treats the environmentgenerously with €35 billion or 8% ofthe total funds assigned to theprotection of the environment.

Thanks to these stimulus plansannouncements, “clean tech” financialdeals are growing again. After aslowdown, green business is increasingagain with fund raising, and mergers andacquisitions amounting to €8.8 billionin Q2 2009 compared to €1.1 billion inthe previous quarter.

In summary, since the end of 2008, wehave witnessed a green bubble deflationbut thanks to the political decisionsfavoring a green economy development,some recovery is foreseen for the 2009year end and for 2010.

� Nuclear investments are differentlyimpacted by the crisis depending on theregion: Nuclear energy is (with, to acertain extent, hydro power) the onlycompetitive energy source that can bescheduled and that is capable ofproducing electricity on a large scalewithout generating CO2 emissions.Combined with safety and operationalimprovements these are the reasons why,since a few years ago, we are witnessinga revival of nuclear power in a numberof regions.

Since the last EEMO edition there havebeen two major events – the election ofBarack Obama as the US president andthe global financial crisis – which havehad an effect on altering the approach tonuclear power in some regions:

• In Asia nothing much has changedwith the crisis and development isgoing ahead as planned. Moreover,China has decided to speed things upwith plans to put six nuclear reactorsinto operation each year for the nextfew years. India also has an ambitiousprogram and has now access toWestern technology, thanks toagreements it signed in 2008;

• In Europe, the former Eastern bloccountries have to a greater or lesserextent been hit by the recession, whichis likely to delay their nuclear program.

became a buyer’s market for severalreasons:

• On the supply side, in 2009, twoliquefaction plants have been startedby Qatargas; more are planned for2010 and a product surplus is nowforecasted for 2010;

• On the demand side, Asian demandhas decreased notably because of theJapanese Kashiwazaki-Kariwa nuclearplant being progressively restarted.The development of unconventionaldomestic gas in the US combined withthe recession has also very stronglydecreased the US demand.In Europe, if all the new EuropeanLNG regas terminals are built, thereshould be a capacity surplus. However,due to a lack of demand combinedwith the credit crunch and difficultiesin public acceptance, some of thoseinvestments could be differed orcancelled.On the longer term, the prediction isthat it will take two or three years toabsorb this LNG “bubble” and that atense supply market could prevailagain.

� Increase storage: The storage demand inthe EU is set to grow quite significantlyover the next few years, as the EUbecomes more dependent on importswhich are less flexible compared toindigenous production. The EUrecommends that each country has astorage capacity of 16% of its annualconsumption (60 days). Thanks to thepast year’s investments, storage capacityin Europe increased by 5% in 2008representing 17% of its annualconsumption. More than 100 newfacilities or extensions projects have beenlisted but certain projects already havebeen cancelled or delayed for financialreasons.

� Build new pipelines routes enabling theimport of gas from Central Asia (mainlyAzerbaijan, Turkmenistan andKazakhstan) without passing throughRussia and thus avoid using Gazprom

However, energy efficiency programs andCO2 saving programs tend to favorelectricity usage by boosting heat pumpsusage, public transportation and electricalcars.

For electrical cars the loading batterypatterns should be carefully planned inorder not to increase peak power demand.

Europe’s high dependency on Russiangas supplies is an issue

As analyzed in last year’s EEMO and in theprevious ones, the EU’s high dependencyon Russian gas (25%) is a threat tosecurity of supply. There were noimprovements on this situation in 2008and as much as 50% of EU gas could stillbe imported from Russia in 2030.

In January 2009, there was a second“wake-up call” as a consequence of thishigh Russian gas dependency. Acommercial and political dispute betweenRussia and Ukraine had deprived Europeof nearly all Russian supplies during aperiod of 22 cold days. These cuts haddramatic consequences for countries likeBulgaria which is 100% Russian gasdependent.

Let’s not forget that history repeats itself!

The dramatic fall of Gazprom’s gas exportsto non CIS countries (45%) in H1 2009 ismore cyclical than structural and measuresneed to be taken to improve Europe’ssecurity of supply.

These measures are of different types:

� Increase the LNG share in the total gassupply, as LNG enables access to 80% ofworldwide proven gas reserves thusproviding a good supply diversification.In 2008, in a tense supply and demandsituation, LNG trade movements rose by5.8% above gas traded by pipelinegrowth of 4.7%.In early 2009 the situation changed; theLNG market that was seller’s market

Security of supply: still to bemonitoredElectricity security of supply improvedin 2008 but was threatened in early2009

The real margin7 hugely improved in 2008from 5.3% in 2007 to 9.2% for the UCTEcountries, due to decreases in peak loadsand capacity additions. However, anddespite the lower consumption, earlyJanuary 2009 exceptional cold threatenedthe generation/consumption balance. Forexample, France had a 92,400 MW recordelectricity peak. It had to import around1,000 MW during a few consecutive days(mainly from Germany). The situationwould have been more tense in a “normal”period and RTE, the French TSO,estimates that with “normal demand”,1,000 MW more imports would have beenneeded.

In the future, RTE foresees that peaks willbe sharper and higher in France so tensesituations could still happen despite ageneral improvement linked to lowerconsumption and past investments.

In the longer term, the impact of newtechnologies will have to be included indemand forecast. For example, the ThirdLegislative Package (adopted in April2009) recommends that a target of 80% ofthe population will be provided withintelligent meters by 2020. This legislationshould push more European countries tomake this investment compulsory, as existsin Sweden. Smart meters, in conjunctionwith demand side management Utilitiesprograms should lead to significantsavings in electricity consumption, peakpower and CO2 emissions. A Capgeministudy8 shows that dynamic programslaunched in the EU-159 countries couldsave 200 TWh per year by 2020 (whichrepresents the combined residentialconsumption of Spain and Germany) and100 million tons of CO2 (a significantshare of the gap to be filled between nowand 2020 to reach the EU objectives).

A Strategic Overview of the European Energy Markets 7

Energy, Utilities and Chemicals the way we see it

7 Percentage of difference between real generation capacity – which integrates non-usable and unavailable generation capacities – and peak load

8 The Capgemini Point of View “Demand Response: a decisive breakthrough for Europe” is available athttp://www.capgemini.com/resources/thought_leadership/demand_response_a_decisive_breakthrough_for_europe/

9 EU 15: original 15 Members of the European Union until May 1, 2004: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, theNetherlands, Portugal, Spain, Sweden and the UK.

hundreds of millions of euros (a positivetrend compared to previous years). Inaddition to physical capacity extensions,increased information transparency andprobably the creation of a European gasprice index are key enablers for quickdecisions and acts during supply threats.It has to be noted that, after longnegotiations with the EuropeanCommission, GDF SUEZ agreed in July2009 to limit its reserved gas pipelinecapacity for imports into France to lessthan half by 2014 from two-thirds. Thisdecision will contribute to opening themarket to new entrants and to increasingits fluidity.

� On the legislative front, a mild version ofthe EU Third Legislative Package wasadopted in April 2009. It includes, inaddition to the preferred option,Ownership Unbundling, twoalternatives: the Independent SystemOperator (ISO), and the IndependentTransmission Operator (ITO). In thelatter option, which was supported byGermany and France, TSOs are allowedto remain part of the integrated Utilityprovided they comply with strong “armlength” rules with their Utilityshareholder and accept that the regulatorhas a powerful role in investmentdecisions. As a consequence, this“sweetened” ITO solution, could proveto be very difficult to operate. The ThirdLegislative Package also establishes anEU Agency for the Cooperation ofEnergy Regulators (ACER), with powersto adopt binding decisions on cross-border issues and on the EU internalmarket.

Climate change: what real progress?The “Climate-Energy” Package wasadopted by the EU on April 6, 2009

By 2020, the EU is committed to reducingits overall Greenhouse Gas (GHG)emissions to at least 20% below the 1990levels, to increasing the share of renewablesin energy use to 20% and to reduce energyconsumption by 20%.

For the sectors covered by ETS (mainlyenergy, Utilities, chemicals and largemanufacturing firms) free allocation of

emission will be progressively replaced byrights auctioning, with a 100% auctioningby 2020. However, for the powergeneration sector, the auctioning of 100%of allowances will start in 2013. Thesecertificates will then have a “real” priceand windfall Utilities profits, as reportedin 2007, should disappear.

Is the EU 3x20 objective likely to bereached in 2020?

Even if in 2008 and probably in 2009 weshould observe a decrease in CO2emissions, these decreases are linked to acyclical effect – the economic crisis – andnot a structural one. Structural effects willappear when buildings and transportationrelated policies and regulations in favor ofenergy savings and CO2 emissionsreduction will start having tangible effects.In this respect 2020 is a short-timehorizon for the renovation of a significantportion of the existing buildings, and forthe switch of the present car fleet toelectrical cars.So, we are not yet on the right track andmore actions should take place.

Before listing them, let’s look at theinternational situation.

The international situation is unclear

A recent Energy InformationAdministration (EIA) report10 shows thatby 2030, worldwide energy consumptionshould increase by 44% and CO2emissions by 39%. With continuedheavy reliance on fossil fuels expectedfor most of the non-OECD economies,much of the increase in CO2 emissions isprojected to occur among thedeveloping, non-OECD nations. In 2006,non-OECD emissions exceeded OECDemissions by 14%. In 2030, however,non-OECD emissions are projected toexceed OECD emissions by 77%.

As atmospheric pollution is global, it iscrucial that commitments on CO2emission limitations be taken by otherlarge emitting regions of the world. If not,European efforts will be a drop of water inthe ocean and their cost could jeopardizeEurope’s development.

8

pipelines. The Nabucco pipeline is theEU’s flagship project. Its expected supplycapacity should amount to 6% of annualEuropean consumption and it is plannedto start operations in 2014. However, itis encountering a lot of difficulties.In addition to financing andconstruction hurdles, the greatestchallenge for Nabucco is the competingSouth Stream project sponsored byGazprom and Eni (Italy) and now otherEU Member States companies are gettinginvolved (including France’s EDF). Inorder to fill in the South Stream,Gazprom has extended its importing gascontracts from some of those CentralAsian countries, notably Azerbaijan, andis financing regional pipelines (orpipeline extensions) to enable more gasfrom these countries to flow to Russia.So today Nabucco’s main challenge is tosecure its gas supply as Central Asia willnot be able to provide enough gas. Iranand Iraq gas could be additionalresources to those providers, but thepresent political situation and securityissues make these alternatives uncertain.

This situation illustrates the difficulty forEU Member States to switch from nationalsecurity of supply concerns to a Europe-wide view and for Europe to implement areal European energy policy.

There has been tangible progresstowards a European single market

A fluid and transparent market favors crossborder exchanges thus increasing solidaritybetween Member States and improvingsecurity of supply for each of them.

� In 2008, electricity exchanges haveincreased thanks to new interconnectorsand wholesale markets have started toconsolidate (e.g. French Powernext andGerman EEX started their commonoperations in July 2009). Other actionssuch as enhancing market couplings andcoordinating and optimizing gridoperations (e.g. Coreso) have alsocontributed to progress towards a singleEuropean electricity market.

� To decrease the numerous physicalcongestions, investments in the gasmarket were budgeted in 2008 for

10 International Energy Outlook 2009, EIA, May 2009

projects were to go forward, they wouldrepresent the annual avoidance of 80million tons of CO2 which is less than4% of the total ETS allowances (thatamount to two billion tons). Let’s notethat in the EU May 2009 energyinfrastructure investment plan, €1.050million was allocated for sevenadditional CCS projects. In addition tothese demonstration or pilot projects,research efforts on the process itself areneeded. A framework has also to bedeveloped regarding the legal status ofthe CO2 storage and, as there are alreadynegative local reactions towards the CO2storage facilities, communicationschemes for neighborhood citizens haveto be worked on.

� Energy savings: This is a “no brainer” as ithelps to decrease CO2 emissions and toincrease security of supply. However,related actions require a long termpolitical will, significant investments anda dynamic participation of citizens.

These actions are multifaceted andinclude legislation decisions, companies’actions in industrial and tertiary sectors,Research & Development efforts as wellas individual’s behavioral changes

• Legislation has to provide for maturetechnologies deployment. The EU’sdecision to withdraw progressivelyincandescent bubbles from the marketand its recommendation to deploysmart meters for 80% of thepopulation by 2020 are goodexamples. At the countries level,legislations have been adopted toreduce energy consumption and CO2emissions. For example in France, theGrenelle de l’environment11 comprisesvarious measures to improve buildinginsulation (400,000 homes per year atcruising speed), to reduce the cars’ CO2emissions with a “green sticker” (inorder to meet the European standard of120 g/km in 2012) and to encouragethe use of rail transportation.

• A lot has already been done in theindustrial sector. In OECD countries,

the industrial energy intensity has beendivided by two over the last 35 yearsand is at 0.0712. This compares withmuch higher figures in developingcountries – 0.63 in China and 1.23 inRussia – showing that these countrieshave a lot of room for improvement.

• In the computer industry majorprogress in computer consumption(leading to up to 40% reduction) andrecycling has been made by IThardware manufacturers. Additional30% energy savings can be achieved byinstalling and running specific softwarethat, for example, switches thecomputer to standby after it has beenidle for an hour. Lastly, Internetdevelopment and video-conferencingenable working from home which cutsdown on travel.

• More needs to be done in the tertiarysector by decreasing the building’senergy consumption. This is a majorpoint, as worldwide buildings’(residential and commercial) potentialsavings represent today’s globaltransportation sector energyconsumption!

• The proposed EU Public PrivatePartnership on buildings is a laudableattempt to reach the implementingintermediaries (construction industry,and architects) and achieve countryrelevant energy efficiency methods andstandards. These buildings could beable to generate and store energy, thusavoiding peak demands by shiftingloads.

• Efforts focusing at the optimization ofcities’ energy systems, i.e. integrationand adjustment of energy productionand consumption are necessary.Control, monitoring and supervisionare needed for which Information andCommunication Technologies (ICT)technologies are indispensable at thetechnology as well as at the systemlevel. On both sides of the Atlantic,innovative smart cities projects arelaunched: in Freiburg (Germany),

With the exception of Japan’s new primeminister’s promise to make ambitious cutsin his country’s GHG emissions, the recentnews from this front is not positive:

• In August 2009 the AustralianGovernment’s proposed CarbonPollution Reduction Scheme failed topass in a Senate vote;

• The election of President Barak Obamaraised hopes that the US would adoptbinding limitations on CO2 emissions,however the Waxman-Markey Energylaw that includes a cap and trade systemwas adopted only with a thin majorityby Congress and should encounter a lotof difficulties in the Senate. If the law isnot passed by December 2009, the USwill have additional difficulties, duringthe Copenhagen summit, to convincethe developing countries to adoptquantitative GHG emissions limitations.

In any case these “post 2012 KyotoProtocol” discussions will be very difficultas developing countries, notably Chinaand India, want as counterparts not onlystrong commitments on Westerncountries’ reductions but also moretechnology transfers and funding. In anutshell, they are reluctant to sacrificetheir economic development, needed fortheir social cohesion, to strong CO2emission reduction objectives.

What, in addition, can be done to meetEU objectives?

� Electricity generation: The contribution ofrenewable and nuclear plants to a lowercarbon energy mix has already beentouched on. Coal is an abundant energyresource with around 150 years ofreserves (compared to oil reservesestimated at around 60 years) and wellspread geographically.

It is thus important to invest in CarbonCapture and Storage (CCS) research anddemonstration projects in order to lowersignificantly the cost of this technology.In 2008, CCS activities in Europe haveincreased but obviously more needs tobe done: even if all the 50 reported

Energy, Utilities and Chemicals the way we see it

A Strategic Overview of the European Energy Markets 9

11 The “Grenelle de l’Environnement” is a Round Table on environmental issues, instigated by the President of France, Nicolas Sarkozy, to define the key points ofgovernment policy on ecological and sustainable development issues for the coming five years.More information are available at http://www.legrenelle-environnement.fr

12 Measured in tons of equivalent oil per US$1,000 GDP

BedZed (UK) and Malmö (Sweden) inEurope, and in Boulder and Miami(US). These projects usually gather themunicipalities, technology and ICTfirms and the local Utilities.

• Technologies: new energy technologieshave a pivotal role to play in ensuringEurope meets its targets. The EU’sStrategic Energy Technology Plan (SET-Plan) involves setting out a long-termenergy research, demonstration andinnovation agenda for Europe. TheSeventh Framework Program forResearch and TechnologicalDevelopment (FP7) paves the way forimplementing the objectives of theSET-Plan. It runs from 2007 to 2013,and a €2.35 billion budget isdedicated to non-nuclear energyresearch. Despite these efforts, andgiven the huge challenges that lieahead to transform the energy sectorinto a low carbon sector, the presentEuropean Research & Development

and Demonstration effort pales incomparison to the

recent announcements and newinitiatives by the US, Japan, China andKorea.

• Individual behaviors: It is extremelyimportant to give the customers theright price signals and reward them fortheir energy conservation behaviorchanges.

In addition to increasing the level andquality of information on energy realissues, it is important to give tocustomers:

� Tools (as smart metering, energyaudits, white products energy relatedlabels…) enabling them to knowbetter their daily energyconsumption level;

� The right price signals that reflect thesupply and demand situation andthe competition. This implieseliminating artificial tariffs that don’treflect the energy market conditions;

� Price rewarding systems for lowerconsumptions during peak hourswhen electricity is provided by gasfired CO2 emitting stations. We

mentioned above the largesavings

Conclusion

After the crisis, in the developedcountries, slow recovery and energy andCO2 saving measures will probably modifythe way companies and individualsconsume energy.

On a global level, it is more than likelythat a large part of the previous problemsrelated to demographic growth and risingstandards of living will re-emerge. Toconvince ourselves, we only have toremember that annual population growthin developing countries is 1.2% and thattheir annual energy consumption isexpected to increase more (by 1.7%)because of standard of livingimprovement.

This is why it is absolutely vital that thereductions in energy consumption in thedeveloped countries aim at compensatingfor the increase in the developingcountries.

It is also necessary, during the crisis, tocontinue to invest not only in demandmanagement, energy infrastructures butalso in achieving the right energyproduction mix. It is the duty ofgovernments to provide the rightlegislative framework and financialincentives to make sure that theseinvestments continue. Otherwise, becauseelectricity and gas are heavy industriesrequiring long periods of time to buildnew infrastructures, the problems whichexisted prior to the crisis will beexacerbated further.

enabled by dynamic demandresponse Utilities programs;

� CO2 taxes are also a way to pushcustomers to buy or use less CO2rich products. These taxes havealready been implemented in severalEuropean countries includingSweden, Denmark, Switzerland andFinland as well as in Canada.According to some economists, theyhave enabled a “green industry”growth and contributed for 0.5% tothe countries economic growth.Their effectiveness is howevercontroversial as delocalization ofpolluting industrial activities arepartly responsible for the observedCO2 savings. In 2010, a carbon taxwill be imposed in France on fossilfuel products. The tax will be basedinitially on a price of €17/tCO2 andall the revenues generated by thisnew tax will be redistributed to theconsumers.

• On the longer term, we all need torethink our economic model and ourlifestyle. A few years ago somedeveloping countries announced thatthey would build their own economicgrowth model adapted to their historyand culture. It is disappointing to seethat adopting the Western lifestyle andaccessing to the same type of livingstandards is now the common goal ofmany people in these countries.

In our Western lifestyle, success ismeasured by the ability to buy a largerhouse, to drive a big car, to flyintensively around the world, toacquire a lot of manufactured goodsand to consume a lot of energyassociated with high CO2 emissions.These individual incentives have tochange and a more frugal, perhapsmore intellectual, lifestyle should beconsidered as a goal.

Energy, Utilities and Chemicals the way we see it

A Strategic Overview of the European Energy Markets 11

Colette LewinerGlobal Leader of Energy,

Utilities and Chemicals Sector at Capgemini

Paris, October 20, 2009

Country Abbrevations and Energy Authorities/Team and Authors 97

Infrastructures and RegulatedActivitiesElectricity TransmissionJagtar Basijagtar.basi@capgemini.com

Electricity DistributionPhilippe Chanelphilippe.chanel@capgemini.com

Gas TransmissionAntonio Michelonantonio.michelon@capgemini.com

Gas StorageChristian Sgardchristian.sgard@capgemini.com

Florent Andrillonflorent.andrillon@capgemini.com

Gas DistributionPhilippe Chanelphilippe.chanel@capgemini.com

Sustainable Energy and ClimateChangeAlain Chardonalain.chardon@capgemini.com

Oskar Alménoskar.almen@capgemini.com

Strategy and FinanceFrançois-Xavier Chambrefrancois-xavier.chambre@capgemini.com

John Honoré+33 1 42 13 51 55john.honore@sgcib.com

Regional FocusBelgiumPierre Lorquetpierre.lorquet@capgemini.com

DenmarkJacob Stagejacob.stage@capgemini.com

FranceVincent Escoffiervincent.escoffier@capgemini.com

Germany/SwitzerlandJan Strobeljan.strobel@capgemini.com

ItalyAntonio Michelonantonio.michelon@capgemini.com

NetherlandsSylvia Harskampsylvia.harskamp@capgemini.com

NorwayMagnus Häggströmmagnus.haggstrom@capgemini.com

PortugalJoão Torresjoao.torres@capgemini.com

SlovakiaMichal Gécimichal.geci@capgemini.com

SpainOscar Barrero Giloscar.barrero-gil@capgemini.com

SwedenOskar Alménoskar.almen@capgemini.com

UKAlistair Greenalistair.green@capgemini.com

Acknowledgements to Alain Bourguignon,Sophie Delamarche, Alain Désandré,Bettina Grötschel, Selma Guignard, KatiaHoupert, Subhash Jha, AlexandreLeondaridis, Fabrice Mendez, JosephMocachen, Berend Olde Rikkert, SundharParthasarathy, Nicolas Roux, JessicaStrömbäck, and Stéphane Sun.

Team and Authors

Research LeaderPhilippe David+33 1 49 00 22 11philippe.david@capgemini.com

Core TeamSopha Ang+33 1 49 00 22 30sopha.ang@capgemini.com

Philippe Coquet+33 1 49 00 22 09philippe.coquet@capgemini.com

Switching insightsVaasaETTDr Philip Lewis+358 40 529 5852philip.lewis@vaasaett.com

European Energy Policy insightsMr Christophe Barthélémy+33 1 47 38 55 00christophe.barthelemy@cms-bfl.com

Competitive PowerGenerationAna-Maria Popaana-maria.popa@capgemini.com

Arnault Prêtetarnault.pretet@capgemini.com

Electricity Wholesale MarketsSébastien Chiriésebastien.chirie@capgemini.com

Electricity Retail MarketsVincent Escoffiervincent.escoffier@capgemini.com

Competitive GasUpstream GasFlorent Andrillonflorent.andrillon@capgemini.com

LNGNick Sharmanick.sharma@capgemini.com

Gas Wholesale MarketsSébastien Chiriésebastien.chirie@capgemini.com

Gas Retail MarketsAntonio Michelonantonio.michelon@capgemini.com

About CMS Bureau Francis Lefebvre

CMS Bureau Francis Lefebvre is a memberof CMS, the organization of 9 majorindependent European law firms providingbusinesses with legal and tax servicesacross Europe and beyond. Operating in48 business centres around the world,CMS has over 595 partners, more than2,240 legal and tax advisers and a totalcomplement of over 4,600 staff.Themembers of CMS are in association withThe Levant Lawyers with offices in Beirut,Abu Dhabi, Dubai and Kuwait.

More information at info@cms-bfl.com andwww.cms-bfl.com

98

About Société Générale

Société Générale Global Research teamscomprise 200 professionals includingeconomists, rates, forex and commoditiesstrategists, credit and equity analysts andstrategists, quantitative and derivativesspecialists. Based in London, Paris, NewYork, Tokyo and Hong Kong they combinetheir expertise to offer:

• A unique cross-asset approach

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More information atwww.sgresearch.socgen.com

About VaasaETT Global Energy ThinkTank

VaasaETT Global Energy Think-Tank is aninnovative provider of collaborativeexpertise and solutions to the energy andutilities industry, through its network ofthousands of senior executives, officials,researchers and other experts that areknown and trusted personally. Value isprovided to partners through the synergyof Interactive Forums and CollaborativeProjects. The Think-Tank focuses broadlyon strategic business, market, innovationand regulatory issues, and is worldrenowned for its expertise in fields such asCustomer Psychology & Behaviour, SmartMetering and Demand Response.

More information at www.vaasaett.com

www.capgemini.com/energy

Capgemini, one of theworld's foremost providers of

consulting, technology and outsourcingservices, enables its clients to transformand perform through technologies.

Capgemini provides its clients withinsights and capabilities that boost theirfreedom to achieve superior resultsthrough a unique way of working, theCollaborative Business Experience™.The Group relies on its global deliverymodel called Rightshore®, which aimsto get the right balance of the best talentfrom multiple locations, working as oneteam to create and deliver the optimumsolution for clients. Present in more than30 countries, Capgemini reported 2008

global revenues of EUR 8.7 billion andemploys over 90,000 people worldwide.

With 1.2 billion euros revenue in 2008and 12,000+ dedicated consultantsengaged in Energy, Utilities andChemicals projects across Europe, NorthAmerica and Asia Pacific, Capgemini'sEnergy, Utilities & Chemicals GlobalSector serves the business consulting andinformation technology needs of many ofthe world’s largest players of thisindustry.

More information about our services,offices and research is available atwww.capgemini.com/energy

About Capgeminiand the Collaborative Business Experience®

Copyright © 2009 Capgemini. All rights reserved.

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