Engaging Power Opportunities within the Benelux

Weero Koster, Partner, Norton Rose LLP Amsterdam

David Haverbeke, Partner, Lydian Lawyers Brussels

European Power Generation StrategyPower Project Financing SummitPrague, 1 December 2009

TABLE OF CONTENTS1. Main characteristics of the Benelux Power Markets

- The Netherlands- Belgium- Luxemburg

2. Cross-border Integration and Regional Initiatives- Third Energy Package- Pentalateral Forum- Interconnections

3. Regulatory Framework for Investments in Power- Main provisions in the Netherlands- Main provisions in Belgium

4. Approach and Methodology for Investments Projects- Usual due diligence processes- Specifications for power opportunities- Specifications for the Benelux Power Market

5. Conclusions2

1. Main Characteristics of the Benelux Power Markets The Netherlands Bruto Produced Energy: 2.843 PJ

Gas: 89,48% Combustible, Renewables and Waste: 5,24% Crude oil: 3,27% Electricity: 0,56% Nuclear: 1,41%

Energy import: 1.381 PJ Consumed Energy: 2.849,74 PJ Consumed Electricity: 427,38 PJ / 123.508 mln kWh Consumed Gas: 830,77 PJ / 45.935 mln m³

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1. Main Characteristics of the Benelux Power Markets The Netherlands

Increasing importance gas import, slow depletion of Slochteren gas field

Dash for Gas: WBL/Nordstream/LNG/Bergermeer

Climate Change Target (Schoon en zuinig): 30% CO2 reduction by 2020 compared to 1990 20% renewable energy by 2020

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1. Main Characteristics of the Benelux Power Markets

The Netherlands Increasing focus on renewable energy (wind, CHP,

biomass), special focus on offshore windenergy

Capacity on grid? Congestion management / Bill on priority for renewables (voorrang voor duurzaam)

Position conventional energy sources increasingly difficult

But: only renewable energy is not enough

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1. Main Characteristics of the Benelux Power Markets The Netherlands

CO2 emission reduction via: ETS/CDM CCS (Barendrecht) Nuclear energy

Plans for 4 new conventional power plants Eemshaven/Maasvlakte: Coal fired power

plants Parliamentary debate on separate emission cap

for coals power plants CCS + Biomass

Eemshaven: Multi-fuel (Gas) power plant Sloe: Gas fired power plant

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1. Main Characteristics of the Benelux Power Markets Belgium

Market profile Production installation capacity: 15 633,9 MW (2008)

Bruto Produced Energy: 14.36 Mtoe (2007) Nuclear energy: 79% (2006) Coal and Peat: 0.1% Renewable and recovered fuels: 20% Heat: 0.4% Hydro: 0.2% Geothermal, solar: 0.2%

Energy import: 51.87 Mtoe (2007) Consumed electricity: 91.54 TWh (2007)

(Key World Energy Statistics 2009, www.ier.org)

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1. Main Characteristics of the Benelux Power Markets Belgium

Not enough installed production capacity Increasing import of power

Nucleair power generation Main source of power Legal uncertainty on the life extension of nucleair power plants Emission reduction

Gas Large scale CCGT projects ongoing

Coal Non-efficient coal plants => Reconversion to new ‘state of art’ coal technologies (UHFC

and IGCC)8

1. Main Characteristics of the Benelux Power Markets Belgium

Renewable Energy (13% in 2020) Off shore wind parks under development Optimalisation of the limited potential Promotion of renewable energy

Green Certificates Obligated Certificates at minimum prices Undertakings trade certificates when they have more or

less certificates than their quotum obligation The certificate prices are quite stable and fit close to the

penalty tariff for each missing certificate Ecology premium Increased investment deduction

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1. Main Characteristics of the Benelux Power Markets Luxembourg

Market profile Production installation capacity: 127 MW (2001) Produced energy: 0.08 Mtoe (2007)

Hydro: 79 % (2006) Geothermal, solar,…: 12% Combustible, renewables and waste: 9%

Energy Import: 4.54 Mtoe (2007) Consumed electricity: 7.83 TWh (in 2007)

(Key World Energy Statistics 2009, www.ier.org)

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2. Cross-border Integration and Regional Initiatives Third Energy Package

Proposals for

A new Electricity and Gas Directive (amending and completing the existing Electricity Directive 2003/54 and Gas Directive 2003/55)

A new Electricity and Gas Regulation (amending and completing the existing Electricity Regulation 1228/03 and Gas Regulation 1775/05)

Establishment of an Agency for Cooperation of Energy Regulators

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2. Cross-border Integration and Regional Initiatives Third Energy Package

Purpose: effective unbundling of network and supply activities removing regulatory gaps (in particular for cross border

issues) addressing market concentration and barriers to entry increasing transparency in market operations

Especially by: Extending competencies and obligations of the National

Regulatory Authorities (NRAs)

Into force in September 2009 (Regulations do not however all apply yet)

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2. Cross-border Integration and Regional Initiatives Third Energy Package

Third Package Implementation in the Netherlands Full ownership unbundling as per 1 January 2011 Level playing field clause EU M&A (Essent, Nuon, more to come?)

Climate Change Package 17 December 2008: New directive on the promotion of

the use of energy from renewable sources Target for the Netherlands:

20% of energy consumption from renewables by 2020 14% of transport fuel from biofuels

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2. Cross-border Integration and Regional Initiatives Third Energy Package

Implementation in the Netherlands Decree Biofuels (besluit biobrandstoffen wegverkeer

2007): Amendement of 6 May 2009: to reduce the percentages of

mixing bio-fuels, from 4.5% to 3.75% for 2009 and from 5.75% to 4% for 2010

Amendement of 8 October 2009: to create possibility to use correction factor (wegingsfactor) for certain categories of biofuels

30 June 2010: Deadline for EU states to present National Renewable Energy Action Plans

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2. Cross-border Integration and Regional Initiatives Third Energy Package

Gas:

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Emden

Oude Staten-Zijl

Julianadorp

Vlieghuis

Winterswijk

Zevernaar

Bocholtz

‘s Gravenvoeren

Hilvarenbeek

Obbicht

Zandvliet

Zelzate

2. Cross-border Integration and Regional Initiatives Third Energy Package

Electricity:

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2. Cross-border Integration and Regional Initiatives Third Energy Package

Electricity: Interconnectors (BritNed / NorNed) Plans for upgrading high voltage grids in:

Maasvlakte (Westland) Northern part of the Netherlands

Gas: Plans for upgrading gas transport net in Emden Gas storage facilities in Germany:

Epe (Essent, Nuon, Eneco, EON) Etzel (EDF, EON)

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2. Cross-border Integration and Regional Initiatives Pentalateral Forum

Temporarily and intergovernmental initiative (Benelux – France – Germany)

MSs part of the Central Western Electricity Regional Initiative North West Gas Regional Initiative (except Luxembourg)

Purpose:

Improve coordination in the field of cross-border exchange

Give political backing to a process of regional integration of electricity markets towards a European single energy market

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2. Cross-border Integration and Regional Initiatives Interconnections

Agreement gas interconnection Fluxys (Belgium) – Zebra (Netherlands)

Transit services by Fluxys (Belgium): Natural gas from ‘s Gravenvoeren (Netherlands) to Blarignies (France)

Additional long term transit capacity to Luxembourg?

=> Opportunity to strengthen supply security Luxembourg

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3. Regulatory Framework for Investments in Power Main provisions in the Netherlands

SDE 2010: State subsidies renewable energy Starting from end of January 2010 to 1 November 2010 Strong focus on offshore wind energy

Total subsidy ceilings in 2010 is € 1955 mio (excl. Offshore wind), allocation: Onshore wind (€ 937 mio); Biomass electricity (€ 380 mio) / gas (€ 180 mio); Solar (€ 93 mio); Sewage treatment facilities or landfill gases electricity

(€ 13 mio) / gas (€ 24 mio); Waste combustion (€ 238 mio); and Hydro power (€ 90 mio)

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3. Regulatory Framework for Investments in Power Main provisions in the Netherlands

In 2010 SDE also for offshore wind energy: Decree of 18 November 2009 fast tracks subsidies for offshore

wind Subsidy tender starting in January 2010 Total of 950MW and a ceiling of € 5.3 billion Distinction on distance from shore

Expirement regulation offshore wind: Ministerial arrangements of 18 November 2009 Total of € 9 mio available - up to € 4.5 mio per application

Co-firing of biomass Temporary subsidized via SDE Minster of Economic Affairs: plans to make it obligatory

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3. Regulatory Framework for Investments in Power Main provisions in the Netherlands

Acceleration administrative procedures by: coordination of spatial planning procedures energy projects of

national importance interim exemption from certain procedural steps for

renewables (Recovery Act) – implementation delayed

State guarantee loans (Garantie ondernemingsfinanciering) State funded crisis recovery program State guarantee to banks for 50% of the amount lend to large

companies Also for renewable energy projects Up to a loan of EUR 50 million per company

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3. Regulatory Framework for Investments in Power Main provisions in Belgium

Act of 29 April 1999 regarding the organisation of the electricity market

Royal Decree of 11 October 2000 regarding the allocation of individual permits for the construction of installations for energy production

Nucleair Phase-Out act of 11 April 2003 and current revision

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4. Approach and Methodology for Investment Projects Usual due diligence processes

Project financing? Identifying main risks - risks allocation:

Regulatory (REB -> MEP -> SDE, within 5-6yrs) Financing – Credit Crunch Technology (Noordzee wind/ Amalia) Off-take Connectivity Environment - Nature conservation Site contracts (ownership/land lease)

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4. Approach and Methodology for Investment Projects Usual due diligence processes

Main Agreements/Arrangements: Off-take agreement: ‘pay-if-offered’, ‘take-or-pay’ Connection & transmission agreement: ‘congestion

management’, Subsidies: SDE, EIA, VAMIL Permits Site contracts

Examples: Renewable energy project - wind park LNG Interconnectors

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4. Approach and Methodology for Investment Projects

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Shareholders agreement

(constructor/turbine

manufacturer)

Consumer PPA

Subsidy SDE

consumerSponsor B

Connection & transmission agreement

PermitsSite lease contracts

Licence agreement

Project SPV

Financing & Securities

Sponsor A

EPC contracts

4. Approach and Methodology for Investment Projects Specifications for power opportunities

Power opportunities Power grid:

Smart grid Interconnectors (BritNed)

Power generation: Renewables (specifically offshore wind) CCS Nuclear energy

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