The role of the CO2 price for

investment decisions in the energy sector

Dr. Stefan UlreichE.ON AGGraz, 25. November 2010

2

Industrialised nations: Transformation of the energy system Problem: Financing

Growth regions: Construction of the energy system Problem: Making energy available

Poor regions: Fight against energy poverty Problem: instable framework

Solution for all regions: Technology & energy efficiency

World Energy Congress 2010:Energy is a common issue in all countries worldwide

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• Further increase of the global energy demand from 32% to 40% until 2030 expected

• Fossil fuels will play an important role globally for decades to come

• Scarcity of capital the more decisive bottleneck than reserves for crude oil, natural gas and coal

• Reserves of fossil fuels substantially greater compared to previous estimates – mainly due to shale gas

• Access to affordable energy and energy as a driver for economic growth, more in the focus than climate change

• The expected outcome of Cancun will not deliver a binding climate change treaty

Energy demand is growing: Global answer are fossil sources

4

Number of people in millionswithout adequate access to electricity

Access to affordable energy is decisiveto reach the millennium goals

116

805

683

851,495

466

Source: International Energy Agency 2009 World Energy Outlook and The World Bank, 2010.

3.6 billion people have no or only limitedaccess to electricity

5

Coal: The World’s Fastest Growing Fuel for the Past Decade

Change in Global Energy ConsumptionChange in Global Energy Consumption

Source: BP Statistical Review of World Energy, June 2010.

0 5 10 15 20 25 30 35 40 45 50

46%1999

– 2

009

Ch

ang

e

27%

10%

25%

7%

Coal

Hydro

Oil

Natural Gas

Nuclear

6

U.S. growth presented in short tons. Source: World Energy Outlook 2009, International Energy Agency; Annual Energy Outlook Forecasts, Energy Information Administration; Peabody analysis.

Developing Asia = 90% of Long-Term Global Coal DemandDeveloping Asia = 90% of Long-Term Global Coal Demand

+690

+2,210+150

+50

+110

+380

Global Coal Use Expected to Rise 53% by 2030

Growth 2007 - 2030 (Tonnes in Millions)

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Zero Out Coal? No Energy Alternative Can Come Close

SOLAR*SOLAR*1,800 x Current Solar Generation

WIND*WIND*2.5 Million Wind Turbines

NUCLEARNUCLEAR1,150 Nuclear PlantsNATURAL GASNATURAL GAS

70 tcf = 3X Russia’s Production HYDROHYDRO

2,250 Dams

To Replace Coal’s Contribution, The World Would Need…To Replace Coal’s Contribution, The World Would Need…

Source: International Energy Agency, World Energy Outlook 2009.*Requires backup baseload generation for cloudy and calm periods.

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postponed

accelerated

By 2 years

By 2 years

2008 2009

increaseddecreasedby more than 20% 0 % By more than 20%

Timing

Volume

Supplycapacity

EnvironmentalimprovementConsumption

capacity

RD&D

Biggest dropin the

sentiment:Consumption

Capacity

WEC Europe Survey

9

The “Energy Trilemma” is here to stay for the long-term - renewables and low-carbon focus are sustainable trends Energy policy priorities keep changing but

evolve around 3 basic objectives Strong renewables trend supported by

both security of supply and continued drive for decarbonisation

Next cycle already apparent as regulatory interventions reflect stronger ambitions for cost effectiveness of RES growth

The Energy

Trilemma

CostsSecurity of

Supply

Carbon

LiberalisationEU Market Integration

Ener

gy E

ffici

ency

EUET

S

Renewables

Market fram

ework

Infrastructure

The “trilemma” of energy policy

Current focus is on integration of renewables and strengthening of carbon policy, at lowest possible cost to the public and customers

10

0

500

1000

1500

2000

2500

3000

3500

4000

Wind offshore

Nuclear

Coal+CCS

CCGT

Coal

Manage new risk profile of investments

High-tech technologies needed to tackle climate change: nuclear, coal + CCS, wind, solar (+biomass)

Higher capex Higher sensitivity to discount

rate (~project risk): bigger benefit of clear energy policy (small risk reduction -> big cost saving)

Higher sensitivity to new-build project performance, sites and skills

Lower variable opex -> less exposure to fuel supply, but more significance of operational performance, availability and flexibility

Low-carbon options have a different risk and reward profile

5000

CSP

Cost comparison (new build, €/kW)

Source: E.ON estimates

Higher capex means policy becomes more important, as do sites and skills

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Low carbon energy systems will require immense capex and effort in technology development and testing Not only low carbon

generation and large scale storage, but also infrastructure requires high upfront capex

Infrastructure investments to avoid grid congestions and/or curtailment both on distribution and transmission level

Order of magnitude: EC estimates one trillion € energy investment 2020, where 200bn€ only for power and gas grids

(Intermittent) Renewables

National transport and inter-connection

Conventional large-scaleplants

Energy efficiency

Large-scalepower storage

Smart grid

Decentralisedgeneration

e-mobility& other DSM

Options for mitigation of intermittency will be 1) capital-intensive, and 2) in competition with each other -> markets will be best at

finding the right solutions

Low carbon playersNuclear, CCGT,

CCS

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Developing deployable options in all key low-carbon generation and system technologies

Renewables Nuclear/CCS Global

leader in offshore 2010

Further growth in CSP/Biomass as dispatchable RES options

Large-scale CCS demo project

Nuclear options UKStorage Demand-side

management Strong pumped hydro storage pipeline

E-mobility / V2G field tests

CAES etc. RD&D

Smart meter products introduced and test projects EU-wide

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E.ON will achieve a >50% reduction of specific CO2-emissions in Europe already by 2020

Setting clear and ambitious targets

E.ON’s CO2 emissions in Europe [g/kWh]

360310

630

0

200

400

600

800>50%

CCGT referen

ce

20202

19901

1 Basis for 1990 was adjusted to reflect recent divestments & acquisitions 2 An extension of nuclear lifetimes for Germany is assumed

Clear commitment

Intentional shift of original 2030 E.ON target to 2020 for European portfolio

Explicit commitment and evident contribution towards the climate and energy targets set forth by the EU

Target level in 2020 far below carbon intensity of modern gas-fired power stations