Challenges for a Spanish utility in the procurement of … for a Spanish utility in the procurement...

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IBERDROLA

July 2008

Challenges for a Spanish utility in the procurement of CO2 emissions

Brussels 7th October 2011

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Agenda

Current situation: Uncertainties

Conclusions

Iberdrola’s overview

Iberdrola’s approach

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Iberdrola in the world

Key operating data

Production (TWh)

Customers

154

27,7 Mio

Employees 29 641

Installed capacity (MW) 44 991

Distributed electricity (TWh) 203 Gas Supplies (TWh) 157

Generation portfolio

Renewables (MW)

Coal (MW)

12 532

4 709

Cogen (MW) 1 229

Hydro (MW) 9 892

Combined cycles (MW) 13 128 Nuclear (MW) 3 344

Total (MW) 44 991

48% 25%

18%

9%

Spain

Latin America

United States

United Kingdom

Production by geographical areas

Fuel-Oil (MW) 157

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IBERDROLA in Spain

Installed Capacity Main figures

2010

Installed capacity

Electrical power distributed

Power generation

Gas supplies

Customers

Employees

28 GW

72,4 TWh

102 TWh

49 TWh

9 600

9,3 Mill.

Hydro 8 847 MW

Nuclear 3 344 MW

Coal-fired 1 253 MW

Oil-fired 157 MW

CHP 399 MW

CCGT 5 893 MW

Renewables 5 696 MW

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IBERDROLA owns and operates a well-balanced Power Plant Portfolio

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IBERDROLA in Spain

72 TWh

79%

Emission free

Nuclear

Hydro

CCGT

Cogen Coal

Renewables

Iberdrola in Spain is leader on environmental efficiency with more than half of its capacity and production emission-free

2010

6 6

Iberdrola in Spain

Emission rate 2010

Rest of Spanish competitors*

Iberdrola

g CO2/kWh

164

389

x 2.4

Emissions

2010

MtonCO2

15

6

2002

- 60% +2 TWh

*Iberdrola’s calculation

After an ambitious investment plan launched in 2002

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CO2 Emissions Reduction 2020

gr CO2/kWh

2007 2020E

436

275 309

IEA 450 ppm Scenario for EU

Iberdrola’s Plan 220

-30%

-30%

-20%

...and has a plan to reduce 30% of their emissions in 2020, 20% more than the demanding IEA 450 Scenario for the European Union

Iberdrola is one of the cleanest companies with emissions 30% lower than European average…

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Iberdrola’s Generation Portfolio Strategy

2008 2020E

>50% >65%

More than 20 000 MW projected in the period 2008-2020 focused in Renewables, Nuclear (UK), Hydro.

>50% emissions free >65% emissions free 43 309 MW installed 65 000 MW installed (estimated)

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Agenda


Conclusions



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CO2 deduction

Coal policy

International agreement

Post-Kyoto CERs use

Uncertainties

EUAs and CERs Market: prices

CERs Issuance

Demand

Production

What does a European utility need to monitor?

Fundamentals: International and

national

International regulation

National regulation

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CO2 deduction

Coal policy


Post-Kyoto CERs use

Uncertainties


CERs Issuance Fundamentals: International and

national


National regulation

Demand

Production


12

0

2

4

6

8

10

12

14

16

18

20

ene-11 feb-11 mar-11 abr-11 may-11 jun-11 jul-11 ago-11 ago-11

CER11 EUA DEC11 Spread 11

Fundamentals: Prices evolution 2011

Source : Bloomberg

Prices in EUAs and secondary CERs market have reflected…

Energy Efficiency Directive, Failure vote on 30%

European debt crisis , Fears “double dip recession“

Fukushima incident

German nuclear decision

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Comercio de emisiones – Límite a la emisión absoluta

Fundamentals: CER issuance 2011

CER prices have been influenced by the same factors as EUAs but also by some specific ones: A significant increase in CERs issued by UN has triggered a drop in

prices due to supply pressure in a weak market…

As a result of CDM Executive Board procedures being improved and increased resources, CER issuance has improved significantly since the beginning of 2011.

Validity rules for CER in the UE from

2013

Project developers and CER sellers are trying to speed up both project registration and CERs issuance

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CO2 deduction

Coal policy


Post-Kyoto CERs use

Uncertainties


CERs Issuance Fundamentals: International and

national


National regulation

Demand

Production


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Fundamentals: Demand

Electricity demand fell drastically in 2009 caused by economic crisis. Its recovery is expected gradually in part due to energy efficiency measures.

Electricity demand

TWh

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Fundamentals: Production

A great incentive to renewable energy is overwhelming expectations

Renewable generation TWh

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Fundamentals: Production

Thermal production

TWh

Demand and renewable are reducing the thermal generation gap

* Iberdrola’s forecast

And in the last few years the technology is switching to CCGTs

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CO2 deduction

Coal policy


Post-Kyoto CERs use

Uncertainties


CERs Issuance

Demand

Production


national


National regulation


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Green Package approval: credit limit 2008-2020, minimum 11% Types of CERs accepted: Commitology. Credit crunch

Phase 3 debate : doubts about types of CERs accepted in the future. “No industrial gases”; Gold standard, LDC,...??

Regulatory changes

Use of credit limit during Phase 2 All CERs valid for compliance except from large hydro, nuc…

Since the beginning of Phase 2 things have changed …

2007

2008

Dec 2008

2009 Waiting for COP 15: NAMAs, REED, Sectorial crediting mechanism CDM reform … ??; 30% target EU-ETS in 2020? US development

Disappointment after COP 15 Uncertainties remain unresolved

Market needs certainty and stability

Industrial gases CER banned from May 2013 Rumours?

2010

2011

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CO2 deduction

Coal policy


Post-Kyoto CERs use

Uncertainties


CERs Issuance

Demand

Production


national


National regulation


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a State intervention with the sole aim of reducing the electricity tariff deficit that results from keeping tariffs below the level of real production costs. The Spanish administration insists on reducing artificially costs of supply for all customers.

a measure to correct the alleged extra revenues for generators resulting from internalization of the cost of the CO2 emission allowances that were given free of charge.

CO2 Deduction: RDL 11/2007

Royal Decree-Law 11/2007, of 7 December, discounting from the compensation for the activity of producing electricity the higher income deriving from the free-of-charge allocation of greenhouse gas emission allowances. (Spanish Official Gazette 294 of 8 December 2007).

The measure

In theory

In practice

rule started in 2006 (RD-L 3/06) and the measure was expected to apply for 2008-2012 ETS Phase II. Finally it was abolished in June 2009.

Duration

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Nuclear and hydroelectric plants are not recipients of emissions allowances, but are caught by the measure and invoiced by an amount equivalent to the allowances assigned to CCGT plants, CCGT plants are invoiced by the equivalent to the allowances received, Carbon and fuel plants are invoiced only by the equivalent to the allowances assigned to CCGT plants, thus much less than actual emission, which allows them to keep the value of part of their allowances.

CO2 Deduction: RDL 11/2007

is described as triggered by the emission allowances received under the National Allocation Plans (NAP), but applies universally to all peninsular generation assets (including non emitting plants) and according to criteria unrelated to the degree of emission.

Amount due

Criteria unrelated to real

emission

Penalizing low emitting technologies

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Assuring the consumption of the yearly production of the “Mining Plan” until 2014 Fixing the income of the electricity coal production for each asset.

National coal stocks are at historical maximum

Coal policy

Received the 15th Sept 09 Started January 2011 To give an incentive to national coal production

Proposal

Why

How

Impact This solution distorts efficient dispatching:

• Displacing imported coal and gas. • Provoking logistical difficulties in the gas system. • Increasing emissions.

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Agenda


Conclusions



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Fundamentals: Emissions forecast

Global vision for 2008 - 2020

2008 2009

11

9,5

Emissions IB in Spain

Mton

7

2010

6

2011e

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Our business

What? When? How much?

Assuring the emission cost once the production income is closed

To manage the margin of the electricity sales

1 TonCO2 emitted = 1 emission right

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EUA: European Unit Allowance CER: Credit Emission Reduction CDM: Clean Development Mechanism

What? Compliance tools

NPA Secondary Primary Projects

• Incertitude on quantities and delivery

• Regulatory, country and counterparty risk

• Multiyear Delivery • Long negotiation: months • Carbon funds

Price Risk

Carbon Credits: CERs

Others

• Counterparty risk • Organized markets or bilateral • Different vintage • Immediate negotiation

EUAs

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When? or When what?

Monitoring the position and with the goal of compliance

• Primary credits: opportunities,

carbon funds

• Secondary credits: at the same time than the electricity sales while there is a discount

• EUAs: at the same time than the electricity sales and as buffer

Iberdrola’s production sold in Forward Markets

2006 2011e

0%

2008

95%

40%

2009

55%

Mton

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How much? Credit limit

3

2

1,3 3

2

1,3

Credit limit for electricity sector in Spain is 42% (7,9% for cogeneration) of the allocation: a big quantity of credits to manage and optimize

Uncertainties in credits regulation deeply affect the CO2 balance

CERs / ERUs

What to use?

How many to use?

When to use?

Credit limit

15,5 Mton

41,5 Mton

NAP

30 30 30

Agenda


Conclusions



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Conclusions

• Delaying the use of CERs….

• ….but always taking into account the maximization of the spreads

• Adjusting our balance continuously • With a close follow-up on regulation:

• Auctions • Compliant post 2012 CERs

Our strategy is continuously under review and currently:

The only motive of emissions market existence is regulation. This market needs certainty and stability.

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IBERDROLA

July 2008

THANK YOU!

Brussels 7th October 2011

Challenges for a Spanish utility in the procurement of … for a Spanish utility in the procurement...

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