Roadmap 2050:Financing for a zero-carbon power sector

November, 2010

CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of the European Climate Foundation is strictly prohibited

Presentation to TBLI Conference

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Background

▪ Folowing the October 2009 announcement by the European Council to achieve an 80%-95% GHG emission reduction by 2050, ECF initiated a comprehensive study to establish the fact base behind this goal and derive implications for the European industry. The study focused specifically on the decarbonisation of the power sector.

▪ Representatives of the European Commission and its services have provided strong encouragement for the development of this undertaking and have given guidance regarding on the objectives and the approach.

▪ The `Roadmap 2050’ study relies on an in-depth model developped by McKinsey & Company (for the macro-economic analysis) and KEMA (for the grid-modelling), Imperial College London and Oxford Economics.

▪ The study was informed and supported by a broad consortium of industry partners (including Enel, E.on, Iberdrola, Shell, RWE, Vattenfall and Vestas), TSOs (National Grid, Tennet, Terna) NGOs (E3G, Germanwatch, WWF) and research institutions (ECN).

▪ The project had oversight from a Board of Advisors including Marta Bonifert, Avril Doyle, Lars G. Josefsson, Meglena Kuneva, Jorma Ollila, Hans Joachim Schellnhuber, Lord Nicholas Stern, Graham Watson.

Roadmap 2050Background

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Key assumptions

▪ The underlying analysis of the roadmap 2050 work uses a `backcasting’ methodology, taking an 80% overall GHG reduction in 2050 as the stipulated end-state. This method is very suitable to highlight where momentum needs to be broken and re-directed in order to achieve future objectives.

▪ The analysis has focused on 4 different pathways, with increasing penetration of renewables from a 40% share to a 100%. The remaining share will be equally accounted for by CCS (coal & gas) and nuclear.

▪ Each of the pathways needs to deliver current levels of energy system stability.

▪ The study does not take into account new technologies coming on the market. The outcomes are based on existing technologies supplying the whole market.

▪ A WACC of 7% is used for all technologies in all regions. This is a non regulated WACC, assuming no regulation to absorb investment risks, uncertainty and cash flow volatility.

Roadmap 2050Assumptions

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Overall key findings

▪ Decarbonizing the power sector is a prerequisite to achieve the EU’s climate and energy security goals by 2050.

▪ Building a sustainable, zero-carbon power sector, while maintaining current levels of system reliability, is technologically feasible and makes compelling economical sense.

▪ Cost of electricity in the low-carbon pathways is not higher than in the baseline scenario, although there is a shift. Operational expenditures will go down, whilst capital expenditures will go up.

▪ EU wide 160,000 new jobs will be created. The job loss in the high-carbon industry could amount to 260,000 jobs by 2020, but this will be offset by job creation in the clean tech sector (potentially 200,000 jobs) and the efficiency sectors (potential 220,000 jobs)

▪ Action before 2015 is critical, with immediate focus on:▪ Aggressive implementation of energy efficiency measures▪ Investments in regional grid interconnection to ensure increased uptake of renewables▪ Market reform to ensure effective long-term investment case in low-carbon technologies

Roadmap 2050Outcomes

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Capex for low-carbon generation capacity

The cost of electricity is similar in the baseline and in the decarbonized pathways, however the capex requirement is higher when decarbonizing, as shown below. This steep increase means that a large shift is required in a relatively short period. Even in the next 15y about €1,500bn is required to meet the 80% reduction target.

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Capex per technology in 2011 – 2050 EUR billions (real), cumulative

Cumulative capex for the baseline is €1,310bn, compared to €2,620bn, €2,360bn and €1,870bn in the 80%, 60%, 40% RES pathways respectively.

Baseline

Pathways

80% RES 10% CCS10% nuclear

60% RES 20% CCS20% nuclear

40% RES 30% CCS30% nuclear

Capex per technology

TotalNuclearCCSFossilRES

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The rate of grid investments compares to historic investments at the European level

Historical growth rate

80% RES

60% RES

40% RES

2050204020302020201020001990

+17

+23

+85

GW, EU-27, Norway and Switzerland1,2

1 Development of grid is driven by the penetration of intermittent power sources (solar PV, wind onshore and wind offshore)2 This assumes a linear build up of grid capacity in thousand GW km between 1990 and 2010, starting at zero, although some grid has

been built even before 1990, i.e. UK-France and much of the Central European interconnections

The evolution looks very different for specific regions. For some, the increase is much higher than historic investments.

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Regional ShiftsRoadmap 2050 outcome

The Roadmap 2050 pathways require significant investments in grid connections and generating capacity. The largest shift is towards new capacity in Iberia.

IberiaWindNuclearHydro power + geothermalSolar CCS and Biomass

1303060

425110

IberiaWindNuclearHydro power + geothermalSolar CCS and Biomass

75105

60

190195

IberiaWindNuclearHydro power + geothermalSolar CCS and Biomass

906060

365130

Production (TWh per year), 2050

40 % RES

60 % RES

80 % RES

Cost of electricity is similar in all pathways

The Roadmap 2050 study shows that the average new built cost of electricity from 2010 to 20501 is not significantly different in the various pathways, especially when taking into account a robust carbon price.

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Cost of Electricity is similar in all pathwaysRoadmap 2050 outcome

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Baseline

Decarbonized

1 Based on a WACC of 7% (real after tax), computed by technology and weighted across technologies based on their production; including grid. COE ranges are based on: Carbon price from €0 to 35 per tCO2e; Fossil fuel prices: IEA projections +/- 25%; Learning rates: default values +/- 25%

The cost of electricity is similar in the baseline and in the decarbonized pathways. The graphs below show the ranges of the levelized cost of electricity of new builds1

€ per MWh (real terms)

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Why this project?

▪ Financial sector plays a key role in the transition to a low-carbon economy. However, compared to other key sectors, the financial sector has not been considered a natural partner in the conversations so far.

▪ The low-carbon recovery should be at the center of the economic and financial restructuring, but there is a gap between the policy makers ambition level and the practical translation into policy.

▪ Part of this gap is due to the lack of understanding of capital markets and their pricing methods on the one hand, and the lack of awareness in the financial community of low-carbon products on the other.

▪ This project aims to bridge that gap by providing a platform for the business community where they can build arguments for better policies that will enable a smooth transition by unlocking private sector capital in the market.

▪ The economic modeling done in the Roadmap 2050 is very sound but to some extent theoretical. The practical expertise and knowledge from the financial community can proof-test the assumptions of the analysis done, thereby strengthening the already compelling feasibility argument.

Roadmap 2050 – Financing for a zero-carbon power sectorBackground

Catalyze the fund flow to achieve a zero-carbon power sector

• Increasing the level of awareness across the EU financial institutions of the Roadmap 2050 conclusions

• Ensuring that the financial opportunities and implications are properly understood

• Understanding how the selected financial institutions would respond to the different funding opportunities, and what policies would increase the likelihood of funding and reduce its cost

• Attitude to the development of national or EU wide ‘Green Infrastructure/Investment banks’ and other ‘new’ policy concepts that can help drive roadmap 2050

• Face to face meetings with key financiers

• Questionnaire to a large group of stakeholders

• Hosting roundtables and workshops with experts from the larger finance community

• Synthesizing the findings from face to face meetings, roundtables and workshops in a report / policy briefs

• Sharing the findings with the financial sector and key policy makers across Europe through a report and a close-out event

Roadmap 2050 – Financing for a zero-carbon power sectorProject overview objectives & activities

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Overall objective Sub goals Key activities