"ENVIRONMENT AND ENERGY: WHAT LIES AHEAD FOR SERBIA” SERBIAN WIND ENERGY ASSOCIATION (SEWEA) CONFERENCE

Impact of EU Environmental Regulation on the Serbian Power Market

2 March 2012, Belgrade

2

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3

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4

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consultancy for the

international energy

markets

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expertise along the entire value chain

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organisational advice

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Extensive consulting expertise in all relevant energy markets

Offices in about 50 countries

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Covering the global

markets with a wide

spread of local offices

Whole

sale

Strategy, M&A, transformations, …

Grid Retail Produc-

tion

Close collaboration with the engineering business areas of the

Pöyry Group

Access to technological competence of approximately 6,500

engineering consultants

Access to the

technology

competence within the

Pöyry group

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within the utility sector and amongst banks investing in and

lending to the sector

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Publishing the renowned ILEX Market Reports

Profound and

fundamental market

insights based on

proprietary market

models

Urban &

Mobility

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Environment

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Consulting

OVERVIEW PÖYRY MANAGEMENT CONSULTING

Pöyry combines strategy consulting with fundamental market insights and

technological competence on a global scale

5

PÖYRY MANAGEMENT CONSULTING

Offering expert advice from strategy to implementation on policy, regulation, business operations, financing and valuation and sustainability

Providing in-depth market intelligence across Europe

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Pöyry offices

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6

EU ENVIRONMENTAL REGULATION SUMMARY

Large Combustion Plant Directive (LCPD):

• Limits NOx, SO2 and fine dust particle emissions (stricter regulation effective starting 2016)

• Applies to plants with rated thermal input above 50 MW (mainly coal and oil fired plants)

• Resulted in reduction of coal fired plants across EU (substituted with other types of plant)

Industrial Emissions Directive (IED):

• Permits must be obtained to show compliance with operators basic obligations and environmental

quality standards (pollution reduction, energy efficiency maximisation, correct waste disposal, etc.)

• Applies to all industries with major pollution potential (energy industries, production and processing

of metals, mineral industry, chemical industry, waste management, rearing of animals, etc.)

EU Emissions Trading Scheme (ETS):

• Cap and trade total EU emissions to facilitate their reduction in accordance with Kyoto Protocol

• Phase III will see allowances reduced on a linear basis from 2013 – 2020 to meet 2020 EU targets

• The power sector in most new member states may originally receive allowances for free, but the

number of free allowances will be reduced to zero by 2020

2020 EU renewable targets:

• 20% reduction of greenhouse gas emissions (compared with 1990 levels)

• 20% of total energy consumed to come from renewable sources

• 20% increase in energy efficiency

Ever stricter EU regulation is being enforced in order to comply with

emission reduction targets outlined in the Kyoto Protocol

7

EUROPEAN UNION

0

200

400

600

800

1.000

1.200

1.400

61

-154 127 13 50

43 32

373 30

152

-42

-53 -58 -22

-10 -150

-1 -55

889

Coal

Oil

Gas

Nuclear

Hydro

Biomass

Wind

Geothermal, CSP, Marine

1‘230

GW

9%

2%

24%

10%

14%

3%

25%

10%

2%

Solar PV

Capacity additions

Capacity retirements

Environmental regulation will potentially incentivise more renewables to

be added to the Power generation capacity mix by 2035

Source: Pöyry, IEA2011

8

PÖYRY’S ENERGY MARKET MODELS

Pöyry offers fundamental modelling capabilities based on a proprietary

platform of fundamental market models

Description of market models Pöyry‘s energy market models

Cronos

Oil model

Olympus

Coal model

EurECa

Carbon

model

Pegasus

Gas model

Electricity model

Gas

prices

Gas

demand

CO2

prices

CO2

emissions

$ $

€ €

€

Eureno

Renewables

(€)

EurECa is used for projecting physical (generator output, fuel use, country flows) and economic behaviour (prices)

Eureno analyses the impacts of the EU’s 2020 renewables targets on the 27 Member States

Cronos generates the future development of oil prices based on fundamentals of supply/demand

Pegasus looks at the development of the European gas market and generates future gas prices under consideration of the USA and Asia

Olympus generates the future development of hard coal prices based on fundamentals of supply and demand

The carbon model captures the EU-ETS and computes carbon allowance prices based on abatement cost curves and trading regimes

A unified approach of the different energy sectors allows Pöyry to create internally consistent scenarios, where gas, carbon and electricity reach a stable equilibrium

9

One way or another, the market will

recognise a value for both generating

capacity and electrical energy

These values will be based on the

underlying economics of the generating

system at the time

For the value of energy, this will entail the

broad economic dispatch of the plants on

the system

Efficient wholesale markets will deliver an

effective merit order

Modelling principles: recovery of fixed costs

The formation of our wholesale electricity price projections takes account

of the need to recover both variable and fixed cost components

Fuel and

carbon costs VOWC

MOP Start-up and

no load costs

SMP

Fixed + capital

cost recovery

Wholesale

price

MOP – Merit Order Price

SMP – System Marginal Price

VOWC – Variable Other Works Costs

10

IMPACTS ON SERBIA (1)

Current environmental legislation in Serbia is less stringent than EU legislation, but there

are a significant number of directives influencing both the operation of power plants

within the industry and their effect on the environment, such as:

• Directive on reduction of the SO2 content of liquid fuels

• Directive on the limitation of emissions of certain pollutants into the air from large combustion

plants

• Directive on the conservation of wild birds

However, as part of the Energy Community, Serbia is expected to harmonise its

legislation with that of the EU

• The Athens treaty entered into force on 1 July 2006, its purpose being the harmonisation of the

energy markets of the energy community with those of the EU

• The Athens treaty aims to, amongst other things, improve the environmental situation in relation to

Network Energy and related energy efficiency, foster the use of renewable energy, and set out the

conditions for energy trade in the single regulatory space

Status quo sees the country having environment regulation less stringent than

EU legislation, however, the country is on a harmonisation path with the EU

11

IMPACTS ON SERBIA (2) – HIGH FOSSIL FUEL GENERATION

Generation Profile to 2035 (a potentially feasible conservative scenario) Gas-fired electricity generation might replace some of the retiring lignite-fired power production units,

however, the latter‘s contribution to the generation mix could remain strong, despite more renewables

being added to the power system

12

IMPACTS ON SERBIA (3) – STRONG RENEWABLES CONTRIBUTION

Generation Profile to 2035 (a potentially feasible scenario) Gas-fired electricity generation might replace a larger part of further retiring lignite-fired power

production units, with the former‘s contribution to the generation mix relatively high, while stronger

renewable generation growth is seen in the power system

13

Winter business day - 2030

SUPPLY CURVES

Winter business day - 2015

Summer business day - 2015 Summer business day - 2030

0

25

50

75

100

125

150

175

200

0 1 2 3 4 5 6 7 8 9 10

Capacity (GW)

Hydro

Renewables

CHP

Embedded

Nuclear

Lignite

Coal

CCGT

Steam gas

OCGT

Oil

Max Net demand

Max National demand

€/M

Wh

(re

al 2

01

0 m

on

ey)

0

25

50

75

100

125

150

175

200

0 1 2 3 4 5 6 7 8 9 10

Capacity (GW)

Hydro

Renewables

CHP

Embedded

Nuclear

Lignite

Coal

CCGT

Steam gas

OCGT

Oil

Max Net demand

Max National demand

€/M

Wh

(re

al 2

01

0 m

on

ey)

€/M

Wh

€/M

Wh

The Serbian power system will see an evolving merit order of power plants by 2030

0

25

50

75

100

125

150

175

200

0 1 2 3 4 5 6 7 8 9 10 11 12

Capacity (GW)

Hydro

Renewables

CHP

Embedded

Nuclear

Lignite

Coal

CCGT

Steam gas

OCGT

Oil

Max Net demand

Max National demand

€/M

Wh

(re

al 2

01

0 m

on

ey)

€/M

Wh

0

25

50

75

100

125

150

175

200

0 1 2 3 4 5 6 7 8 9 10 11 12

Capacity (GW)

Hydro

Renewables

CHP

Embedded

Nuclear

Lignite

Coal

CCGT

Steam gas

OCGT

Oil

Max Net demand

Max National demand

€/M

Wh (

real 2010 m

oney)

€/M

Wh

14

CARBON PRICE AND CARBON PASS-THROUGH

The carbon price (and potential carbon pass-through) will have to be factored

into the wholesale electricity price in Serbia once the country joins the EU

2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030

Wh

ole

sale

Ele

ctr

icity P

rice

, €

/MW

h

Electricity Price without carbon

Electricity Price with carbon (strong renewables contribution)

Electricity Price with carbon (high fossil fuel generation)

NB: Assumed hypothetical small nominal increases in electricity and carbon prices, Serbian EU-accession later this decade and a gradual carbon

pass-through rising to 100% over a 10-year period – exemplifying the influence of factoring the carbon price into the wholesale electricity price.

15

PÖYRY MANAGEMENT CONSULTING INVESTIGATES THE EFFECTS IN

MORE DETAIL

Zephyr integrates historical weather patterns with hydro and thermal generation

into a market model to provide detailed long term market projections

Countries

CEE / SEE countries (and other

markets) as relevant and applicable

New build of

generationDemand

module

Intermittent

module

Availability

module

External border

module

Value of

Capacity

module

Plant data

Commodity

prices

Zonal data

Constraints

Prices

Plant revenue

Interconnection

Load factors

• 8760 hours per year

• 7 historical years

• Plant dynamics

• Zonal analysis

• Hydro modelling

BID

(Hydro module) ZephyrZephyr

Reserve data

16

CURRENTLY, THE SYSTEM REQUIRES LESS FLEXIBILITY AND HAS LOWER PRICE VOLATILITY

0

10

20

30

40

50

60

70

01-Jan 04-Jan 07-Jan 10-Jan 13-Jan 16-Jan 19-Jan 22-Jan 25-Jan 28-Jan 31-Jan

Genera

tion (

GW

)

Nuclear Biomass Coal CHP CCGT Other renewables Demand Peaking plants Imports

Example for GB for January 2010 (based on weather of Jan 2000)

0

10

20

30

40

50

Ge

ne

ratio

n (

GW

) Intermittent generation

0

100

200

300

400

500

Ele

ctr

icity p

rice

(£

/MW

h)

Electricity Price

0

10

20

30

40

50

60

70

01-Jan 04-Jan 07-Jan 10-Jan 13-Jan 16-Jan 19-Jan 22-Jan 25-Jan 28-Jan 31-Jan

Ge

ne

ratio

n (

GW

)

Nuclear Biomass Coal CHP CCGT Other renewables Demand Peaking plants Imports

Nuclear

Coal

CCGT

Wind

17

BY 2030, THE ENTIRE SYSTEM WILL HAVE TO RESPOND TO WEATHER PATTERNS

Prices spike at £7700/MWh

Prices may

become highly

volatile, and

driven

increasingly by

wind

generation

Wind

generation is

very variable,

leading to

periods of very

high

generation,

and periods of

very low

generation

Thermal plant

will have to

operate in a

different

manner, with

lower load

factors and

higher risk

-100

0

100

200

300

400

500

Ele

ctr

icity p

rice

(£

/MW

h)

ElectricityPrice

0

10

20

30

40

50

60

70

01-Jan 04-Jan 07-Jan 10-Jan 13-Jan 16-Jan 19-Jan 22-Jan 25-Jan 28-Jan 31-Jan

Ge

ne

ratio

n (

GW

)

Nuclear Biomass CCSCoal Coal CHP

CCGT Other renewables Demand Peaking plants Imports

0

10

20

30

40

50

Ge

ne

ratio

n (

GW

)

Intermittent generation

In GB, prices may become much more volatile, with prices below zero due to wind subsidies, and high spikes driven by the need to recover investment

0

10

20

30

40

50

60

70

01-Jan 04-Jan 07-Jan 10-Jan 13-Jan 16-Jan 19-Jan 22-Jan 25-Jan 28-Jan 31-Jan

Ge

ne

ratio

n (

GW

)

Nuclear Biomass Coal CHP CCGT Other renewables Demand Peaking plants Imports

SCHEMATIC EXAMPLE

FOR DISPLAY ONLY

18

RES and climate change targets, driven by EU and national

policy, change the future dynamics in the energy markets

renewable energy sector still presents many opportunities in

CEE and SEE

RES and climate

change targets

Growth in RES will present new opportunities but also risks for

market players in CEE/SEE

Different market features from the supply-demand balance to

the market design will have to adapt

Opportunities and

risks in CEE / SEE

Replacement of aging/inefficient generation assets in CEE

and, particularly, SEE

Both “green” and “grey” power plants to be added to the power

system, but this process has to be planned well in advance

Supply will evolve

Growing economies in many CEE / SEE countries will see a

sustained growth in energy demand

Growing power demand has to be met within the wider policy

framework, including RES

Demand growth

RENEWABLES TRENDS IN CEE/SEE MARKETS

Intermittency impact will increase dramatically in all CEE/SEE countries in

the coming years as more renewables generation capacities are added

Need to

understand

intermittency

trends and

their impact

on the

CEE/SEE

markets

19

CEE / SEE INTERMITTENCY STUDY SUMMARY

The impact of renewables has turned out to be much more complicated than a

simple “Can the market deal with this?”

Investors will face major challenges in developing appropriate investment strategies

in a market where the uncertainties are so great

Equally, the challenge for policy makers and regulators is to create suitable market

designs without relying on ‘golden bullets’

The study will draw on a deep understanding of the economic character of individual

markets, and will take realistic views on the outlook for current and future

investments and developments

The study will look at a range of important issues, which could be developed and

modelled through different scenarios that consider the impact of reaching

renewables targets, the effects of increasing interconnection, capacity auctions,

lower renewables, etc.

The study should be undertaken in 2012 – with a kick-off in early April 2012 – given

the urgency created by nuclear retirals, LCPD impact and lead time for new build

20 20

Pöyry Management Consulting

21

Dr. Wolfgang Pospischil

Managing Director

Pöyry Management Consulting Austria GmbH

Mail: wolfgang.pospischil@poyry.com

Phone: +43 664 828 5001