Energy demand dynamics and infrastructure development plans in the EU. October 10 th, 2012 Jonas Akelis, Managing Partner - Baltics

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1 Energy demand dynamics and infrastructure development plans in the EU October 10 th, 2012 Jonas Akelis, Managing Partner - Baltics

2 Forecasted energy demand dynamics of EU-11 will be significantly higher than EU-27 and EU-15 averages toe Gross Inland Consumption (GIC) of primary energy per capita, toe, % 110% 105% 100% 95% 90% 1,67 1,94 2,03 2,09 2,37 2,60 2,66 Romania Croatia Latvia Lithuania Bulgaria Hungary Poland 3,25 3,55 Slovakia Slovenia 4,26 4,55 Czech Rep. Estonia 2,60 PRIMES baseline EU-11 and EU-27 energy consumption Source: Eurostat, IHS Global Insight EU 11 EU 27 EU 11 3,73 EU 15 Most of the EU-11 countries are characterized by lower gross inland consumption of primary energy per capita than the EU-15 average. In 2010 an average gross inland consumption per capita in EU-11 accounted for only 70% of the EU-15 value. According to PRIMES model, energy consumption path will differ in EU-11 and EU-27. While the growth of GIC of primary energy in EU-11 will reach 10-13% in , in case of EU-27 the GIC change will be negligible (baseline scenario) or even negative (reference scenario). Page 2

3 Implementation of the EU policies in EU-11 countries can be especially difficult in terms of economy s competitiveness Electricity prices in the EU in 2011 (EUR/kWh, Power Purchasing Standards (PPS) 0,25 0,20 0,15 0,10 0,09 0,09 0,09 0,10 0,10 0,11 0,12 0,12 0,12 0,14 0,14 0,14 0,15 0,15 0,15 0,16 0,16 0,16 0,17 0,18 0,19 0,20 0,21 0,22 0,05 0,00 France Finland Source: Eurostat Denmark Estonia Sweden Greece Netherlands Luxembourg Portugal Austria Slovenia Croatia Germany Italy United Kingdom Belgium Ireland Latvia Bulgaria Romania Czech Republic Lithuania Spain Poland Cyprus Slovakia Hungary Malta EU-27 In case of EU-11 higher demand for energy together with strict rules related to environment protection (carbon pricing, RES targets etc.) will inevitably put further pressure on energy pricing in the EU-11 Page 3

4 Energy resources (solids, petrol, gas) import dependency is quite significant in EU 27 and reaches 54% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 13% Estonia Source: Eurostat 22% 26% Romania Czech Republic 32% Poland 41% 44% Bulgaria Latvia 49% 52% Slovenia Croatia 58% Hungary 63% Slovakia 84% Lithuania 37% EU-11 57% 54% EU-15 Low import dependency of some of EU-11 countries is a result of large own resources and export of solid fuels. However the implementation of the EU environmental protection regulations will result in lowering of the importance of solids in the energy mix, thus leading to the increase EU-27 of total import dependency in the region With increasing energy demand EU-11 energy policy should especially focus on security of supply issues. This calls for vast infrastructure investment and rethinking solid s role in the energy balances of the EU-11 region Page 4

5 Achieving Roadmap 2050 targets will be more difficult for EU-11 mainly due to currently higher share of solids GIC mix in EU-11, 2010 GIC mix in EU-15, ,3% 9,5% 8,5% Solids Petroleum products Gas RES Nuclear 25,4% Total: 277 Mtoe Source: Eurostat, Roadmap to ,8% 2050 Decarbinization GIC mix 52,2% 18,0% Petroleum products Gas Nuclear Solids RES 3,3% 2,7% 23,8% 10,0% 12,3% Petroleum products 37,1% Gas Nuclear 14,4% Solids RES 26,2% Total: 1486 Mtoe As the major aim of the Roadmap 2050 is building a low-carbon technology, it may be easier to achieve this target for EU-11 by using clean coal and nuclear technologies. Page 5

6 The need for replacement of aging thermal generation capacities is substantially higher in EU-11 region Capacity of thermal power plants and their age in EU Over 38% of generation capacity in EU-27 countries is over 30 years old In the country with largest power capacity, i.e. Poland, 58% of capacity is over 30 years old In the years to come, EU-11 will face higher decommissioning and replacement costs than EU-15 or EU-27 on average Source: Ernst&Young Business Advisory Poland calculations based on RWE and Polish Energy Market Agency (ARE) data Page 6

7 The gap between historical and planned energy investments is of serious importance 3.0% % GDP 2.5% 2.6% 2.0% ~115% 1.5% 1.3% 1.2% 1.4% 1.3% 1.0% 1.2% 1.0% 1.0% 0.9% 0.9% 1.1% 0.5% 0.0% average Gross capital formation in electricity, gas, steam and air conditioning supply, selected EU-11 countries Forecasted annual value of investments by average Source: Historical values Eurostat, estimation of investement needs Report, GDP forecasts HIS Global Insight; Historical values include data for Czech Republic, Estonia, Hungary, Poland, Slovenia and Slovakia only. For other countries data were not available According to data presented above EU-11 average of energy investment costs (as % of GDP) indentified in the Report* exceed the EU average of investment in electricity, gas, steam and air conditioning supply by ~115% * Report have been prepared for Central European Partners AISBL by Ernst&Young Business Advisory Poland according to an agreement dated December 21th, 2011 Page 7

8 The flagship investments in EU-11can be estimated at about bn EUR 240 by % Electricity generation Dane 23% Electricity transmission Electricity generation* Electricity transmission ~170bn EUR ~8 bn EUR 3% 71% Gas transmission and storage Gas transmission and storage Oiltransmission and storage ~55 bn EUR ~6 bn EUR Oil transmission and storage Total ~240bn EUR Total: ~240 bn EUR * Including decommissioning and replacement costs Source: Estimation prepared by Ernst&Young Business Advisory Poland based on publicly available data Over 38% of electricity generation capacity in EU-27 is over 30 year old, which triggers the need for large amount designated for decommissioning and replacement costs At the same time the EU estimates that a total of bn EUR 1,000 energy sector investments will be needed in the next ten years (starting 2011) on the EU-27 level. Page 8