NOTES ON ENERGY AND ENVIRONMENTAL MARKETS AT

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1 NOTES ON ENERGY AND ENVIRONMENTAL MARKETS AT OVERVIEW OF ITALY AND BORDERING COUNTRIES November 2016

2 SUMMARY Q POWER AND ENVIRONMENTAL MARKETS In the first nine months of 2016 (9M 2016) there was a -3.1% decrease in Italian electricity demand. Hydroelectric production decreased by -6.3%, particularly focused in September (-13.2%). A decrease in solar production was recorded as well (-10%). Thermoelectric production in Q3 decreased by 5.9% as a result of the decrease in July and August 2016 (-15.1%, -8.6% respectively) related to the very hot temperatures recorded in Summer 2015 and of the increase in September 2016 (+7.7%) due to lower net imports. Decrease in the import-export balance (-9.9%) in Q In September, net imports fell by 14.4%, due to the French nuclear plants maintenance. Slump in PUN prices (-13.8 /MWh y-o-y in 9M 2016) due to the fall in gas prices and to the weak demand. In Q316 CCGTs saw a strong decrease in the number of hours in which they are the marginal technology, while Coal plants saw an increase: this is due to the narrowing costs between the two technologies. In Q316 the CSS increase trend halted (on a year-on-year basis) only due to the extraordinary conditions in July 2015: afterwards, in August and September, new increases were registered. The correlation between PSV and PUN is steady (CCGTs are still marginal plants in the Italian market), while the correlation between PUN and Brent is low due to fewer gas supplies linked to oil formulas. Temperatures in Q316 in Italy were lower than in Q315 and in line with the 10YR average. The month of July was colder then last year, but broadly in line with the 10YR average. The persistent oversupply on the carbon market continued to weigh on carbon prices. Prices fell to a three-year minimum at the beginning of September. Prices rebounded later, mainly driven by the bullish sentiment on the power markets and by in the increase in thermal production. 2

3 SUMMARY Q GAS MARKETS Growing gas demand in Q316 (+1.8% year-on-year), +1.5% in the first nine months of the year (9M 2016 vs. 9M 2015). Increasing LNG imports into Italy (+40.5% in Q316 on a year-on-year basis), with around +0.4 bcm through Livorno OLT. Improving industrial gas demand (+3.9% in Q316 vs. Q315, +2.9% in the first nine months of 2016 vs. 2015). Decreasing thermal gas consumption during Q316 (on a year-on-year basis) mainly due to the exceptional hot temperatures in Significant increase in thermal gas consumption in the first nine months of the year (+5.2% on a year-on-year basis). Strong gas price decline in Q316 vs. Q315 on the PSV (about -34%). Spreads with the Austrian VTP, TTF and Peg Nord (Q316 vs. Q315) decreased as well. Rising LNG global supply, mainly due to the rise in Australian exports. Rising exports from the US liquefaction plants as well, but few US cargoes coming into Europe by now. Strong demand for LNG in Asia in 9M 2016 (China and India in particular). Strong summer demand coming from the Middle Eastern countries as well (UAE, Kuwait). Surging LNG imports into Egypt. 3

4 CONTENTS 01 Power Market Supply & Demand Spot Markets 02 Gas Market Supply & Demand Spot Markets 03 Crosscommodities 04 Environmental Markets: EUA 4

ITALIAN ELECTRICITY SUPPLY BREAKDOWN BY SOURCE IN Q3 REDUCTION IN THERMAL PRODUCTION IN JULY AND AUGUST, INCREASE IN SEPTEMBER; FALL IN NET IMPORTS In the first 9 months 2016 there was a -3.

5 ITALIAN ELECTRICITY SUPPLY BREAKDOWN BY SOURCE IN Q3 REDUCTION IN THERMAL PRODUCTION IN JULY AND AUGUST, INCREASE IN SEPTEMBER; FALL IN NET IMPORTS In the first 9 months 2016 there was a -3.1% decrease in electricity demand (-5% in Q3). Hydroelectric production decreased by -6.3% in the first 9 months and by 1.2% in Q3: in September, in particular, the fall was -13.2%. In the firs 9 months, a decrease in solar production was recorded too (-10%), while there was an increase in wind production (+13.2%). Thermoelectric production in Q3 decreased by 5.9%: this is the result of the decrease in July (-15.1%, due to the hot July 2015) and in August (-8.6%) - due to the hot summer and the increase in September (+7.7%), due to the fall in net imports. Decrease in the import-export balance (-9.9%) in Q3. In September, the net imports fell by 14.4%, due to the French nuclear plants maintenance. Source: Terna - Monthly Report on the Electricity System. 5

6 ITALIAN ELECTRICITY DEMAND AND SUPPLY HISTORICAL TRENDS -3.1% DECREASE IN DEMAND TWh Italian Power Production (9 months) Foreign Balance Thermal Solar+Wind Hydro TWh Italian Power Demand months Q After a stable thermal production in H1, in Q3 thermal production declined (mainly in July and August, while it increased in September). Stable new renewables production, due to the fall in FV production and the increase in wind production. Hydro production at a low level (the lowest since 2012): in Q3, there was a y/y increase in July and August, a fall in September. -3.1% year-on-year decrease in the Italian power demand - despite the economic recovery. The decrease was particularly strong in July (-9.7%), due to the temperatures (lower than in 2015). Source: Terna - Monthly Report on the Electricity System. 6

ITALIAN ELECTRICITY SPOT PRICES STRONG PUN DECREASE y/y (but reversal in October); REDUCTION IN PL-BL SPREAD The first 9 months registered a slump in PUN prices, due to the fall in gas prices and to

7 ITALIAN ELECTRICITY SPOT PRICES STRONG PUN DECREASE y/y (but reversal in October); REDUCTION IN PL-BL SPREAD The first 9 months registered a slump in PUN prices, due to the fall in gas prices and to the weak demand. July was the month with the highest decrease in prices y/y (-24.9 /MWh for the baseload, due to the hot weather in 2015). This trend weakened in September (-6.5 /MWh) and reversed in October (+5.4 /MWh, due to the high prices in France). Peakload prices decreased more than baseload prices, bringing down the BL-PL spread. Source: Gestore Mercato Elettrico (GME) 7

8 ITALIAN ELECTRICITY SPOT PRICES: MARGINAL TECHNOLOGY ON MGP CCGTs STILL THE MAIN MARGINAL TECHNOLOGY, BUT IN A LOWER NUMBER OF HOURS; NARROWING CCGT AND COAL PLANTS MARGINAL PRICES In Q3 CCGTs saw a strong decrease in the number of hours in which they are the marginal technology, while Coal plants saw an increase: this is due to the narrowing costs between the two technologies, as showed in the marginal prices table. Marginal prices are strongly lower than last year for all the technologies, and in particular for the CCGTs, due to the slump in gas prices. Hydro plants marginal prices are still the highest (apart from oil), but with a significant reduction compared to Coal plants marginal prices decrease is weaker than for other technologies, due to the increasing coal prices. Source: MPF (on GME data). The data are calculated as weighted averages for the six zones (North, South, CSouth, CNorth, Sardinia, Sicily) 8

9 ITALIAN ELECTRICITY MARKET: ZONAL HOURS AT ZERO PRICE NO 0-PRICE HOUR After the 2014 peak in the number of 0-price hours, the number has decreased steadily. No 0-price hour was registered in 2016, despite the slump in prices. 9

ITALIAN ELECTRICITY CLEAN SPARK AND DARK SPREADS (CSS AND CDS) IMPROVEMENT IN CSS DUE TO LOW GAS PRICES, DECREASE IN CDS In Q316 the CSS year-on-year increase trend halted only due to

Indeed, during the last weeks high power prices were sustained by the French prices, more than by the fuel costs.

10 ITALIAN ELECTRICITY CLEAN SPARK AND DARK SPREADS (CSS AND CDS) IMPROVEMENT IN CSS DUE TO LOW GAS PRICES, DECREASE IN CDS In Q316 the CSS year-on-year increase trend halted only due to the extraordinary conditions in July 2015: in August and September new increases were registered (even stronger in October). Indeed, during the last weeks high power prices were sustained by the French prices, more than by the fuel costs. On the contrary, the increasing trend in coal prices has led to a fall in CDS y/y. Clean Spark Spread: PUN (BL/PL) gas PSV cost (eff. 51%) EUA cost CV cost (up to 2014)- variable transport costs Clean Dark Spread PUN BL coal cost (API2 + spread MED + variable transport costs - eff. 35%) EUA cost CV cost (up to 2014) 10

11 THE SITUATION ON THE FRENCH MARKET THE STORY... News on French and Swiss nuclear production 2015: AREVA informs ASN (Autorité de sûreté nucléaire) of the discovery of technological anomalies in some of the Flamanville plant s components (pressure vessel). This plant is under construction and the anomaly is due to the carbon segregation phenomenon in the pressure vessel steel produced by Creusot Forge. April 2016: AREVA informs of anomalies due to the carbon segregation phenomenon also on 400 parts produced by Creusot Force since 1965 and used by active nuclear plants. June 2016: ASN asks EDF to control 18 French nuclear reactors virtually affected by the carbon segregation phenomenon (17.45 GW, 27.6% of French nuclear capacity: Blayais 1, Bugey 4, Chinon 1-2, Civaux 1-2, Dampierre , Fessenheim 1, Gravelines 2-4, Saint-Laurent 1-2, Tricastin ). July 2016: EDF revises 2016 nuclear production from to TWh and extends the summer outages of 4 plants. Due to the controls and to other technical reasons in September the plants Bugey 5, Cattenom 3, Fessenheim 1, 2, Gravelines 5, Paluel 2, Tricastin 1, Tricastin 3 are subjet to extraodinary outages (7 GW). End of September: new EDF controls on 12 plants for up to 3 months (Bugey4, Civaux1, Dampierre3, Fessenheim1-2, Gravelines 2-4, St Laurent1, Tricastin1,2,3,4, for 11.3 GW). EDF revises 2016 nuclear production to TWh. Further extension of the «statutory outages» until March on several plants. October the 6th: the Leibstad Swiss nuclear plants (1.2 GW) restart is postponed to February 2017 (from December 2016 ). October the 18th: The ASN provides a list of 5 additional reactors to be tested within the next three months (Fessenheim-1, Gravelines-4, Civaux-1, Tricastin-2-4 for 5.1 GW) October the 20th: further extension of the outages of two plants to mid November (1.8 GW). Publication of the outages for the 5 plants mentioned in the previous point, with effects from December to January. October the 26th: the ASN warns the controls will last for at least one more year. November the 4th: EDF postpones the restart of five of its nuclear reactors until the end of the year (4.5 GW) 11

EFFECTS of FRENCH POWER MARKET on ITALIAN PRICES STRONG

THAN THE FRENCH ONES Volumes Prices In September, net

reduce, due to the fall in French nuclear production As a

12 EFFECTS of FRENCH POWER MARKET on ITALIAN PRICES STRONG REDUCTION IN NET IMPORTS FROM FRANCE; ITALIAN PRICES LOWER THAN THE FRENCH ONES Volumes Prices In September, net imports from France (and from Switzerland) began to reduce, due to the fall in French nuclear production As a consequence, in October Italian power prices were lower than in France. 12

13 CONTENTS 01 Power Market Supply & Demand Spot Markets 02 Gas Market Supply & Demand Spot Markets 03 Crosscommodities 04 Environmental Markets: EUA 13

14 ITALIAN GAS SUPPLY BREAKDOWN BY SOURCES STRONG ALGERIAN FLOWS, LNG IMPORTS RISING IN Q316 mcm Q Q % Q316/Q315 9M M 2015 % 9M16/9M15 Import Mazara del Vallo (Algeria) Gela (Libia) Tarvisio (Austria) Gorizia (Slovenia) Passo Gries (Svizzera) Total Pipeline Rovigo (Cavarziere) Panigaglia Livorno (OLT) Total LNG Total Import Domestic Production Delta Stock Demand ,5% ,3% ,2% ,0% ,0% ,4% ,5% ,1% ,6% ,7% ,9% ,9% ,5% ,5% ,0% ,0% ,0% ,5% ,5% ,0% ,8% ,5% +1.8% in gas demand during Q316 (year-on-year basis), +1.5% in the first nine months of the year. Increase in LNG imports (+40.5% in Q316 on a year-on-year basis), with around 0.4 bcm through OLT. Strong imports from Algeria, compensated by fewer imports through Tarvisio and Gela (year-on-year basis). Source: Bloomberg, Snam Rete Gas, PCS correction by Snam Rete Gas during 2016, data corrections by Snam Rete Gas 14

15 ITALIAN GAS CONSUMPTION GROWING DEMAND IN Q3-16, +1.0% YOY Italy: Gas consumption mcm Industry Thermal Distribution Network Other networks Total 2015 Q Q Q Q M Q Q Q Q M Q3-16 vs. Q3-15 9M-16 vs. 9M Q316 showing a slight rise in natural gas consumption, on a year-on-year basis Industrial gas demand showing improvements (+3.9% in Q316 vs. Q315, +2.9% in the first nine months of 2016 vs. 2015) Decreasing thermal gas consumption during Q316 (on a year-on-year basis) mainly due to the exceptional hot temperatures in Significant increase in thermal gas consumption in the first nine months of the year (+5.2% on a year-on-year basis) Source: Bloomberg, Snam Rete Gas, PCS correction by Snam Rete Gas during 2016, data corrections by Snam Rete Gas 15

16 ITALIAN GAS SPOT PRICES PSV AND MAIN HUBS SPREAD PSV PRICES AND SPREADS STRONGLY DECREASED IN Q316 VS. Q315 /MWh PSV PSV-TTF PSV-VTP PSV-PEG NORD Q1 27,1-1,0 0,3-1, Q2 28,4 1,2 0,9 0,5 Q3 27,7 1,8 0,8 1,2 Q4 28,5 1,7 1,1 1,2 Year 27,9 0,9 0,8 0,3 Q1 25,5 1,2 0,5 1, Q2 20,8 1,9 0,6 1,2 Q3 20,5 2,4 0,8 1,7 Q4 25,7 3,6 1,7 3,2 Year 23,1 2,3 0,9 1,8 Q1 24,1 2,8 1,7 2, Q2 22,5 1,5 1,0 1,4 Q3 22,0 2,2 1,2 2,2 Q4 19,4 2,4 1,4 2,1 Year 22,0 2,2 1,3 2,0 Q1 14,5 1,6 1,1 1, Q2 14,7 1,6 0,9 1,5 Q3 14,5 1,8 0,5 1,5 Q Year Q3-16 vs. Q ,5-0,3-0,7-0,7 Strong gas price decline in Q316 vs. Q315 on the PSV (about -34%) Spreads with the Austrian VTP, TTF and Peg Nord (Q316 vs. Q315) decreased as well. Source: ICE-Endex, CEGH, Powernext 16

17 GLOBAL GAS OUTLOOK LNG SUPPLY DEMAND GROWING AUSTRALIAN SUPPLY AND US SUPPLY, BUT FEW US CARGOES TO EUROPE Rising global supply, due to the rise in Australian exports. Rising exports from the US liquefaction plants as well. Few US cargoes coming into Europe by now Strong Asian demand in the first 9 months of the year (China and India in particular). France seeing more cargoes than in 2015, UK imports picking up in September Strong summer demand from the Middle East countries (UAE, Kuwait). Surging LNG imports into Egypt. Source: Thomson Reuters 17

18 CONTENTS 01 Power Market Supply & Demand Spot Markets 02 Gas Market Supply & Demand Spot Markets 03 Crosscommodities 04 Environmental Markets: EUA 18

CORRELATION AMONG COMMODITIES CORRELATION AMONG ENERGY COMMODITIES STABLE IN Q316 P SV-P UN P SVB RENT P SV-COA L P UNB RENT P UN-COA L B RENTCOA L MAX 87% 74% 90% 63% 87% 90% MIN 52% 0% -2% 23% 19%

19 CORRELATION AMONG COMMODITIES CORRELATION AMONG ENERGY COMMODITIES STABLE IN Q316 P SV-P UN P SVB RENT P SV-COA L P UNB RENT P UN-COA L B RENTCOA L MAX 87% 74% 90% 63% 87% 90% MIN 52% 0% -2% 23% 19% 56% AVG TODAY 73% 43% 56% 42% 59% 78% Stable high correlation between PSV and PUN (CCGTs still marginal plants in the Italian market) Weak correlation between PUN and Brent oil Stable PSV-Brent correlation (fewer gas supplies linked to oil formulas but more competition with spot gas prices due to the oil price crash, LNG prices still linked to oil formulas) Stable high correlation between Coal and Brent oil Source: GME, Thomson Reuters, Bloomberg 19

20 ITALIAN TEMPERATURES, PRECIPITATIONS AND WIND HIGHER PRECIPITATIONS, LOWER TEMPERATURES IN Q316 THAN IN Q315 Temperature Precipitations Q1 10-YR Average Q2 10-YR Average Q3 10-YR Average 9 months 10-YR Average Q Q Q months 2015 Q Q Q months 2016 Wind 7,7 17,3 22,9 184,6 160,4 132,8 6,7 6,2 6,7 16,0 159,3 6,5 8,0 17,5 23,9 16,5 8,4 17,2 22,9 16,2 162,8 107,4 110,1 126,8 160,1 133,9 126,2 140,1 7,1 6,2 5,7 6,3 6,7 6,4 5,7 6,3 Temp. 16 vs. 15 Prec. 16 vs. 15 Wind 16 vs. 15 Temp. 16 vs. 10-YR Avg. Prec. 16 vs. 10-YR Avg. Wind 16 vs. 10-YR Avg. 5% -2% -4% -2% -2% 25% 15% 10% -6% 4% 0% -1% 9% 0% 0% 1% -13% -17% -5% -12% 0% 4% -15% -4% Temperatures in Q316 in Italy were lower than in Q3-15 and in line with the 10YR average; The month of July was colder then last year, but broadly in line with the 10YR average. According to the latest analyses by NASA, 11 of the past 12 consecutive months dating back to October 2015 have set new monthly high-temperature records (only June, according to the last updates, was the third warmest June behind 2015 and 1998). Precipitations in Q316 were higher than last year, but lower than the 10YR average: the month of July was wetter then last year, but in line with the 10YR average. The month of August was drier then last year and the 10YR average. Wind in Q316 was in line with Q315, but below the 10YR average. Source: Bloomberg. Temperatures are the average temperature (usually of the high and low) that was observed between 7am and 7pm local. Precipitations include rainfall and the liquid equivalent of snow and sleet (measurement: Integer in 100th millimeters). Wind Speed is the average sustained winds which does not include wind gust. Bloomberg data (in particular, data about precipitations) are subject to ex-post adjustiments. 20

21 CONTENTS 01 Power Market Supply & Demand Spot Markets 02 Gas Market Supply & Demand Spot Markets 03 Crosscommodities 04 Environmental Markets: EUA 21

EUA MARKET OVERSUPPLY WEIGHED ON THE MARKET, BUT EUA PRICES HAVE INCREASED SINCE SEPTEMBER The persistent oversupply on the carbon market continued to weigh on the carbon prices.

22 EUA MARKET OVERSUPPLY WEIGHED ON THE MARKET, BUT EUA PRICES HAVE INCREASED SINCE SEPTEMBER The persistent oversupply on the carbon market continued to weigh on the carbon prices. After being between 4.4 /ton and 5 /ton for most of the time in July and August, prices fell to a three-year minimum at the beginning of September (lowest level since the European Parliament temporary rejection of backloading in May 2013). In September, prices rebounded (up to 6.5 /ton at the beginning of November), mainly driven by the bullish sentiment on the power markets and by in the increase in thermal production. In mid October, ITRE (EU Parliament Committee on Industry, Research and Energy) adopted its opinion on the revision of the EU ETS for phase 4 ( ), with some light changes to the EU Commission proposal. ENVI should vote at he beginning of December and the Parliament in February France decided to posticipate the introduction of the carbon floor (initially set for January 2017), with little effect on EUA prices. Source: Reuters. 22

23 BACKUP SLIDES MARKET ANALYSIS & PRICE FORECASTING November

24 GLOSSARY (1) Baseload (BL-PL): A Baseload Day consists of all hours from 00:00 to 23:59 Central European Time of each calendar day CDS (Clean Dark Spread): It represents the margin an hypothetical coal plant with 35% efficiency can obtain on energy markets by selling one unit of electricity, given fuel and environmental costs. Throughout our analysis CDS are computed as follows CDS = PUN BL coal cost (API2 + spread MED + variable transport costs - eff. 35%) EUA cost CV cost (up to 2014) China DES: it is the Argus price assessment for Chinese landed LNG cargoes delivered in the ports of Guangdong, Fujian, Shanghai, Jiangsu, Dalian, Zhejiang, Tangshan, Zhuhai, Tianjin CSS (Clean Spark Spread): It represents the margin that an hypothetical CCGT power plant with 51% efficiency can obtain on energy markets by selling one unit of electricity, given fuel and environmental costs. Throughout our analysis CSS are computed as follows: CSS = PUN (BL/PL) gas PSV cost (eff. 51%) EUA cost CV cost (up to 2014)- variable transport costs EUA (European Union Allowances): A tradable and bankable unit under the EU ETS. Each allowance equals 1 tonne of CO2. Heating degrees days: it is a proxy of the average Italian temperature during the winter season. It is related to gas consumption for heating. It is calculated as follows: HDD = Y AVG, Y = 18 ºC, HDD = Mean, if HDD<0 then HDD=0 24

25 GLOSSARY (2) Henry Hub: It is the main US gas hub, located in Erath, Louisiana. It serves as the official delivery location for futures contracts on the NYMEX Marginal Technology: electricity generating technology that sets the selling price on the Italian day-ahead market in each hour. Data on marginal technologies are an average of zonal data taken from the marginal technology index (ITM) published by the GME. Peakload (PL): A Peakload Day consists of all hours from 08:00 to 19:59 Central European Time of each weekday (i.e. Monday to Friday inclusive) PSV (Punto di Scambio Virtuale): virtual trading point for natural gas in Italy, as established by the relevant Network Operator and located between the entry points and the exit points of the national transportation network where shippers may exchange and sell natural gas PUN (Prezzo Unico Nazionale): average of Zonal Prices in the Day-Ahead electricity Italian Market, weighted for total purchases and net of purchases for Pumped-Storage Units and of purchases by Neighboring Countries Zones. VTP (Virtual Trading Point): a notional point in Austria at which gas can be traded within the market area after injection and before offtake. The VTP is not a physical entry/exit point but enables grid users to transfer capacity titles from one balancing group to another within the market area (for trading) without the need to book capacity. TTF (Title Transfer Facility): it is a virtual trading point for natural gas in the Netherlands. Peg Nord (Point d Echange du Gaz): it is one of the virtual trading locations for the sale, purchase and exchange of natural gas and LNG in France. It is one of the pricing and delivery points for Powernext natural gas futures contracts. 25

NOTES ON ENERGY AND ENVIRONMENTAL MARKETS AT

NOTES ON ENERGY AND ENVIRONMENTAL MARKETS AT 30 06 2017 OVERVIEW OF ITALY AND BORDERING COUNTRIES July 2017 WITH GLOSSARY SUMMARY Q2 2017 POWER AND ENVIRONMENTAL MARKETS In Q217 there was a 2.2% increase