Challenges for a Spanish utility in the procurement of CO 2 emissions

Challenges for a Spanish utility in the procurement of CO 2 emissions IBERDROLA July 2008 Brussels 7 th October 2011 1 1

Agenda Iberdrola s overview Current situation: Uncertainties Iberdrola s approach Conclusions 2

Iberdrola in the world Key operating data Installed capacity (MW) 44 991 Production (TWh) Distributed electricity (TWh) 154 203 Gas Supplies (TWh) 157 Employees 29 641 Customers 27,7 Mio Production by geographical areas Latin America 25% Spain 48% 9% United States 18% United Kingdom Generation portfolio Hydro (MW) 9 892 Renewables (MW) Combined cycles (MW) 12 532 13 128 Nuclear (MW) 3 344 Cogen (MW) 1 229 Coal (MW) 4 709 Fuel-Oil (MW) 157 Total (MW) 44 991 3

IBERDROLA in Spain IBERDROLA owns and operates a well-balanced Power Plant Portfolio Main figures Installed Capacity 2010 Hydro 8 847 MW Installed capacity Power generation Electrical power distributed 28 GW 72,4 TWh 102 TWh Nuclear CCGT Oil-fired 3 344 MW 5 893 MW 157 MW Gas supplies 49 TWh Coal-fired 1 253 MW Employees 9 600 CHP 399 MW Customers 9,3 Mill. Renewables 5 696 MW 4 4

IBERDROLA in Spain Iberdrola in Spain is leader on environmental efficiency with more than half of its capacity and production emission-free 2010 Emission free Renewables Coal Cogen CCGT 72 TWh Hydro 79% Nuclear 5

Iberdrola in Spain After an ambitious investment plan launched in 2002 MtonCO2 Emissions Emission rate 2010-60% +2 TWh g CO 2 /kwh x 2.4 15 389 6 164 2002 2010 Iberdrola Rest of Spanish competitors* *Iberdrola s calculation 6

CO2 Emissions Reduction 2020 Iberdrola is one of the cleanest companies with emissions 30% lower than European average gr CO2/kWh 436 IEA 450 ppm Scenario for EU 309-30% -30% 275-20% Iberdrola s Plan 220 2007 2020E...and has a plan to reduce 30% of their emissions in 2020, 20% more than the demanding IEA 450 Scenario for the European Union 7

8 Iberdrola s Generation Portfolio Strategy 2008 2020E >50% >65% 43 309 MW installed 65 000 MW installed (estimated) >50% emissions free >65% emissions free More than 20 000 MW projected in the period 2008-2020 focused in Renewables, Nuclear (UK), Hydro.

Agenda Iberdrola s overview Current situation: Uncertainties Iberdrola s approach Conclusions 9

Uncertainties What does a European utility need to monitor? Fundamentals: International and national EUAs and CERs Market: prices CERs Issuance Demand Production International regulation International agreement Post-Kyoto CERs use National regulation CO2 deduction Coal policy 10

Fundamentals: Prices evolution 2011 Prices in EUAs and secondary CERs market have reflected German nuclear decision 20 18 16 CER11 EUA DEC11 Spread 11 European debt crisis, Fears double dip recession 14 12 10 8 6 4 Fukushima incident Energy Efficiency Directive, Failure vote on 30% 2 0 ene-11 feb-11 mar-11 abr-11 may-11 jun-11 jul-11 ago-11 ago-11 Source : Bloomberg 12

Fundamentals: CER issuance 2011 Comercio de emisiones Límite a la emisión absoluta 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 13

Fundamentals: Demand Electricity demand fell drastically in 2009 caused by economic crisis. Its recovery is expected gradually in part due to energy efficiency measures. TWh Electricity demand 15

Fundamentals: Production A great incentive to renewable energy is overwhelming expectations TWh Renewable generation 16

Fundamentals: Production Demand and renewable are reducing the thermal generation gap TWh Thermal production And in the last few years the technology is switching to CCGTs * Iberdrola s forecast 17

Regulatory changes Since the beginning of Phase 2 things have changed 2007 2008 Dec 2008 2009 2010 2011 Use of credit limit during Phase 2 All CERs valid for compliance except from large hydro, nuc Phase 3 debate : doubts about types of CERs accepted in the future. No industrial gases ; Gold standard, LDC,...?? Green Package approval: credit limit 2008-2020, minimum 11% Types of CERs accepted: Commitology. Credit crunch 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 Industrial gases CER banned from May 2013 Rumours? Market needs certainty and stability 19

CO2 Deduction: RDL 11/2007 The measure 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). In theory 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. In practice 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. Duration 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. 21

CO2 Deduction: RDL 11/2007 Amount due 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. Criteria unrelated to real emission 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. Penalizing low emitting technologies 22

Coal policy Proposal Received the 15th Sept 09 Started January 2011 To give an incentive to national coal production Why National coal stocks are at historical maximum How Assuring the consumption of the yearly production of the Mining Plan until 2014 Fixing the income of the electricity coal production for each asset. Impact This solution distorts efficient dispatching: Displacing imported coal and gas. Provoking logistical difficulties in the gas system. Increasing emissions. 23

Agenda Iberdrola s overview Current situation: Uncertainties Iberdrola s approach Conclusions 24

Fundamentals: Emissions forecast Global vision for 2008-2020 Emissions IB in Spain Mton 11 9,5 7 6 2008 2009 2010 2011e 25

Our business To manage the margin of the electricity sales Assuring the emission cost once the production income is closed 1 TonCO2 emitted = 1 emission right What? When? How much? 26

What? Compliance tools EUAs Carbon Credits: CERs NPA Others Secondary Primary Projects Counterparty risk Organized markets or bilateral Different vintage Immediate negotiation Incertitude on quantities and delivery Regulatory, country and counterparty risk Multiyear Delivery Long negotiation: months Carbon funds Price EUA: European Unit Allowance CER: Credit Emission Reduction CDM: Clean Development Mechanism Risk 27

When? or When what? Iberdrola s production sold in Forward Markets 0% Mton 40% 55% 95% 2006 2008 2009 2011e 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 Monitoring the position and with the goal of compliance 28

How much? Credit limit 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 3 1,3 41,5 Mton 2 NAP 15,5 Mton Credit limit CERs / ERUs What to use? How many to use? When to use? Uncertainties in credits regulation deeply affect the CO2 balance 29

Agenda Iberdrola s overview Current situation: Uncertainties Iberdrola s approach Conclusions 30

Conclusions Our strategy is continuously under review and currently: 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 The only motive of emissions market existence is regulation. This market needs certainty and stability. 31

THANK YOU! IBERDROLA July 2008 Brussels 7 th October 2011 32 32