The challenges of a changing energy landscape

The challenges of a changing energy landscape October 26 th 2016 Maria Pedroso Ferreira EDP Energy Planning maria.pedrosoferreira@edp.pt

Agenda 1 A changing energy landscape 2 Challenges and opportunities in the Electricity sector 3 Portugal s strategy for the electricity sector 2

Questions 1. Which country/region is the top energy consumer in the world? a) China b) USA c) European Union 2. What was the percentage of renewables in the Portuguese generation mix in 15? a) ~10% b) ~30% c) ~50% 3

Agenda 1 A changing energy landscape 2 Challenges and opportunities in the European Electricity sector 3 Portugal s strategy for the electricity sector 4

Agenda 1 A changing energy landscape a The map of energy is changing Efforts to tackle climate change still fall short of its target The role of electricity in demand is increasing 5

Global energy demand is expected to evolve at two speeds: flat growth in the OECD and strong growth in non-oecd, pushed by China and India Primary energy demand Mtoe, 1990-2015 Consumption growth per geography Mtoe, 2014-2035 18.000 16.000 4.379 5% 14.000 12.000 10.000 8.000 6.000 Non OECD 32% 20% 11% 32% 4.000 2.000 OECD 0 1995 2005 2015 2025 2035 Total OECD China India Middle East Others Source: BP Energy Outlook 2035 6

Consumption growth in China has been outstanding: in the past decade it added two times the EU s total growth in 35 years Primary energy demand Mtoe, 1965-2035 Consumption growth Mtoe 4.500 4.000 Historical Forecast China 1.470 +94% 3.500 3.000 2.500 2.000 +185% USA 992 758 1.500 EU 1.000 500-87% 147 188 0 1960 1970 1980 1990 2000 2010 2020 2030 2040 2000-2010 2010-2020 Annual 2000-2010 1965-2010 EU UK total 2014 Source: BP Energy Outlook 2035 China 7

Huge disparities in energy consumption levels still subside: a New York inhabitant consumes 40x more electricity than one in Sub-Saharan Africa Residential electricity consumption in New York and Sub-Saharan Africa New York State (US) Sub-Saharan Africa Population ~20 Million People ~800 Million People Consumption/ capita 2.000 kwh/capita 50 kwh/capita Total = 40 TWh/year 40 TWh/year consumption Source: IEA, WEC 8

Currently, 1.2 billion people still lack access to electricity, but demand growth in non-oecd should drive millions out of energy poverty Population without access to electricity Millions, 2013 Population without access to electricity Millions, 2012 and 2050 1.200 Others 1.283 41 53% Asia 620 44% 2% 1% 530 1 128 319 Africa 622 53 401 266 Total Africa Asia LatAm Middle East WEO 2012 Symphony Jazz 2050 WEC scenarios Source: IEA, WEC 9

Demand will grow faster than supply in non-oecd, eroding its net exporter position; energy will increasingly flow from West to East Change in net energy balance Cumulative from 2004, % of consumption Primary Energy net balances 1 Mb/d, 1990-2035 1. FSU Former Soviet Union Source: BP Statistical Review 2014, BP Energy Outlook 2035 10

The US is a showcase of this trend: spectacular increases in oil and gas production, pushed by tight oil and shale gas, reduce its import needs US oil production Million tonnes, 1965-2014 US gas production Bcm, 1970-2013 600 500 400 300 200 100 700 600 500 400 300 200 100 Shale gas 0 0 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 1990 1995 2000 2005 2010 2015E Source: BP Statistical review 2014, EIA 11

which had a significant impact in the global commodity markets Oil price $/bbl, Jan 2005 Aug 2016 Gas price /MWht, Jan 2005 - Aug 2016 140 120 WTI Brent 45 40 NBP Henry Hub 100 35 30 80 25 60 20 40 15 10 20 5 0 0 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18 12 Source: Reuters

Agenda 1 A changing energy landscape The map of energy is changing b Efforts to tackle climate change still fall short of its target The role of electricity in demand is increasing 13

To limit the global warming to 2⁰C, known fossil fuel reserves need to stay underground The Carbon bubble The Carbon Bubble dilemma: the World either overshoots the 2⁰C limit, or fossil fuel listed companies are overvalued Source: Conservation Magazine 14

However, emissions under IEA s base scenario use all the remaining carbon budget by 2040; adaptation measures will also be needed Global CO 2 emissions Gt, 1990-2040 Share of remaining carbon budget used under IEA s Base Scenario % 44.100 36.700 +95% 18.800 1990 2000 2010 2020 2030 2040 Current Policies New Policies 450 IEA s 450 scenario is the only that considers the necessary measures to stabilize the increase in temperature to 2⁰C 1. IEA International Energy Agency 100 90 80 70 60 50 40 30 20 10 0 100% Share of budget used in Central Scenario 2012-2040 1900-2012 Source: IEA WEO 2015 15

Avoiding severe climate change requires a significant step up in low carbon investment, notably in improved efficiency and renewables Average anual low carbon investment Trillion dollars(2013), 2014-2040 Source: IEA International Energy Agency 16

Agenda 1 A changing energy landscape The map of energy is changing Efforts to tackle climate change still fall short of its target c The role of electricity in demand is increasing 17

Electricity as a final energy source has grown significantly in the past, and it should remain as the highest growth source in the future Inputs to electricity as a share of total primary energy %, 1965-2035 Final energy CAGR by fuel type % CAGR 13-40 2,5 2,0 Highest historical and forecasted growth Electricity 1,5 1,0 0,5 Gas Total Oil Renewables Coal 0,0 0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,5 CAGR 73-13 Source: BP Statistical review 2014, IEA WEO 2015 18

Indeed, strongly reducing emissions implies increasing electrification of energy demand, besides decarbonizing the power sector Emissions reduction as a function of the share of electricity in final energy demand % Target % CO 2 emissions reduction B C Decarbonize electricity > Renewables > Nuclear > CCS Emissions factor Zero Today s A Increase electrification > Transport (EV) > H&C > Energy efficiency % electricity in final energy demand Source: EDP analysis 19

Through the electrification of transports and H&C, overall energy consumption decreases due to higher efficiency of electric techs Transport Electrification 1 Average for 100 km Heating & Cooling Electrification DIESEL VEHICLE ELECTRIC VEHICLE H&C NON- ELECTRIC HEAT PUMP Primary Energy Final Energy after the engine 58,7 kwh (6 liters) 13,5 kwh (1,4 liters) VS 24,3 kwh 13,5 kwh Efficiency VS 90% 300% Electric vehicles 2,5x more efficient Heat pump 3x more efficient than non-electric technologies 1. It is assumed a primary energy/final energy ratio of 68% for generation and 91% for transport and distribution Source: Deloitte, EDP analysis 20

Agenda 1 A changing energy landscape 2 Challenges and opportunities in the European Electricity sector 3 Portugal s strategy for the electricity sector 21

The context that presided over the last significant change in the industry (liberalization in the 90 s) has dramatically changed Generation Grids and downstream 1990 s > Depreciated assets > Dash-for-gas era > Low and stable fuel prices > Few renewables > Increased consumption > Grid expansion Today > Need to ensure investment in low carbon techs (capex intensive) > Very volatile fuel prices > High share of renewables > Thermal increasingly needed for back-up > Stagnated consumption > Replacement and upgrade of grids > Energy efficiency > Distributed generation and storage Source: EDP analysis 22

The uptake of RES has been consistently revised upwards... Solar energy installed capacity forecast GW, 2013-2030 Wind energy installed capacity forecast GW, 2013-2030 600 550 500 450 400 350 300 250 200 150 100 50 0 x8.0 x6.9 x6.2 2015 1.100 1.000 900 800 700 600 500 400 2010F 300 200 2006F 100 x2.0 0 2013 2020 2030 2013 x3.6 x2.5 2015F 2010F 2006F 2020 2030 Source: IEA WEO 2015 24

thanks to increased competitiveness as innovation and mass production drove sharp cost reductions which are expected to continue Levelized costs of electricity for Europe $/MWh, 2015-2040 177 88 99 75 93 87 127 84 63 64 111 92 Source: BNEF NEO 2015 25

The EU Energy Policy has been a key driver in RES investment in Europe, with electricity as a major contributor 43% share in generation in 30 Targets 2020 2030 EU electricity generation mix TWh, 1990-2030 ENERGY EFFICIENCY > - 20% consumption vs BaU > - 27% consumption vs BaU 3.251 3.358 3.528 RENEWABLE SHARE > 20% in final consumption > 10% in transportation > 27% share at EU level 2.576 RES 12% 29% 36% 43% EMISSION REDUCTION > - 20% of GHG vs 1990 > - 40% of GHG vs 1990 Non RES 88% 71% 64% 57% 1990 2015 2020 2030 Source: EC Reference Scenario 2016 26

Changes should be structural for distribution and retail: smart grids, consumers also as producers, and new products and services Distribution and downstream growth opportunities Examples 1 3 Electric vehicles and services 1 5 Smart grids > Total costs of ownership should achieve parity in the 20 s > Remote control and Vehicle to Grid expected soon 2 > Smart grids enable bidirecional communication and energy flows, enhancing efficiency and quality of service Smart equipment Smart grids > Equipment controllable via smartphone > Example: Google s thermostat learns the consumer s habits Source: Eurelectric Innovation Action Plan Taskforce analysis, Google 28

Agenda 1 A changing energy landscape 2 Challenges and opportunities in the European Electricity sector 3 Portugal s strategy for the electricity sector 29

In 2015, RES accounted for 51% of total generation over the last decade RES contributed to increase energy dependence and lower the energy bill Electricity generation in Portugal 1 2015, % TWh Energy dependence %, 2004-2014 Cumulated energy bill savings from RES generation (excl. hydro) 3 Bn, 2005-2015 CHP non RES -10 p.p. 5,6 Thermal 39% 10% Others RES 2 7% 24% Wind 84% 72% 3,4 20% 2,2 Hydro Σ Renewables in generation 1 = 51% 2004 2014 2005-2010 2011-2015 Total 1. Includes pumping and small hydro; not adjusted for hydro index 2. Includes solar PV, solar CSP, biomass, biogas, MSW, geothermal and waves/ocean/tides 3. Excludes hydro; considers the replacement of RES for CCGT (60%), coal (30%) and interconnection (10%), and includes CO 2 savings Source: EDP, REN, DGEG, ERSE, IMF, Eurostat 30

By leveraging on its natural resources, Portugal has achieved one of the highest shares of renewable capacity in the European Union Installed capacity mix GW, February 2016 % RES 45% 55% 36% 49% 50% 34% 21% 65% Others RES 2 Solar Wind Hydro 1 Nuclear 955 4% 10% 15% 16% 13% 192 133 113 102 90 5% 2% 1% 6% 5% 7% 20% 9% 17% 12% 23% 19% 8% 11% 5% 25% 20% 19% 11% 7% 6% 6% 47% 37 2% 12% 6% 79% 21 2% 3% 24% 36% Thermal 3 42% 39% 17% 51% 43% 55% 35% EU-28 Germany France Italy Spain UK Poland Portugal 1. Includes small hydro and pumping 2. Includes geothermal, Tidal, Ocean, Wave and biomass 3. Includes Special Regime Production with fossil fuels Source: IHS February 2016 Planning Scenario 31

Portugal s generation has already relied entirely on renewables during particular periods for 4 days in May, demand was fully covered by RES Generation mix in Portugal GWh, 6 th -15 th May 2016 200 150 100 50 0 6-May 7-May 8-May 9-May 10-May 11-May 12-May 13-May 14-May 15-May Thermal Others SR Wind Hydro Consumption 32 Source: REN

The investment in RES is also key to fulfill the energy policy commitments the share of wind, hydro and solar should grow further until 2030 Renewable share in final demand target 2020 2030 Gross generation forecast European Commission Reference scenario GWh European Union target Portugal target 20% 31% 1 27% 40% 2 48.507 29% 7% 2% 24% 48.244 13% 6% 9% 32% Thermal Others RES 4 Solar Wind Impact on the power sector 50%-60% 60%-70% 3 38% 39% Hydro 2020 2030 1. Scenarios PNAER 2013, RCM 20/2013 2. Target defined by the Government at the Compromisso para o Crescimento Verde, RCM 28/2015 3. EDP estimate 4. Mainly biomass-waste Source: EC, PNAER, Compromisso para o Crescimento Verde, European Commission 33

Questions? 34