The Value of Hydro António Castro, EDP Produção Chief Development Officer The Value of Hydro Hydro operating flexibility provides higher revenues per h than other technologies: 1. Capacity to concentrate output in periods of stronger demand 2. Major provider of ancillary services: gaining importance with wind power growth 3. Capacity to store energy through pumping (namely surplus/cheap wind power) Low operating costs: CO 2 emissions free, zero marginal cost, low O&M costs; Long asset life: Low maintenance capex The value of hydro assets is increasing and they are scarce: No significant greenfield growth opportunities in Europe and there are no assets for sale 1
Hydro achieves higher prices than the remaining technologies Realized Price: Hydro vs. Other Technologies ( /h) (Example Spain 27E) Index 119 12 1 1 89 95 18 8 6 4 Capacity Charge Ancillary Services Pool 2 Final Price Nuclear Hydro Coal CCGT Higher price than average justified by (1) ability to concentrate sales in peak-hours (2) capacity to compensate sudden changes in system balance (3) energy storage capacity through pumping Source: EDP 2 Hydro is able to concentrate electricity sales in peak hours, which have better prices Pool Prices and Market Output 14.7.27 (Portugal) Three categories of hydro plants: Pumping Hours 6 5 4 58 5 6 /h 55 Avg. hourly pool price 2H7 Consumption Pumping: Capacity to store cheap and/or surplus energy (eg. wind output at night) and to sell it at higher prices in peak hours. 5 Imports 4 3 Reservoir Run of River Fueloil Reservoir: Storage capacity between 1 week and 4-6 months. Concentrates production in peak- hours over the year 2 1 2 4 6 8 1 12 14 16 18 2 22 Hours CCGT Coal Special Reg. Run of River: EDP has run of river plants (éclusees) have a storage capacity up to ~6 hours allowing to sell at peak hours over the day 1 Source: REN/OMEL 1 Excludes Mini-hydros 3
Hydro is the main technology for ancillary services receiving revenues for assuring electricity system stability Market Output by Technology at 14.7.27 (PT) Portugal Turbine start up time (min.) 45 4 35 Reservoir Hydro 3 3 25 2 ~45 were suddenly out of the system Run of River Fueloil Gasoil CCGT 15 15 6 9 Extremely Expensive 15 CCGT Coal/Fueloil 18 36 6 1 5 Coal Hot Start Source: EDP Warm Start Cold Start 1 2 3 4 5 6 7 8 9 1 11 12 13 14 15 16 17 18 19 2 21 22 23 Hours Ancillary services market: balances electricity demand and supply close to real time, gaining relevant in moments of system instability Hydro and CCGTs are the key providers of ancillary services; Ancillary services market provides an important source of revenues: 375m in the Spanish market in 27 Source: REN/OMEL Source: EDP 4 Value of hydro rises with higher weight of wind in the system Weight of wind in the Iberian Market (GWh) Wind and Hydro Output (3.8.27) Portugal 19% 3 Avg. Selling price: 82 /h 16% 17% 25 2 Avg. Pumping price: 52 /h 15 8% 8% 1 4% 5 Portugal Spain Iberia Portugal Spain Iberia 27 215E -5 1 3 5 7 9 11 13 15 17 19 21 23 Hours Wind Output Hydro Pumping Hydro Output Price Hydro pumping storage: Matching intermittent wind output with demand needs* Value of hydro increases with intermittent generation weight growth, namely wind Source: REN/OMEL * Pumping price has to be 3% lower than selling price to compensate energy losses 5
Hydro plants in operation have a long expected useful life Remaining Expected Useful Life of EDP s Generation Capacity in Iberia by technology Fuel 4 In Spain: Ley de la Água The concession can be extended for 1 years if a significant refurbishment is done. Gasoil CCGT 3 24 In Portugal: Lei da Água Allows the extension of the concession period between 2-25 years Coal 11 Hydro 39 27 Hydro has the longest useful life and potential to extend it Source: EDP estimates 6 Hydro plants deserve higher EV/ multiple than other technologies 1 8 Fixed O&M Costs ( /kw) 6 4 2 Hydro Nuclear Wind Biomass Coal CCGT Valuation (M /) 2,2 1,8 1,4 Investment (M /) 1, 1,6-2, 1,9-2,1 1,2-1,4,6-,8 2,4-2,6,9-1,1,4-,5,6,2 Hydro Wind CCGT Repowering New Plant Nuclear Wind Biomass Coal CCGT Higher revenues per h, lower operating costs and longer useful life period justifies a valuation premium in terms of multiples vs. other technologies Source: EDP estimates. Valuation multiples based on recent transactions 7
EDP s Hydro Assets 8 EDP has the highest weight of hydro among major generation portfolios in Southern Europe Hydro Capacity in the Conventional Mix in Southern Europe Major Players in the Region (Sep-7) 45% 38% 37% 31% 24% 18% edp *** Iberdrola ENEL (exc. Endesa) Endesa * PPC Union ** Fenosa Source: EDP estimates and company reports Hydro is key in EDP s Generation Mix * 27E ** 26 *** includes Alqueva 9
Today 8% of EDP s hydro assets In the Iberian market are remunerated by PPAs/CMECs EDP s Hydro Inst. Cap. in Iberia Plant Type Remuneration Total (Iberia) 5172 Reservoir/ pumping 21% Reservoir 3% Until the term of the former PPA contract if not before Jun-17: PPA/CMEC CONTRACTED GROSS MARGIN: LT Contracted Plants: PPA/CMEC 495 Run of River 49% ROA 8.5% real pre-tax + Annual Depreciation + Contracted O&M (Values updated to inflation) (8%) After the term dates of PPA/CMEC or after Jun-17: Energy to be sold in the market Merchant Plants (18%) Mini-Hydro* (2%) 99 168 28 Reservoir/ Reservoir 15% pumping 41% Run of river 44% Energy sold in the market Fixed Tariffs: In 26 85/h (updated to inflation) * Includes 1% of Pebble Hydro 1 The value of the extension of the hydro domain Concession of hydro plants (years) Average Duration of under CMEC 9 In Feb-7 EDP reached an agreement with the Portuguese government to operate hydro plants that where under PPAs beyond the end of these contracts and until the end of their useful life (247 in average); Average duration of the Market Average Duration of Hydro Assets 28 247 3 39 Main assumptions in the agreement: electricity price at 5/h (real) and WACC of 7.8%: Cash payment to be done by EDP: 759m; The extension of the Hydro Domain allowed edp to relaunch its repowering program 11
Weight of EDP s hydro capacity in the market will increase to 5% by 215 and 1% by 217 Hydro Installed Capacity Evolution in Iberia 8 7 Hydro in Liberalised Market 6 5 4 3 Hydro with PPA/CMEC 2 1 28 29 21 211 212 213 214 215 216 217 218 219 22 PPA/CMEC Liberalised Market 495 99 495 99 495 99 495 99 495 1383 495 1793 3291 312 3291 3515 2664 4142 686 686 686 686 EDP s hydro assets retain the full upside of long term power prices 12 Growing in Hydro 13
Portugal has a high level of hydro potential undeveloped Developed hydro potential in Europe -Why Portugal has lagged behind its Peers? France Italy Germany 86% 86% 97% System security reasons: (1) High weight of hydro in Portuguese generation mix (2) Low level of interconnection with Spain; (3) volatility of annual hydro production in Iberia PPA term dates did not incentive repowering investments Spain 78% -Growth drivers Finland 65% 22E Ongoing 2x increase of interconnection capacity with Spain PORTUGAL 46% 67% Start up of MIBEL Greece 42% Targets for renewables as a % of primary energy Increase, of oil, coal and CO 2 prices Hydro potential available Hydro potential developed Higher wind penetration increases the value of hydro due to: (1) hydro s storage capacity through pumping (2) hydro s ancillary services capability Source: Ministry of Economy 14 EDP expects to increase its hydro capacity by 36% until 215 in the Iberian Market Edp s Investment Plans in Hydro 18% 36% 918 234 883 55 Inst. Cap. in Iberia Ongoing Investments Repowering Projects Potential Projects Dec-27 212/213 214/215 22 15
EDP s ongoing hydro investments in Portugal: 883 s, accumulated capex of 856m Ongoing Investments Hydro Plans Capex To enter in Operation Type Status Picote II 241 135 212 Repowering Under construction Bemposta II 191 13 212 Repowering Construction to start in 2Q8 Ribeiradio (@55%) 41 72 213 New Plant Construction to start in 1Q9 Alqueva II 24 15 212 Repowering Construction to start in 28 Baixo Sabor 17 369 213 New Plant Construction to start in 2Q8 TOTAL 883 856 Commissioning of ongoing hydro investments concentrated in 212-213 16 EDP has repowering projects in advanced stage of study, which totals 918 and operating by 215 Repowering Projects in Advanced Stage of Study Hydro Plan Repowering Project Hydro Plant Venda Nova III Salamonde II Cabril II Paradela II TOTAL 435 88 85 31 918 To enter in Operation 214 214 215 215 Repowering is the refurbishment of a plant by including a new generator group taking advantage from the existing reservoir. EDP has exclusive rights on repowering of its plants Lower Capex/; lower environmental restrictions The IRR of Repowering is in average higher than the IRR of a New Plant New Plant Old Plant Reservoir 17
Portuguese government announced intention to award 1 new hydro plants with a total of 1,96 s National Hydro Plant Hydro Plants Basin Foz Tua Douro 234 EDP has a preference right To be Subject to an international tender Fridão Padroselos Gouvães Daivões Vidago Almourol Pinhosão Girabolhos Alvito Douro Douro Douro Douro Douro Tejo Vouga Mondego Tejo 163 113 112 19 9 78 77 72 48 EDP already made a preliminary assessment of these projects and intends to compete for them in the international tender. EDP has a proven track-record on developing and operating hydro plants in Portugal. EDP will target attractive IRRs Total 196 EDP considers to be in a good position to be awarded a significant number of these projects 18 Hydro in Brazil 19
Brazil: Strong demand growth, tight reserve margin and high level of undeveloped hydro Electricity Demand (CAGR) System s reserve margin (GW) 5.% 5.2% 27-211 212-216 Needs of additional capacity 1.1 1.6 1.4.3-2.4-5.2-8.2-12. -16.5 28 29 21 211 212 213 214 215 216 Source: EPE Source: PDEE 27; Energias do Brasil Brazil expects an increase in hydro generation capacity of approximately 6 GW from 25 to 22; Investments in electricity are set to rise in the next years. The main bottleneck to Brazil s Hydro growth is environmental licenses; Brazil has a stable and clear regulation with 75% of hydro power being sold through long term PPAs with distributors; New large hydro plants are contracted through auctions (2 auctions scheduled for 28); Mini-Hydro plants & Repowering: More flexible and lighter environmental licensing process with shorter construction period (~2 years); 2 EDP s hydro capacity in Brazil: 1,43 in operation, 1,589 projects under study EDP Hydro Capacity In Brazil Hydro Plants Contract Type Maturity Avg. Price 7 (R$h) Peixe Angical Lajeado Mascarenhas 12 Mini-Hydro 452 25 181 161 PPA PPA PPA PPA & Merchant 216 212 131 until 212 5 until 237 Avg. 223 132.3 86.3 74.7* 15.9 EDP has a proven trackrecord on developing and operating hydro plants in Brazil TOTAL 27 1,43 Avg. Life of PPAs: 1 years EDP Hydro Development Projects Hydro Plants Under Construction 24 Mini-Hydro Plants <3 12 Hydro Plants Under Study TOTAL 29 538 1,22 1,56 1,589 Hydro Development Under Study Santa Fé PPA contracted until 238 (124.99 R$/h); Under Development analysis - concession can be directly attributed to EDP by the Brazilian regulator (main restriction: environmental licence) Studies - Concessions to be awarded through competitive auctions. * Average price from 28 onwards - R$121,92/h 21
Conclusion: Hydro plays an important role in EDP s generation portfolio and it should continue to increase The value of hydro has been increasing in recent years, namely given the increase of fossil fuels and CO2 prices and increasing penetration of wind EDP has the highest weight of hydro in the generation mix in Southern Europe, 8% of capacity is under PPA/CMEC but EDP retains full long-term market upside Portugal has a 56% of undeveloped hydro power, which supports EDP s unique 36% expected growth of hydro capacity in Iberian market in 27-215 In Brazil EDP is also looking for value enhancing growth opportunities in Hydro 22