Energy security and sustainability: Where do we go?

Energy security and sustainability: Where do we go? Carlos Gascó Travesedo Head of the Prospective Department The OECD Development Centre - EmNet network s activities 19 February, 2007 IBERDROLA RENEWABLE ENERGIES

Index I. A sustainable energy model II. The role of renewable energies III. What can the private sector do? IV. Showcase: Iberdrola s renewable strategy ٠ Renewable Plan 07-09 IBERDROLA RENEWABLE ENERGIES 2

Context Perverse CO 2 emissions and the need to enhance security of supply, are priorities in the current energy debate in developed economies. Meanwhile, more than 3 billion people, worldwide, lack access to basic energy services. In this context,a key question arises: what are the best technologies to reach a sustainable energy model? The right decision is not just technological, it has social, economic and environmental implications. My thesis: renewables are an option of great interest for their environmental and security of supply characteristics, but also for economic reasons. IBERDROLA RENEWABLE ENERGIES 3

Key drivers for a sustainable model ECONOMIC EFFICIENCY ENERGETY SECURITY Reasonable cost of electricity Essential for the social lifestile and the competitiveness ENVIRONMENT Dependence growing, creating equal geopolitic clashes Global Warming (Kioto commitments) Sustainable use of Natural Resources IBERDROLA RENEWABLE ENERGIES 4

The current global energy model is unsustainable Facts: Great growth of energy demand (X2 since 1980) Reserves and potential of traditional energy are limited, so are technology options Reserves located in unstable areas Electric demand ever growing Unacceptable environmental impact Developed countries, in spite of efficiency and saving Plans, will increase their demand. Developing countries, will increase demand at a faster pace. IBERDROLA RENEWABLE ENERGIES 5

Environment Emissions by sector, OECD countries (2004) Agricult ure 11% Electricity 22% Domestic 17% Industry 25% Transport 25% The electricity sector shows greatest potential for emissions reduction IBERDROLA RENEWABLE ENERGIES 6

Energy security Limited reserves of traditional energy resources Concentration of these reserves in unstable countries Volatility price of oil Oil price scenarios 1980-2030 Available reserves at current pace 50-100 60-150 150-300 Source: EIA, Annual energy outlook 2006 Reserves are limited, exhaustible and, probably, increasing in price IBERDROLA RENEWABLE ENERGIES 7

Energy efficiency: generation costs 350 300 Average generation costs ( /MWh) 200-300 200-300 In an analysis in the short term: Renewables are today more expensive. They need to receive finantial support from consumers (not bearable in Developing Countries) 250 200 150 100 50 0 50-60 Coal 40-60 Hydro 60-65 CCGT 80-85 Fuel 70-80 Wind 80-100 Biomass Hypothesis: considering oil costs at 50$ barrel, coal at 65$ Tn and 10 Tn CO 2 Working hours: Coal: 6.000h; Gas: 4.000; Fuel: 2.000; Wind: 2400 (Very sensitive to working hours). Solar Nevertheless, those costs are the result of a simple and static analysis: How fuel price will evolve? Prices include energy dependence? These figures internalyze all environmental costs? What effects would produce a sharp CO 2 cost increase? IBERDROLA RENEWABLE ENERGIES 8

What would be the effects in an 100 $/barrel scenario and 25 /Tn per CO 2 emissions? Average generation costs ( /MWh) FUEL EFFECT 350 200-300 190-280 The increase of oil costs would affect the variable costs of traditional thermic assets. 300 250 200 150 100 50 0 60-70 50-60 Coal 30-40 40-60 Hydro 75-85 60-65 CCGT 100-110 70-80 50-60 70-80 Fuel Wind 80-100 60-80 Biomass Solar The average cost of fuel will increase CCGT and coal fired stations as well. CO 2 CDM EFFECT Fuel effect: increase barrel price to 100$ MDL effect: CO 2 at 25 Tn IS THIS A REALISTIC SCENARIO? An IEA report on November 06 considers a price of 95 $ per barrel in 2025 (in trend projection). It was just at 30 $/barrel 2 years ago. Not accomplishing Kyoto commitments will cost 100 /Tn after the 2008-2012 period. CO2 price increases the value of the CERs obtained by the renewable projects in Developing Countries, through CDM s. For example, in Nicaragua, 1 MWh installed of wind energy reduces 0,8 Tn of CO2 emissions, so the investor obtains 0,8 CER s. If the CO2 market approaches 25, the promoter will obtain 20 /MWh, so the cost of MWh for the consumer of Nicaragua will be 60 (80 cost 20 for CDMs). IBERDROLA RENEWABLE ENERGIES 9

Perspectives for renewable generation costs Feed-in tariffs will be effective until renewables become competitive by themselves Future development of investment costs Source: Energy [r]evolution IBERDROLA RENEWABLE ENERGIES 10

Prospective study about the current energy trend In the current trend scenario, 2030 perspectives are: Up to 60% of growth in the global energy demand High energy dependence in all OECD countries The EU rate will increase from 50% to 70% Volatility of the oil price as well as the gas (indexed price), under growing unstability Increasing CO2 emissions (could increase some 60%) IBERDROLA RENEWABLE ENERGIES 11

Strong need for investment IEA believes it is necessary to invest some 20 trillion dolars in the 2005-2030 period in order to satisfy future energy demand IBERDROLA RENEWABLE ENERGIES 12

The crossroads: What is the path to follow? HYDROCARBONS: - Limited reserves - Political risks - Environmental impact COAL: - Large reserves. Low political risk - High impact in the climate change - Bridge technology NUCLEAR ENERGY - Risky. Only safe countries - High specific investment - Treatment radioactive waste - Social unrest Factors: Population increases and energy demand Access to energy at reasonable cost Enviroment restrictions Economic limitations and fossil reserves RENEWABLE ENERGY - Need for R&D - High specific investment - Wide social dialogue - International collaboration - Interconnections - Target: 35% by 2020 IBERDROLA RENEWABLE ENERGIES 13

Index I. A sustainable energy model II. The role of renewable energies III. What can the private sector do? IV. Showcase: Iberdrola s renewable strategy ٠ Renewable Plan 07-09 IBERDROLA RENEWABLE ENERGIES 14

The role of the renewables in the definition of a sustainable model Is it not economically feasible an energy provision contract, up to 20 years, at fixed price of 70-80 /MWh? With a mature technology, that means significant cost reductions in the future. With a production over 2.500 hours per year. With a native, renewable, inexhaustible fuel. In addition contributes to socioeconomic development. Is it not a good option cover to risk fuel price increases, and bet on tecnologies that reduce dependency? IBERDROLA RENEWABLE ENERGIES 15

Renewable socioeconomic benefits Renewable energies have (unlike some conventional) Promoted the development of local industry: Manufacture of machinery Provision of components Maintenance Generates direct and indirect jobs at a five fold rate vs. Thermal, bringing local economic benefits The renewable development, well planned, can be a vector for economic and social development. IBERDROLA RENEWABLE ENERGIES 16

The bet for renewables Contribution of Renewables to Electricity Generation (1995-2020) (TWh) Source: EREC Renewable Energy Target for Europe. 20% by 2020 Wind energy will be the most important renewable source in the generation mix by 2020 Hydro will continue playing a basic role. Biomass, yet on a stand still, shows significant figures, given its potential. Photovoltaic and geothermal, even with exponential figures, will noy play a significant role in the electric supply. IBERDROLA RENEWABLE ENERGIES 17

Wind enegy in 2020: at least X3 the present capacity At the end of 2006, more than 70,000 MW in operation worldwide, growing at a 30% rate annualy The main global market is the EU. Currently about 50,000 MW (68% of total installed). Potential of around 180,000 by 2020 Trends in the EU Key drivers MW 200.000 100.000 0 2003 2005 2007f 2009f Source: BTM Consult, EWEA Currently evolution Potential: 180,000 2020 Political impulse: stable and sufficient support systems Definition of European and National objectives Interconnection between Members States needed Efficient integration in the system and markets Increased social awareness Challenges: Control the increasing investment costs Offshore development IBERDROLA RENEWABLE ENERGIES 18

Index I. A sustainable energy model II. The role of renewable energies III. What can the private sector do? IV. Showcase: Iberdrola s renewable strategy ٠ Renewable Plan 07-09 IBERDROLA RENEWABLE ENERGIES 19

What can the private sector do? Private sector has the necessary capabilities to make the renewables a trustworthy and competitive energy resource. Shareholders and managers must trust renewables as a profitable and stable business. From the regulatory point of view two different options can be proposed: Integral model: reshaping mechanisms and regulation to internalize the external costs of the traditional resources. Given its scope and implication, it would be required that regulation comes from multilateral and global institutions. Current model: put in place support systems for renewable energy: stable, predictable and with a reasonable yield. This is a partial solution. IBERDROLA RENEWABLE ENERGIES 20

Role of utilities Europe s wind market is seeing rapid change as wind energy evolves as a mainstream generation asset Wind developer business models must quickly adapt to increasing market saturation, stronger competition and repositioning on the value chain Utilities: Iberdrola, FPL, EDP, Vatenfall, etc IPPs (Independent Power Purchasers): Acciona, bobcock & brown, etc The last 4-5 years indicate a clear shift in ownership from german private investors, wich help over 50% of MW installed in 2002, to utilities and IPPs, wich controlled 57% of the market in 2005 IBERDROLA RENEWABLE ENERGIES 21

Wind market: Spain vs Germany End of year 2006 Population (millions) Total demand (TWh) Wind installed capacity (MW) Wind production (GWh) Consume per capita (KWh) Germany 82.4 509 20,622 29,600 6,177 Spain 44.5 268 11,615 23,810 6,022 Indices Wind installed capacity (MW) / population (millions) Wind production/ Total demand Wind production / Population (millions) Germany 250.26 5.8% 359.22 (GWh/M) Spain 261.01 8.8% 535.05 (GWh/M) Source: IEA Wind Energy, REE and EWEA IBERDROLA RENEWABLE ENERGIES 22

Index I. A sustainable energy model II. The role of renewable energies III. What can the private sector do? IV. Showcase: Iberdrola s renewable strategy ٠ Renewable Plan 07-09 IBERDROLA RENEWABLE ENERGIES 23

Showcase: renewable strategy of Iberdrola Regulation: capability to contribute with its expertise as a utility to Regulators in the definition of technical & economic frameworks. Engineering, operation and mainteinance: 100 years utility culture in development & construction and operation of assets at large scale. Grid connections: analysis & infrastructure construction. Knowledge and management of the transport and distribution networks. Investment policy: Largest global turbine purchaser ensures the supply at the most competitive prices. Best financial capabilities. IBERDROLA RENEWABLE ENERGIES 24

The near future: our strategic plan 2007-2009 84% Growth in installed capacity Power installed evolution (MW) +84% >7,000 480 1.447 Other technologies 3.810 316 236 3.258 8.971 5.074 Wind (international) Wind (national) 3.258 2005 2009 with an average growth of 800 MW annually IBERDROLA RENEWABLE ENERGIES 25

Investments plans 3.2 billion investments in 07-09: 88% in wind energy 2005 Breakdown of investments 07-09 09 2009 International 6% Mini-hydro Others 5% 7% International 21% 3,810 MW + 7,000 MW 37% 51% 94% Domestic International wind Domestic wind 79% Domestic IBERDROLA RENEWABLE ENERGIES 26

Renewables International expansion International expansion as growth driver UK Ucrania Mexico USA. France Germany Poland China Spain Brazil Portugal Italy Grecee IBERDROLA RENEWABLE ENERGIES 27

Energy security and sustainability: Where do we go? Carlos Gascó Travesedo Head of the Prospective Department The OECD Development Centre- EmNet network s activities 19th February, 2007 IBERDROLA RENEWABLE ENERGIES