Investment in offshore wind - utility s perspective Marek Dziewior

European Summer School 2015 Economic and Legal Aspects of the Electricity, Gas and Heat Market Investment in offshore wind - utility s perspective Marek Dziewior European Summer School 2015 1

Agenda E.ON and its renewable business Offshore wind in E.ON s portfolio Long way to the investment decision Regulatory framework for renewables European Summer School 2015 2

E.ON s business areas Gas supply and transport Conventional Generation Renewable Energy Trading Distribution Energy efficiency Sales European Summer School 2015 3

E.ON Group Financial Highlights 1 in millions 2014 2013 +/- % Electricity Sales (billion kwh) 735.9 696.9 +6 Gas Sales (billion kwh) 1,161.0 1,219.3-5 Sales 111,556 119,688-7 EBITDA 2 8,337 9,191-9 EBIT 2 4,664 5,624-17 Investments 4,633 7,992-42 Employees (at year-end) 58,503 61,327-5 1. Adjusted for discontinued operations 2. Adjusted for extraordinary effects (see glossary on eon.com). European Summer School 2015 4

E.ON s renewables business in figures Investments ( m) 2,299 1,485 1,065 1,235 1,250 1,687 937 1,118 2007 1 2008 2009 2010 2011 2012 2013 2014 EBITDA ( m) 823 684 452 550 562 Formation of EC&R 152 293 2007 2008 2009 2010 2011 2012 2013 2014 We drive performance by building renewables where they create the most value European Summer School 2015 5

E.ON s wind business Summary San Francisco 2510 MW Chicago 54% 46% Europe 165 MW Austin Key facts Assets with >4 GW total capacity 14.5 TWh electricity produced in 2013, equivalent to demand of 3.6m homes Global #8 in onshore wind Global #3 in offshore wind North America 2013: 875 employees, 31 nationalities 913 MW 41 MW 1,732 Essen Coventry Be 84 MW Hamburg Milan Malmö Szczecin 463 MW 328 MW 155 MW Be Headquarter Office location Capacity (MW) Onshore wind Offshore wind European Summer School 2015 6

E.ON s offshore Wind Energy Projects Aa Kårehamn (48 MW) Robin Rigg (180 MW) Aa Scroby Sands (60 MW) London Array (189 MW) Amrumbank Kriegers Flak Aa West (600 MW) (288 MW) Ab Delta Nordsee Ab (324 MW) Aa Arkona-Becken Südost Humber alpha ventus Ab Rødsand II (378 MW) Aa Aa Gateway (16 MW) (41 MW) (219 MW) Aa Aa Ab Dutch Tender (2x350 MW) Aa Rampion (400 MW) AaIn operation Aa In construction Ab In development European Summer School 2015 7

E.ON s offshore wind portfolio Country Project Status Start of Operation Capacity E.ON Share UK Blyth Operational 2001 4 MW 100% UK Scroby Sands Operational 2004 60 MW 100% Germany Alpha Ventus* Operational 2009 60 MW 26.25% UK Robin Rigg Operational 2010 180 MW 100% Denmark Rødsand 2 Operational 2010 207 MW 100% UK London Array** Operational 2013 630 MW 30% Sweden Kårehamn Operational 2013 48 MW 100% UK Humber Gateway Construction 2015 219 MW 100% Germany Amrumbank West Construction 2015 288 MW 100% To date, E.ON has already invested more than 3.7 billion into offshore wind projects, including London Array**, the world s largest offshore wind farm * Joint Venture of E.ON (26.25%), EWE (47.5%) and Vattenfall Europe (26.25%), **Joint Venture of E.ON (30%), DONG Energy (50%) and Masdar (20%)0 European Summer School 2015 8

The next project is Rampion Project Summary Capacity: 400.2 MW Technology: 116 x Vestas 3.45 MW turbines Average wind speed: 9.1m/s @ 81.5m hub height Planned average turbine availability: ~96.7% Offshore substation: 1 substation, 2 x 240 MVA transformers, 2 export circuits Onshore substation: 2 x 240 MVA transformers, 2 circuits Onshore works: a 26.4 km underground cable route from landfall to the 400 kv substation (owned by National Grid), around 2 km south-west of Bolney Partnering: Green Investment Bank (25%) European Summer School 2015 9

Why is offshore wind beneficial? Why E.ON fits offshore? Benefits for the system? Competitive advantage Wind yield/base load Similar to conventional generation No NIMBY 1 Investment size Jobs 1 NIMBY Not In My Back Yard European Summer School 2015 10

Offshore projects require extensive longterm planning Origination Development Construction Operation Initial screening of potential sites Preliminary evaluation of seabed and wind conditions Securing of project and property rights Application for permission Wind Assessment/ Ground Survey Environmental Impact Assessment (EIA) Technical planning Securing of grid connection Receiving of construction permit Component contracts signed Installation of foundations and wind turbines Connection to onshore grid Commissioning and start of operation Hands-on and proactive operation Regular check and maintenance of technical equipment Repairs, overhauls and upgrades At end of lifetime: decommissioning or repowering The realization time of an offshore wind park, from the first idea to the start of the project, might require up to 10 years of continuous work and a complex project management European Summer School 2015 11

Internal investment process Illustrative 2m 20-40m 1bn Gate 1 Presentation of early development/ strategic options Approval of budgets for development capital expenditure Gate 1.5 Proof of concept Approval of budgets for development capital expenditure Gate 2 Final Investment Decision Approval of construction budget Partnering agreement, bylaws All permits in place Most procurement contracts in place European Summer School 2015 12

Documents supporting investment decisions Data Book Key project assumptions Risk register Risk and opportunities associated with the approval Counterparty risk assessment Compliance, sustainability and credit checks Financial model Independent economic calculation Gate paper Financials, KPIs, impact on organization, HSSE European Summer School 2015 13

To invest or not to invest, that is the question NPV The present value of an investment's expected cash inflows minus the costs of acquiring the investment. IRR The interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero. Payback period The length of time required to recover the cost of an investment. The average total cost to build and operate a powergenerating asset over its lifetime divided by the total power output of the asset over that lifetime LCOE /MWh 200 142 100 123 102 87 0 2013 2017 2020 2023 Source: http://www.investinganswers.com; http://www.investopedia.com; Make Consulting; Offshore Stiftung European Summer School 2015 14

Data needed for financial modelling CAPEX breakdown CAPEX 34% 16% 13% 13% 7% 17% 3.370 M WTG Foundation Installation Electrical Other Risk + Contingency OPEX profile OPEX Wind rose Weibull distribution Power curve Wind yield Tariffs & Prices Offshore UK: income streams Power price ROCs WACC Cost of Equity Cost of Debt WACC * Proportion of equity * Proportion of debt European Summer School 2015 15

Risk makes offshore wind more expensive Development Construction Operation Soil conditions Certification Financing availability Grid availability Weather risk Suppliers credit risks Interface risk Regulatory risk Components reliability O&M counterparty Wind risk (volume) Price risk Permitting Certification Grid connection Taxation Health & Safety Support schemes European Summer School 2015 16

Support schemes drive the development of renewable generation / kwh Direct Marketing Feed-in Tariff Premium Model Green Certificate Trading US schemes Accelerated Depreciation (MACRS) 1 Constant / Adjusted Feed-in Tariff (FIT) Constant / Variable Premium Variable Revenue Green Certificate (GC) Renewable Energy Certificates (RECs) Production Tax Credits (PTCs) Wholesale price Wholesale price Wholesale price Wholesale price No support in addition to normal market price. Production is not traded in the market, generator receives revenue from authority. Either constant over support duration or annually adjusted, e.g. by consumer price index. Generator receives premium in addition to market price. Premium is either constant over support duration or annually adjusted depending on market price development. 1 Accelerated depreciation options for renewables assets exist in many countries, in addition to the specific support schemes Generator sells into the market and receives GCs per MWh produced (may be technology-specific). Suppliers have to fulfill increasing RES quotas, creating a national GC market. Value of GCs depends on RES quota fulfillment. No unified support across the US. Federal support includes cash grants, tax credits, and accelerated depreciation options. In addition, state certificate systems (RECs). European Summer School 2015 17

What is good policy? What do investors expect from policy makers? Targets Targets must be ambitious but realistic and transparently financed Policy change It should be clear when or under which conditions policy will be reviewed Nondiscrimination Equal treatment of all investor groups Market orientation Level playing field for RES and conventional power generation, robust CO2 price gradual phase out of subsidies. Retroactive changes and stop-and-go policies hinder steady development and cost reductions Retroactive changes Spain 2013: remuneration scheme for operating renewable energy projects has changed - the feed-in tariffs are replaced with a regulated return on investment. Stop-and-go policy EEG 2009 EEG 2012 EU State Aid Guidelines EEG 2014 New EEG 2009 2012 2014 2017 European Summer School 2015 18

Well designed tender can bring cost down and attract new investors 1 State aid for environmental protection and energy - Due to cost inefficiencies and distortion of competition EU Commission adopted in April 2015 new rules on public support for RES generation. - From 2017 public support must be allocated in competitive bidding process. 2 Why tenders are good? Price discovery Competitive auctions can be a path for a gradual phase out of subsidies for more mature technologies like onshore wind and PV. In the long term also for less mature technologies like offshore wind. Cost control In contrast to FIT regime build out of capacity can be better steered and by that cost to consumers and grid operators is more predictable. Grid Better coordination of grid enhancement. Stable income Remuneration in form of market premium reduces for operators the income risk. 3 Key elements of clever auction design Rigorous Prequalification Competition Only price matters Uniform pricing Realistic delivery window Penalties for non realization European Summer School 2015 19

What do we expect from the EU? 2030 targets A robust governance system for the Energy Union and 2030 Framework Rules harmonization Public support, cooperation mechanism Regulatory barriers (e.g. European Birds and Habitats Directive) Carbon pricing ETS: Robust CO2 price signal for investment allocation R&D Provide funding for R&D (e.g. floating foundations, maritime logistics) Grid Coordinated development of grid (e.g. North Seas Countries' Offshore Grid Initiative, NSCOGI) European Summer School 2015 20

Thank you for your attention! European Summer School 2015 21

Back-up European Summer School 2015 22

E.ON s new strategy Strategy Empowering customers. Shaping markets. Transformation One2two: Best in both worlds. New profiles Uniper Empowering customers Shaping markets European Summer School 2015 23

Business portfolio of future E.ON 1 Renewables Distribution Customer Solutions ~4.0 GW capacity ~15 GW global pipeline >1 million km networks ~26 million grid customers ~32 million sales customers Europe onshore Europe offshore US onshore 1.1 GW 0.5 GW 2.3 GW Germany Sweden Other EU 2 Turkey 2 440,000 km 137,000 km 311,000 km 200,000 km UK 7.7m Germany 6.3m Other EU 2 9.4m Turkey 2 9.0m 1. 2014 figures, corrected for Spain/Italy disposals agreed to 2. E.ON holds 49% in ZSE and 50% in Enerjisa. Figures for ZSE and Enerjisa included at 100% European Summer School 2015 24

Business portfolio of Uniper 1 Power Generation Global Commodities Exploration & Production 2 46 GW of capacity 3 Germany 17.2 GW UK 7.5 GW Sweden 6.5 GW Other Europe 5.0 GW Russia 9.9 GW Coal supply Gas LTCs Gas storage LNG regas 29 m t 35 bcm 9 bcm 4.7 bcm Russia Production 37.3 mm boe 1. 2014 figures, corrected for Spain/Italy disposals agreed to 2. Strategic review of E&P North Sea 3. E.ON holds 83% of E.ON Russia and 43% of Eneva. E.ON Russia included at 100%, Eneva not included European Summer School 2015 25

Offshore wind: capacity installed 2014 MW 4.552 712 1.049 1.271 215 247 25 26 Ireland Finland Sweden Netherlands Belgium Germany Denmark United Kingdom European Summer School 2015 26