V SIMPOSIO EMPRESARIAL INTERNACIONAL FUNSEAM: LOS RETOS DEL SECTOR ENERGÉTICO MESA 1. RETOS PARA EL SECTOR DE LA ELECTRICIDAD Inversión en proyectos intensivos en capital y señales de mercado: Dña. Ana Quelhas, Directora de Planificación Energética del Grupo EDP Preside la mesa: D. Ferran Tarradellas, Director Representación en Barcelona de la Comisión Europea

1. Mesa 1
Retos para el sector de la electricidad
Ana Quelhas
Directora de Planificación Energética
EDP
Inversión en proyectos intensivos en
capital y señales de mercado

2. 2
Europe has assumed a long term economy-wide decarbonization goal of
at least 80% emission reductions by 2050 compared to 1990
• Strong push for energy efficiency
• Strong electrification of energy
demand
• Full decarbonization of power
sector
EU GHG emissions by sector
100% = 1990
Source: EC, “A Roadmap for moving to a competitive low carbon economy in 2050”, 2011

3. 3
Renewables and energy efficiency are the main instruments to achieve
decarbonization
Source: IEA – International Energy Agency
Average annual investment in low carbon techs
Trillion $13, 2014 - 2040
Greenhouse gas emissions reduction by driver
Gt, 2010 - 2040

4. 4
Source: BNEF
For renewables, innovation and mass production led to a strong reduction
in the costs of these technologies, namely for wind and solar PV
Onshore wind levelized cost2
$/MWh
Solar PV module cost1
$/W
1. Prices are in real (2015) USD. Current price is $0.4/W
2. Pricing data has been inflation corrected to 2014. Data is for Northern Europe.

5. 5
Source: IEA
The boost in the competitiveness of RES technologies led to frequent
upwards revisions of the forecasts for installed RES capacity
Solar energy installed capacity forecast
GW, 2013 - 2030
Wind energy installed capacity forecast
GW, 2013 - 2030
0
50
100
150
200
250
300
350
400
450
500
550
600
20302020
2015
2006F
2010F
0
100
200
300
400
500
600
700
800
900
1 000
1 100
2020 2030
2006F
2015F
2010F
20132013
x6.9
x8.0
x2.0
x2.5
x3.6 x6.2

6. 6
The EU needs to invest $2.2 trillions in the power sector up to 2035 to
renew the infrastructure and meet the decarbonization goals
Needed investments in the European power sector in the period 2014-2035
billions of USD
166
655
254
254
574
103
Other
renewables
117
2,223
TotalT&DNuclear
100
GasCoal Solar PVHydro Wind
Source: IEA, “World Energy Investment Outlook 2014”
Generation represents 70%

7. 7
The EU needs to invest $2.2 trillions in the power sector up to 2035 to
renew the infrastructure and meet the decarbonization goals
Needed investments in the European power sector in the period 2014-2035
billions of USD
166
655
254
254
574
103
Other
renewables
117
2,223
TotalT&DNuclear
100
GasCoal Solar PVHydro Wind
Source: IEA, “World Energy Investment Outlook 2014”
Renewables represent 75% of generation

8. 8
Levelized Required Revenues by technology in Iberia1
€’16/MWh, 2016
127
Biomass
79
66
Wind
onshore
Coal
88
108 108
Solar PVCCGT Nuclear
86
51
Hydro Wind
offshore
FixedVariable
1. Assumes 5000h for CCGT and Coal plants. Assumes plant enter into operation by 2016.
Source: EDP
However, pool prices are not signalling the need for those investments,
even in countries where generation adequacy is an issue
Pool
price
Pool prices
do not
remunerate
the full costs
of any tech

9. 9
Although renewables are competitive, the energy-only market design is
not adequate for massive decarbonization
Marginal pricing model
MWhNuclearWind Hydro CCGTCoal
Variable cost
Fixed cost
Comments
• Decarbonization leads to technologies
based on fixed costs (e.g., renewables,
nuclear, thermal backup, storage,
networks, etc.)
• In a capital intensive sector, the marginal
pricing model is not an efficient
instrument:
- Prices tend to zero in the absence of
market power
- Price uncertainty and volatility
increase the risk premium, hence the
cost of capital…
- … which will be reflected in higher
end user prices
€/MWh
Price
Supply curve
Demand curve

10. 10
As the share of renewables increases, the wholesale price drops, making
it insufficient to remunerate any technology…
Wholesale price of electricity vs. share of renewables in power demand Portugal
€/MWh vs. %, weekly data, Jan 2012 – Dec 2016
Source: Reuters, REN, OMIE, DPE analysis
R² = 0,66
0
10
20
30
40
50
60
70
80
90
20% 40% 60% 80% 100% 120% 140%

11. 11
… particularly the fixed costs of CCGT plants, which are needed to ensure
security of supply
Source: REN, REE, DPE analysis
2004 2006 2008 2010 2012 2014 2016
1 000
7 000
9 000
8 000
3 000
5 000
2 000
4 000
6 000
0
Working hours of gas plants (CCGT)
Hours, 2004 - 2016
Gas spread required to cover fixed costs of
CCGT (€/MWh vs. annual equiv. hours)
0
25
50
75
100
125
150
175
200
10 0006 000 8 0004 0002 0000
• Renewables replace conventional thermal generation, but do not avoid the need of firm capacity as
backup, which is a service offered by conventional thermal technologies
• In energy-only markets, backup capacity is only remunerated with unacceptable price spikes

12. 12
Factor Measures to achieve an adequate market
Renewables
Thermal
backup
Spot
market
ETS
Inter
connections
> Introduce ex-ante competition for long term contracts (ex. Contracts for Differences auctions,
preferably at European level) to reduce risk premium
> Recognize the value of backup capacity
> Harmonize the rules to adequately remunerate backup capacity
> Implement regional CRM, namely at the Iberian level
> Maintain spot prices for short term optimization and dispatch signal
> Deepen markets integration allowing for flexibility valuation and renewables participation
> Reinforce the CO2 price by adopting the reform measures proposed by the European Parliament
> Adopt a EU-level strategy against possible national approaches
> Reinforce the necessary interconnections for the internal market efficient operation
> Make investment decisions based on thorough cost-benefit analysis
Key reforms are required at various levels to adapt the current market
design to the new reality of European policies and utilities

13. 13
Source: Bloomberg New Energy Finance
Mechanisms to remunerate renewables by country
2010 2016
A broad set of countries are implementing auctions/tenders as a
mechanism to define renewables’ remuneration

14. 14
Source: IHS
It is also observed regulatory changes regarding mechanisms to
remunerate capacity in the majority of the European countries
Regulatory developments regarding capacity remuneration mechanisms (2015)

15. 15
Key messages
CONTEXT:
Europe has ambitious
targets of GHG emissions’
reduction, which will imply
full decarbonization of the
power sector
This requires strong
investments in RES, which
are already competitive vs
thermal plants
MARKET FAILURES:
The energy-only market
is not adequate in a
context of techs with
low/null variable costs,
since prices tend to zero
in a competitive market
Backup capacity, which is
needed to ensure security
of supply, is only
remunerated with
unacceptable price spikes
REFORMS:
Decarbonization requires
a strong CO2 price signal
and a reform in the
wholesale market design
based on competitive
mechanisms for long-
term contracting