The role of the CO 2 price for investment decisions in the energy sector

1. The role of the CO2 price for investment decisions in the energy sector Dr. Stefan Ulreich E.ON AG Graz, 25. November 2010

2. World Energy Congress 2010:Energy is a common issue in all countries worldwide Industrialised nations: Transformation of the energy system  Problem: Financing Growth regions: Construction of the energy system  Problem: Making energy available Poor regions: Fight against energy poverty  Problem: instable framework Solution for all regions: Technology & energy efficiency

3. • Further increase of the global energy demand from 32% to 40% until 2030 expected• Fossil fuels will play an important role globally for decades to come• Scarcity of capital the more decisive bottleneck than reserves for crude oil, natural gas and coal• Reserves of fossil fuels substantially greater compared to previous estimates – mainly due to shale gas• Access to affordable energy and energy as a driver for economic growth, more in the focus than climate change• The expected outcome of Cancun will not deliver a binding climate change treaty Energy demand is growing: Global answer are fossil sources

4. 3.6 billion people have no or only limitedaccess to electricity Access to affordable energy is decisiveto reach the millennium goals 683 85 116 1,495 805 466 Number of people in millionswithout adequate access to electricity Source: International Energy Agency 2009 World Energy Outlook and The World Bank, 2010.

5. Change in Global Energy Consumption Coal: The World’s Fastest Growing Fuel for the Past Decade 7% Nuclear 10% Oil 25% Hydro 1999 – 2009Change Natural Gas 27% 46% Coal Source: BP Statistical Review of World Energy, June 2010.

6. Developing Asia = 90% of Long-Term Global Coal Demand Global Coal Use Expected to Rise 53% by 2030 +110 +150 +2,210 +380 +690 +50 Growth 2007 - 2030 (Tonnes in Millions) U.S. growth presented in short tons. Source: World Energy Outlook 2009, International Energy Agency; Annual Energy Outlook Forecasts, Energy Information Administration; Peabody analysis.

7. To Replace Coal’s Contribution, The World Would Need… Zero Out Coal? No Energy Alternative Can Come Close • SOLAR* • 1,800 x Current Solar Generation • WIND* • 2.5 Million Wind Turbines • NUCLEAR • 1,150 Nuclear Plants • NATURAL GAS • 70 tcf = 3X Russia’s Production • HYDRO • 2,250 Dams *Requires backup baseload generation for cloudy and calm periods. Source: International Energy Agency, World Energy Outlook 2009.

8. WEC Europe Survey By 2 years Biggest dropin thesentiment:ConsumptionCapacity Environmental improvement Consumptioncapacity accelerated Timing RD&D postponed Supply capacity By 2 years by more than 20% 0 % By more than 20% decreased increased Volume

9. The “Energy Trilemma” is here to stay for the long-term - renewables and low-carbon focus are sustainable trends Energy policy priorities keep changing but evolve around 3 basic objectives Strong renewables trend supported by both security of supply and continued drive for decarbonisation Next cycle already apparent as regulatory interventions reflect stronger ambitions for cost effectiveness of RES growth The “trilemma” of energy policy Carbon RenewablesMarket frameworkInfrastructure Energy EfficiencyEUETS The Energy Trilemma Security of Supply LiberalisationEU Market Integration Costs Current focus is on integration of renewables and strengthening of carbon policy, at lowest possible cost to the public and customers

10. 0 Manage new risk profile of investments Cost comparison (new build, €/kW) Low-carbon options have a different risk and reward profile • High-tech technologies needed to tackle climate change: nuclear, coal + CCS, wind, solar (+biomass) • Higher capex • Higher sensitivity to discount rate (~project risk): bigger benefit of clear energy policy (small risk reduction -> big cost saving) • Higher sensitivity to new-build project performance, sites and skills • Lower variable opex -> less exposure to fuel supply, but more significance of operational performance, availability and flexibility 5000 Wind offshore CCGT Coal Coal+CCS Nuclear CSP Source: E.ON estimates Higher capex means policy becomes more important, as do sites and skills

11. Low carbon energy systems will require immense capex and effort in technology development and testing Low carbon players • Not only low carbon generation and large scale storage, but also infrastructure requires high upfront capex • Infrastructure investments to avoid grid congestions and/or curtailment both on distribution and transmission level • Order of magnitude: EC estimates one trillion € energy investment 2020, where 200bn€ only for power and gas grids Nuclear, CCGT, CCS Options for mitigation of intermittency will be 1) capital-intensive, and 2) in competition with each other -> markets will be best at finding the right solutions

12. x Developing deployable options in all key low-carbon generation and system technologies Renewables Nuclear/CCS • Global leader in offshore 2010 • Further growth in CSP/Biomass as dispatchable RES options • Large-scale CCS demo project • Nuclear options UK Storage Demand-side management • Strong pumped hydro storage pipeline • E-mobility / V2G field tests • CAES etc. RD&D • Smart meter products introduced and test projects EU-wide

13. , Setting clear and ambitious targets E.ON’s CO2 emissions in Europe [g/kWh] Clear commitment • Intentional shift of original 2030 E.ON target to 2020 for European portfolio • Explicit commitment and evident contribution towards the climate and energy targets set forth by the EU • Target level in 2020 far below carbon intensity of modern gas-fired power stations >50% 19901 20202 CCGT reference E.ON will achieve a >50% reduction of specific CO2-emissions in Europe already by 2020 1 Basis for 1990 was adjusted to reflect recent divestments & acquisitions 2 An extension of nuclear lifetimes for Germany is assumed