Workshop about “Security of energy supply for electricity generation” IEA&NEA

1. Workshop about “Security of energy supply for electricity generation” IEA&NEA Session 2: Security of Energy Supply & Specific Technologies José Antonio de Tomás Paris, 24 May 2005

2. CONTENTS • UNION FENOSA Group overview • Energy in Spain • Generation facilities in Spain • Limits and opportunities of technologies • UNION FENOSA’s Gas Project and CCGT Programme • Action lines to improve security of supply

3. UNION FENOSA GROUP OVERVIEW UNION FENOSA is Spain’s third-largest electric utility, with a vertically-integrated structure, 15.2 billion euro in assets, 19,460 employees, and 9,811 MW of operating capacity world-wide UNION FENOSA’s strategy is to be an integrated energy company in the Iberian Peninsula and an international electricity operator UNION FENOSA is Spain’s fourteenth-largest company, with a capitalisation of 7.2 billion Euro 2000-2004 Operating Capacity (MW) Customers (Thousands) Electricity Production (GWh) 40,770 9,811 8, 224 7,802 13,745 2,723 25,460 6,788 4,772 588 4,875 1,286 27,025 7,088 24,872 5,502 3,349 3,030 2000 2004 2000 2004 2000 2004 Domestic International

4. ENERGY IN SPAIN Energy dependence (%) • Very few energy sources and heavily dependent on foreign ones, much more than the rest of Europe • Intense growth in economic activity and population 78.3% 78.4% 67.5% 48.0% • Sharp increase in demand • Rise in energy intensity • Reduction in the spare capacity 2002 2030 Spain EU-25 Sources: “EU Energy and transport in figures: Statistical pocketbook 2004” and “European energy and transport trends to 2030” (European Commission)

5. ENERGY IN SPAIN: FEW ENERGY SOURCES Import Dependency (%) (*) Spain EU25 Coal 66.3 33.2 Fuel-oil 101.2 76.8 Natural gas 101.0 51.3 All fuels 78.3 48.0 (*) Import dependency=Net Imports/Bunkers+Inland Consumption Source: “EU Energy and transport in figures: Statistical pocketbook 2004” (European Commission). 2002 data Energy dependency is greater in Southern Europe

6. ENERGY IN SPAIN: INTENSE ECONOMIC AND POPULATION GROWTH Economic growth (%) Population (Mn) 8.6% Spain Euro zone Source: Spanish National Statistics Institute (INE) and Bank of Spain. Source: Spanish National Statistics Institute (INE). Data from municipal census at 1 January.

7. ENERGY IN SPAIN: SHARP INCREASE IN ELECRICITY AND GAS DEMAND Electricity demand (GWh) Gas demand (GWh) 320,305 275,242 CCGT 243,354 211,990 211,741 20.5% Conventional demand 51.0% Source: Red Eléctrica de España Source: Comisión Nacional de la Energía • Increase in demand due to economic and population growth and to higher equipment and living standards • Peak demand in the summer is now closer to that of winter and has outgrown average demand • A very dynamic market that is gradually approaching European consumption levels • Boost in new CCGTs

8. GENERATING FACILITIES IN SPAIN: INSTALLED CAPACITY • Demand coverage • Spanish system capacity (MW) 51,287 47,422 46,310 44,079 44,181 1,6 1,4 +16.3% +76.9% 1,2 15,497 13,801 12,663 1 8,318 10,557 0,8 1996 1998 2000 2002 2004 2006 2008 2010 2011 2000 2001 2002 2003 2004 Minimum desirable index = 1.1 Ordinary regime Special regime Source: REE; 2004-2011 UNION FENOSA Source: Red Eléctrica de España

9. GENERATING FACILITIES IN SPAIN: PRODUCTION STRUCTURE • Coal is still the largest single energy source for power generation in Spain • Renewable energy is increasing its weighting in the energy balance, but it is still considerably below its share of installed capacity • In just a few years, CCGTs have become essential to meeting strong demand • Nuclear output has decreased its weighting but still accounts for 25% of total generation Electricity generation by type of technology (GWh)(*) 2000 2004 CCGT 12% Oil + Gas 3% Coal 30%

10. GENERATING FACILITIES IN SPAIN: CAPACITY STRUCTURE • According to Government planning, the development of Spanish generating capacity mostly relies on new CCGTs and renewable energy plants • Nevertheless, in order to guarantee security of supply at affordable prices, all technologies should be part of the capacity mix Projections for generating facilities in Spain CAGR 04-07 2001 2002 2003 2004 2007E ... Special reg. - MW 10,557 12,663 13,801 15,497 20,720 10.2% Special reg. - % mix 19.3% 21.5% 22.5% 23.2% 27.6% CCGT - MW ------ 2,794 4,394 8,259 14,800 21.5% CCGT - % mix 0.0% 4.7% 7.2% 12.4% 19.7% CCGT - % Ord. reg 0.0% 6.0% 9.3% 16.1% 27.2% 2001 2004 2007 CCGT 12% CCGT 20% Coal 15% Oil + Gas 10% Coal 17% Oil + Gas 5%

11. LIMITS AND OPPORTUNITIES OF TECHNOLOGIES: RENEWABLE ENERGIES (I) • Over 20% of electricity in Spain was generated with renewable sources in 2004 • Spain has invested heavily in renewables and is gradually approaching its 2010 target • However, renewable sources are limited and the technology needs to mature • HYDROELECTRIC: Depleted energy • Low/medium and irregular rainfall • Large number of reservoirs • WIND POWER: Expensive energy that does not ensure security of supply and poses difficulties for the system operator • SOLAR: Scant development • Special non-renewable energy: COGENERATION • Limited potential • Dependent on gas TECHNOLOGIES

12. LIMITS AND OPPORTUNITIES OF TECHNOLOGIES: RENEWABLE ENERGIES (II) • Unlimited renewable sources • Clean energy that does not emit pollutants • Less dependency on fossil fuels • Opportunity for the economic development of certain regions Renewable energy as a % of electricity demand measured at power plant bars OPPORTUNITIES 250,000 50% 44.9% 45% 200,000 40% 35% 150,000 30% 20.3% 25% 100,000 20% • Depends on the weather • Limited security of supply (needs back-up energy) • Sizeable specific investments and requires premiums • Sometimes, considerable environmental impact (big hydro) • Scheduling of production and integration into the grid 15% 50,000 10% 5% 0 0% 1990 1992 1994 1996 1998 2000 2002 2004 LIMITS RENEWABLES SPECIAL REGIME HYDROELECTRIC ORDINARY REGIME DEMAND (plant bars) Total RENEWABLES (Includes special regime renewable energy and conventional hydroelectric) / DEMAND (plant bars) RENEWABLES/SPECIAL REGIME

13. LIMITS AND OPPORTUNITIES OF TECHNOLOGIES: COAL • Provides considerable flexibility to the generating portfolio • Enables biomass to be used as fuel • Possibility of technology improvements to limit environmental effects • Spanish coal is uncompetitive but it is an autochthonous source • Investments have already been made, some have already been completely depreciated • Low O&M costs OPPORTUNITES Coal prices (US$/t) (*) 80 71.90 70 60 42.52 39.29 50 35.98 • Sharp increase in prices • Application of Large Combustion Plant Directive • Impact of Kyoto commitments and the emission rights market • Spanish coal is not competitive (sulphur content, heating value, humidity,etc.) • Uncertainties about the Coal Mining Plan (reduction in activity and premiums) 31.65 40 30 2000 2001 2002 2003 2004 20 LIMITS MCIS index US$/t Average import price UFG Average MCIS index US$/t (*) McCloskey index (MCIS : index used as reference for coal prices in Europe.

14. LIMITS AND OPPORTUNITIES OF TECHNOLOGIES: CCGTs CCGTs vs. Coal-fired plants • Proven technology • Short construction period • Lower investment per MW • Higher energy yield • High operating flexibility • Lower specific emissions • Lower O&M costs CCGTs Coal Yield 55-58% 38-40% Specific investment 440 €/kW 1,200 €/kW OPPORTUNITIES CO2 emissions 0.37 kg/kWh 0.82 kg/kWh Construction period 2 years 4 years Useful life (economic) 25 years 30 years Working hours 5,000-7,000 6,000-7,000 Breakdown of CCGT costs • High weighting of fuel costs • Increases the average generation cost in the system • Indexed to crude prices and higher volatility. Pass-through is the key factor • Rigid gas supply contracts (deadlines, take-or-pay, destination, etc.) • Dependent on capacity and availability of gas infrastructure As a % of price per kWh 28-17% 13-9% LIMITS 58-74% Gas O&M Return on Investment Note: Crude price scenario at US$20-38/bbl and 4,000-6,500 equivalent hours

15. UNION FENOSA’s GAS PROJECT • Under these circumstances, UNION FENOSA took up a distinctive position in the gas chain, aiming at leveraging the advantages of becoming an integrated energy company Sharp growth in gas demand • Development of an integrated approach • Position established in 2000, when oil prices were much lower than at present • Presence throughout the gas chain hedges against fluctuations in oil prices, and generates a competitive advantage • Distinctive position in the sector • Ensures UF’s CCGT plants have a competitive and flexible gas supply • Provides access to international gas markets Need for flexible, competitive gas supply to CCGTs Strong growth ininternational LNG market Liberalisation of the Spanish gas market

16. OMAN EGYPT UNION FENOSA’s GAS PROJECT • A cheap, flexible gas supply is decisive in order to be competitive in current conditions, particularly under high oil price scenarios • Our integrated approach is a source of value creation Upstream Gas purchase contracts Liquefaction Transport Regasification CCGTs Electricity Gas supply International trading Liquefaction Procurement Transportation • Diversified supply • Flexible contracts (20+5 years) • Competitive prices • Mitigation of high oil prices • Access to US and Korean/ Japanese markets • Supplies UF gas demand • High processing capacity • Competitive supply due to low unit costs • Offers adaptable logistics • Allows flexible supply of gas to the international market • High transportation capacity: • Spirit Galicia: 138,000m3 • Cadiz Knutsen: 140,500m3

17. UNION FENOSA’s GAS PROJECT • A cheap, flexible gas supply is decisive in order to be competitive in current conditions, particularly under high oil price scenarios • Our integrated approach is a source of value creation Upstream Gas purchase contracts Liquefaction Transport Regasification CCGTs Electricity Gas supply International trading Regasification Supply CCGTs • Holdings ensure control of an essential part of the gas supply chain • Regulated returns • Good locations (Sagunto and Reganosa) • Flexible supply • Ensures a competitive source of electricity • 3,600 MW projected in 2007 • Greater competitiveness in supply in Spain • International markets offer profitable flexibility

18. UNION FENOSA’s CCGT PROGRAMME • Our position in gas provides competitiveness, flexibility and stability to our CCGTs’ gas procurement • The design and location of our CCGT plants increase their competitiveness Entry into operation of UF CCGT plants Location of UF’s CCGT plants in Spain MW Sabón-Reganosa pole 400MW Sagunto pole 1,200 MW 1,600 Aceca 400MW 3,600 400 400 1,200 Palos-Huelva pole 1,200 MW 2004 2005E 2006E 2007E Total 04-07E NGS 800 MW • Economies of scale due to establishment of energy poles • Optimisation of investment and O&M due to plant design • Location in areas of high power usage

19. LIMITS AND OPPORTUNITIES OF TECHNOLOGIES: NUCLEAR POWER • Security of supply • Large amount of energy with small amount of fuel • No emissions of CO2 or particles • Low variable costs • Nuclear fusion (ITER project) Nuclear power plants in Spain OPPORTUNITIES Garoña Ascó Trillo Vandellós Almaraz • Installation security (probability of small accidents/serious consequences) • Treatment and storage of radioactive waste • Social rejection • High capital costs J.Cabrera Cofrentes NUCLEAR (7,878 MW) Trillo (1,066 MW) J.Cabrera (150 MW) Almaraz (1,957 MW) Ascó I and II (1,033 and 1,027 MW) Vandellós (1,087 MW) Cofrentes (1,092 MW) Garoña (466 MW) LIMITS

20. ACTION LINES TO IMPROVE SECURITY OF SUPPLY Increase security of supply (in a situation of higher energy prices and inevitable dependency) via… • A balanced generation mix: • Maintain coal-fired plants in operation • Support renewable energies as an autochthonous source • Reopen the nuclear debate and recover this technology • CCGT competitiveness • Interconnections and international grids (take advantage of the strategic geographical situation of the South European countries) • Diversification of gas procurement sources • Energy saving and efficiency: • Highly developed in terms of optimisation of operations and availability at generating plants • But there is still considerable scope for improving demand management • New technologies and investment in RDI (applying “the spirit of Lisbon” to the energy market)

21. ACTION LINES TO IMPROVE SECURITY OF SUPPLY From a regulatory standpoint: • Long-term planning • Capacity payment • Balance between gas and electricity regulations • Remuneration for transmission/transportation and distribution • Attend to all segments of the supply chain

22. ACTION LINES TO IMPROVE SECURITY OF SUPPLY Remember… • Power is supplied via an entire chain: • Every single link must work • This is more important with gas-electricity integration • All the players in the chain are important (quality and security of supply do not depend only on distributors and suppliers) • Pass-through: pass on all supply costs to end customers • Give price signals to consumers when energy prices are high

23. THANK YOU FOR YOUR ATTENTION