EU Climate Change Policy – challenge for power sector

1. EU Climate Change Policy – challenge for power sector Prague, 23rd October 2008 Alan Svoboda Executive Director Sales and Trading, CEZ, a. s.

2. EUROPEAN POWER SECTOR IS FACING A CHALLENGE OF A COMPLEX NATURE Liberalisation packages Liberalisation of electricity market „Sufficient and secure electricity supply for socially acceptable prices together with GHG emissions reductions“ Security of Supply Emissions reduction Diversification of Supply Climate-energy package

3. MAIN POWER SUPPLY QUESTION MARKS Generation capacity Will there be enough generation capacity to meet demand? Fuel supply Will power plants have uninterrupted delivery of fuels? Power grids Will supplies of power be disrupted by grid failures?

4. MOST OF THE WORLD’S LARGEST ELECTRICITY CONSUMERS ARE TAKING MEASURES TO KEEP UP WITH THE GROWING DEMAND Source: IEA, EIA, Bloomberg, WNI

5. GW* Peak demand Additional planned capacity Coal Lignite Gas/Oil Other Hydro Nuclear EUROPEAN POWER GENERATION CAPACITY IS LIKELY TO FALL SHORT EU-27 countries 320 GW Shortfall * maximum available capacity Source: Platts, Eurelectric, CEZ

6. GW* Other Coal Lignite Gas/Oil Wind Nuclear + Hydro MOREOVER, THE VAST MAJORITY OF PLANNED NEW GENERATION CAPACITY WILL BE COVERED BY EXPENSIVE AND INSECURE SOURCES, SUCH AS GAS AND WIND EU-27 countries *maximum available capacity of new investments Source: Platts, Eurelectric, CEZ

7. INVESTMENT DECISION-MAKING NEEDS TO CONSIDER SEVERAL KEY FACTORS, SUCH AS FUEL SUPPLY POTENTIAL, CONSTRUCTION TIME, … Long-term scale of investment is given by the nature technologies in the power sector and industry as a whole. Fuel supply potential Time from investment decision to full operation

8. Full costs of a new power plant* EUR/MWh CO2 fuel and other variables fixed costs 71 71 69 capex 42 …AND ALSO THE PRICE OF CO2 THAT IS GETTING MORE IMPORTANT IN THE LONG RUN • Nuclear plant is the most commercially attractive option for electricity generation and a viable solution for large-scale CO2 reduction • The economic evaluation of other sources is driven by CO2 regulation, which is not clear in the long term • Power producers have to have assurance that investments in CO2-less intensive plants, that are more expensive, will pay back. *The full costs reflect the fuel price and CO2 price as in Q1 2008

9. THERE IS NO CLEAR CHOICE; CRITICAL SCRUTINY OF ALL OPTIONS IS NEEDED, WITHOUT ANY PREJUDICE Nuclear • Coal Natural gas Renewables Energy efficiency • Can it eliminate the anticipated shortage? What will the power price need to be for energy efficiency to make a difference?

10. EMISSIONS TRADING – EU’S PREFERRED EMISSION REDUCTION TOOL Motivate to emission reductions through price of carbon Efficient carbon markets Provide flexibility in achieving reduction targets (CAP and TRADE) Investments in low-carbon technologies • Well-defined long-term rules (policy, legislation) • A truly global trading scheme involving also the US and China • Investments in projects involving new technologies • EU unlikely to achieve substantial reductions without Carbon Capture and Storage Long-term carbon price signal The carbon markets are sustainable only if they deliver significant emission reductions.

11. EU ETS HAS ALREADY BROUGHT A NUMBER OF SIGNIFICANT CHANGES, BUT IMPROVEMENTS NEED TO BE MADE… Functional and structured market with allowances and its derivates Price for carbon is real and is a key factor in decision making System resulted in emission reductions (estimated 2-5 %) Lack of harmonisation resulting in different treatment of companies within the EU ? Absence of a long-term stability and predictability that is needed for investment into modern technologies

12. D S € D S EFFECT OF AUCTIONING ON POWER PRICES - TWO FORCES WILL WORK TOGETHER Increasing demand on electricity Accelerated phase-out of carbon intensive power plants due to auctioning Increase of power prices as a secondary effect of auctioning Lack of capacities in EU

13. USE OF AUCTIONING FOR DISTRIBUTION OF ALLOWANCES IS A LOGICAL DEVELOPMENT, BUT SHOULD BE GRADUAL TO ALLOW POWER INDUSTRY SUFFICIENT TIME FOR ADAPTATION Full auctioning for power sector and exemptions for other sectors is just another form of distortion and results in a different treatment of companies on the same market Auctioning of allowances will drain funds away from industry – they will be lacking for investments and modernisation Serious analysis of impacts of full auctioning on power sector and economy as a whole is missing Rules of action are still unclear, there is a high risk of delays, lack of harmonisation and uncertainty on the market What will happen with the revenue ? Increasing the overall tax burden of industry is not the step to the right direction…

14. OPTIONS FOR CARBON ABATEMENT – MIX OF OPPORTUNITIES AND CHALLENGES Significant emission reductions are a complex issue and require a complex solution: right mix of policies and incentives, together with research and development of new technologies Cheap abatement opportunities exist, but they are not explored due to various barriers Contribution of industry can be significant, but right incentives are needed Source: McKinsey and Co.

15. LOW CARBON TECHNOLOGIES – THE NEED FOR RESEARCH, DEVELOPMENT AND DEMONSTRATION Improved nuclear energy Low carbon fossil sources Non-traditional renewables potential mid-term challenges long-term challenges • zero emission power • security of fuel supplies (availability of uranium) • relative social acceptability • optimization of operation • life-time extension • used-fuel storage • back-end fuel cycle (disposal of spent fuel) • cost-effective recycling • generation IV reactors • decomissioning technologies • near zero emission power • use of coal (domestic resource, sufficient supplies) • demonstration of CO2 capture • storage potential (geological survey) • competitive CO2 abatement potential • rational deployment in production portfolio (transport grids,..) • multi-fuel and multi-products technologies • feed-in tariffs & certificates • political support • sustainability • demonstration of regional potential (temperature profile, artificial heat exchanger) • use in municipality heating and cooling systems • low enthalpy energy cycles • efficient drilling

16. THE RECESSION, THE BEST THING FOR CO2 REDUCTION ? Panic in financial markets could make at least someone happy: climate specialists. The crisis of 1929, the Second World War, oil shocks, and even the collapse of U.S. savings have impact on CO2 emissions... The history of the last century shows that till now, the recession was the only effective method to quickly reduce emissions...

17. THANK YOU