Workshop about “Security of energy supply for electricity generation”

IEA&NEA

José Antonio de Tomás

Paris, 24 May 2005

Session 2: Security of Energy Supply & Specific Technologies

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 avertically-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 theIberian Peninsula and an international electricity operator

2000-2004

Domestic International

3,030

7,802

4,772 4,875

3,349

8, 224

2000

5,502

1,286

6,788

7,088

2,723

9,811

2000

24,872

2000

27,025

2004

40,770

25,46013,745

588

Electricity Production (GWh) Operating Capacity (MW) Customers (Thousands)

2004 2004

UNION FENOSA is Spain’s fourteenth-largest company, with acapitalisation of 7.2 billion Euro

4

ENERGY IN SPAIN

• Very few energy sources and heavily dependent on foreign ones, much more than the rest of Europe

• Intense growth in economic activity and population 78.4%78.3%

67.5%

48.0%

2002 2030

Spain EU-25

Energy dependence (%)

Sharp increase in demand

Rise in energy intensity

Reduction in the spare capacitySources: “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

33.2

76.8

51.3

Coal

Fuel-oil

Natural gas

66.3

101.2

101.0

Import Dependency (%) (*)

48.078.3

86.784.278.3

70.7

GREECE SPAIN PORTUGAL ITALY (*) 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

All fuels

Spain EU25

6

ENERGY IN SPAIN: INTENSE ECONOMIC AND POPULATION GROWTH

42.7241.8441.1240.5 43.9743.2

2000 2001 2002 2003 2004 2005e

Source: Spanish National Statistics Institute (INE). Data from municipal census at 1 January.

Source: Spanish National Statistics Institute (INE) and Bank of Spain.

2.0%

0.5%0.9%

1.6%

3.5%

2.7%2.5%2.2%

2.8%

4.4%

2000 2001 2002 2003 2004

8.6%Spain

Euro zone

Economic growth (%) Population (Mn)

7

216,025199,841

254,010235,212

199,094

66,295

40,03027,329

12,249 12,647

2000 2001 2002 2003 2004

235,022

195,010205,634 211,518

225,851

2000 2001 2002 2003 2004

ENERGY IN SPAIN: SHARP INCREASE IN ELECRICITY AND GAS DEMAND

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

211,990 211,741

243,354

275,242

320,305

CCGT

Conventional demand

20.5%

51.0%

Electricity demand (GWh) Gas demand (GWh)

8

GENERATING FACILITIES IN SPAIN: INSTALLED CAPACITY

51,28747,42246,31044,18144,079

15,49713,80112,663

10,5578,318

2000 2001 2002 2003 2004

+16.3%

+76.9%

Special regimeOrdinary regime

Demand coverage

Minimum desirable index = 1.1

0,8

1

1,2

1,4

1,6

1996 1998 2000 2002 2004 2006 2008 2010 2011

Source: REE; 2004-2011 UNION FENOSA

Spanish system capacity (MW)

Source: Red Eléctrica de España

9

GENERATING FACILITIES IN SPAIN: PRODUCTION STRUCTURE

Electricity generation by type of technology (GWh)(*)

• 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

2000 2004

Special regime18%

Hydro12%

Nuclear25%

Oil + Gas3%

Coal 30%

CCGT 12%

Nuclear31%

Hydro14%

Special regime13%

Oil+Gas5%

Coal37%

10

Special regime28%

Hydro22%

Nuclear10%

Special regime23% Hydro

26%

Nuclear12%

• 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

2001

Special reg. - MW 10,557

2002 2003 2004 2007E

12,663 13,801 15,497 20,720

...

Special reg. - % mix 19.3% 21.5% 22.5% 23.2% 27.6%

CCGT - MW ------ 2,794 4,394 8,259 14,800

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%

CAGR 04-07

10.2%

21.5%

Nuclear14%

Hydro31%

Special regime19%

Oil+Gas15%

Coal21%

2001 2004 2007

GENERATING FACILITIES IN SPAIN: CAPACITY STRUCTURE

Oil + Gas10%

Coal 17%

CCGT 12%

Oil + Gas5%

Coal 15%

CCGT 20%

11

• 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

LIMITS AND OPPORTUNITIES OF TECHNOLOGIES: RENEWABLE ENERGIES (I)

TE

CH

NO

LO

GIE

S

• 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

12

0

50,000

100,000

150,000

200,000

250,000

1990 1992 1994 1996 1998 2000 2002 2004

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

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

OP

PO

RT

UN

ITIE

S • Unlimited renewable sources

• Clean energy that does not emit pollutants

• Less dependency on fossil fuels

• Opportunity for the economic development of certain regions

LIM

ITS

• 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

Renewable energy as a % of electricity demand measured at power plant bars

LIMITS AND OPPORTUNITIES OF TECHNOLOGIES: RENEWABLE ENERGIES (II)

20.3%

44.9%

13

LIMITS AND OPPORTUNITIES OF TECHNOLOGIES: COAL

OP

PO

RT

UN

ITE

S

• 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

LIM

ITS

• 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)

(*) McCloskey index (MCIS : index used as reference for coal prices in Europe.

20

30

40

50

60

70

80

MCIS index US$/t Average import price UFG Average MCIS index US$/t

2000 2001 2002 2003 2004

Coal prices (US$/t) (*)

35.9839.29

31.65

42.52

71.90

14

LIMITS AND OPPORTUNITIES OF TECHNOLOGIES: CCGTs

OP

PO

RT

UN

ITIE

S

• Proven technology

• Short construction period

• Lower investment per MW

• Higher energy yield

• High operating flexibility

• Lower specific emissions

• Lower O&M costs

CCGTs vs. Coal-fired plants

CCGTs Coal

Yield 55-58% 38-40%

Specific investment 440 €/kW 1,200 €/kW

CO2 emissions 0.37 kg/kWh 0.82 kg/kWh

Construction period 2 years 4 years

Useful life (economic) 25 years 30 yearsWorking hours 5,000-7,000 6,000-7,000

LIM

ITS

• 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

Breakdown of CCGT costs

As a % of price per kWh

Note: Crude price scenario at US$20-38/bbl and 4,000-6,500 equivalent hours

Gas O&M Return on Investment

58-74%

13-9%28-17%

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

Need for flexible, competitive gas supply to CCGTs

Liberalisation of the Spanish gas market

• 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

Strong growth ininternational LNG market

16

• 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

Gas supply

Electricity CCGTsRegasification

International trading

TransportLiquefaction

• 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: 138,000m3Cadiz Knutsen: 140,500m3

Liq

ue

fact

ion

Tra

nsp

ort

atio

n

Gas purchase contracts

Upstream

• Diversified supply• Flexible contracts (20+5 years)• Competitive prices• Mitigation of high oil prices• Access to US and Korean/

Japanese markets

Pro

cure

me

nt

UNION FENOSA’s GAS PROJECT

EGYPT OMAN

17

• 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

Gas supply

Electricity CCGTsRegasification

International trading

TransportLiquefactionGas purchase

contractsUpstream

UNION FENOSA’s GAS PROJECT R

ega

sifi

cati

on

CC

GT

s

• 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

Su

pp

ly

• Greater competitiveness in supply in Spain

• International markets offer profitable flexibility

18

• 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

UNION FENOSA’s CCGT PROGRAMME

Entry into operation of UF CCGT plants

MW

Location of UF’s CCGT plants in Spain

400

1,600

4003,600

1,200

Sabón-Reganosa pole400MW

Aceca400MW

NGS800 MW

Palos-Huelva pole1,200 MW

Sagunto pole1,200 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

2004 2005E 2006E 2007E Total 04-07E

19

LIMITS AND OPPORTUNITIES OF TECHNOLOGIES: NUCLEAR POWER

OP

PO

RT

UN

ITIE

S

• 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)

LIM

ITS

• Installation security (probability of small

accidents/serious consequences)

• Treatment and storage of radioactive

waste

• Social rejection

• High capital costs

Trillo

J.CabreraAlmaraz

Ascó

Vandellós

Cofrentes

Garoña

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)

Nuclear power plants in Spain

20

• 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)

Increase security of supply (in a situation of higher energy prices and inevitable dependency) via…

ACTION LINES TO IMPROVE SECURITY OF SUPPLY

21

• 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

From a regulatory standpoint:

ACTION LINES TO IMPROVE SECURITY OF SUPPLY

22

• 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

Remember…

ACTION LINES TO IMPROVE SECURITY OF SUPPLY

23

THANK YOU FOR YOUR ATTENTION