Mesa 1Retos para el sector de la electricidad

Ana QuelhasDirectora de Planificación Energética

EDP

Inversión en proyectos intensivos en

capital y señales de mercado

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 sector100% = 1990

Source: EC, “A Roadmap for moving to a competitive low carbon economy in 2050”, 2011

3

Renewables and energy efficiency are the main instruments to achieve decarbonization

Source: IEA – International Energy Agency

Average annual investment in low carbon techsTrillion $13, 2014 - 2040

Greenhouse gas emissions reduction by driverGt, 2010 - 2040

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/W2. Pricing data has been inflation corrected to 2014. Data is for Northern Europe.

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 forecastGW, 2013 - 2030

Wind energy installed capacity forecastGW, 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

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

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

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

Poolprice

Pool prices do not

remunerate the full costs of any tech

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

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

… 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

Factor Measures to achieve an adequate market

Renewables

Thermal backup

Spot market

ETS

Interconnections

> 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

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

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

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 zeroin 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