Engaging consumers in a decarbonized world with the right pricing

BEHAVE 2016

Coimbra, 9th of September of 2016

Ana Quelhas

Director of Energy Planning Department

ana.quelhas@edp.pt

• Achieving decarbonization

• Pricing distortions

• Engaging consumers in Portugal

Agenda

2

Europe has assumed a long term economy-wide decarbonization goal of at least 80% emission reductions by 2050 compared to 1990 level

• 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

LCOE wind onshore$/MWh

Cost of Solar PV module$/W

Source: BNEF

Innovation and mass production of renewable energy led to a strong reduction in the costs of these technologies, namely for wind and solar PV

5

The boost in the competitiveness of RES technologies led to frequent upwards revisions of the forecasts for installed RES capacity

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

Solar energy installed capacity forecastGW, 2013-2030

Wind energy installed capacity forecastGW, 2013-2030

20132013

x6.9

x8.0

x2.0

x2.5

x3.6 x6.2

Source: IEA

6

The increase in intermittent power generation sources needs to be accompanied by investments in techs that provide flexibility to the system

TRENDS OBSTACLES SOLUTIONS

Centralized Decentralized

Conventional Renewable

Dispatchable Intermittent

Source: European Commission

Grid instability

Grid congestion

Volatile markets

MWEnergy storage

Smart analytics

KEY

Flexibility

7

While historically generation techs have adapted to demand changes, in a decarbonized world it will be demand adjusting to supply changes

While in a conventional world, generation techs are able to adapt to demand changes...

Portugal’s electricity balance at 07/05/2016Portugal’s electricity balance at 09/08/2008

Source: REN

... in a decarbonized world, demand needs to adapt to generation changes

8

In this context, the “energy efficiency” concept is also evolving from consuming less to consuming smart

GenerationFully dispatchable

Mostly pollutant and limited resources

Cost structure

Scarce resource

Energy efficiency

CONVENTIONAL POWER SECTOR

DECARBONIZED POWER SECTOR

Mostly intermittent

Mostly clean andabundant resources

Energy Capacity

High fuel cost with low capex Low fuel cost with high capex

Reduced energy consumption Smart energy consumption

0,0

0,5

1,0

1,5

2,0

2,5

0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,5

Oil

CAGR 13-40

CAGR 73-13

Coal

Gas

Electricity

Total

Renewables

Highest historical and forecasted growth

Inputs to electricity as a share of total primary energy%, 1965-2035

Final energy CAGR by fuel type%

Source: BP Statistical review 2014, IEA WEO 2015

Electricity as a final energy source has grown significantly in the past, and it should remain as the highest growth source in the future

Source: EDP analysis

% CO2 emissions reduction

% electricity in final energy demand

Emissions factor

Zero

Today´s

Increase electrification> Transport (EV)> H&C> Energy efficiency

Decarbonize electricity> Renewables> Nuclear> CCS

Target

A

B

C

Indeed, strongly reducing emissions implies increasing electrification of energy demand, besides decarbonizing the power sector

Emissions reduction as a function of the share of electricity in final energy demand%

11

Through the electrification of transports and H&C, overall energy consumption decreases due to higher efficiency of electric techs…

Source: Deloitte, EDP

Transport Electrification1 (Average for 100 km) Heating & Cooling Electrification

ELECTRICVEHICLE

DIESELVEHICLE

VS

58,7 kWh(6 liters)

24,3 kWh

13,5 kWh(1,4 liters)

13,5 kWh

Primary Energy

Final Energy “after the engine”

HEAT PUMP

H&C NON-ELECTRIC

Heat pump 3x more efficient than non-electric technologies

VS

90% 300%Efficiency

1. It is assumed a primary energy/final energy ratio of 68% for generation and 91% for transport and distribution

Electric vehicles 2,5xmore efficient

12

…contributing to decarbonization not only due to reduced overall energy consumption, but also due to the ability of use renewable sources

1%

10%

14%

20%

Electricity

21%

8%

15%

Transport

10%

6%

17%

34%

26%

Total Heating and Cooling

2014

2020

2004

Share of Renewables by sector in the EU1

%, 2004 - 2020

1. EU-27 - excludes MaltaSource: Eurostat

Higher %RES in electricity is explained by the higher easiness of RES implementation for power generation – there are several RES technologies available at a competitive cost

• Achieving decarbonization

• Pricing distortions

• Engaging consumers in Portugal

Agenda

14

Source: Eurelectric

In the last years, electricity retail tariffs have been pressured upwards mainly due to the strong increase in the costs related to taxes and policy

Evolution of electricity retail tariff components in the EU€cent/kWh, 2008 - 2014Retail tariff components

> Energy– Costs are related to production in

power plants, trading & selling, customer service

> Network– Costs related to transport and

distribution activities

> Tax & Policy Costs– Costs are related to taxes and

energy policy such as: renewable and CHP support, nuclear decommissioning, vulnerable customers, etc.

Taxes and Policy costs

Network

15

There is an imbalance between the way costs are charged to final consumers and the underlying structure of costs...

Energy

Charge structure

Mostly kWh

Mostly kWh

Mostly kWh

Underlying costs

Mostly kWh

Mostly kW

Fiscal nature (Taxes)

Mostly kW (Policy)

Match?

YES

NO

NO

16

... which generates a significant mismatch between the costs and the revenues’ structure in the power sector in several countries

Structure of costs and revenues of the power sector by country1

0%

20%

40%

60%

80%

100%

RevenuesRevenuesCost Cost

Variable

Revenues

Fixed

Cost

1. Data for Spain refers to 2015 and comes from BCG analysis; Revenues data for Portugal calculated for all voltage levels; Cost and revenue data for Portugal refer to 2016; in Italy, revenues’ structure refer to households only

Source: Eurelectric, BCG, European Commission, EDP analysis

17

Charging fixed costs through a variable retail tariff leads to distortive incentives to reduce demand from the grid

Representation of tariff deficit creation due to demand reduction

Costs

Revenues

Breakeven

VolumeV0V1

Deficit

M€

Comments

> A demand contraction causes a reduction of revenues by α, which is higher than the cost reduction of the system (β), thus leading to a tariff deficit

> Increase power demand costs α to the consumer, but only costs β to the system (α> β)

— This penalizes demand electrification and overvalues investments that reduce demand at grid (energy efficiency and distributed generation)

— Clients with higher load factors are paying more than the costs that the system incurs to satisfy that demand, so as to subsidize clients with lower consumption

α

β

18

This cost to price mismatch leads to a “vicious cycle”, where system costs will be charged over few(er) customers, increasing the “consumer divide”

Source: EEI, “Disruptive Challenges: Financial Implications and Strategic Responses to a Changing Retail Electric Business”, 2013

Loss of revenues >

cost reduction

Tariff increase required

Customer assessment

Behavior change

DER1

Recovering the revenue gap through tariff increases will:

• Push costs to consumers who didn’t invest in distributed resources (“consumer divide”)

• Increase profitability to invest in distributed resources (“death spiral”)

Reduction of grid demand

1. DER: Distributed Energy Resources

19

There are historical reasons for these distortions, but the context has changed and the associated inefficiencies are now greater and need to be addressed

Historical motivation

Context

• Robust demand growth rates

• Power generation mix had a higher share of technologies with high variable cost

Emissions/ Energy

Efficiency

Innovation

Why need to change?

• A highly variable tariff protects consumers with low load factors (progressive effect)

• Higher variable tariff provides stronger incentive to reduce demand, contributing thus to energy efficiency and the reduction of greenhouse gas emissions

• Power demand stagnation / reduction

• Increased penetration of technologies with low or null variable cost

• Equity is more effectively achieved with special mechanisms to vulnerable consumers

• A highly variable tariff over-incentivizes new technologies, penalizing consumers who are not able to invest (regressive effect)

• Decarbonization of the power sector

• With RES abundance, energy efficiency is not about reducing demand, but instead consuming when energy is more abundant

Equity

• Customers had no viable technological option to reduce grid demand without loss of service

• Set of new technologies (energy efficiency, storage, distributed PV) allows change in grid demand without changing the clients’ service level

20

The tariff structure also over incentivizes investment in distributed resources over centralized plants, which are more economical

• Return for investor is higher with investment in distributed resources

• However, the optimal for the society would be if these investments were in centralized generation (not only in utility-scale solar, but also in thermal and in other mature renewables)

Solar LCOE vs Revenues/Savings by segment in Portugal1

(€/MWh, 2015)

0

20

40

60

80

100

120

140

160

Residential IndustrialCommercial Utility-Scale

LCOE Variable retail tariff

Distributed Generation

1. Prices exclude VAT; WACC 8% nominal; CAPEX considered: 1800€/kW (Residential), 1150€/kW (Commercial), 1050€/kW (Industrial); 1450h levelized eq. hours; O&M=10€/kW for commercial and industrial; Regulated tariffs assumed: Residential simple tariff <10.35kVA, Commercial tariff refers to BTE for long uses at “horas de cheio”, Industrial tariff refers to MT at “horas de cheio”; For utility-scale, CAPEX considered is 977€/kW and 1800h.

Source: EDP

21

Thus, the tariff structure should evolve to a higher fixed share, as occurred in the telecom’s business

€/minute €/month

€/kWh €/month

TELECOM

ELECTRICITY

• Achieving decarbonization

• Pricing distortions

• Engaging consumers in Portugal

Agenda

23

EDP launched its solar energy offer in Portugal in 2015...

Innovative offer Customer benefits

Autonomy Savings

Sustainability Simplicity

Reduce your energy bill

Produce your own energy for more

than 25 years

• Solar energy solutions for customers to produce and consume their own energy

• edp re:dy system is offered to manage consumption, control appliances and monitor solar generation in real time

• Ability to pay the solar solutions in 36 monthly instalments in the energy bill, starting from 20€per month with no upfront payment

24

... with solutions designed to fit each customer consumption profile, reducing grid injection and energy waste

Example

5 solar panels

14% electric bill

reduction

360€ average

annual savings

Price of 77€/month

(36 months)

3 panels 4 panels 5 panels 6 panels 8 panels

Savings% Electricity bill reduction 9% 12% 14% 16% 19%

1st year savings 193 € 248 € 297 € 339 € 405 €

Average annual savings for 25 years(1) 233 € 300 € 360 € 413 € 497 €

Solar Energy% Self-consumption 91% 88% 84% 80% 72%

% Injected energy 9% 12% 16% 20% 28%

Home electricity

% from solar system 10% 13% 16% 18% 22%

% from the electric grid 90% 87% 84% 82% 78%

Solar Energy Solution

Installed power capacity (kW) 0,75 1 1,25 1,5 2

Annual solar energy production (kWh) 1052 1402 1753 2104 2805

Minimum space for panels 6 m2 8 m2 10 m2 12 m2 16 m2

50 €/month 64 €/month 77 €/month 90 €/month 5900 €(36 months) (36 months) (36 months) (36 months) (upfront)

Licensing cost with VAT 0 € 0 € 0 € 0 € 70 €

Extra costs for selling energy with VAT(3) 0 € 0 € 0 € 0 € 0 €

Environment

CO2 emissions avoided (Kg/year) 240 321 401 481 641

No. of trees with equivalent CO2 absorption 24 32 40 48 64

Price (includes installation and VAT)(2)

Self-consumption

Recommended system

25

EDP solar energy customers receive edp re:dy for free, a home energy management system...

Simple so easy to use

No worries it does it for me

Comfort it feels good being at home

Efficient saves energy and money

Control do what you want

26

... that allows customers to monitor their generation and be alerted if failure occurs

27

Distributed generation

House equipment

Electric gridElectric mobility

Storage

Energymanagement

system

When to turnon equipment?Where to get the energy from? Grid? Production?Battery?

How does my house interact with the grid (e.g. DSM)?

How does theelectric installationsupport EV charging?

Buy from thegrid now to consume later?

Consume, store or sell the production?

edp re:dy not only controls solar energy, but is evolving to be the automated manager for all the home’s energy

28

With solar and re:dy combined together, customers started to use more the web portal and app

• More than 244.000 sessions

• More than 600 daily sessions

• More than 5 pages visited per session in the portal

We

b p

ort

alA

pp

• More than 277.000 sessions

• More than 650 daily sessions

• Android prevails

29

With this knowledge, customers were able to change their consumption habits, to maximize the use of their solar asset...

Month March April

Total production 194,18 kWh 193,80 kWh

Self consumption 43,69% 67,29%

Total consumption 303,25 kWh 353,29 kWh

Consumption from solar 27,98% 35,90%

Example of a Monday in March Example of a Monday in April

30

...helping to increase the system’s flexibility

2016

March April

31

Key messages

• In order to reach Europe’s ambitious decarbonization goal, a strong push for RES and efficiency is needed

— The costs of renewable energy have decreased steeply, namely for wind and solar PV, leading to frequent upwards revisions in the forecasts of installed capacity for these technologies

— This increase in intermittent power generation needs to be accompanied by investments in technologies that provide flexibility to the system (ex: storage, smart grids, DSM...) to guarantee grid stability

— In this context, the concept of “energy efficiency” is evolving from consuming less to consuming smart

— Electrification of transports and H&C is essential for the decarbonization process, not only due to reduced overall energy consumption (more efficient electric technologies), but also due to the ability to use RES sources in electricity

• There is a mismatch between costs and revenues structure in the power sector, which generates several distortions, namely biased signals for investment decisions and financial imbalances in the system

— The fact that fixed costs are being recovered through a variable tariff leads to biased price which favors reduction of grid demand, which in turn will lead to a “vicious cycle” where system costs will be charges over few(er) consumers

— Furthermore, distorted tariff structure favors investments in distributed resources over centralized plants, which implies a social welfare loss

• EDP Comercial has launched its solar energy offer, with solutions designed to fit each customer characteristics

— EDP solar energy customers receive a re:dy for free – a home energy management system – which allows them to monitor and optimize their energy consumption pattern and use of solar energy, thus contributing to maximize the benefits of clients’ investment and to improve system’s flexibility