rwe npower simon stacey retail finance director

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RWE npowerSimon StaceyRetail Finance DirectorTHE FINANCIAL CHALLENGES FACING THE ENERGY INDUSTRY

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THE FINANCIAL CHALLENGES FACING THE ENERGY INDUSTRY

Contents

RWEnpower – Background InformationEnergy Production in the UK Market Place

Current UK Generation MixThe Generation Capacity GapMeeting the Generation Gap

The Retail ChallengeCurrent UK Retail Market Share and what is RetailManaging Customer ValueProduct PropositionRetail Challenges – Regulatory and Environmental

Management via KPIsWhat are KPIs and Value DriversHow RWEnpower develops KPIs

Questions?

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RWE npower as part of RWE Group

RWE npower is a leading UK energy company, operating within the RWE Group, one of Europe’s largest industrial companies

The RWE Group has over 60,000 employees worldwide. RWE npower employs over 12,500 employees at 60 sites across the UK

The turnover for the RWE Group was €49 billion in 2008. RWE npower’s turnover for 2008 was €8.6 billion

RWE’s core businesses electricity, gas and energy services

RWE’s core markets are Germany, UK and central Eastern Europe

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> Revenue (€million)

> Operating Result (€million)

> Employees

> Generation Capacity(MW)

RWE npower 2008 % of Total RWEGroup

8,618

534

12,747

10,145

18%

19%

22%

8%

RWE AG (Group Centre)

RWE Power

RWE Dea

RWE Supply & Trading

RWE Energy RWE npower RWE

Innogy

RWE Group Structure

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RWE have leading positions in two of Europe’s largest markets as well as in strongly growing CEE markets and own a large upstream position in both Europe and North Africa.

GasElectricityMarket

Product

Germany No. 2 No. 3

UK No. 4 No. 4

> No. 2 in Hungary

> No. 3 in Slovakia

> Active in Poland

> No. 1 in the Czech Republic

> Leading position in Hungary

Central-Eastern Europe

Europe No. 3 No. 6

RWE Today: One of the Top 5 Integrated European Utilities

United Kingdom

Netherlands

Luxembourg

Austria

Hungary

Poland

Slovakia

CzechRepublic

Germany

Electricity Gas Water

RWE Core Markets Leading Positions in Core Markets

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Building a powerful future

Turning people into fans

With power comes responsibility

Turning customers into fans

To become the UK’s leading integrated energy company

RWE npower’s vision

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Contents





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RWE is one of the UK’s leading electricity generators

We have the capacity to generate around 10,800MW from coal, oil and gas fired power stations along with wind, hydro and co-generation plants

We have a diverse fuel portfolio which ensures a high degree of commercial flexibility to the benefit of our customers

Diverse Energy Generation

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RWE npower Generation – Current Generation Fleet

Littlebrook1

2,000MW OilFawley1

1,000MW Oil

Tilbury B1

1,000MWCoal

Didcot A1

2,000MWCoal

Aberthaw1,500MWCoal

Didcot B1,370MWCCGT

Little Barford680MW CCGT

Great Yarmouth420MW CCGT

Cowes140MW OCGT

1 Opted-out under LCPD

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Big 6 have approximately 50% of GB installed capacity

This Includes all the opted-out coal plant

British Energy has 15% of installed capacity and generates about 19% of the UK Generation from nuclear power plants

Most other non-Big 6 companies generally have a gas-biased portfolio

The major exceptions: Drax, International Power, BE, NDA

GB Generation Installed CapacityBritish Energy

15%Centrica

5%

Drax 5%

EDF 7%

E.ON 14%RWE 15%

Scottish Power 9%

SSE 11%

Others 19%

GB Generation Market Share 2007

British Energy

19%

Centrica 4%

Drax 8%

EDF 8%

E.ON 12%RWE 9%

Scottish Power 7%

SSE 12%

Others 23%

UK Generation Market – Major Participants

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The UK capacity gap is likely to be more than filled up to 2012, subsequently the gap is expected to grow further

Projected Evolution of UK Generation Stack

The need for new plant in the UK is well recognisedHowever uncertainties still exist around the exact timing of this need. Key determinants are:

− Use of 20,000 hours by opted-out coal plant− Whether further nuclear plants receive life

extensions− The level of demand growth and penetration of

technologies such as microgeneration

The generation gap appears to be more than met out to 2012, however this will be strongly determined by the actual timings of new build commissioningFrom 2013 onwards the gap is expected to grow to a further 5GW by 2015 and up to 20GW by 2020 RWEn aims to capitalise on this operating environment to achieve its market share aspirations by:

- Leading the ‘Big VI’ in new build projects commissioning by 2012 (Staythorpe/Pembroke)

- Developing attractive options for further new build in the post-2013 period

- Expanding into nuclear generation

Potential Evolution of UK Generation Gap1

Gas Coal Nuclear Renewables Other Range of Plant Retirement

0

20

40

60

80

100

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

GW

Gap inc. only new build currently under construction

-15

-10

-5

0

5

10

15

2008 2009 2010 2011 2012 2013

GW

(Gap

/ U

nder

Bui

ld)

(No

Gap

/ O

ver B

uild

)

Gap inc. new build currently under construction & pending construction

UK Generation Market – The Generation Gap

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Challenges RWE npower Actions

Environmental and CO2 targets

Uncertain energy markets

Maintain financial performance in a period of rising investment

Engineering requirements

> CCGT new build

> Nuclear involvement

> R&D into Clean Coal (CCS)

> Pressing for regulatory clarity

> Balanced new build strategy

> Strong set of plant options

> Planning ahead

> Leveraging RWE Group scale economies

> Substantial in-house expertise

> Active recruitment

> Knowledge share in RWE Group

1 Combined Cycle Gas Turbine; 2 Research and Development; 3 Carbon dioxide Capture & Storage

We are preparing for the challenges of future growth

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RWE npower Key Fossil Plants & New Build Plans

> Staythorpe (1,650 MW)– Construction started in 2007– Alstom secured as EPC1 provider– Commissioning expected in 2009/10– Thermal efficiency of 58%

> Pembroke (2,000 MW)– Consent Granted 2009– Alstom EPC1 option, option expires

30th Nov 08– Commissioning expected in 2011/2– Thermal efficiency of 59%

> Further options: more than 8,000 MW

New Build & Planned CCGT

1 Engineer, Procure & Construct

Pembroke

Staythorpe

New Build CCGT Plant

Coal Site options

Tilbury

Blyth

> Blyth (1,600 – 2,400 MW)

> Tilbury (1,600 MW)

Coal Site Options

We have 3.6 GW of planned new gas plant and over 3 GW of coal site options

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Andrew Duff, Chief Executive of RWEnpower, said:

“New nuclear build is a key part of RWEnpower’scommitment to meet the UK’s energy needs and toreduce carbon dioxide intensity. E.ON is the idealpartner for UK development given that ourbusinesses have complementary strengths andcapabilities, and a successful track record in nuclearpower. “

“ The UK power industry needs significantinvestment to replace aging coal and nuclear plantand to drive the change to a lower carbon economy.This joint venture will deliver an early, substantialand vital contribution from nuclear power.”

Nuclear – The RWEnpower Perspective

Nuclear R&D programme since 2006Auctioning of NDA sites in 2009JV with E.ON to build at least 6 GW

Nuclear - Summary

Nuclear Strategy

E.ON and RWE to build £20bn UK nuclear reactorsTIMES Online Jan 14th 2009

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Contents





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Electricity Retail Volume Share TWh 2007 Gas Retail Volume Share TWh 2007

Source: Cornwall Associates 2007

npower17%

EDF Energy

17%

E.ON UK16%

SSE16%

British Gas13%

British Energy

8%

Others14%

npower10%

Scottish Power

6%

E.ON UK14%

SSE7%

British Gas35%

British Energy

8%

Others22%

GDF 6%

The RWEnpower Retail Business

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Retail - Energy at Home and Work

Since its launch in 1999 the npower brand has grown to be recognised by nearly 90% of the UK population

One of the UK’s leading energy brands

Since 1999 customer base has grown from 500,000 to over 6 million customer accounts

npower business provides simple, essential energy services and products to its customers and is one of the largest energy suppliers in this sector

Sponsors of Test Cricket and proud to provide energy for the new Wembley Stadium

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Our strategy is to deliver segmented propositions which differentiate us from the competitionWe know the marketing channels and products that work best for each customer segmentThis supports our dual goals of growing market share while maintaining margins

Targeted Marketing

Driven Through

Brand/PromotionsCross sellTarget advertisingSponsorship

ChannelRemoteFace-to face

Product/PropositionPayment methodDual fuelGreen productsHome Energy Services

Service/Operational Excellence

BillingCall centreMeter reading

Retail – Managing Customer ValueWe segment our customers in terms of behaviour to understand their long-term value

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Juice – a green electricity product matched to the output from the UK’s first offshore wind farm North Hoyle National Trust partnership – green energy affinity programme donating £15/customer/year for low carbon initiatives to the National TrustGas Guardian – ‘price promise’ product fixed to competitors gas offering at a time of rising pricesTracker – launched in early 2007 and was the first product of its type; Tracker reflects changes in wholesale energy costs by following an independent pricing indexFormation of npower hometeam boosted through the acquisition of Homerserve’s gas service business – provide heating maintenance and installation services

1 Domestic Combined Heat & Power

Core

> Gas

> Electricity

> Dual Fuel

> Payment methods

Prod

ucts

& S

ervi

ces

Green

> ‘Juice’

> National Trust partnership

Innovation

> ‘Gas Guardian’

> ‘Tracker’ product

Energy Services

> npower hometeam

> Installation & service

> Solar

> Heat pumps

Future

> Wind

> DCHP1

> CO2management

Retail – Managing the Production Proposition

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Retail Challenges – The Regulatory Environment

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Retail Challenges - Pricing

Pricing methodology – “follow market” or “smoothed prices”Power challenge for future as new investments come on streamMedia expectation versus profitability

0

50

100

150

200

250

300In

dex

Valu

e

Brent Oil ($/Barrel 1 Month Ahead)Net Average Unleaded Petrol (p/LITRE)npower QCC RETAIL Gas (p/THERM)Wholesale Gas Cost (p/th 1 Month Ahead)

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Carbon Emissions reduction target (CERT)

Partnership of local councils, voluntary organisations and energy suppliers in the most deprived areas of the UKPower generators included in the programmeHouse-to-house calls to offer free and discounted central heating, energy efficiency measures and benefit checksMeasures must deliver significant CO2and fuel bill savingsCreation of 100 new community schemes benefiting some 90,000 homesAllocation to energy companies pro rata to market share3

Community Energy Savings Programme (CESP)

Voluntary Social Spend

Retail Challenges – The UK’s CO2 reduction and social energy programmes

This phase of the energy supplier obligation to last 3 years (April 2008 –April 2011)Replaced the Energy Efficiency CommitmentTarget of 154mt CO2 emissions reduction, increased by 20% to 185mt CO2in September08 Emissions savings to be delivered by measures improving energy efficiency in householdsObligation to make 40% of saving in priority group1(including those aged 70 and over)RWEnpower CO2reduction target of 26.2 million over 3 yearsGovernment proposed on 12 Feb 2009 to continue with a CERT equivalent obligation until Dec 2012

Expected industry spend for CO2 reduction and social obligation

Voluntary commitments by energy suppliers to support certain customer groups such as fuel poorMeasures principally in form of reduced tariffsRWEnpower committed to spend approximately £53 million over 3 years (April 2008 –April 2011)

3 Year Spend (2008-11)£m

CERT (Original Spend) 2800CERT (20% Increase) 560CESP 350Voluntary Social Spend 375Total 4085

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Challenges RWE npower Actions

Environmental and social obligations

Customer retention

Continuing strong competition

Regulation & Media

Developing affordable green energy products

Continue to improve customer service & value proposition greater product bundling

Maintain brand strength and develop further channel offerings

Proactively engaging with stakeholders, tell our story better

We are preparing for the challenges of future growth

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Contents





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Value Drivers and KPIs

RWE npower use KPIs to reflect and measure key drivers of business value.

Value drivers move the organization in the right direction to achieve its stated financial and organizational goals. Examples of value drivers might be “high customer satisfaction” or “excellent product quality.”

In most cases, KPIs are not financial metrics. Rather, KPIs reflect how well the organization is doing in areas that most impact financial measures valued by shareholders, such as profitability and revenues.

As such KPIs are “leading” not “lagging” indicators of financial performance.

A good KPI should:

Be easy to understand

Be always relevant

Be based on valid data

And most importantly should drive positive action

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Identification of Value Drivers and KPIs (1/2)

Goal

Components

Value Generator

Management Decision

Control Area

Control Parameter

Important Factor Pr

ice,

C

over

age,

Pr

oduc

ts

Qua

ntity

Pric

e,

Cov

erag

e,

Proc

urem

ent

Qua

ntity

Pers

onne

l Ex

pend

iture

Mat

eria

l C

osts

Mar

ket S

hare

Polit

ical

En

viro

nmen

t Ex

pect

atio

ns

Com

petit

or

Expe

ctat

ions

Decomissioning

Strategic Projects

Market Expectation

Market Modelling

Sales Growth, Profit Levels, Tax Rate

Operating BusinessEnhancement

CapexReplacement

Capex

Variable Generation Costs

Electricity Generation income Operating Expenses

Cost ControlControl of Margins

Shareholder Value

Operating Cash Flow

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Identification of Value Drivers and KPIs (2/2)

Control Parameter

Important Factor Pr

ice,

C

over

age,

Pr

oduc

ts

Qua

ntity

Pric

e,

Cov

erag

e,

Proc

urem

ent

Qua

ntity

Pers

onne

l Ex

pend

iture

Mat

eria

l C

osts

KPIs Plant Availability

Generation Volumes Efficiency Lost Time

Incidents

Total Controllable Cost per MW

Capacity

Generation Volumes

Start Reliability

Ratio of Fuels Used

Employee Surveys

Biomass useage

Plant Availability

Employee Turnover

Rate

Configuration of Power Stations by Capacity and

Fuel type

Average Age and Fuel Type of

Competitors Fleet

No. New Power Station Build Apllications

Variable Generation Costs

Electricity Generation income Operating Expenses

Mar

ket S

hare

Polit

ical

En

viro

nmen

t Ex

pect

atio

ns

Com

petit

or

Expe

ctat

ions

Market Modelling

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Question?

rwe npower simon stacey retail finance director

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