Profitability & Sustainability A holistic approach for Iberdrola

International Master in Sustainable Development and CR

2010-2011

STUDENTS Dichamp, Christelle García-Borreguero, Carlos Gómez González, Elisa Rabe, Jan Lorenz

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Executive Summary i

List of abbreviations xiii

Introduction 1

Part I Electricity Production 7

1 Actual Situation of the Spanish electricity sector in the European 7 context

2 Future Scenarios for Spanish Electricity Market 22

2.1 Introduction 22 2.2 Future demand (2010-2030) 23 2.3 Description of four possible scenarios for 2030 25 2.4 Results 27 2.4.1 Introduction: Energy Balance 27 2.4.2 Economic efficiency 28 2.4.3 Environmental Sustainability 29 2.4.4 Security of supply 30 2.4.5 Synthesis 31

3 Production capacity and structure of Iberdrola 32 3.1 Introduction 32 3.2 Ordinary Regime 33 3.3 Special Regime 36

4 Analysis of future alternatives in terms of sustainability 38

4.1 Introduction and description of the model 38 4.2 Sustainability analysis of different technologies 47 4.2.1 Nuclear power 47 4.2.2 Coal power plants 53 4.2.3 Gas-fired power plants 57 4.2.4 Onshore wind power 62 4.2.5 Offshore wind power 69 4.2.6 Photovoltaic Power 73 4.2.7 Thermosolar Power 77 4.2.8 Biomass Co-firing 80 4.2.9 Lifetime enlargement of old nuclear power plants 84 4.3 Comparison of different technologies in terms of sustainability 87

5 Recommendation for a sustainable and profitable future of Iberdrola 94

5.1 Iberdrola - Actual situation (2010) 95 5.2 Approach of the model 98 5.3 Analysis of Scenario 1 100 5.4 Analysis of Scenario 2 106 5.5 Analysis of Scenario 3 111 5.6 Conclusions 117

Part II - Energy efficiency for Bono Social beneficiaries as the 121 means toward Iberdrola’s profitability and sustainability

1 Analysis of the Spanish electricity consumers 123

1.1 The last resort rate (TUR) 123 1.1.1 Legal framework for a liberalised electricity market 123 1.1.2 Nominated energy operators in the market (CUR) 124 1.1.3 Prices 125 1.1.4 Comparison in bill pricing for the TUR and the Bono 127 Social 1.1.5 Customers eligible for the TUR: low voltage electricity 129 customers

1.2 The “Bono social” 129 1.2.1 The creation of the bono social freezing electricity 129 prices 1.2.2 The beneficiaries of the Bono Social 130

1.3 Who the beneficiaries are 132 1.3.1 Clients contracting less than 3 KW 132 1.3.2 Pensioners 134 1.3.3 Focus on two out of four beneficiary groups for better 142 results

2 Energy efficiency in the national policy and energy sector contexts 143

2.1 Spain’s action plan and strategy toward sustainability 143 2.2 The energy sector and energy efficiency: a very limited offer 145 2.2.1 Iberdrola Servicios Energéticos: Energy efficiency offers 146 for the liberalised market 2.2.2 Competitors’ actions upon energy efficiency for households 148 2.2.3 Spanish energy companies: basic information, but no real 150 measures offered to clients in the regulated market 3. Bono Social: from burden to business opportunity through energy efficiency 151 3.1 Energy consumption posts: Fridge and illumination as the biggest 152 energy saving potentials. 3.2. Leading Iberdrola toward profitability and sustainability: a three 156 step model proposal for Bono Social beneficiaries 3.2.1 Assumptions 157 3.2.2 Three step model 159 3.2.3 Financing 169 3.2.4 Different offers 167 3.2.5 Positive environmental impact 184 3.2.6 Three steps for a win-win-win situation 187

Conclusion 191

References 193

Appendix 199

INTERNATIONAL MASTER IN SUSTAINABLE DEVELOPMENT AND CR Profitability and Sustainability for Iberdrola

Executive Summary

Throughout human history, energy has played a crucial role in economic and social development.

After the aftermath of the oil crisis in 1973, security of supply has become a major concern for competitiveness. Indeed, geostrategic considerations as well as limited resources entail increasing pressure on dependent importing countries.

As a number of international conferences clearly highlighted, environmental issues play a greater role: the Kyoto Protocol paved the way toward CO2 emissions targets for developed countries. Those environmental matters have been taken into account in the 20-20-20 European Directive: the objective is to reach 20% of energy production from renewable sources, 20% improvement in energy efficiency and to decrease CO2 emissions by 20% until 2020 compared to the levels of 1990.

By adopting this new legislation, changes are intended on the production side with a focus on renewable energies. Spain is actually one of the leading countries in Europe with regards to renewable energies, being particularly strong in onshore wind energy. The country invested on a large scale and can therefore now enjoy a competitive advantage exporting its knowledge. This new approach was also a booster for the economy, creating thousands of jobs, most of them in regions where the unemployment rate was high.

On the other hand, possible changes on the demand side are also part of the solution. The emphasis is put on energy efficiency as one of the means to decrease energy consumption and the related CO2 emissions, thus, also reducing dependency on resources and foreign suppliers. As Spain lacks behind European countries in terms of energy efficiency, actions in this field can lead to good and fast results, increasing as well Spain’s competitiveness.

Our project intends to apply the same principle at a company level, focusing on Iberdrola, one of the most prominent players on the Spanish energy market with 31% of market share.

In the first part of this work, we will analyse which are the best alternatives for Iberdrola’s electricity generation mix for 2030, taking into account profitability and environmental sustainability.

In the second part, we chose to focus on a specific customer segment: the Bono Social beneficiaries. Due to the current regulation, this target group generates losses for Iberdrola.

By developing a business model based on energy efficiency, we aim at conciliating profitability and sustainability for the company on this segment but also giving an added- value to customers.

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Part I - Electricity production

The first part of this work focuses on the production side, more specifically on the current and future generation mix of Iberdrola.

The first step was to analyse the Spanish and European energy and electricity market as basis for this work. Then we used a study developed by PriceWaterhouseCoopers (PWC) for the future energy planning of Spain in order to come up with our own model for the company specific case of Iberdrola. We considered the PWC approach – the most recent one we could find - to be the most neutral one as it was developed by a well-known external consultancy. It included four scenarios with different generation mixes fulfilling the requirement in terms of the three bases of energy planning: security of supply, environmental sustainability and cost-efficiency. These scenarios have been developed for the Spanish government to choose for the best suitable option for the Spanish market, for the period 2010 - 2030. In terms of results, all scenarios had shortcomings regarding at least one of the pillars of energy planning and the choice of the current government would be due to priorities. As it is not clear for which of the scenarios the government would opt, we considered all of them for the specific case of Iberdrola in our own analysis. The scenarios differentiated between the share of renewable energies and the future of nuclear energy for Spain. The latter includes the enlargement of old nuclear power plants as well as the construction of new nuclear power stations:

Scenario Renewable energies Nuclear energy 1 50% of demand Progressive closing of actual utilities 2 50% of demand Enlargement of useful life up to 60 years 3 30% of demand Enlargement of useful life up to 60 years 4 30% of demand Enlargement of useful life up to 60 years and building 3 new plants

The model also incorporates the necessary back-up capacity in terms of thermal power plants, which will depend on the respective scenario and the share of renewable energy sources.

In order to be able to provide a suitable solution to Iberdrola for each of the four scenarios, we first assessed all commercially available technologies in terms of sustainability with our own criteria, mainly focusing on the economic profitability by developing an investment analysis for all of the technologies and calculating the level of CO2-emissions. Besides the technologies that are already in use in Spain, we included biomass co-firing and wind offshore, which are already under operation in other countries. While biomass co-firing could

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be adapted in the short-term, offshore wind still faces technical difficulties in Spain due to the physical conditions of the coastline. All other technologies currently in the Research and Development (R&D) stage have been excluded from the analysis as according to an expert of Iberdrola Renewables, they will not be able to contribute to a significant share within the next 20 years. We did not focus on hydro power and cogeneration as all four scenarios state an equal increase for these technologies. We differentiated between technologies that run under the special and the ordinary system and were handled by Iberdrola and Iberdrola Renewables. All power plants that operate under the ordinary regime are handled over a market, while the ones under the special regime (new renewables, including small hydro power plants) have guaranteed access to the grid and get a fixed tariff by the government per unit of electricity produced.

For our sustainability analysis, we used the best available and comparable data, both operational and financial as input for our model, as described in detail in the document. We considered two cases of future price increases, as this is one of the most sensitive figures of our analysis. The first case is a moderate increase of power prices of 2% annually, equivalent to the inflation rate predicted by the International Monetary Fund (IMF). By contrast, case 2 considers an increase of 5% annually in accordance with the predictions of the plan for renewable energy sources 2011-2020 (PANER) by the Spanish government. With these data, a sustainability analysis was performed for each technology and both cases of future power price increases. The results are the following:

 While new nuclear power plants are profitable in the case of a 5% annual power price increase (case 2), they are not a profitable option based on an expected annual power price increase of 2% (case 1). Due to the strong dependence on the future power price evolution, the risk of losses has to be considered very high. Moreover, the risk of environmental damages as well as social difficulties in building new nuclear power plants (60% of the population against this power source) have to be taken into account.

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INTERNATIONAL MASTER IN SUSTAINABLE DEVELOPMENT AND CR Profitability and Sustainability for Iberdrola

We therefore think that new nuclear power plants are not a solution for the Spanish market. Consequently, we have excluded scenario 4 of PWC (construction of three new nuclear power plants) from our model.

 In terms of fossil fuel power plants, we have concluded that for both cases of price evolution, gas-fired power plants are profitable while coal power plants are not, due to commodity and CO2 prices. Gas-fired power plants as well provide environmental advantages (regarding all types of emissions) and therefore seem to be the appropriate option for the future, especially due to their flexibility as back-up for renewables.

 Among the new renewable electricity sources the most profitable technology is solar thermal power, which surprisingly appears to be even more profitable than both wind on- and offshore. This is common to both cases.

 For co-firing, efforts should be undertaken as fast as possible for the two newest coal power plants of Iberdrola (shown for both cases of price increase) to use this technology as it reduces the environmental impact and creates profits.

 All new renewable technologies still strongly rely on price incentives from the government, especially solar power. Therefore, even if the Internal Rate of Return (IRR) for solar might be higher at the moment, this situation can change quickly due to legislative amendments. For this reason, we want to keep a balance between the different renewable sources.

 Also onshore wind power is further developed both in terms of technology as well as maturity and may soon reach the point when it can compete on the market without subsidies providing a lower risk due to legislative changes. The growth rate of this technology was quite stable over recent years, making it a more predictable source. However, problems arising from balancing the power still have to be solved.

 We based our analysis on the currently available technologies plus biomass co-firing and offshore wind power, as it is very likely that these will be the only sources available on a large scale. Nevertheless, if rapid improvements are made in other technologies like biogas, geothermal or marine power, Iberdrola would have to adjust to them as well. Yet, the investment in R&D remains very important independently of the scenarios.

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INTERNATIONAL MASTER IN SUSTAINABLE DEVELOPMENT AND CR Profitability and Sustainability for Iberdrola

 Another important factor that should be focused on in terms of R&D is electricity storage capacity, as it facilitates the usage of the unpredictable renewable electricity sources and might provide large benefits in financial terms but also environmental terms, as it could decrease the need for thermal back-up power.

After having analysed the different technologies in terms of sustainability, we developed the most sustainable generation mix for each of the three scenarios based on the results derived above.

As previously mentioned, we considered for hydro and cogeneration a linear increase of installed capacity in accordance with the increase of the demand, forecasted by PWC, keeping the current market share of Iberdrola.

The increase of new renewable energy sources was based on the current market share of the company and we considered a mix of 50% wind and 50% solar. This was done to reduce the risk of reduction in tariffs for one of the technologies and seems to be the best option even if solar provides higher returns in terms of IRR. For wind power, three types of plants were differentiated: new wind farms, substitution of old ones (after 20 years of lifetime) and offshore wind which will start to be an option from 2020 onwards according to PANER. To diversify the portfolio, a share of 50/50 was taken for solar thermal and photovoltaic power. The total amount of installed capacity was increased according to the goal of the different scenarios developed by PWC.

For nuclear power the scenarios differentiate between a close down of existing plants after a lifetime of 40 years and extending their lifetime to 60 years.

Due to the environmental and economic reasons, we decided not to build new coal power plants and use gas-fired CCGTs as back-up power plants. For the existing coal power plants, we recommend to implement biomass co-firing for the two newest coal plants. The decisions about when to start building new CCGTs was based on the overcapacity factor (ratio between production capacity and demand) of the market.

Recommendations for the different scenarios

We would recommend scenario 2 (50% renewables, extension of nuclear) to Iberdrola, as it is the most profitable and the less pollutant one (in terms of CO2 and NO emissions). However, this model has two limitations.

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INTERNATIONAL MASTER IN SUSTAINABLE DEVELOPMENT AND CR Profitability and Sustainability for Iberdrola

First of all, it is the one that requires the highest amount of initial investment. In fact, the necessary investment represents almost two times the one of the third scenario. It will depend on the capacity of Iberdrola to raise funds if this scenario can be implemented instead of another one that is less costly.

The second restriction is about the future of the nuclear energy in Spain. Indeed, this scenario involves the extension of the lifetime for further 20 years of the power plants. Today, nobody can predict what is going to happen in the short term with the nuclear. Is Spain going to take the decision to abandon nuclear power as soon as Germany (until 2022)? If an extension should turn out not to be possible, the company should focus on our solution for the first scenario.

We have already avoided the possibility to build new nuclear plants, but the extension of the lifetimes represents a good compromise for the country, as the plants are already depreciated and therefore represent a cheap electricity source, whereas the environmental risks always have to be kept in mind.

On the other hand, scenario 2 fulfills the three requirements considered for a good energy mix. As already discussed, it is the most cost efficient and the most environmentally-friendly. Concerning the security of supply, Spain having enough uranium and coal, will only depend on the importation of gas, which represents only 25% of its installed capacity (compared to 46% in scenario 1 and 45% in scenario 3).

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INTERNATIONAL MASTER IN SUSTAINABLE DEVELOPMENT AND CR Profitability and Sustainability for Iberdrola

So what should Iberdrola do to be successful in convincing the Spanish government to implement this second scenario? Lobbying the government directly and give the previously mentioned arguments, but not just directly but also lobby through the autonomous regions which would profit from e.g. the enlargement of nuclear power plants. Also other relevant stakeholder groups should be consulted during the process. For the renewable energies Iberdrola could animate other actors to move in the same direction if large investments are made in this sector. This could lead to lower production prices and therefore provide benefits to the company.

But what could be the risks? As the renewable technologies rely on the regulation set by the government in form of price incentives, a huge risk lies in a reduction of the tariffs which would make them unprofitable. However, this risk might be considered low as Spain needs to reach the 20-20-20 target and it is probable that future targets will be set up. Therefore, it is also to the benefit for Iberdrola to diversify their portfolio in terms of renewable energy sources in order to be less dependent on the decisions of the government. New nuclear power plants and even the extension of old ones entail large initial investments and always the risk of shutting them down due to social reasons is present (as seen just recently in Switzerland and Germany).

Iberdrola as well should focus on wind power as it is world leader in terms of onshore power which can provide the company a competitive advantage, the reduction of operational costs due to scale effects and bargaining power vis-à-vis suppliers in terms of new investments. Concerning off-shore wind Iberdrola is also already active in the North Sea (in Germany and in the UK) and could use its know-how to implement it more effectively compared to the competitors in Spain.

Another important point might be the enlargement of the interconnecting power networks with neighbour countries. Iberdrola should lobby for the enlargement as the power prices in Spain are rather low compared to the other large European markets (France, Germany, Italy and the UK) and the company would be able to increase the power sold in the foreign countries, and exporting the overcapacity.

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INTERNATIONAL MASTER IN SUSTAINABLE DEVELOPMENT AND CR Profitability and Sustainability for Iberdrola

Part II: Electricity consumption

After having focused on the generation side of Iberdrola, we will now analyse how the company can make the demand side more sustainable.

In 2003, the European Directive 2003/54/CE paved the way toward the liberalisation of the electricity market across the European Union in order to improve the quality of service for clients. Spain started transposing it into national law in 2007 and the actual liberalisation became effective in July 2009.

In order to protect households from too high price increases, the government nominated 5 electricity companies (CUR) that agreed to apply the especially designed “Tarifa de Último Recurso” (TUR), a regulated frame for all customers with an installed capacity of less than 10kW. This encompasses a few small companies as well as almost all domestic customers, about 20 million clients in total.

Within this segment, the government also froze the electricity prices for the population it considered as potentially vulnerable. The so-called “Bono Social”, coming to an end on December 31, 2013, concerns about three million of the TUR customers. The latter benefit from prices lower than the electricity production costs. This results in losses for the electricity companies. In this work, we developed a profitable and sustainable solution for both Iberdrola and the Bono Social beneficiaries. In this specific case, it is actually profitable for the company to reduce the clients’ consumption. This will decrease the clients’ electricity bills, which will definitively make the latter more capable to upfront future price increases. This is also in the interest of the government which will not have to support these clients in the long-term.

To tackle the losses generated by Bono Social measure to Iberdrola, we chose to focus on energy efficiency. This is in line with Spain’s national strategy which actually devotes 56.5% of public funds for households to implement energy efficiency measures. On this segment, buildings and appliances are identified as two key vectors to reach the European 20-20-20 target.

Surprisingly enough, Spanish electricity companies making losses due to the Bono Social measure do not have any such offer for that segment. Tangible energy efficiency solutions are only aimed at commercial customers, those in the regulated market being only offered tips. Therefore, on top of being a means toward profitability, we do think that energy efficiency alternatives can be an asset for Iberdrola, and more precisely for its branch Iberdrola Servicios Energéticos, to profile itself even more as a sustainability leader in Spain.

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INTERNATIONAL MASTER IN SUSTAINABLE DEVELOPMENT AND CR Profitability and Sustainability for Iberdrola

To target the Bono Social beneficiaries, it is essential to know more about those specific customers. The latter are divided into four categories: low-voltage clients, minimum amount pensioners, unemployed households and large families. We chose to focus on the two largest segments, the low-voltage clients and the minimum amount pensioners.

The low-voltage customers, automatically included by law, represent the largest Bono Social segment with 84% of the total beneficiaries. This group is very heterogeneous. Apart from low electric capacity installed (less than 3kW) corresponding to about 4 main appliances in house, among those a fridge and a washing machine, those customers do not share any further common characteristics as a group.

After defining the target groups, for optimal results we analised the largest share of the beneficiaries’ electricity bills in terms of appliances. Because of the power they need, but also due to the consumption rate, fridges and illumination are the two appliances with the biggest share. Taking action on those well-known appliances presents the huge opportunity of bringing energy efficiency into homes. This is crucial, above all for pensioners who are rather reluctant to changes and innovation.

Thus, we based ourselves on this information to develop a new business model consisting in three steps “contact – engage – renew” and an energy efficiency pack for Iberdrola Servicios Energéticos.

Steps 1+2: Contact and engage

Since the low-voltage customers group is very heterogeneous, we thought of reaching the beneficiaries through their bills or with leaflets in public places such as the doctor’s office for. Once the contact is established, it is important to raise awareness about the savings the clients can make by implementing these measures so that they can engage and sign for the energy efficiency pack.

As for pensioners, we thought of a more comprehensive approach to guarantee the measure’s success to Iberdrola as well as to meet the pensioners’ different needs. We decided to collaborate with a third party specialised in third age issues, namely with a recognised pensioner association, the Unión Democrática de los Pensionistas (UDP). This collaboration between Iberdrola and the UDP could enable to select the first pensioners to contact and to

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INTERNATIONAL MASTER IN SUSTAINABLE DEVELOPMENT AND CR Profitability and Sustainability for Iberdrola

really explain them about electricity saving possibilities. It would also be the opportunity for the association to check social needs and give assistance. This will help to establish trust and thus to get them engaged.

Step 3: Renewal of appliances

The third step is the actual renewal of appliances. To benefit from the best prices on the market as well as from economies of scales, we think it is important to work directly with one appliance producer. It is all the more important since offering low prices to Bono Social customers is one of the keys to success. To allow greater savings and environmental impacts, we will opt for energy efficient appliances. Finally, to be coherent with the sustainability principles, the recycling of all replaced appliances will be organised to get the latter definitively out of the market.

Offer and financing

As mentioned, the actual offer and its financial aspect are key elements for this model to succeed. We designed two fridge and lighting packs for each segment taking their needs into account. Moreover, we created a financing plan to make the pack affordable to the greatest number so as to increase the conversion rate. Basically, this investment will be partly financed by the energy savings related to the appliance renewal while the other part will be financed directly by the Bono Social customers. As a matter of fact, the low-voltage clients’ consumption being lower, the payback period will be longer. To offer them an attractive deal, we planned a two year payback period with a € 9.- direct financing. For pensioners, the higher electricity savings enable to design a financing plan in one year with € 8.- direct payment. Moreover, since Iberdrola can resell this electricity saved at market price, the company can make extra profit.

As a whole, this new business model will lead to a win-win-win situation.

First of all, this model enables Iberdrola to conciliate profitability and sustainability on a deficit customer segment. Indeed, by decreasing the electricity consumption of those Bono Social beneficiaries, they get an extra profit from the electricity savings sold at market price together with the related CO2 emissions: reaching 10% of the tackled Bono Social groups would enable €2.39 million in extra profits for Iberdrola as well as 7.700 tons of CO2 emissions reduction for these customer groups. Moreover, this action plan will help the company to get more information on their clients. This will help to monitor their consumption to do better demand forecasts in the future. Besides, by implementing this new business model, Iberdrola will acquire knowledge about energy efficiency. Finally, this is the opportunity for Iberdrola to position itself as a leader in the sustainability field, thus gaining a competitive advantage in terms of reputation.

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INTERNATIONAL MASTER IN SUSTAINABLE DEVELOPMENT AND CR Profitability and Sustainability for Iberdrola

On the pensioner segment particularly, using the 2012 year of active aging and the collaboration with the UDP can definitively be a great public relation management.

The targeted Bono Social customers will benefit from this initiative as well. First, renewing their appliances will reduce their bills for the expected switch to the TUR prices in 2014. This investment will also increase their quality of life. For the pensioners, this model presents an added value since the social aspect is really taken into account to bring them more than just energy efficiency. This is linked to the role the company intends to play in society and is part of sustainability.

Finally, society as a whole will benefit from this model since it comprehends all three components of sustainability. From an economic point of view, tackling the Bono Social customers means decreasing the possible debt of the state. From a social point of view, it helps households controlling their expenses to avoid any financial problems. From an environmental point of view, energy efficiency and the related lower electricity consumption means fewer CO2 emissions.

Conclusion

When trying to tackle sustainability in the electricity sector, we have observed a big difference between the production and consumption sides. Indeed, on the production side, changes will lead to large scale impacts whereas for the demand side, a large percentage of the population needs to be targeted to reach visible results. Still the changes on the demand side are easier and cheaper to implement. Beside all the efforts companies and customers can do, the government keeps playing a key role when tackling sustainability and the result it can achieve.

For the production side, as the “clean” energies are ruled by the special regime, with fixed tariffs imposed by the government. Hence, companies are limited in their actions. However, as the Spanish electricity sector is concentrated around main actors, each of them has a high negotiation power with the institutions. A company like Iberdrola can actually lobby directly the government due to its size, encouraging it to take the path towards sustainability.

In this work, we have developed a sustainable solution for Iberdrola’s generation for all of the scenarios of PWC. We emphasised the fact that the cleanest scenario for Iberdrola, with 50% of renewable energies and enlargement of the life time of the nuclear power plants, was also the most profitable one. The main assumptions for this scenario were that the government would allow keeping nuclear power plants running, and would keep high feeding tariffs.

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INTERNATIONAL MASTER IN SUSTAINABLE DEVELOPMENT AND CR Profitability and Sustainability for Iberdrola

The latter represents a trade off the government has to deal with. Indeed, the high tariffs, financed by a tax on electricity, represent a high cost to society. At the same time, this investment increases the security of supply as well as the environmental performance. Even if it is not cost-efficient, it provides the optimum mix of all three factors mentioned. On the other hand, from a company point of view, due to the tariffs set by the government this scenario is the most profitable.

The best scenario in terms of profitability and sustainability also requires the largest amount of investment and the funds may not be accessible to implement the measures needed. Therefore energy policies take into account many factors which can sometimes be antagonist.

On the consumption side, however, even if a regulation is put in place, more investment is needed in order to raise awareness to change consumption patterns on the long-term and to allow the necessary investments in energy efficiency. Moreover, technological innovation as well as research and development need to be supported by the government in order to achieve greater impacts. It is crucial to make it easy for companies and clients to implement energy efficiency measures.

Another essential question is how the government can set incentives for Iberdrola to decrease the energy consumption of all its customers. Under the current system, this is working against the core business of the company and would lead to decreased profits. Due to the temporary regulation of the Bono Social, we were able to come up with a solution to decrease electricity consumption while increasing the profits of the company. However, in normal market conditions, parameters would act differently.

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ABBREVATIONS

BAU – Business As Usual

CCGT - Combined Cycle Gas Turbine

CCS - Carbon Capture and Storage

CNE – National Energy Commission (Comisión nacional de energías)

CO2 – Carbon Dioxide

CSN - Nuclear Safety Council (Consejo de Seguridad Nuclear)

CUR – Last Resort rate providers (Comercializadores de Último Recurso)

EACI - Executive Agency for Competitiveness and Innovation

EAH – Effective Annual Hours

EDI - Energy Development Index

EU - European Union

EU ETS - European Union Emission Trading Scheme

GDP - Gross Domestic Product

GHGs - Greenhouse Gases

GWEC - Global Wind Energy Council

HDI - Human Development Index

IDEA - Institute for Energy Diversification and Saving (Instituto para la Diversificatión y Ahorro de la Energía)

IEA - International Energy Agency

IMF - International Monetary Fund

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INTERNATIONAL MASTER IN SUSTAINABLE DEVELOPMENT AND CR Profitability and Sustainability for Iberdrola

IRR - Internal Rate of Return

LNG - Liquefied Natural Gas

MIBEL - Iberian electricity market (Mercado Ibérico de la Electricidad)

MITyC - Ministry of Industry, Tourism and Trade (Ministerio de Industria, Turismo y Comercio)

NO – Nitrogen Oxide

NPV - Net Present Value

O & M – Operation and Maintenance

OMEL – Spanish electricity market operator (Operador del Mercado Eléctrico)

PANER - Renewable Energy Plan of the Spanish government (Plan de acción nacional de energías renovables)

PWC - PriceWaterhouseCoopers

R&D - Research and Development

REE – Red eléctrica de España

SO2 – Sulfar Dioxide

SOVI - Compulsory Elderly and Disability Insurance (Seguro Obligatorio de Vejez e Invalidez)

TTF - Title Transfer Facility

TUR - Tarifa del Último Recurso

UDP – Unión Democrática de los Pensionistas

US EIA – United States Energy Information Agency

WACC - Weighted Average Cost of Capital

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Introduction

In the human history, and more specifically since the 19th century and the first industrial revolution in Great Britain, energy has played a crucial role in development. It is undoubtedly closely linked to economic growth since no production on a large scale would be possible without energy, may the latter be oil for transport or electricity for the industry. Generally, a correlation between country’s Gross Domestic Product (GDP) and the energy consumption of this same country can be established.

The same conclusion is valid for quality of life and human development in general. It seems logical that economic growth triggers off social progress for people at some point. The International Energy Agency clearly shows in the following graph the link between the Energy Development Index (EDI), an indicator measuring the energy consumption per capita and percentage of people with access to electricity, and Human Development Index (HDI).

Figure 1: Link between HDI and EDI, Source: WEO 2010 – Energy Poverty

Thus, energy is key to both economic and social development, which confers it a tremendous importance.

However, since the oil crisis in 1973 and the recession which followed, more and more issues have emerged related to this topic.

First of all, security of supply is a very sensitive issue. Most of the oil, gas or coal reserves are located in politically rather unstable countries, namely Russia and Libya as just two of

1 them. From a geostrategic point of view, this makes the situation very complex: energy dependency can put the whole economy at stake since dependent importing countries are not really in a position to negotiate, as the gas crisis between Russia and Ukraine in 2008 showed for instance.

The slightest change automatically has an impact on prices and therefore on an economy’s competitiveness and development, all the more as gas prices are indexed on oil prices

Security of supply also has to do with resources: fossil fuels are by definition no renewable energies, at least not on a human life scale. They are present in limited amounts and at the pace at which they are exploited today, according to the most pessimist scenarios, supply is not guaranteed for more than 30 years for oil for instance1.

This has actually been an issue over the last decades. Already 30 years ago, the Brundtland Commission recognized the environmental challenges linked to energy and stated the need to move towards a more sustainable development (United Nations – Brundtland Report, 1983), that "meets the needs of the present without compromising the ability of future generations to meet their own needs."

The concept of responsibility toward future generations was mentioned officially for the first time in an environmental context.

This same concept of responsibility will be highlighted / emphasised again later in 1997 in the framework of the Kyoto Protocol. During this international conference about climate change, invited countries will discuss the global impacts of CO2 emissions. The historic responsibility of developed countries toward developing countries will be recognised. What does this mean? The map below about climate change impacts and extreme events gives a striking answer to that question.

The so-called developed countries, to develop, used resources no matter the impacts those could have on the environment, on health, on people more generally. Especially as many impacts were not understood well in these times. Pollution being a global phenomenon, although CO2 emissions are produced in one part of the world, the impacts are not necessarily occurring in that same part of the world. Quite on the contrary! Looking at figure 2, we can see that developing countries are the ones more impacted by extreme events (in blue). They are also the ones having the least means for mitigation or adaptation to those new situations, making vulnerable people even more vulnerable.

1 García Ybarra P. Conventional energies/Development and the environment. IMSD 2010-2011

2

Figure 2 : Climate change vulnerability map 2011. Source www.maplecroft.com

The historic responsibility of developed countries being established, actions had to be taken and this took the form of CO2 emissions reduction targets for developed countries that have signed the Protocol.

In 2008, the European Union also set its own target with the 20-20-20 directive. The objective is to reach 20% of energy production from renewable sources, 20% energy efficiency and to decrease CO2 emissions by 20% until 2020.

Spain being a European Union Member State, it had to transpose these goals into its national strategy plan. To do so, the country described two axes of action.

On the one hand, changes are intended on the production side with a focus on renewable energies. Spain is actually one of the leading countries in Europe when talking about renewable energies, with strength in wind onshore power. The country invested a lot and can now enjoy a competitive advantage exporting its knowledge. This new orientation was also a booster for the economy, creating thousands of jobs, most of them in regions where the unemployment rate was high.

On the other hand, possible changes on the demand side are also part of the solution. The emphasis is put on energy efficiency as one of the means to decrease energy consumption and the related CO2 emissions, thus also reducing dependency on resources and suppliers.

3 By tackling the energy issue from the supply to the demand side, Spain tries to approach the challenge in the most holistic way, including stakeholders at all levels.

Spain is also a very interesting country for more than one reason when it comes to energy.

Apart from the high share of renewable energies in the national energy mix compared to other countries, Spain also has an overcapacity for electricity generation. If maintaining extra production units such as, for instance, flexible gas-fired power plants has a cost. This also aims at backing-up the unpredictability of renewables to ensure a secure electricity supply to Spanish companies and households. In the current system, strengthening clean energy as an expression of political will implies an extra cost under the form of subsidies as well. This political engagement is naturally closely linked to the European targets for 2020. Contrary to oil or gas, electricity is actually the only source of final energy which can play a major role in all three areas by modifying the generation mix. This is why we decided to focus on the electricity sector.

Since the liberalisation in 2009, the households could benefit from regulated prices, which are lower than the commercial prices offered to companies, the latter being in the liberalised market by law.

In this context, barriers of entry are very high for potential new entrants and the energy sector basically consists in three big players: Iberdrola, Gas Natural-Fenosa and Endesa. Those energy providers share the Spanish territory among themselves in such a way that there is no real competition: each one of them is the unique provider in the autonomous community in which it is present. But due to the liberalisation this might change in the future and is a risk as well as an opportunity to the companies to reach new customers.

In this work, we chose to focus on one of them: Iberdrola. Many reasons for this decision.

First of all, Iberdrola is one of the electricity companies which is present in the autonomous community of Madrid .

Moreover, with a market share of 31%2, Iberdrola is the second energy provider in Spain. It is also the main producer of electricity from renewable sources. This is above all part of the company’s policy and it reflects its focus on sustainability

This shift of Iberdrola towards clean energy coincides with the arrival of Ignacio Sánchez Gálan at the head of the company in 20013.

2 Ministerio de industria, turismo y consumo (MITYC), La energia en Espana 2009, 2009

3 Accenture, Real substance : Sustainability at Iberdrola, 2010

4 From a historical point of view, Iberdrola, as the result of the merger between Iberduero and Hidroeléctrica Española in 1991, has already got some expertise in the field of clean energy with hydropower. Mr. Gálan wants to make the company the leader in clean energy and will decide to invest heavily in wind energy, renewable energies becoming the main vector for growth. As such, Iberdrola will be a pioneer in Spain, even being ahead of the national agenda since the national strategy for energy will first be voted in November 20034.

This new energy portfolio is part of Iberdrola’s vision of sustainability, as Mr. Gálan will emphasise in this statement: “we must cover our needs, that we do not need to reduce the level of comfort and the level of service we provide to society, but at the same time, we need to keep things in the same shape or better for our children and their children”.

Sustainability goes beyond the mere environmental aspect. To be effective, it must be part of the company’s management. At Iberdrola’s, sustainability is deeply embedded in the corporate governance since a Corporate Social Responsibility committee is included in Board of directors itself. This influences all decisions made by the company.

However, to be fully sustainable, a company must integrate the economic aspect as a capital component. If Iberdrola strives to do so, many barriers prevent the company to be fully successful in that respect.

Indeed, the regulation imposed by the State prevents electricity companies in general, and Iberdrola in particular, to charge the real price for energy.

This is precisely the challenge we will approach in the framework of this analysis first addressing the production side and then the demand side: How can Iberdrola conciliate profitability and sustainability in the current situation?

The first part on the generation mix is on a timescale of 20 years, starting in 2011 and lasting until 2030. As the energy and electricity market of Spain is connected to the rest of Europe the first step is an analysis of the European and Spanish energy and electricity market. After analysing the historic development the next step are future electricity trends for the Spanish market, where a study of PriceWaterhouseCoopers (PWC) was used for predictions until 2030. After having analysed historic and future aspects of the market, the focus will be on the company Iberdrola itself. The power plants that are under operation were separated in conventional and renewable sources and an analysis about regulation of different technologies was executed. In the following chapter we were

4 Ministerio de Industria, Turismo y Comercio, Plan de Acción 2008-2012, 2007

5 focusing on the points of sustainability and profitability with an analysis of the actual technologies concerning these two points. So Net Present Value (NPV) and Internal Rate of Return (IRR) calculations will were done as well as environmental impact analysis, especially CO2-Emissions. Having comparable data for the different technologies we have then developed for each scenario given by PWC a solution for the generation park of Iberdrola for the time period of the next 20 years, which in our opinion will provide the most sustainable solution . We considered hereby the additional capacity needed for the increasing demand, the lifetime of all existing power plants and their upcoming substitution, but as well facts like CO2-emission from different technologies as well as economic factors in terms on NPV and IRR.

To respond to the profitability-sustainability challenge in the most comprehensive way, after having dealt with the electricity generation in the first part, we will address the electricity demand side in the second part of this work. More precisely, we will focus on one particular segment within the whole demand: the Bono Social beneficiaries.

As previously mentioned, Spain liberalised its energy market in 2009. However, to protect households from switching to too high prices at once, the government created the Tarifa de Ultimo Recurso (TUR). Within this, the Bono Social special measure was created to protect small and/or vulnerable customers.

The three million Bono Social beneficiaries are entitled to lower electricity prices. The difference between these regulated prices and the electricity production cost is currently financed by the energy companies, among those by Iberdrola. As a matter of fact, this system cannot not be sustainable for the Spanish company.

But what about the beneficiaries? Making them switch to a commercial offer would not be sustainable for them either as most of them may simply not be able to afford it or would have to review their priorities.

Keeping this socio-economic dilemma as well as Iberdrola’s focus on sustainability in mind, we will try to come up with a new business model based on energy efficiency to make a profitable business opportunity out of a burden.

6 Part I - Electricity Production

The first part of the thesis is based on the electricity production of Iberdrola. After explaining the general context of energy and electricity in Europe and Spain, we will base our analysis on the future challenges and opportunities for Iberdrola in the Spanish market. As the electricity business is a highly regulated business, political plans and regulations play a major role.

We therefore based ourselves on four scenarios for the future electricity mix for Spain developed by PriceWaterhouseCoopers (PWC). The goal of this part is to show the best suitable way Iberdrola should adjust its strategy through this external conditions, which are decided on a political level.

After the description of the model used by PWC and their results, we developed business cases for all available technologies and compared them based on economic as well as on other factors in the field of sustainability, like environmental and social impacts.

With these results, we could develop a best suitable generation mix for Iberdrola for the time horizon 2011-2030 for each of the scenarios and by comparing the results of the different outcomes the preferable case for the company.

1. Actual Situation of the Spanish electricity sector in the European context

Introduction

When looking at the Spanish electricity market 10 years ago, there was hardly any need to consider the European market, as all electricity companies were just on their term to get privatized and also the interconnectors between the countries were not well developed. This situation has changed to a large extend and nowadays as the European Commission regulates the European market, cross-border investments were made and the network of interconnectors has, which explains the importance to consider not just Spain but also Europe. For the case of Spain, the investments leaded to higher import and export capacities especially to France and Portugal, and also to a smaller extend to Morocco as shown in the following graph. However the interconnector capacities are still quite small compared to other European countries and could also provide new business opportunities.

7

Figure 1: International Interconnectors and energy balances (negative numbers mean exports), Source: Red Electríca de Espana (REE)

So before going deeper into the field of the Spanish electricity market, we want to see the overall energy situation of Spain in the European context and what has historically changed.

The Spanish energy consumption increases while the energy intensity falls below European average

The energy consumption in Spain increased strongly from 1990 until 2007 as illustrated in figure 2.

8 Gross Energy Consumtion 160,00 140,00 Gross Inland Consumption 120,00 Solid Fuels 100,00

80,00 Oil Mtoe 60,00 Gas 40,00 Nuclear 20,00 Renewables

0,00 Other

1997 2006 1990 1991 1992 1993 1994 1995 1996 1998 1999 2000 2001 2002 2003 2004 2005 2007

Figure 2: Original Analysis on gross energy consumption Spain by primary energy source 1990 - 2007, Data: Eurostat

This increase of 64% from 1990 to 2007 was mainly driven by a large increase in GDP of 68%5 and was not downsized by the reduction of energy intensity. Concerning the field of energy intensity Spain is still lacking behind the European average as the following figure shows. While the other European countries on average could reduce their energy intensity, for Spain it remained quite stable between 1990 and 2007. The reasons for this development are probably due to missing awareness of long-term financial potential of new technologies, which resulted in the lack of investments in more energy efficient technologies. As well a lot of support in form of subsidies was given to the electricity companies in the past for the installation of power plants. This is

Figure 3: Spot power prices in the largest European electricity markets, Source: still valid today for Bloomberg renewable electricity sources. This lead to an overcapacity of the Spanish electricity market and therefore low wholesale electricity prices compared to other European countries (see figure 3). This

5 International Monetary Fund, World Economic Outlook Database April 2011

9 situation also explains the lack of incentives in the past to invest in energy efficiency measures.

Energy Intensity 240,0 230,0 220,0 210,0 200,0 190,0 EU-27

180,0toe/Meuro Spain 170,0 160,0 150,0

Figure 4: Original analysis on energy intensity of Spain and EU27, Data: Eurostat

Increasing import dependency due to increasing consumption coupled with stable production levels

Spain joined the European Community in 1986. This enabled the country to catch up other European neighbours’ level, triggering off rapid economic growth. As a result, the energy consumption rate rose sharply over the last two decades. However, the production from local sources remained more or less stable (see figure 5).

To keep up with the increased consumption, the share of energy imports had to be increased during the last two decades and doubled during this period (see figure 5), leading to a higher dependency on foreign imports of primary energy goods.

10 Energy Consumption vs. Net imports 160,00 140,00 120,00 100,00

80,00 Production Mtoe 60,00 Net Imports 40,00 Gross Inland Consumption 20,00

0,00

2000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2001 2002 2003 2004 2005 2006 2007

Figure 5: Original Analysis on energy consumption versus net imports of energy for Spain 1990-2007, Data: Eurostat

By now, Spain (79,5%) is under the three top countries, with Italy (85,3%) and Portugal (82%), in terms of import dependency, making them highly dependent on foreign imports of energy sources and far above the EU25 average of 53,6%. Of course, this bears high risks in terms of energy supply and international commodity prices. Importing energy also has a negative impact on the local job creation. Therefore, this model can definitely not be considered as a sustainable solution in the long-term. So the goal for a sustainable future should be a decrease of import dependency for Spain.

Figure 6: Original analysis, import dependency of selected European countries for 2007, Data: Eurostat

11 This is especially true for oil and gas with nearly 100% dependency, but also for coal with 66,6% in 2007 according to Eurostat. Nevertheless according to the latest country report published by the International Energy Agency (IEA) in 2009, Spain is improving in term of geographical diversification of both oil and gas. This leads to gas diversification and Liquefied Natural Gas (LNG) development in Europe6. But in our opinion the long-term goal for a less dependent and therefore more sustainable future should focus on local energy sources. Indeed, besides coal, Spain also has direct access to uranium and a large potential for renewable energy sources.

At this point, it is also important to mention that the import dependency as share of primary energy can be reduced by switching to renewable electricity sources for example. The overall import dependency of the country can also be reduced by energy efficiency measures reducing the overall demand, which will be tackled more in details in the second part of this work.

Energy mix for European countries is strongly dependent on geographically and politically conditions

The following figure shows the energy consumption by source for the 16 most important European countries.

Figure 7: Original analysis on gross energy consumption of selected European countries for 2007, Data: Eurostat

6 Internationa Energy Agency, Energy policies of IEA Countries, Spain: 2009 Review, 2009

12

Norway, Sweden and Switzerland – countries rich in reservoirs for hydro power due to geographical conditions - are especially strong in renewable energy sources with a long history in hydro power. France, Sweden and Switzerland rely strongly on nuclear power. So this group of countries is responsible for fewer CO2 emissions while other countries like Poland still heavily consume electricity from coal power plants, as they have large national resources.

Comparing Spain with the European average of the EU25 leads to the conclusion that the country relies strongly on oil and less on nuclear power for their energy. The share of renewable energy sources for Spain in 2007 of gross energy consumption was still very low, which has changed in the recent years. It is important to underline that for Spain, the historic exploitation of coal as local sources leaded to a large usage of solid fuels.

Comparing the sources of renewable energy for the different countries (shown in figure 8) also leads to interesting results. Especially Norway and Switzerland are very strong in hydro-power, due to their geographic conditions and long experience with this technology. Italy has a high share of geothermal power, while for wind power Spain is already in 2007 in a leading position. On contrast solar power does not contribute significantly to the energy mix of these countries even though large investment incentives were given by some governments, such as those in Spain and Germany.

Figure 8: Renewables on Gross Inland Energy Consumption, Source: Eurostat

Division of the Spanish electricity sector in regulated and unregulated market

So after having a look at the primary energy sources and Spain’s dependency in the European context, we will now focus on the Spanish electricity market. It is important to

13 mention first that back in 2007 an Iberian electricity market common to Spain and Portugal (Mercado Iberico de la Electricidad – MIBEL), was created to increase the security of supply and competition in those two countries. As well the interconnection capacity to neighbouring countries, especially France and Portugal was increased7.

The current situation of the Spanish electricity market is shown in table 1. The particularity of the Spanish market is the existence of two systems: the ordinary and the special regime. While the ordinary system works like every normal market by the placement of bids and offers over a market operator, which in the case of Spain this is the Operador del Mercado Electrico (OMEL), the production by the special regime is guaranteed access to the distribution grid and the pricing is fixed by a regulated system (fixed price versus market price plus premium).

The special regime was introduced to the Spanish market by the government to promote renewable energy sources for electricity generation. This had several reasons, one being the compliance with the European Union goals on renewable energy production and another one the promotion of a new industry for job creation. By these actions sustainability could be increased, but profitability keeps being dependent on the subsidies given by the state. In case the Spanish government would decrease the subsidies, the investment from utilities like Iberdrola in that field would decrease.

The government is expected to adjust the subsidies due to the development of the production costs of the different technologies. The decrease in production costs for renewable technologies and the increase of raw material prices at the same time leads to the expectation that these technologies will become competitive in the future even without subsidies.

So what effects could be achieved? So what could be the impacts? The division between special and ordinary regime is described in the table 1. Already 33% of the installed capacity fall under the special regime. As well a large share of the ordinary regime is from hydro power, a clean source of energy also represents a high share of the ordinary regime. Large hydro power (>50 MW) is not subsidized by the government as it is the cheapest energy source and does not need financial incentives. Besides hydro, combined cycle power plants have the highest share with 26%, followed by wind and coal accounts for 12% and nuclear for just 7% of the installed capacity.

7 International Energy Agency, Energy policies of IEA Countries, Spain: 2009 Review, 2009

14 Installed Capacity 31.12.2010 GW % Increase 09/10

Ordinary Regime Hydro 16,66 16% 0

Nuclear 7,72 7% 0

Coal 11,89 12% 0,2

Fuel/Gas 5,89 6% -1,3

Combined Cycle 26,84 26% 9,8

Total 69 67% 3,5

Special Regime Wind 19,96 19% 5,8

Solar 4,19 4% 15,3

Rest 9,94 10% 1

Total 34,09 33% 5,4

Total 103,09 100% 4,1

Table 1: Original analysis on installed capacity of Spain 2010, Data: REE

When considering the annual production for 2010 the share of the ordinary regime is nearly double compared to the one of the special regime. For the installed capacity the data are pretty equivalent, with 67% ruled by the ordinary regime and 33% by the special. The fact that only the share of nuclear power varies a lot for production in comparison to installed power is astonishing. Indeed with just 7% of installed capacity, nuclear power produces 21% of the energy for 2010 as shown in figures 9 and 10.

This is due to the capacity to produce electricity of different power plants. While nuclear power plants are clearly base load power plants, running 24 hours a day and just stop during revision, typically once a year for one month. This technology is not very suitable to adjust its capacity to the demand, even though with the new generation of nuclear power plants, this is possible.

15

Annual production 2010 GWh % Increase

Ordinary Regime Hydro 38001 13% 59,30%

Nuclear 61944 21% 17,40%

Coal 25851 9% -30,70%

Fuel/Gas 9624 3% -4,30%

Combined Cycle 68828 23% -16,30%

Total 204248 69% -1,00%

Special Regime Wind 42976 15% 18,30%

Solar 7276 2% 21,00%

Rest 41237 14% 6,40%

Total 91489 31% 12,80%

Total production 295737

Self Consumption -7555

Pump Storage consumption -4439

International exchanges -8490

Total 275253 100% 2,9 Table 2: Original analysis on electricity Generation of Spain 2010, Data: REE

16 Share of installed capacity 2010 Share of generation 2010

10% 16% 14% 13% 4% Hydro Hydro 2% Nuclear Nuclear 7% Coal Coal 19% 15% 21% Fuel-Oil Fuel/Gas Combined Cycle Combined Cycle Wind Wind 12% Solar Solar 6% Rest 9% Rest 26% 23% 3%

Figure 9: Share of installed capacity Spain, 2010, Source: REE Figure 10: Share of generation Spain 2010, Source: REE

Wind onshore and solar power depend strongly on wind and sun respectively, and therefore typically have approximately 2000 effective hours a year. Coal should run base load (constant) as well, as starting up and shutting down the power plants include high costs, while gas-fired Combined Cycle Gas Turbine (CCGT) are specially suitable for adjusting to the demand and are especially constructed for peak load (working days 8:00-20:00) and typically run 3500 hours. So compared to normal times coal, fuel/gas-fired and combined cycle power plants were just running at a low percentage of time, as shown on the following figure 11.The general rule is that the higher the share of renewable electricity sources is, the higher the thermal back-up capacity is that is needed.

Effective hours different technolgies, Spain 2010 10000 8000 Hydro 6000 Nuclear 4000 2000 Coal 0 Fuel/Gas Combined Cycle Wind

Figure 11: Original Analysis on effective hours for different technologies for Spain for the year 2010, Data REE

In our opinion several factors influence the market behaviour. First of all the power handled under the regulated market has primary access and receive a feed-in-tariff, so renewables will produce electricity at all times possible and do not depend on the actual market prices. On the contrary, profitability of thermal power plants depends on market

17 prices for electricity and corresponding hours of operation compared to the commodity prices. As for nuclear power the fuel cost are low compared to other expenses and the production does normally not depend on the commodity price for uranium. The case for coal- and gas-fired is different and can be explained by the commodity price increase on the international markets in 2010, while the power price in Spain stayed at a low level compared to the other large European electricity markets (see figure 3).

Figure 12: Commodity and power prices in Spain, 2010-2011 Source: Bloomberg

Another interesting point is the fact that a large amount of electricity of 8,49TWh was exported to neighbour countries, the largest amount was going to Morocco8. Concerning the connections to France, for the first time, Spain exported more than it imported. The historic and the expected development until 2016 is illustrated in the figure 13 below.

Figure 13: Electricity generation 1973-2016 for Spain by source, Source: IEA/OECD - Energy Balances of OECD Countries

8 Red Electríca de Espana (REE), The Spanish electricity system – Preliminary Report 2010, 2010

18

Oil is expected to lose its small share contributing to electricity generation even more until 2016, while the share of gas will increase. The decrease in oil for electricity generation is due to the high environmental impact and the rising prices for oil as a commodity. Coal, hydro and nuclear power are all expected to remain stable for the coming years, while increases are expected in the field of the renewable (see figure 13). Especially wind power will contribute to the increase in electricity generation, but also and to a far lower extend solar power and power from renewable combustibles.

As shown the installed capacity rose from 2009 to 2010 by 4,1%9 while the – by workdays and temperature - adjusted demand was growing by 2,9% for 2010. So while before the

Figure 14: Annual Electricity Demand Growth 2006-2010, Source: REE

financial crisis the demand growth was quite stable at a adjusted level of about 4,2%, the demand was shrinking by nearly 5% as a consequence of the economic downturn in 2009. It recovered pretty fast with a growth of 2,9% in 2010, even though the economy was still in a recession.

Industry Structure

As in many European countries, in Spain also the market shares are mainly divided among few big companies. 75% of the market share belong to the three big companies, Iberdrola, Endesa and Gas Natural Fenosa (see figure 15). Percentage share of installed capacity was quite similar to generation for that year.

9 Red Electríca de Espana (REE), The Spanish electricity system – Preliminary Report 2010, 2010

19 So while for the total generation of electricity Iberdrola and Endesa have 60% of the market, their dominance for supply to end-users with 80% of market share is even higher. So even though there are many small electricity suppliers, the power is still with the big companies. Also due to the subsidised prices defined by the government with the so-called Tarifa del Ultimo Recurso (TUR), consumers hardly switch suppliers. But as the probability is quite high that the whole system may change after the next general elections in 2012, it is important to be prepared to this step and a company like Iberdrola should be able to offer incentives to clients as proposed in the second part of this work.

After having analysed the overall situation we will now focus on the direct and indirect competitors. By direct competitors we mean the ones fighting on the Spanish market for the market share and by indirect ones we mean European companies that could have strategic interests in the Spanish companies10.

Figure 15: Demand evolution for Spain 2006-2010, Source: REE

All calculations executed in the following sections assume that Iberdrola is able to keep its strong market position in the electricity market, with a market share of about 30% in the field of conventional energy sources and about 25% for wind power. Even with high barriers of entry this will just be possible to achieve with the right strategy, as the field of the renewable energies with the fixed-in-tariff facilitates the entry of new competitors.

10 Internationa Energy Agency, Energy policies of IEA Countries, Spain: 2009 Review, 2009

20 Institutions

Institution Initials Mainfunctions

- Ministry of Industry, - MITYC - Main institution Tourism and Trade - Policies formulation for energy matters - Promotion of energy efficiency, renewables, tariffs,...

- Red de Distribución de - REE - In charge of the transport of electricity in Electricidad de España Spain - Owned at 20% by public institution (SEPI) and 80% on the stock market

- National Energy - CNE - Regulation of electricity, gas and oil Commission - Consultative body - Guarantor of the free competition between all the actors - Proposal of new legislation, in terms of tariffs, for instance

- Institute for Energy - IDAE - Increase public awareness about future Diversification and challenges Saving - Financing of R&D projects for low-carbon technologies - Plan de accion nacional de energias renovables de Espana (PANER) 2011-2020

- Strategic Reserves - CORES - In charge of keeping a minimum stock of Corporation crude oil in the Spanish reserves - Guarantee the security of supply

- Nuclear Safety Council - CSN - Responsible for the nuclear security

- Autonomous Regions - Responsible for power plants permits - Promoting renewable energies and energy efficiency regional plans

Table 3: Original Analysis on Spanish institutions, Source: EIA

21 2 Future Scenarios for Spanish Electricity Market

2.1 Introduction

In order to establish the best energy mix for a country, planners/policy makers should take into consideration three main aspects:

 Security of supply: companies and government need to secure and guarantee the supply of energy. As Spain consumes mostly primary energy that it does not extract, the country should diversify its supply sources, as well as avoid suppliers in conflict areas and having strong contractual agreements.  Environmental sustainability: the main decision-makers should take into account the emissions of Greenhouse Gases (GHGs) when developing a plan, in order to achieve all the commitments of the country (Kyoto Protocol and European 20-20-20 target). Besides, other environmental impacts and damages should be considered by for measure like Environmental Impact Analysis.  Economic efficiency: The production of energy should always be based on the consideration of cost efficiency of any technology that generates electricity.

These are also the main factors usually considered. However we wanted to extend these a bit further in the next chapters to a general sustainability framework in which other factors like job creation and other related economic progress are considered.

The increase of the demand has also to be taken into consideration. We will focus our analysis on a report of PwC which was prepared for the Spanish government. The latter considers the following steps11:

 Construction if the demand curve for 2030  Penetration rate of renewable energies  Demand for renewable energies = net demand (nuclear and thermal energies)  Nuclear energy as second input  Thermal energies for the rest of the demand

11 PriceWaterhouseCoopers, El Modelo Eléctrico Español en 2030, Escenarios y Alternativas, 2010

22

2.2 Future demand (2010-2030)

PWC focused their future demand model on the basis that the GDP growth rate is the best indicator for the future increase in demand for electricity. The historic values are shown in the graph below and indicate the strong correlation between the two factors.

Figure 16: Historic GDP and electricity demand growth rate, Source: REE and INE (updated by C. Aguirre)

According the International Monetary Fund (IMF), the Spanish GDP would increase by 1,5% annually between 2010 and 2014, 2,7% for the period 2015 - 2019, and 3% for 2020 – 2030, which was also used for the study12 by PWC.

The penetration of the electrical vehicle is also to be taken into consideration. PWC has considered that the number of this kind of vehicle would be 250.000 in 2014, and 10 million in 2030. To consider the impact on the electricity demand, a charging time of 8 hours at 2,4kW, and 4 days between the recharges. That leads to 5% of the total demand in 2030.

Moreover, the implementation of smart grids is supposed to have an impact from 2020 on. It has been estimated as a 3,5% reduction of overall demand in 2030.

Some sensitivity analyses have been done concerning the electricity intensity. A variation of 0,1% in 2020 would lead to a variation of 4% of the electricity demand in 2030. But there is not much emphasis on electricity efficiency in the model. Even though it was not considered by the model of PWC, in our opinion energy efficiency is a useful tool to decrease import dependency and increase the overall sustainability of the energy model

12 International Monetary Fund, World Economic Outlook Database April 2011

23 and we therefore put our emphasis on this in the second part. Actually the PWC model shows that any small impact on the demand will be increasing over the years, as these measures have the potential to scale up.

Considering all these parameters, the demand would reach from 430TWh to 470TWh in 2030 as shown in the graph below. Consequently, by decreasing the future demand for electricity the need for new power plants can be reduced and can also help to create a sustainable future model. This approach will be handled in the second part of this thesis on the consumption side.

Figure 17: Historic and future expected demand growth, Source: PWC

24 2.3 Description of four possible scenarios for 2030

Two main parameters are paramount to describe and elaborate future energy mix scenarios: the amount covered by renewable energies, and the future of nuclear energy, which is still uncertain, especially after the impacts of the tsunami on the nuclear power plant of Fukushima in Japan. Therefore options for nuclear power vary between zero - the rapid exit scenario - over the enlargement of the useful lifetime of existing nuclear power plants, to the building of new ones.

Scenario Renewable energies Nuclear energy 1 50% of demand Progressive closing of actual utilities 2 50% of demand Enlargement of useful life up to 60 years 3 30% of demand Enlargement of useful life up to 60 years 4 30% of demand Enlargement of useful life up to 60 years and building 3 new plants with a capacity of 1,500 MW each Table 5: Original Analysis, Data: PWC

It is important, at this stage to mention some assumptions underlying these data. The parameters considering renewable energies concerning the predictability and the power generation are the same as the actual technologies.

For example, for hydro power, the almost full exploitation of the best sites is not considered. This source of energy is almost saturated in Spain, as all the best sites are already exploited. Indeed, hydro power is one the oldest, cheapest and easiest existing technologies. The amount of exploitable sites being limited in a country like Spain, there is not much more room for development of this technology. The model does not take into consideration future improvement of the actual technology of renewable energies.

It is furthermore assumed that thermal energies are enough to back up the exceeding demand. In any case, an overcapacity factor of 1,1 is assumed, which means that the installed capacity is 10% higher than the highest demand. This value of 1,1 can be considered the optimum. Nowadays, Spain has an overcapacity factor of 1,27, which is far too high according to PWC.

25 Figure 18: Original Analysis, source: PWC

26 2.4. Results

2.4.1. Introduction: Energy Balance

First of all, all the scenarios show a much higher installed capacity and production than today, as the demand is increasing to a large extent. Spain will need to build new plants of capacity between 3.800 MW and 5.800 MW per year, from which 1,300 MW to 3,500 MW of installed capacity are from renewable energies depending on the scenario.

Energy mix starting point Scenario 1 Scenario 2 Scenario 3 Scenario 4 Type Total Installed capacity (MW) Total Installed capacity (MW) Generation (Gwh) Total Installed capacity (MW) Generation (Gwh) Total Installed capacity (MW) Generation (Gwh) Total Installed capacity (MW) Generation (Gwh) Thermal 25.476 48.733 165.462 41.574 110.095 53.313 202.179 48.596 164.257 Nuclear 7.255 57.123 7.241 57.720 11.734 93.538 Peak power plants 12.923 12.923 6.879 6.856 Hydro conventional 16.456 20.878 29.103 20.755 28.147 20.900 27.083 20.847 29.255 Renewables 25.443 96.242 208.384 96.238 207.583 51.511 115.967 51.509 115.899 Cogeneration 6.757 11.966 58.632 11.966 58.632 11.966 58.632 11.966 58.632

Total 74.132 190.742 461.581 190.711 461.580 151.810 461.581 151.508 461.581

Figure 18 Results of the scenarios (installed capacity and power generation), PriceWaterhouseCoopers. 2009

Besides the great efforts Spain will have to do in terms of renewable energies, an important capacity of thermal energy has to be built as a back-up for peak hours: from 21.000 MW to 28.000 MW between 2009 and 2030. We can see here, that scenario 1 and 4 need the same amount of back-up power, although they use different amounts of renewable energies. Scenarios 1 with 50% of renewable energies also need a high level of investment in thermal power plants.

In the following paragraphs we will state the results of the four scenarios in terms of economic efficiency, environmental impact and security of supply.

27 2.4.2 Economic efficiency

We need to consider both costs: the investments costs for the building of the new facilities, and the running costs of every technology. Table 6 shows the cumulative total investment costs for the period 2009-2030, while table 7 provides information about the generation costs.

Scenarios Additionalcapacity (2009 - 2030) Total investmentcosts (2009 – 2030) Mio€ 1 117 GW 170. 068 2 117 GW 163. 824 3 78 GW 98. 335 4 77 GW 111. 228 Table 6 : Original Analysis about additional capacity and investment costs needed, Source: PWC

Scenarios 1 (50% renewable, no nuclear) and 2 (50% renewable, enlargement nuclear) are the most expensive ones, considering the high costs of investment for renewable energies, as well as a high level of thermal energy.

It is important to mention that one of the assumptions is that the enlargement of the lifetime of nuclear power plants has been considered as additional capacity as well, but at no extra cost. The difference between scenarios 1 and 2 shows that to compensate the closing-down of nuclear power plant, extra thermal power plants have to be built, which is translated into an extra cost of € 7 billion .

Scenarios Generationcost Euros/MWh(2030) Total annul costs in 2030 Mio€ 1 72 Eur/MWh 33. 018 2 67 Eur/MWh 30. 917 3 58 Eur/MWh 26. 963 4 58 Eur/MWh 26. 767 Table 7: Original Analysis on generation costs and annual costs, Source: PWC

The generation costs are higher for scenarios 1 and 2 due to the high costs that renewable energies represent compared to nuclear power.

28 2.4.3 Environmental Sustainability

The least polluting scenario is number 2, because of the high share of renewable energies and the extension of nuclear power, as shown in the following figure 19. This of course does not include the risks associated with nuclear energy.

Figure 19: Sustainability analysis of the four the scenarios, Source: PWC

We can conclude from the graph that in none of the four scenarios it will be possible to reduce the CO2-emissions below the 1990 level. This is mainly due to the large increase in demand within the last two decades as well as further expected demand growth until 2030 (see Chapter 2.2). Indeed, it is not realistic to develop a scenario composed only of renewable energies, as a large amount of thermal back-up has to be built to ensure the security of supply. While in scenario 2 the emission at least could be brought nearly to the1990 level, in the case of scenario 3, the emission level will further increase above the 2006 level. For the scenarios 1 and 4 the emissions level compared to 2006 keeps pretty stable, which also can be considered a success considering the expected demand growth.

29 2.4.4 Security of supply

Renewables as natural and regenerating energy source offer a full level of sufficiency. Spain has also reserves of coal, but as the price for extracting this source is not competitive, it can just be considered secure of supply, when taking into consideration higher prices. Also uranium can be found in Spain which makes this a secure source in terms of supply.

A model of the level of self-sufficiency was also established for the different scenarios (table 8 below)

2009 Scenario 1 Scenario 2 Scenario 3 Scneario 4

Level of Self- 48% 33% 54% 36% 47% sufficiency

Table 8: Original Analysis, Source: PWC

 Scenario 1 with 50% renewable energy sources and no nuclear power, a large share of back-up thermal power is needed to ensure security of supply, keeping the import dependency high (especially on natural gas)  Scenario 2 with also 50% renewables, but also a share of nuclear power has a larger share of power which can be considered secure. Compared to scenario 1, the share of thermal power is produced as well by nuclear instead of natural gas, lowering import dependency.  Scenario 3 has a large import dependency due to the large share of natural gas, as this is used instead of renewables compared to scenario 2.  Scenario 4 has larger nuclear capacity compared to scenario 3 as an additional capacity of 4.500 MW and by this reduces the dependency.

30 2.4.5 Synthesis

Comparing the four scenarios under the aspects of security of supply, environmental impact and economic efficiency, we can conclude the following information from the study.

Scenario 1 Scenario 2 Scenario 3 Scenario 4 Additional capacity (GW) 117 117 78 77 Investment (Mio. €) 110.068,00 163.824,00 93.335,00 111.228,00 Running costs (€/MWh) 72 67 58 58 Additional total CO2 90 66 104 89 emissions (MtCO2)

Security of Supply 33% 54% 36% 47%

Table 9:Original Analysis comparison scenarios, Source:PWC

Depending on what is considered more important, a different scenario will be chosen. If we consider only the economic efficiency, scenario 3 will be chosen (30% renewables and enlargement of nuclear power plants). If we consider the CO2 emissions and the security of supply, scenario 2 will be preferred (50% renewable energy, enlargement of the useful life of nuclear power plants).

Considering the current discussions about nuclear energy, we do not think it is realistic to consider scenario 4, which implies the construction of 3 new plants. All the other scenarios can be envisaged, with preferences for 2 and 3, which present some advantages compared to the first one.

31 3 Production capacity and structure of Iberdrola

3.1 Introduction

As briefly described in Chapter 1.5, the Spanish market is separated into two different submarkets: one free market, ruled by the laws of demand and supply, working as a stock exchange and a regulated market subsidised by the government for the special regime with the intention to support renewable energy sources.

Therefore at a company level one also has to differentiate between these two markets as they do not compete freely with each other. Power plants under the regulated market are subsidised by the state as well as primary access to the power grid is guaranteed. The power plants are able to apply for the special regime a from renewable energy source (for hydro power they have to be below a certain threshold of power).

The power plants under the two regimes are shown in table 10: while 67% of power fall under the ordinary regime, the share of renewable energy sources under the special regime could be increased by powerful incentives given by the Spanish government to promote these technologies. Under the ordinary regime are old thermal coal power plants as well as nuclear power plant, but also gas-fired power plants built within the last decade. Large hydro-power plants (>50 MW) fall as well under the ordinary regime. Whereas new small hydro power plants as well as wind and solar power, but also cogeneration are regulated by the special regime.

32 InstalledCapacity Spain 31.12.2010 GW % Increase 09/10 Ordinary Regime Hydro 16,66 16% 0 Nuclear 7,72 7% 0 Coal 11,89 12% 0,2 Fuel/Gas 5,89 6% -1,3 Combined Cycle 26,84 26% 9,8 Total 69 67% 3,5 Special Regime Wind 19,96 19% 5,8 Solar 4,19 4% 15,3 Rest 9,94 10% 1 Total 34,09 33% 5,4 Total 103,09 100% 4,1

Table 10 : Installed Capacity Spanish Market, Data: REE, 2010

3.2 Ordinary Regime

As the potential for new big hydro power plants is limited according to the IEA13, because the best sites are taken as already mentioned earlier, we considered their share to be mainly constant which is also in accordance with the fact, that under the new Renewable Energy Plan of the Spanish government (PANER14) just a 2% increase of installed capacity for large hydro power plants is considered.

As other sources15 also confirm, the future potential of large hydro can be considered low for most European countries. Therefore we focus our analysis on the other energy sources and taking the assumption, that Iberdrola will keep their market share in big hydro power plants.

13 Internationa Energy Agency, Energy policies of IEA Countries, Spain: 2009 Review, 2009

14 Ministerio de industria, tourismo y consumo (MITYC) and Instituto para la Diversification y Ahorro de la energia (IDAE), PLAN DE ACCIÓN NACIONAL DE ENERGÍAS RENOVABLES DE ESPAÑA (PANER) 2011 - 2020, Jun 2010

15 Smith, L., The New North: Our World in 2050, Debate Ciencia, published May 2011

33 Share of thermal installed capacity Iberdrola under the ordinary regime

32%

Total Nuclear 56% Total Coal 12% Total CCGT

Figure 20: Share of thermal installed capacity Iberdrola under the ordinary regime , Data: MITyC

In table 11 shown on the next page, all power plants (excluding large hydro) operated by Iberdrola under the ordinary system are shown in three sections: nuclear, coal and gas- fired power plants. While all nuclear and coal power plants are quite old, the gas-fired power plants were all constructed between 2002 and 2008 and sum up to 56% of the share of thermal power under the ordinary regime. The new CCGTs were built as part of Iberdrola´s Strategic Plan 2002-2006 replacing the old fuel fired power plants. In the following table all thermal power plants are listed with installed capacity, Iberdrola´s share and the year the power plant went productive. The data provided in table 11 are used in the analysis of the different scenarios in chapter 5.

34 Installed Capacity Iberdrola Ordinary Regime 2011

Year of Nuclear Installed Capacity (MW) Ownership Operation Maria Garona 466 50% 1971 Almaraz I 977 52,70% 1981 Almaraz II 980 52,70% 1983 Cofrentes 1092 100% 1984 Asco II 1087 15% 1985 Vandellos II 1087 28% 1987 Trillo 1066 48% 1988 Total Nuclear 3335 Year of Coal InstalledCapacity (MW) Ownership Operation Guardo I 155 100% 1964 Pasajes 217 100% 1967 Lada III 148 100% 1967 Lada IV 348 100% 1981 Guardo II 342 100% 1984 Total Coal 1210 Year of CCGT InstalledCapacity (MW) Ownership Operation CASTELLÓN 793 100% 2002 ARCOS DE LA FRONTERA GRUPO 1 396 100% 2005 ARCOS DE LA FRONTERA GRUPO 2 379 100% 2005 ACECA, GRUPO 3 359 100% 2005 ARCOS DE LA FRONTERA GRUPO 3 812 100% 2006 CTCC ESCOMBRERAS 814 100% 2006 CTCC CASTELLÓN, GRUPO 4 854 100% 2008 Castejon 386 100% 2003 Taragona 424 100% 2003 Santurce 402 100% 2005 BBE 800 25% 2003 Total CCGT 5819

Total OrdinaryRegime 10365 Table 11: Power plants under the ordinary regime, Source: MITYC

35 3.3 Special Regime

In this section we are going to analyse the installed capacity of Iberdrola Renewables of technologies under the special regime, and the useful life of these, in order to be able to determine when the old installations should be replaced by new ones

Currently, Iberdrola Renewables only has three kinds of technologies: onshore wind power, small hydro and thermosolar. Figure 21 represents the share of each one in the total installed capacity of Iberdrola as per 2010 and clearly shows the predominance of wind power:

Figure 21: Original Analysis Share of renewables of Iberdrola Renewables, Source: Iberdrola Renovables S.A

The evolution of installed capacity for the different technologies is shown in the figure 22 below.

Evolution of the installed capacity Iberdrola special regime (MW)

6000

5000

4000 Wind Thernosola 3000 Hydro

2000

1000

0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Figure 22: Original Analysis, Data: IbedrolaRenovables annual reports and AsociaciónEmpresarialEolica Española 36

The following table provides the exact data in MW, according to the years of installation:

Year Wind Thernosola Hydro 1998 180,75 0,00 0,00 1999 352,00 0,00 0,00 2000 589,50 0,00 0,00 2001 880,50 0,00 0,00 2002 1.414,00 0,00 270,00 2003 2.257,00 0,00 275,00 2004 2.891,00 0,00 315,00 2005 3.494,00 0,00 316,00 2006 3.662,00 0,00 333,00 2007 4.229,00 0,00 341,00 2008 4.526,00 0,00 342,00 2009 4.882,00 50,00 342,00 2010 5.302,00 50,00 342,00

Table 12: Original Analysis on renewable installed capacity in MW for Iberdrola Renewables, Data: Ibedrola Renovables annual reports and Asociación Empresarial Eolica Española

And the following table represents the useful life used by Iberdrola. For the technologies that are not yet under use by Iberdrola, the numbers below represent the most common used ones:

Technology Useful Life (years) Onshore Wind 20 Offshore Wind 20 PV solar 25 Solar thermal 25 Biomass co-firing 20

Table 13: Original Analysis, Data: Ibedrola Renovables S.A. annual report

37 4 Analysis of future alternatives in terms of sustainability

4.1 Introduction and description of the model

In this chapter we will evaluate all possible sources of electricity production in terms of sustainability. Sustainability consists in three pillars: social benefit, economic progress and environmental protection. In our analysis we focused on just two pillars, namely environmental protection and economic efficiency, as we considered that an adequate supply of electricity to be essential for the social benefit. In terms of social issues the most important factors are the creation of jobs, especially for a country like Spain with its high unemployment rate. This can be achieved by decreasing import dependency and therefore local source of energy supply. In terms of economic efficiency, we mainly based our analysis on facts like Net Present Value (NPV), Internal Rate of Return (IRR) and Payback period. For the environmental protection the most important factor to us are the CO2- emissions, but also SO2 and NO emissions, which were evaluated quantitative but also the qualitative impact.

We based our analysis on the current available technologies, as according to a judgment from an expert within Iberdrola16, it is not realistic to consider that new technologies, like marine electricity production, will be commercially available on a large scale for electricity production within the next 20 years.

Also according to another expert statement17 the usage of Carbon Capture and Storage (CCS) will not provide a cheap and environmental friendly source of electricity production and it is difficult to know when it will actually be commercially viable. As well Iberdrola’s share in coal fired power plants is quite low and therefore has low incentives to make huge investments in Research and Development (R&D). The only technologies that in our opinion will contribute to the Spanish energy-mix which are currently not existent are wind offshore and biomass co-firing.

The analysis therefore was based on the thermal power of nuclear, coal and gas power plants, as well as renewable sources of electricity production, including solar PV, solar thermal, wind on- and offshore, as well as biomass co-firing. As the different scenarios

16 Interview with Uli Daniel Kaim, Iberdrola Renovables Mercados y Propectiva, April 2011

17 Interview with Carlos Aguirre, Europraxis, April 2011

38 evaluated by PWC for the future scenarios do not differentiate for hydro and cogeneration power, we considered an increase for these two sources but without evaluating their economic and environmental impacts.

The first step was the collection of necessary input data for the different technologies necessary to evaluate economic as well as environmental outcomes. In terms of environmental impacts, the analysis was focused primarily on the CO2-emissions and therefore the emission factors for the different technologies. The data are provided in figure 23.

Figure 23: Lifecycle emissions of GHG of electricity production, Source: IEA

As for the economic analysis data needed were the following:

 Debt-Structure/Leverage  Cost of debt vs. cost of equity  Initial investment costs  Generation costs (operation, maintenance and commodity prices)  Market price for the unregulated market versus. regulated tariff for the installations below the special regime  Lifetime of different technologies  Yearly production in effective hours  Inflation rate

In the following paragraphs the information and sources for these data will be provided.

39 The cost of capital

Concerning the first two points we differentiated between the power plants that operate below the regulated and unregulated regime. The analysis was therefore undertaken twice, for Iberdrola and Iberdrola Renewables, to get the different debt structures and costs of debt respectively equity. This to us seems the right approach as the power plants managed by Iberdrola Renewables are operating below the special regime, while Iberdrola operates the traditional power plants.

Financialsituation Iberdrola Iberdrola Renewables

2009 18 2010 19 Avg. 2009 20 2010 21 Avg.

Equity 29.029.852 31.663.070 30.346.461 11.417.714 11.967.505 11692609,5

Net Income 2.938.688 2.941.715 2.940.202 376.949 367.678 372313,5

ROE 10,12% 9,29% 9,69% 3,30% 3,07% 3%

Interestpaid 2.469.623 2.914.141 2691882 326687 413029 369858

Debt (financial) 30.911.700 31.818.846 31365273 3736519 4744590 4240554,5

Cost of debt 7,99% 9,16% 8,58% 8,74% 8,71% 8,72%

Debt 57.981.142 62.037.882 60009512 3736519 4744590 4240554,5

Debt 64,7% 66,2% 66,4% 24,7% 28,4% 26,6%

Equity 35,3% 33,8% 33,6% 75,3% 71,6% 73,4%

Table 14: Original analysis on financial structure, Data: Iberdrola and Iberdrola Renewables

18 Iberdrola S.A., Cuentas consolidadas, 2009

19 Iberdrola S.A., Cuentas consolidadas, 2010

20 Iberdrola Renovables S.A, Cuentas consolidadas, 2009

21 Iberdrola Renovables S.A, Cuentas consolidadas, 2010

40 The results of table 14 show the significant difference between the two companies in terms of debt structure as well as cost of equity and debt. So while Iberdrola Spain is financed by 66,2% by debt, Iberdrola Renewables is just by 28,4%. The cost of capital of both companies is also different. Iberdrola Renewables has a very low net profit of just 3%, while it is 9,7% for Iberdrola Spain. This makes sense as the regulated business operated by Iberdrola Renewables is less risky as it is based on a long term power plants regulated with fixed prices, while the profitability in the unregulated market strongly depends on the market prices. This is in accordance with the fact that investors demand a higher return for taking larger risks. Nevertheless the numbers for Iberdrola Renewables to us seem a bit low and we adjusted them up to 5 % in accordance with calculations for the regulated market. In terms of costs of debt the two companies are quite similar with 8,7 % respectively 9,2 %. The Weighted Average Cost of Capital (WACC) which we used in all our calculations is based on these figures and is calculated according to the following formula:

WACC = Debt * cost of debt * (1 – tax-rate) + Equity * cost of equity

With the data of the financial statements of both companies and a corporate tax rate of 25% we derived the following WACCs depending on the technology:

 WACC (regulated system) = 5,4 %  WACC (unregulated system) = 7,8 %

Due to the lower risk for the regulated system as well as the lower debt structure the cost of capital for technologies under the special regime is lower.

Initial investment and generation costs

Initial investment costs are highly dependent on the different technologies and are especially high for nuclear power, solar power and wind offshore. On the contrary, co- firing and gas can be considered the cheapest sources in terms of initial investment.

Technology Initial investment generation costs €/kW €/MWh Coal 2.170,0 43,5 Nuclear 4.313,0 15,9 Gas 702,1 27,7 Onshore Wind 1.277,0 13,5 Offshore Wind 4.559,5 11,6 Solar PV 3.628,0 7,3

Solar thermal 3.580,0 21,4 Cofiring 300,0 7,2

Table 15: Original analysis concerning investment and generation costs, Data: US Energy Information 41 Administration (EIA) Not surprisingly the highest generation costs are for coal and gas especially high with the commodity price rise of the last year. Nuclear is still pretty cheap in terms of generation as the commodity uranium just accounts to a minor percentage of generation costs. Also high generation costs are in the field of thermal solar power, which can be explained with high operation and maintenance costs. Another interesting fact is that the generation costs for offshore wind are lower than for onshore wind per electricity produced. The number of effective hours of both technologies gives a good explanation. As shown later, the operational and maintenance expenses for wind offshore are higher, but as the plants are expected to run nearly double the time, the costs per electric output are lower than for wind onshore. The details for the calculation of the generation costs of each technology will be provided in the subchapters of the economic evaluation.

Benefits for the unregulated power production

Also for the benefits for the power production - the prices the utilities receive for the production of electric power - the differentiation between unregulated and regulated markets has to be made. For the unregulated market, one single price exists for the Iberian market, as the power markets of Spain and Portugal are handled together. The agency responsible for the spot market-price is OMEL. Figure 24 shows the market price evolution within the last six months.

Figure 24: Original analysis of spot power prices Spain, Data: Bloomberg

42 As power like commodity prices are very volatile, in our opinion it would be the wrong approach to base the calculations for long term investments on just the current prices, but rather take the average of the last half year performance (01.10.2010 – 31.03.2011).

While for nuclear power the average price as base-load power plant is adequate for the economic evaluation, for the coal and gas-fired power plants we chose a different approach. These two technologies were running at a rather low number of hours of around 2000-2500 hours per year due to the low electricity prices and we considered the relevant prices as average of these hours. But we did not take the hourly prices for the average prices as it is technically not possible to switch on and off a thermal power plant within one hour, as start up and shut down a power plant need some time in the range of a few hours. Therefore the daily price is more relevant for our calculations. Figure 24 shows the prices during the half year period sorted by size.

Figure 25: Original Analysis on the average power price gas and coal power plants 2010, Data: Bloomberg

Instead of the average price of 44,11 €/MWh we used an average price determined by the hours the technology was producing electricity, which was 50,3 €/MWh for coal and 50,25 €/MWh for CCGTs. For biomass co-firing the power price of 50,3 €/MWh, while for the other renewable electricity sources this approach is not necessary as they operate under the special regime and do not directly depend on the market prices, as well for these technologies the possibility to switch on when the prices is high is not given.

43 Concerning the future price increase, the approach with traded future prices has the same shortcoming for the long-run and prices are just traded one year ahead for the Spanish electricity market. Instead of taking future prices as indicator of future price increases over a 20 year period we considered two scenarios. The first one relies on the assumption that future prices increase with the rate of the inflation predicted by the IMF to be in between 1,5% and 2% until 2016 and 2% afterwards (see figure 26). The second scenario relies on price increase expected by the Spanish government in the PANER 2011-2020! The total increase in prices is expected to double from 2011 until 2030 and therefore, we assumed a steady increase of prices of 5% annually22. The results for both scenarios will be presented. Furthermore, the assumption was made that the raw material and maintenance costs would increase at the same rate.

Figure 26: Original analysis on future inflation Spain, Data: IMF - World Economic Outlook Database 2011

Benefits for the regulated power production

The power plants under the special regime are regulated by laws and experienced quite a few changes. We have chosen the premium and tariffs for 201123. This of course includes a

22 Ministerio de industria, tourismo y consumo (MITYC) and Instituto para la Diversification y Ahorro de la energia (IDAE), PLAN DE ACCIÓN NACIONAL DE ENERGÍAS RENOVABLES DE ESPAÑA (PANER) 2011 - 2020, Jun 2010

23 Ministero de Industra, Turiso y Comercio, Boletín Oficial del Estado, Orden ITC/3353/2010, December 2010

44 risk, as the government might change the tariffs, which is even more likely with the probable government change in 2012. Nevertheless we considered this as best option to forecast future prices, as it is probable that the government will adjust the tariffs due to the development of the reduction in production costs for the different technologies. Consequently we assumed that the margin should stay stable over time.

Technology Feed-in-Tariff (€/Mwh) Premium (€/Mwh) Onshore wind 79 Offshore wind 91 PV Solar 248 Thermosolar 290 Biomass 58 Table 16: Original analysis on tariffs and Premium for new renewable electricity sources, Data: MITYC

The incentives for the special regime can be provided as a tariff, or as a premium. The premium is a fixed amount that has to be added on the pool price of the electricity. In the case of the offshore wind, the premium reaches 90€, but has a limit of 169,4€ (90€ + pool price cannot exceed 169€).

The tariffs for the biomass are different for every type of biomass. In order to be conservative we choose the lowest value of feed-in-tariff.

Lifetime of different technologies

For the lifetime of different technologies we mainly based on the information provided by the company Iberdrola itself, as it has to state lifetime of different technologies in their annual report for financial reasons of depreciation. Figure 27 shows the information given by the company in annual report 2010. We used these numbers and considered 40 years for a new coal power plant to be realistic. Solar power was not included, but other data sources stated that 25 years of useful life is a realistic assumption.

45 Figure 27: Lifetime values of different power plants, Source: Iberdrola

Yearly production in effective hours

Effective annual hours describe the amount of electricity produced within one year, if the plant would have we run at full load during these amount of hours. This figure is especially important to be able to compare different technologies, as nuclear and coal power plants normally run as base load plants 24 hours a day. While renewable energy sources are dependent on the resources (wind and sun) and therefore run as well partially. Gas-fired and hydro power plants are used as well for back-up. To compare the amount of electricity produced within one year the annual effective hours (EAH) are used.

Figure 28: Original analysis on effective annual hours for Spain, Data: REE

For our calculations we based the EAH on the data of 2010 for the Spanish market. So while nuclear power plants are running the whole year with typically the exception of a one-month period of revision, the renewable technologies just run at a full load equivalent of around 25%. We based our calculations on these general input data and will discuss the calculation for the different technologies and results in terms of economic and environmental terms.

46 4.2. Sustainability analysis of different technologies

4.2.1 Nuclear power

If discussing about nuclear power there are always contrary views. The ones that support it as cheap, reliable and environmental friendly (very low CO2-emissions) electricity source and on the other side the ones that argue against it due to the long-term risks (environmental damages, health problems) associated to this power. We will first base our approach just on economic terms, before considering the environmental risks and damages. But is this clear separation really so strict? In our opinion not, as risks (environmental and health) also have to be considered when taking investment decisions. How to do it? Our approach is the insurance model and the yearly premium a utility would have to pay to get insurance for the risks mentioned above. According to studies we assumed a cost of insurance of 50 Mio. € per year and power plant. This may sound very high, but if taking into consideration that the financial risks associated with nuclear power can be as high as 1 trillion, the number is quite realistic24.

Concerning nuclear power plants one has to include the significant costs for decomposition of the plant as well as radioactive materials (3 €/MWh)25. The generation costs consist of three factors, the operational expenses, maintenance as well as raw materials. For the raw materials the transformation process from Uranium to uran-oxid pallets, includes conversion, enrichment and fuel fabrication26. In the generation cost calculation we had to consider these facts as well and the table below shows the outcomes of it.

24 OECD Nuclear Energy Agency - The Economic Modeling Working Group Of the Generation IV International Forum, Cost estimating guidelines for generation IV nuclear energy systems, Sep 2007

25 World Nuclear Association, Radioactive Wate Management, Updated April 2011, http://www.world- nuclear.org/info/inf04.html, Retrieved on May 2011

26 World Nuclear Association, The economics of nuclear power, update March 9 2011, http://www.world- nuclear.org/info/inf02.html, Retrieved on April 2011

47 Uranium: 8.9 kg U3O8 x $146 US$ 1299

Conversion: 7.5 kg U x $13 US$ 98

Enrichment: 7.3 SWU x $155 US$ 1132

Fuel fabrication: per kg US$ 240

Total, approx: US$ 2769

Conversion 360 MWh/kg

Price 7,69 $/MWh

Nuclear power fuel price27 5,87 €/MWh

Fixed O&M costs28 8,42 €/MWh

Variable O&M costs29 1,56 €/MWh

Total generationcosts 15,85 €/MWh

Table 17: Generation costs for production of nuclear energy

Figure 29: Original analysis on the share of nuclear energy generation costs

27 Bloomberg, www.bloomberg.com, data retrieved on 15.05.2011

28 U.S Energy Information Administration, Updated Capital Cost Estimates for Elecricity Generation Plants, Released date: November 2010, http://www.eia.gov/oiaf/beck_plantcosts/index.html, Retrieved on April 2011

29 idem

48 The production costs for nuclear power are therefore mainly due to operation and maintenance (O&M) and fuel costs just account for 37%.

The financial analysis of the nuclear power plant was based on the data, explained in the introduction to this chapter, which are the following for nuclear power:

Overnight InvestmentCosts 4.313.000.000 €

InstalledCapacity 1000 MW

InvestmentCosts/kW 4313 €/kW

Lifetime 40 years

ConstructionPeriod 5 years

Debt Finance 65,5%

EquityFinance 34,5%

Cost of Equity 9,7%

Cost of Debt 9,2%

Tax-Rate 25,0%

WACC 7,9%

YearlyProduction 8040 H

Yearly Power Price Increase / Inflation 2%

Power Price 44 €/MWh

Yearly Nuclear Production Cost Increase 2%

ProductionCosts 16 €/MWh

Decompensationcosts + WasteDisposal 3 €/MWh Table 18: Original analysis on input-data for the nuclear power plant calculations

The results about the future profitability of nuclear power plants are the following: The NPV for case 1 with an increase of 2% in power price results in a minus 1,6 Bio. € at a lifetime of 40 years and a WACC of 7,8 %. The IRR lies around 4,64 % and therefore the payback period is not reached within the useful lifetime of the power plant. The break- even power price is at about 53 €/MWh, which is 9 €/MWh above the actual price, that means an increase on 20% of the actual power price is needed to make nuclear power profitable from an economic point. For case 2 with an annual increase of power prices of 5% the NPV is positive with 777 Mio. €, an IRR of 8,92% and the payback period is 31 years. So the profitability of a nuclear power strongly relies on the development of the prices, as well as on the lifetime of the plant. A higher increase in power prices results in a faster payback of the credits and therefore costs, which is a main point for a nuclear power plant. What the results show that the profitability depends strongly on the expected future price increase of power.

49 Also a sensitivity analysis was made for both cases of expected future price increase. The sensitivity concerning reduced and increased lifetime, as well as a structural shift in price level of plus and minus 10 percent compared to the Business-As-Usual (BAU) scenario. The results of the sensitivity analysis show that nuclear power plants become profitable with an annual increase of 5% in power prices and a lifetime of 30 years (see figures 30 and 31). For case 1 with a moderate increase in power prices over the period 2011-2020 the plants are neither profitable with extended lifetime nor price level increase of 10%.

Figure 30: Sensitivity analysis NPV case 2

Figure 31: Sensitivity analysis NPV case 1

50 Besides the economic analysis of a new nuclear power plant the environmental issues are very controversial as described in the beginning. Taking the best case scenario and the case that no radioactivity is released during the lifetime of the power plant, still the radioactive waste has to be considered. And of course as well it is true that nuclear power plants are much more environmental friendly in terms of CO2-emissions. But as the radioactive waste has a time period of up to millions of years and in many countries no adequate and save locations for storage have been found it remains a big issue. In the case of an accident, like the one recently experienced in Japan the damages are as high as to influence the overall economic situation of a country. But even if the costs can be paid, the environmental impact is leaving the destroyed areas inhabitable for decades. As well health issues as cancer have to be considered. In terms of social conflict nuclear also has to be considered rather negative as a strong opposition from different stakeholder groups is facing this issue. But as for Spain this opposition has not grown to a significant number we considered this point neutral.

The following table 19 gives an overview about our general sustainability rating for nuclear power, which from our point of view is considered regular to bad, but not just due to environmental impacts, but also due to the risky economic performance of this technology.

51

Factor Number Sustainability Valuation

Economic Case 1 (2%) Case (5%)

NPV -1.591 Mio. € 777 Mio. € Risky

IRR 4,64 % 8,92%

Payback period n.a. 31 years

CO2 – emissions (lifecycle) No direct emissions from fuel burning Good

but still emissions in the mining process (lifecycle emissions: 3mg/kWh)

Other environmental damage Radioactive waste disposal Bad

Risks concerning release of radiation (environment, health)

Low SO2 and NO emissions

Social inclusion Strong resistance against nuclear power Regular from certain groups, but relatively low in Spain

Overall sustainability Regular-Bad

Table 19: Original analysis on the sustainability of a new nuclear power plant

52 4.2.2 Coal power plants

Coal power is the oldest technology in terms of thermal power in use and has improved a lot in terms of efficiency, especially within the last decade due to increased commodity prices as well as the newly priced CO2-emissions within the European Union Emission Trading Scheme (EU ETS). But nevertheless the last power plants of these technology for the case of Spain were built in the 80`s of the last century. Coal power plants as nuclear plants are built to supply the base-load demand and are not very suitable for short term operational changes. One condition specifically needed for the effects of the variability of the renewable energy sources.

In terms of monetary values we already stated that coal power plants constructed as base load power plants were just running at a low number of hours within Spain. The reason for this could be that the generation costs exceed the market price for power on the stock exchange due to the overcapacity of the market. So concerning figures for the generation costs, like for nuclear, we differentiate between fixed and variable operation and maintenance costs and most important for this technology the commodity price for burning coal. But additionally the costs for

Figure 32: Original analysis on the share of generation costs for coal fired power the emissions of CO2 have plants to be considered, as for every ton of CO2, certificates have to be delivered. Figure 30 shows the share of the cost. The raw material coal is accounting with about 31 €/MWh30 to 56 % of the total costs. CO2 certificates with a price of 12,34 €/MWh (15 €/t) participate with 22%, fixed costs for O&M are 9,55 €/MWh and the variable costs are just accounting to 5% with 2,98 €/MWh31. Which results in total expenses of 55,85 €/MWh, exceeding the average power price for coal of

30 Bloomberg, www.bloomberg.com, data retrieved on 15.05.2011

31 U.S Energy Information Administration, Updated Capital Cost Estimates for Elecricity Generation Plants, Released date: November 2010, http://www.eia.gov/oiaf/beck_plantcosts/index.html, Retrieved on April 2011

53 50,3 €/MWh and confirms our assumptions that the power plants run just at a low number of hours due to the high commodity price for coal.

The reason why the coal power plants were running at all, was that national coal in Spain is partially subsidized (about 10% of the market), with a fixed electricity price of 57 €/MWh until 2014.32.

Table 20 shows the input data for a typical new dual unit PC coal power plant with a typical efficiency of 38,8%, consisting of two power units of each 650 MW. With a cost of 2170 €/kW the initial investments is around 2,8 Bio. €33. According to the figures from the annual report of the company we assumed the lifetime of 40 years. The debt structure is analog to that of Iberdrola and we assumed that the yearly production stays at a low level of 2174 effective annual hours, which is in accordance with the study from PWC. We assumed furthermore an increase of the CO2 certificates is equal to rate of 2% respectively 5% depending on the case of future power increase.

Overnight InvestmentCosts 2.821.000.000 € InstalledCapacity 1300 MW InvestmentCosts/kW 2170 €/kW Lifetime 40 Years ConstructionPeriod 2 Years DebtFinance 66,2% EquityFinance 33,8% Cost of Equity 9,7% Cost of Debt 9,2% Tax-Rate 25,0% WACC 7,8% YearlyProduction 2174 H YearlyPower Price Increase 2% Power Price 50,30 €/MWh Yearly coal Production Cost Increase 2%

ProductionCosts 43,51 €/MWh Table 20: Original analysis on input-data for the coal power plant calculations

32 Interview with Carlos Aguirre, Europraxis, April 2011

33 U.S Energy Information Administration, Updated Capital Cost Estimates for Elecricity Generation Plants, Released date: November 2010, http://www.eia.gov/oiaf/beck_plantcosts/index.html, Retrieved on April 2011

54

Feeding our model with this data results in the financial results of a negative NPV of 3,06 Bio. € for case 1 and 3,25 Bio. € for case 2, even higher than the initial investment as the production costs are higher than the benefits from selling the electricity. As the costs exceed the benefits the payback period will never be reached and a calculation is not possible from a mathematical point of view. We can conclude from these figures that investment with current high commodity prices for coal and relatively low wholesale market power prices compared to the other large electricity markets in Europe and the makes coal power plants unprofitable. The break-even power price is at around 117 €/MWh (case 1), so the power price would have to increase by about 150%, with unchanged commodity and CO2 prices.

As well the relative emissions of CO2 and other power related emissions (SO2 and NO) are worst compared to the other technologies. And cannot be compensated by the experience of this technology and improved efficiency and also CCS to us will not provide a suitable solution as it increase the installation prices in the case it will become technical feasible.

Even though we consider coal fired power plants very bad from both an economic as environmental point, it still provides a significant amount of jobs in Spain in the mining process. In our opinion it makes sense to keep the existing plants run, when it makes economically sense but not build new power plants. This process as well will enable the slow transformation of employment from mining into different areas of the labor market.

Our final conclusion we will give in the section of CCGT as these two technologies are substitutes as thermal power sources.

55

Factor Number Sustainability Valuation

Economic Case 1 Case 2  NPV -3.063 Mio. € -3.247 Mio. € Very Bad  IRR n.a. n.a.  Payback period n.a. n.a.

CO2 – emissions (lifecycle)  Around 821 kgCO2 / MWh Very Bad  As well other emissions of CO2 in the mining process

Other environmental damage  Mining process leaves Bad environment damaged  Higher levels of other emissions SO2(700 mg/kWh) and NO(700 mg/kWh)

Social inclusion  Employement provided in coal Regular mining for Spain. But these jobs are subventioned by the government and theirfore not sustainable.  Bad reputation within large groups of the society

Overall sustainability Bad-Very bad

Table 21: Original analysis on the sustainability of a typical new coal power plant

56 4.2.3 Gas-fired power plants

Concerning natural gas fired power plants we considered so called Combined Cycle Gas Turbine (CCGT) with a typical installed capacity of 400 MW. Within the European market gas-fired power plants experienced a huge growth within the last decade due to improved infrastructure of the natural gas transportation system, with both pipelines and LNG34. CCGTs are especially suitable to compensate shortcomings of the renewables in terms of balancing electricity to low supply. Production of renewables is hardly predictable and neither suitable to react to changes in demand, therefore always back-up power is needed with the availability to adjust its power output in the short term. And gas-powered power plants are providing these characteristics35.

As back-up or peak-load power plants gas-fired power plants are normally running at a lower amount of hours like base-load coal or nuclear power plants in the range of 3000- 4000 hours. The low power prices and the overcapacity of the Spanish market lead to a low number of effective annual hours of just 2564.

Figure 33: Original analysis on the share of generation costs for coal fired power plants The share of production is structured as well in fixed and variable operation and maintenance costs (O&M), the fuel and CO2-certificte price. As shown in figure 33 like for coal power plants the fuel costs amount for the majority of the production costs of 66% with 21,65 €/MWh taken from the Title Transfer Facility (TTF) in Holland as average price

34 Internationa Energy Agency, Energy policies of IEA Countries, Spain: 2009 Review, 2009

35 Red Electríca de Espana (REE), The Spanish electricity system – Preliminary Report 2010, 2010

57 of the half year period (01.10.2010-31.03.2011)36. Second biggest amount is due to the EU ETS certificates with 5,13 €/MWh (15%), followed by the fixed O&M costs with 3,86 €/MWh (12%) and variable O&M costs of 2,18 €/MWh (7%)37. The total production costs per MWh are 32,81 €/MWh (including CO2-certificates).

The typical lifetime of a CCGT is around 35 years without further investments besides O&M and the debt structure is again the one of Iberdrola with 66,2% debt finance. Initial investment costs with around 700 €/kW are much lower than for the other thermal technologies and also the building period with 2 years is quite low. The summary of all data used for the calculations is shown in table 22.

Overnight InvestmentCosts 280.840.000 €

InstalledCapacity 400 MW

InvestmentCosts/kW 702,1 €/kW

Lifetime 35 years

ConstructionPeriod 2 years

DebtFinance 66,2%

EquityFinance 33,8%

Cost of Equity 9,7%

Cost of Debt 9,2%

Tax-Rate 25,0%

WACC 7,8%

YearlyProduction 2564 h

YearlyPower Price Increase 2%

Power Price 50 €/MWh

Yearly coal Production Cost Increase 2%

ProductionCosts 27,68 €/MWh

Table 22: Original analysis on input-data for the gas power plant (CCGT) calculations

36 Bloomberg, www.bloomberg.com, data retrieved on 15.05.2011

37 U.S Energy Information Administration, Updated Capital Cost Estimates for Elecricity Generation Plants, Released date: November 2010, http://www.eia.gov/oiaf/beck_plantcosts/index.html, Retrieved on April 2011

58 An efficiency of 53,1% was furthermore assumed for this technology which is equivalent to CO2-emissions of 341 kgCO2/MWh38. With this data we calculated the NPV to be 1,58 Mio. € for case 1 and 168 Mio. € for case 2. The profitability increases by a large extend with the increase in power prices. The IRR with 7,87% is slightly above the WACC of 7,8% for case 1, while it is 11,56% for case 2. The payback period therefore reached at the last year of the lifetime for case 1 and already after 18 years for the second case. So gas power plants are profitable even with moderate price increases and become highly profitable with huge increases in power prices.

For the second scenario with an expected price increase of 5% the outcome even with reduced lifetime of 30 years and a price level decrease of 10% is still positive. For the first case with an increase of 2% in power prices the payback period is 35 years for the Business- As-Usual (BAU), while with a price level decrease of 10% the outcomes are negative (figure 34 and 35).

Figure 34: Sensitivity analysis NPV case 1

38 U.S Energy Information Administration, Updated Capital Cost Estimates for Elecricity Generation Plants, Released date: November 2010, http://www.eia.gov/oiaf/beck_plantcosts/index.html, Retrieved on April 2011

59

Figure 35: Sensitivity analysis NPV case 2

So why there have been large investments in gas-fired power plants in the past decade? In our opinion the utilities expected a huge increase in electricity demand and therefore price increases which would make the technology much more profitable. But within the last ten years during the financial crisis the demand for two years decreased (see figure 17) while the new installed capacity of renewable electricity sources increased due to high price incentives leading to the mentioned overcapacity of the Spanish electricity system, which of course put pressure on the power prices and led to lower electricity prices. So the bet on strongly increasing power prices also explains the huge investments that were made. The lesson learned from this have to be for the utilities for the future to steadily increasing the installed capacity without creating an overcapacity, even if overcapacities represents barriers for new entrants it reduces the benefits of the company and cannot be considered a sustainable solution in the long-term. We incorporated this in our model used in the next chapter. Another important issue not taken into account in this calculation is the balancing electricity market were also high profits can be achieved for flexible power plants like CCGTs. And these power plants therefore have another advantage compared to coal power plants.

Concerning the CO2-emissions gas-fired power plants just emit about 41% the emissions coal fired plants do (341 kgCO2/MWh in comparison to 821 kgCO2/MWh). A relative costs as well as the environmental impact reduction is the consequence. They also produce less other greenhouse gases (SO2 and NO), and can therefore be considered more environmental friendly than coal power plants.

In terms of social impacts it has to be said that they are an essential back-up plants for renewable electricity production as no other solution like smart grids have been implemented.

60 In comparison to coal power plants they are better performing in terms of economic as well as environmental point, while for social factors we graded both equally.

Factor Number Sustainability Valuation

Economic Case 1 Case 2  NPV 1.58 Mio. € 167,82 Mio. € Regular-Good  IRR 7,8 % 11,56%  Payback period 35 years 18 years

Extra profits on the balancing market

CO2 – emissions (lifecycle)  Around 341 kgCO2 / MWh Bad  As well other emissions of CO2 in the mining process

Other environmental damage  Mining process leaves Regular-Bad environment damaged  Low levels of other GHG emissions  New sources of gas extraction can cause release of other damaging gases (Methane)

Social inclusion  Necessary technology as support Regular of renewable energy sources  Spain is big player in terms of LNG

Overall sustainability Regular

Table 23: Original analysis on the sustainability of a typical new gas power plant (CCGT)

61 4.2.4 Onshore wind power

During the last decade, Spain has been developing a solid industry of onshore wind power. Now being the fourth country in the world concerning installed capacity, Spain has been increasing its onshore wind market rapidly since 2000, as a consequence of a security oriented set of laws that impulse the investment.

As the production of onshore wind energy has been growing during the last 10 years, and considering that wind energy is not a continuous supply of energy (it depends on the fluctuation of wind), the government has had to develop strict electricity requirements on grid codes to avoid the negative impact that this fluctuations on the electric system of the country, as wind energy now represents a great part of the production of electricity. This will be true as well for the other new renewable electricity source if they increase their market share.

The current situation regarding wind power in Spain is favorable but the scientific community will have to work side by side with policy makers in order to provide a secure path towards the future of the industry and the supply system in general.

BASIC ASSUMPTIONS ABOUT COSTS

To give you a clear picture of the costs we have divided these costs not just in investment costs and operational costs, but also in the detailed structured of both. Later in this chapter we will elaborate more on one other very important parameter namely turbine electricity production and the factors that come in play when generating revenue from wind power, but first we want to determine that will account for the following costs.

INSTALLATION COSTS

Even though the development and improvement of onshore wind turbines technically have come a long way their costs still will dominate the investment costs as can be seen the pie chart below.

The costs as depicted above are based on the typical cost structure of a 2MW turbine erected in Europe. As instillation costs are also determined by numerous other factors that differ per country like for example the cost of grid connection we had to take into account Spain’s specific situation and adjust the investment costs per MW.

62 Installations-Cost in Spain are about 1.3 Mio. € per MW according to Executive Agency for Competitiveness and Innovation (EACI), which is in accordance with the data of the US EIA. This number will be used when doing the financial analysis later on in the report.

Figure 36: Share of investment costs for onshore wind turbines, Source: EACI

In summary, when looking for the installation costs and how they are built up the two most dominate elements that have to be taken into account are the cost of the turbine and the grid connection.

OPERATIONAL COSTS

Once the wind farm is built, costs will be incurred for the operation and maintenance of the wind farm. These costs contribute significantly to the total amount of annual costs acquired when operating a wind turbine.

Spain, as mentioned, has a lot of experience with wind farms and according to the data from Spain the Executive Agency for Competitiveness and Innovation, it has derived that around 60 % of the total operational costs goes to the actual operation and maintenance of the turbine and installations. The other 40% can be divided equally between, land rentals, insurance and overheads as can be seen in the pie chart below.

As operation and maintenance costs are receiving greater attention of wind turbine manufacturers it is expected that these costs will continue to drop. For this reason we expect that because lower maintenance costs will be incurred with the purchase of new turbines this will level out the increase in costs expected to come from the aging of the turbines as is described in most cases we studied.

63 According to research conducted by the Executive Agency for Competitiveness and Innovation operating expenses in Spain are in between 12-15 €/MWh. For the financial analysis, as explained later on in this report, we have taken an average 13.5 €/MWh of costs over the total lifetime of a turbine.

Figure 37: Original analysis on Share of operating costs for a typical 2MW wind mill, Data: EACI

EFFECTIVE ANNUAL PRODUCTION

At the end of 2008, Spain ranked among the 4 biggest producers (USA, Germany and China) of wind power with an installed capacity of 16,740 megawatts39. This was the same year that wind had overtaken coal plant output in energy; making wind the third technology after Gas and nuclear.

Over the last couple of years a strong focus from the government has resulted in what some would call a “renewable energy revolution”. But installed wind capacity is not equally distributed over Spain. The main reason for this is the wind potential and the population distribution. For Spain best condition for instalation of wind power are in the nothern and southern part. Eventhough Spain has allready installed a huge amount of wind power, there is still a high potential for new wind farms, as the ongoing growth in new installed capacity shows:

39 Global Wind Energy Council (GWEC) and Greenpeace, The global wind energy outlook 2010, Oct 2010

64

Figure 38: Original analysis on the increase of total installed capacity wind-onshore Spain, Data: GWEC

We are assuming that the best places in Spain for producing wind energy onshore are already occupied, but that there is still potential of sites which provide a reasonable wind output. That’s why we are assuming an average case of wind-farm. So the wind parks in 2009 with an installed capacity of 19.15GW were producing 36.2TWh giving an average of 1890 hours of operation at full capacity40. That taking an average of 1890 effective annual hours of operation for new wind farms in Spain is a realistic assumption, was confirmed by an expert of the company41.

REGULATION

The spanish system provides a favorable system for putting electricty into the grid, which assures acquisition of wind energy to the grid and therefore gives priority to wind and other renewable energies. There are two mechnism for pricing the wind energy as shown in the following graph, with the possibility of yearly switching between the two mechanism.

Figure 39: Wind regulation for Spain, Source: MITYC

40 Global Wind Energy Council (GWEC) and Greenpeace, The global wind energy outlook 2010, Oct 2010

41 Interview with Uli Daniel Kaim , Iberdrola Renewables – Mercados y Prospectiva

65 The first mechanism is according to a fixed-in-tariff of 78 €/MWh independet how the market price is. The second mechanism is based on the market price, but as well with a cap and floor. So at prices below 45€/MWh one gets the Floor-Price of 76 €/MWh, which rises to market price plus a premium of 31 €/MWh between prices of 45-59 €/MWh. If the prices are further increasing from 59-90 €/MWh one gets the Cap-Price of 90 €/MWh and above 90 €/MWh the actual market price (figure 39).

Economic Evaluation

For the economic valuation we used the following input data. We assumed a typical wind farm with an installed capacity of 50 wind mills of each 2MW, so in total 100 MW. The lifetime is typically 20 years and we were choosing the fixed in tariff of 78 €/MWh as the actual power price of 44,11 €/MWh plus the premium of 31 €/MWh is less profitable.

Overnight InvestmentCosts 127.700.000 € InstalledCapacity 100 MW InvestmentCosts/kW 1277 €/kW Lifetime 20 Years ConstructionPeriod 1 Years DebtFinance 28,4% EquityFinance 71,6% Cost of Equity 5,0% Cost of Debt 8,7% Tax-Rate 25,0% WACC 5,4% YearlyProduction 1890 H Yearly Power Price Increase / Inflation 2% Power Price 78 €/MWh Yearly Nuclear Production Cost Increase 2% ProductionCosts 14 €/MWh

Table 24: Original analysis on input-data for the gas power plant(CCGT) calculations

66 The results show a NPV of 40,5 Mio.€ , an IRR of 8,82 % and the payback period is around 14 years. This is valid for both cases as the onshore wind power falls below the special regime. But still it is important to mention that the faster the prices increase the sooner wind onshore power becomes competitive.

As renewable electricity source no direct CO2-emissions are produced, but still in the production process CO2-emission are included in the lifecycle analysis. Also other environmental concerns are sometimes raised by the general public about birds and visual impacts. But in our consideration every technique to produce electricity will have some impact, and trade-offs have to be made. For onshore wind power we consider the benefits in environmental terms much better than the negative impacts.

Also positive about onshore wind power is its maturity. It has experienced a stable growth over the last decade and will probably be the first new renewable technology become competitive in the market42.

42 Ministerio de industria, tourismo y consumo (MITYC) and Instituto para la Diversification y Ahorro de la energia (IDAE), PLAN DE ACCIÓN NACIONAL DE ENERGÍAS RENOVABLES DE ESPAÑA (PANER) 2011 - 2020, Jun 2010

67

Factor Number Sustainability Valuation

Economic  NPV 40,5 Mio. € Good  IRR 8,82 %  Payback period 14 years

CO2 – emissions (lifecycle)  No direct CO2-emissions Very good  Low indirect CO2-emissions (7kg/MWh)

Other environmental damage  Impacts on birds regular  Other GHG emissions (SO2: 21 mg/kWh; NO: 14 mg/kWh)

Social inclusion  Large amount of employment Good created through the sector  Local energy source, no import dependency Good Overall sustainability

Table 25: Original analysis on the sustainability of a typical wind onshore farm

68 4.2.5 Offshore wind

There is nowadays no offshore wind farm in Spain, mainly because of the physical aspect of the coast, where the slopes are too steep. The past techniques did not allow setting up wind farms at a deep sea level, without being far enough from the coasts. Spanish seaside is also a great source of revenue for the country, considering the huge amount of tourists every year as well as the fishery sector. There was thus a high pressure from tourist actors to avoid setting up wind mills and influencing the landscape.

Even if such projects have not been reality so far, Spain is expected to have around 750 MW of offshore wind by 2020 according to the PANER and we therefore assumed that this technology will become commercially available from 2020 onwards43.

This represents a great opportunity for Iberdrola to develop its renewable energies park. And as we will see later on, this type of investments could be really profitable if the government puts the necessary incentives to reach it 20-20-20 target.

Indeed, offshore wind power represents some advantages compared to the onshore one. Each wind mill is much larger in scale for offshore power and has therefore a higher installed capacity (5MW instead of 2MW). The utilization rate is 40% instead of 20- 25%44.Even if the investment costs are higher, the tariffs offered by the government are more attractive: 134 EUR/MWh (market price + 90 €/MWh premium) instead of 78 EUR/MWh for onshore wind45.

We decided to analyse the investment for a wind farm of 400 MW (80 wind mills each 5MW). The financial analysis takes into account the following parameters:

43 Ministerio de industria, tourismo y consumo (MITYC) and Instituto para la Diversification y Ahorro de la energia (IDAE), PLAN DE ACCIÓN NACIONAL DE ENERGÍAS RENOVABLES DE ESPAÑA (PANER) 2011 - 2020, Jun 2010

44 PriceWaterhouseCoopers, El Modelo Eléctrico Español en 2030, Escenarios y Alternativas, 2010

45 Ministero de Industra, Turiso y Comercio, Boletín Oficial del Estado, Orden ITC/3353/2010, December 2010

69 Overnight Investment Costs 1.823.808.000 € Installed Capacity 400 MW Investment Costs/kW 4559,52 €/kW Lifetime 20 years Construction Period 1 years Debt Finance 28,4% Equity Finance 71,6% Cost of Equity 5,0% Cost of Debt 8,7% Tax-Rate 25,0% WACC 5,4% Yearly Production 3504 h Inflation Rate 2% Power Price 134 €/MWh Yearly coal Production Cost Increase 2% Production Costs 12 €/MWh

Table 26: Original analysis on input data for the offshore wind farm

The results of this analysis on 20 years show that the NPV is around 559 Mio.€ and the IRR is 8,71%. This indicates that the investment is profitable in the case when the government gives incentives on the tariffs and pays off after 14 years.

Sensitivity analysis:

As for wind offshore energy the regulation provides a system of market price plus premium it would be possible to calculate the results for both cases. In our opinion nevertheless the premium will be periodically adjusted to current market conditions and huge increases in power price (case 2) would probably lead to a decrease in the premium. Therefore we considered it more realistic to take case 1 with a moderate price increase into consideration, as well because the increase in the premium is linked to the inflation. To see the risk and opportunities we calculated the sensitivity concerning lifetime and price level shifts. Price level shifts could result from market price changes, as well as changes in the field of production costs or changes in the regulation.

70

Scenario Analysis Power price Lifetime -10% NPV IRR Payback Period 15 52.408.851 5,9% 14 20 472.507.025 8,2% 14 25 818.903.517 9,4% 14 0,00% NPV IRR Payback Period 15 122.782.447 6,39% 13 20 557.724.832 8,71% 13 25 918.221.348 9,80% 13 10% NPV IRR Payback Period 15 193.156.043 6,93% 13 20 644.942.640 9,18% 13 25 1.017.539.180 10,23% 13 Table 27: Original analysis: Sensitivity analysis

If we do a sensitivity analysis on the life time of the project (5 years longer and shorter) and on the power price (10% more and less), we have the following results:

So even with a reduction of power prices by ten percentages and a lifetime of 15 years the investment is profitable. We can see these as well in the following graphs in terms of NPV:

Sensitivity Analysis NPV (power price)

1.200.000.000

1.000.000.000

800.000.000 -10% 0,00% 600.000.000 10%

400.000.000

200.000.000

- 15 20 25

Figure 40: Original analysis Sensitivity analysis NPV in €

As a conclusion, we can say that, even with a variation of the lifetime and the energy price, the investment is still highly profitable and also good in terms of other sustainability issues.

71

Factor Number Sustainability Valuation

Economic

NPV 558,73 Mio. € Good

IRR 8,71%

Payback period 14 years

CO2 – emissions (lifecycle) No direct emissions, but emissions during Very Good the production of the wind mills and the installation process

Other environmental damage Environmental damages in the ocean life Regular

birds death impact

Visual impact

Other GHG emissions

Social inclusion Some resistance for some people because Regular of the visual impact and the impact it can have on some activities like tourism and fishing

Job creation

Local energy source, no import dependency

Overall sustainability Regular-Good

Table 28: Original analysis on the sustainability of a typical offshore wind farm

72 4.2.6 Photovoltaic Power

Iberdrola Renovables nowadays does not have any photovoltaic power in Spain. But the government would like to almost double the installed capacity of Spain from 3787 MW in 2010 up to 7250 MW in 2020 according to the PANER46 . To do so, it should put the needed incentives.

We based our analysis on the laws set for 201147. We considered for our calculations an investment for a photovoltaic farm of 50 MW, as follow:

Overnight Investment Costs 181.400.000 € Installed Capacity 50 MW Investment Costs/kW 3628 €/kW Lifetime 25 years Construction Period 1 years Debt Finance 28,4% Equity Finance 71,6% Cost of Equity 5,0% Cost of Debt 8,7% Tax-Rate 25,0% WACC 5,4% Yearly Production 1736 h Inflation Rate 2% Power Price 245 €/MWh Yearly coal Production Cost Increase 2% Production Costs 7 €/MWh

Table 29: Original analysis on input data for the photovoltaic power plant

We considered a utilization rate of 20%, according to the PWC model48, and the production costs are related to normal operation of maintenance. We come up with the following results for different useful life, and a payback period of 10 years:

46 Ministerio de industria, tourismo y consumo (MITYC) and Instituto para la Diversification y Ahorro de la energia (IDAE), PLAN DE ACCIÓN NACIONAL DE ENERGÍAS RENOVABLES DE ESPAÑA (PANER) 2011 - 2020, Jun 2010

47 Ministero de Industra, Turiso y Comercio, Boletín Oficial del Estado, Orden ITC/3353/2010, December 2010

48 PriceWaterhouseCoopers, El Modelo Eléctrico Español en 2030, Escenarios y Alternativas, 2010

73 Lifetime NPV IRR 20 106.195.687 11,39% 25 149.795.121 12,27% 30 185.811.992 12,71% Table 30: Original analysis on input data for the photovoltaic power plant

No sensitivity analysis concerning price changes was done, as the cash flows are ruled by laws for the regulated market and not the market therefore the results are common for both cases of price increase.

Figure 41: Original analysis: Sensitivity analysis (IRR)

Figure 42: Original analysis: sensitivity analysis (NPV in €)

74 We can see, again, that this investment is highly profitable, in the case of the government gives incentives of 245 EUR/MWh. This is even true with a decreased lifetime of 20 years. Still the profitability is created by the strong incentives by the government, which is nearly five times the market power price. And as regulation can change, it provides a possible risk to a possible strategy of Iberdrola that is focused too much on this technology

Factor Number Sustainability Valuation

Economic

NPV 149, 79 M. € Good

IRR 12,27%

Payback period 11 years

CO2 – emissions (lifecycle) No direct emissions, but emissions during Very Good the production of the solar panels and the installation process

Regular

Other environmental damage Other GHG-emissions higher compared to the rest of renewable sources

Danger from cadmium (production, recycling)

Social inclusion Job creation Good

Local energy source, no import dependency

Overall sustainability Good

Table 31: Original analysis on the sustainability of a typical photovoltaic power plant

75

As a conclusion, photovoltaic power is a really good opportunity to invest for Iberdrola, as it represents a solution sustainable from the financial point of view as well as from the environmental point of view.

76 4.2.7 Thermosolar Power

Iberdrola has, as per 2010, 50 MW of installed capacity on this type of energy49. Even if the production cost are higher than for the photovoltaic power (21 Eur/MWh instead of 7 Eur/Mwh)50, considering only the normal operation and maintenance costs), the tariffs proposed by the government for this technology makes it more profitable (288 Eur/MWh instead of 245 Eur/Mwh)51.

Overnight Investment Costs 358.000.000 €

Installed Capacity 100 MW

Investment Costs/kW 3580 €/kW

Lifetime 25 Years

Construction Period 1 Years

Debt Finance 28,4%

Equity Finance 71,6%

Cost of Equity 5,0%

Cost of Debt 8,7%

Tax-Rate 25,0%

WACC 5,4%

Yearly Production 2278 H

Inflation Rate 2%

Power Price 288 €/MWh

Yearly coal Production Cost Increase 2%

ProductionCosts 21 €/MWh

Table 32: Original analysis on input data for the thermosolar power plant

49 Iberdrola Renovables S.A, Resultados 2010, Informe trimestrial, 2010

50 U.S Energy Information Administration, Updated Capital Cost Estimates for Elecricity Generation Plants, Released date: November 2010, http://www.eia.gov/oiaf/beck_plantcosts/index.html, Retrieved on April 2011

51 Ministero de Industra, Turiso y Comercio, Boletín Oficial del Estado, Orden ITC/3353/2010, December 2010

77

We considered a useful life of 25 years, and a utilization rate of 26%52. The installation cost are quite high with 3580 €/KW53 and explain to some extend why these large incentives of 288 €/MWh are provided by the government.

These are the financial results obtained from the investment analysis depending on the lifetime:

Lifetime NPV IRR 20 483.991.357 18,05% 25 611.171.816 18,54% 30 716.085.469 18,74%

Table 33: Original analysis on the profitability of solar thermal power

Concerning the sensitivity analysis it becomes clear that for all lifetimes the technology is highly profitable with over 18% IRR. The risk is analog to the photovoltaic technology in the changes of the regulations, which can decrease the profits.

Figure 43: Sensitivity analysis for a solar thermal power plant

52 PriceWaterhouseCoopers, El Modelo Eléctrico Español en 2030, Escenarios y Alternativas, 2010

53 U.S Energy Information Administration, Updated Capital Cost Estimates for Elecricity Generation Plants, Released date: November 2010, http://www.eia.gov/oiaf/beck_plantcosts/index.html, Retrieved on April 2011

78 So independent of the lifetime this technology is profitable at the actual rates of feed-in- tariff. Figure 43 show the dependency of IRR on the lifetime of the power plant. If we consider that the government keeps the same tariffs to encourage the development of this technology, we can conclude that it is one the most profitable renewable energy and the goal of the government according to the PANER is to increase the installed capacity up to 4800 MW in 2020 compared to 632 MW in 201054. From the sustainability analysis we can conclude that this technology is good in financial, environmental and social terms.

Factor Number Sustainability Valuation

Economic

NPV 611,17 M. € Good

IRR 18,54%

Payback period 7 years

CO2 – emissions (lifecycle) No direct emissions, but emissions during the Really Good production of the solar panels and the installation process

Other environmental damage Not much Good

High demand for water (scarcity)

Social inclusion Job creation Good

Local energy source, no import dependency

Overall sustainability Good

Table 34: Original analysis on the sustainability of a typical photovoltaic power plant

54 Ministerio de industria, tourismo y consumo (MITYC) and Instituto para la Diversification y Ahorro de la energia (IDAE), PLAN DE ACCIÓN NACIONAL DE ENERGÍAS RENOVABLES DE ESPAÑA (PANER) 2011 - 2020, Jun 2010

79 4.2.8 Biomass Co-firing

Biomass Co-firing represents a great opportunity for coal power. Indeed, by replacing only 10% of the production by biomass, great savings can be realized, both from the financial point of view as CO2 emissions as we will show.

The most important factor for a biomass co-firing is the availability of appropriate biomass from the surrounding of the power plants, as transportation is one of the most important cost factors. From a study about the issue concerning the Spanish market we can conclude that in the areas of coal-fired power plants the potential for a supply of cheap and reliable biomass within a perimeter of 100 km around the plants is given55.

We proceeded to this analysis by a difference model compared to a normal coal power plant. For example, for the price of the raw material, we took the difference between the price of the biomass (38,256 €/MWh) and the price of the coal (30,98€/MWh)57 which results in a delta of 7,2 €/MWh. So biomass as raw material therefore is more expensive. This means we substitute the raw material of 10% of the power output and calculate the price difference, as well we considered the price difference between tariff for biomass compared to market price.

In terms of operation and maintenance costs, there is no extra cost for running the power plant with biomass, therefore, these cost are considered to be zero.

We also have to consider the money earned by the CO2 emissions savings. Indeed, by avoiding 10% of CO2 emissions from the coal firing, CO2 certificates can be sold on the market, as we consider that biomass doesn´t emit direct CO2 emissions. This positive cash flow has to be introduced in the model. This corresponds to 10% of the costs of CO2 for coal power generation.

The investment costs vary a lot depending which study one takes as reference and we therefore took the average price of 300 €/kW58, where the costs are just for the installed capacity that replaces biomass for coal.

55 D. García-Galindo and F. Sebastián, Current Spanish biomass co-firing potential in coal power stations, 2009

56 Sustainable Forestry for Bioenergy and Bio-based Products, The Economics of Forests Biomass, Production and Use, Fact Sheet 6.2, www.forestbionergy.net, Retrieved on May 2011

57 Bloomberg, www.bloomberg.com, data retrieved on 15.05.2011

58 D. García-Galindo and F. Sebastián, Current Spanish biomass co-firing potential in coal power stations, 2009

80 The following parameters are used in our model. For the power price, we chose the lowest available tariff of 58,3 €/MWh and took the difference to the actual price of coal59, because the additional money that a utility will earn is exactly the difference between feed-in-tariff and the actual power price. The selection of the lowest one gives the most conservative values in terms of profits.

We assumed no enlargement of the lifetime of the existing coal power plants by this measure, which makes an individual NPV calculation for each power plant necessary.

Overnight Investment Costs 10.260.000 € Installed Capacity 34,2 MW Investment Costs/kW 300 €/kW Lifetime 20 years Construction Period 1 years Debt Finance 66,2% Equity Finance 33,8% Cost of Equity 9,7% Cost of Debt 9,2% Tax-Rate 25,0% WACC 7,8% Yearly Production 2174 h Inflation Rate 2% Delta Power Price 50 €/MWh Yearly coal Production Cost Increase 2% Production Costs 7 €/MWh Table 35: Original analysis on input data for a typical biomass co-firing power plant

For each individual power plant we evaluated the analysis for both scenarios of future power prices (2% vs. 5%). For the first case the results are the following:

Power Plant Expected Lifetime Installed Capacity Years of operation NPV € IRR Payback Guardo I 2013 155 MW 1 -4.242.876 -91% n.a. Pasajes 2016 217 MW 4 -4.417.188 -29% n.a. Lada III 2016 148 MW 4 -3.012.645 -29% n.a. Lada IV 2030 348 MW 18 35.390 8% 18 years Guardo II 2033 342 MW 21 923.311 9% 18 years Total -6.471.132 Table 36: Original analysis on the biomass co-firing financial potential for Iberdrolas coal power plants (case 1)

59 Ministero de Industra, Turiso y Comercio, Boletín Oficial del Estado, Orden ITC/3353/2010, December 2010

81 And for the second case, with a larger increase of 5% of power prices:

Power Plant Expected Lifetime Installed Capacity Years of operation NPV € IRR Payback Guardo I 2013 155 MW 1 -4.230.385 -90% n.a. Pasajes 2016 217 MW 4 -4.260.699 -27% n.a. Lada III 2016 148 MW 4 -2.905.915 -27% n.a. Lada IV 2030 348 MW 18 2.912.855 11% 14 years Guardo II 2033 342 MW 21 4.449.770 12% 14 years Total 196.011 Table 37: Original analysis on the biomass co-firing financial potential for Iberdrolas coal power plants (case 2)

So for both cases just in the two plants of Lada IV and Guardo II the measures for biomass co-firing should be implemented. This of course is just true under the assumption of a tariff of 58 €/MWh. The sensitivity analysis in figure 44 shows the results for three types of possible tariffs:

Figure 44: Original analysis on sensitivity analysis for biomass co-firing for a lifetime of 20 years and plant size of 400 MW

So with the increase in tariffs the NPV is increasing a lot and at a price 100 €/MWh all power plants without Guardo I will be profitable. But without the necessary knowledge about the available biomass and the appropriate regulation in our opinion it is wise to be rather conservative and take the lowest tariff as assumption.

We can conclude that Iberdrola faces a really good alternative to switch a part of its coal production to biomass co-firing, which is more profitable, due to the incentives given by the government through the regulated tariffs, as well by the saving of CO2 emissions.

82

Factor Number Sustainability Valuation

Economic

Positive for all coal power plants except Good Guard I (depending on the lifetime)

CO2 – emissions (lifecycle) Only CO2 emissions that had already been Good absorbed by the biomass. Therefore, no net emission if the process is done correctly

Other environmental damage Large NO emissions Regular

Biomass has to be handled appropriate

Social inclusion Valorisation of agricultural waste, creation Good of other source of income for farmers

Overall sustainability Good

Table 38: Original analysis on the sustainability of a typical biomass co-firing power plant

83 4.2.9 Lifetime enlargement of old nuclear power plants

When planning to enlarge the useful life of a nuclear power plant, huge investment costs have to be taken into account in order to comply with the security rules. According to the CEO of EDF, these costs reach 550 million per GW per 10 years of enlargement60. As our model considers an enlargement of 20 years, we need to take into consideration an investment cost of 1,1 billion Euros. As well, we need to consider extra costs for the nuclear waste management. According to the World Nuclear Association, a levy of 3 €/MWh is used in Spain61. This amount has to be taken into account in the yearly production costs.

We considered the different parameters for our investment analysis: error in the graph investment costs

Overnight Investment Costs 1.100.000.000 € Installed Capacity 1000 MW Investment Costs/kW 4313 €/kW Lifetime 20 years Construction Period 1 years Debt Finance 66,2% Equity Finance 33,8% Cost of Equity 9,7% Cost of Debt 9,2% Tax-Rate 25,0% WACC 7,8% Yearly Production 8040 h Yearly Power Price Increase / Inflation 2% Power Price 44 €/MWh Yearly Nuclear Production Cost Increase 2% Production Costs 16 €/MWh Decompensation costs + Waste Disposal 3 €/MWh Table 39: Original analysis on input data for the enlargement of a nuclear power plant

The financial results are a NPV of about 746,6 Mio.€ for an expected annual price increase of 2% (case 1), equal to an IRR of 15,33%. For the more optimistic case 2 with an annual power price increase of 5% the NPV is 1.402 Mio. € (IRR = 19,42%).

60 Belot J.M., Hausse des couts d EDF en vue de prolonger ses centrales, Le Nouvel Observateur, 18 March 2011, http://tempsreel.nouvelobs.com/actualite/economie/20110318.REU4737/hausse-des-couts-d-edf-en-vue-pour-prolonger-les- centrales.html, Retrieved on May 2011

61 World Nuclear Association, Radioactive Wate Management, Updated April 2011, http://www.world- nuclear.org/info/inf04.html, Retrieved on May 2011

84 The following results have been obtained, and the following sensitivity analysis has been done. Which for the enlargement are especially important, as political decisions can result in a prior shut down of nuclear power plants recently seen in Germany.

The following graph show the variation of the NPV when lifetime and power price are varying:

Figure 45: Original analysis on financial results for the enlargement of a nuclear power plant for case 1 in €

Figure 46: Original analysis on financial results for the enlargement of a nuclear power plant for case 2 in €

Both cases shows that enlargement of nuclear power plants results highly beneficiary and only in the case 1 with an increase of just 2% in power price and a drop of price level of 10% and a lifetime of less than 13 years.

85 As a conclusion, we can say that enlarging the life time of a nuclear power plant is sustainable from the financial point of view.

Factor Number Sustainability Valuation

Economic

NPV 746,6 Mio. € Very Good

IRR 15,33%

Payback period 10 years

CO2 – emissions (lifecycle) No direct CO2 emissions Good

Other environmental damage Nuclear waste management???? Bad

Social inclusion Really bad reputation of the nuclear energy since the drama of Fukushima. No social acceptance and general fear of this Bad technology

Overall sustainability Regular

Table 40: Original analysis on the sustainability of the enlargement of a nuclear power plant

Even if nuclear is considered as a “clean” energy from the point of view of the CO2 emissions and it is financially profitable to enlarge the useful life of the actual power plants, the general fear of the public opinion and the example showed by Germany that want to get out of this kind of technology by 2022 make that kind of investment little realistic at the moment.

86 4.3 Comparison of different technologies in terms of sustainability

After having analyzed the different technologies individually we want to focus now again on the bigger picture of the energy planning for Iberdrola in the Spanish context. We have seen that three conditions have to be fulfilled for a good electricity generation system: Security of supply, economic efficiency and environmental sustainability. We therefore based our work on the projection of the study of PWC62. And as it is essential to diversify the electricity production, the purpose of this analysis is not to elect one of the technologies and focus solely on it, but rather find the best alternatives in the general framework. Therefore we divided the different technologies in three areas: Nuclear power, fossil-fuel thermal power (coal and gas) and the renewables.

First of all we base our results on the financial analysis of the different technologies for both cases (2% and 5% annual increase in power prices). As we have considered every power plant with different initial investments and lifetimes as well as different installed capacities we considered different indicators to be important:

1. NPV/MW The indicator allows us to compare different technologies independently from the lifetime. In a business world every power plant with positive NPV would mean a positive investment decision. In the following graph the results for case 1 for the different technologies are shown:

Figure 47: Original analysis on NPV/MW for all technologies considered in € for case 1

For the second case with a larger increase in power prices it results, that especially nuclear power plants (new and enlargement) are positive in terms of NPV/MW and

62 PriceWaterhouseCoopers, El Modelo Eléctrico Español en 2030, Escenarios y Alternativas, 2010

87 to a smaller extend also gas-fired power plants. The renewable technologies remain unchanged as they are under the special regime with fixed tariffs, and therefore independent of the market prices. As nuclear power plants require large initial investment they specially benefit from the increase in power prices as the cost of debt can be reduced. Coal doesn’t benefit from the larger price increase as in our model the assumption was that the commodity prices will increase at the same rate and they are currently especially high for coal.

Figure 48: Original analysis on NPV/MW for all technologies considered in € for case 1

From this figures the renewable energy sources are clearly better off in financial terms than the fuel based power plants. In our opinion the reason for this behavior is twofold, on the one hand the renewable energy sources are strongly subsidized by the government and on the other hand the conventional energy sources are facing a problem in the Spanish market. While the power price was quite stable in Spain for the last 6 month on a low level compared to other European countries like France and Germany, the commodities (uranium, coal and gas) experienced sharp increases within the last year (see figure 49).

88 Figure 49: Original analysis on commodity prices for coal and gas and power Spain (Oct. 2010 – Mar. 2011), Data: Bloomberg

Also interesting to see is that all renewables are in the positive range due to the strong incentives given by the Spanish government to these technologies. It is important to keep in mind that this is NPV/MW not considering the lifetime of the power plant.

2. IRR

The Internal Rate of Return provides information of an investment decision independent of the size or time period. It is very useful when the funds of money are limited and therefore just a limited number of investment decisions can be taking. The results for our comparison are the following for case 1. Coal is not included as the production costs are higher than the benefits and therefore no IRR calculation is possible.

89 Figure 20: Original analysis on the IRR of all technologies except coal for case 1 And for case 2:

Figure 51: Original analysis on the IRR of all technologies except coal for case 2

So again, as mentioned in the last paragraph the technologies that would profit most from a larger increase in power prices are nuclear (new ones and enlargement) and gas-fired power plants.

For coal the generation costs are actually higher than the average power price and therefore the power plant would make losses even in the daily market. It is not possible to calculate an IRR for this technology and explains why the coal power plants are running at a very low number of hours in Spain within the last year. As described above due to the low electricity prices for the Spanish market compared to the European average and the sharp increase of commodity prices,

Nuclear power has an IRR of 4,64 % for case 1 with an increase of annually 2% in power prices, which is below the cost of capital of about 7,8 % and therefore the NPV results negative. In the case 2 with an increase of 5% annually the nuclear power plants becomes profitable with an IRR of 8,92%. The profitability of nuclear power plants is therefore highly dependent on the future price increase and subject to a high risk.

CCGTs are also suffering from the low electricity prices but not by the same extent as coal power plants, and they are still profitable with an IRR of 7,87%, slightly higher than the WACC of 7,8%, leaving a small positive NPV for case 1. While for the larger increase of power price of case 2 leads to high profits through a IRR of 11,56%.

90 Co-Firing clearly depends on the expected lifetime of the power plant with 18 (case 1) respectively 14 years (case 2) and therefore is profitable for the newest two power plants (Lada IV and Guardo II). In terms of NPV the number is not that high, as we assumed a typical coal power plant with an installed capacity of 400 MW and just 10% are converted into co-firing (40MW). But still this investment is profitable for the before mentioned power plants.

It is also interesting to notice that solar power relatively creates higher returns than wind power. So solar PV (IRR = 12,27 %) and solar thermal (IRR = 18,54 %) are some percent higher than wind power with onshore (IRR = 8,82 %) and offshore (IRR = 8,71 %) for both cases as new renewables are handled under the special regime. Here we have to mention that wind offshore power still faces serious challenges to overcome in Spain and we consider it to be a realistic option from 2020 onwards. Wind onshore is the most advanced technology and probably the one that first will be able to compete in the market.

Concluding from our analysis we came up with the following points:

New nuclear power plants are not a suitable option from an economic point of view at actual power prices and at an expected annual power price increase of 2% (case 1), while they are profitable for the case of a 5% annual power price increase (case 2). Due to the strong dependence on the future power price evolution, the risk of losses has to be considered very high. The risk of environmental damages has to be considered as well, side by side with the social difficulties in realizing new nuclear power plants. We therefore think that new nuclear power plants are no solution for the Spanish market therefore we have excluded scenario 4 of PWC from our analysis. Still this assumption is taken under the actual situation and may change in the future. So increasing power prices could make nuclear power an alternative from an economic point of view(as shown in case 2), even though the resistance from the society has to be considered. For a company like Iberdrola it is very important to include stakeholders into their business decisions for a long-term project like a nuclear power plant. Therefore the construction of new nuclear power plants may be easier in the same location as the old ones, due to lower social concerns. Still we consider the probability as very low after the accident in Japan.

91 o In terms of fossil fuel powered plants we can conclude that for both cases gas-fired power plants are profitable while coal power plants are not. Gas- fired power plants as well provide benefits in terms of the environment (all types of emissions) and therefore to us seem the adequate option for the future.

o For the new renewable electricity sources the most profitable technology is solar thermal power, surprisingly even more profitable than both wind on- and offshore. This is common for both cases.

o For co-firing efforts should be undertaken as fast as possible to use this technology, as well in financial and environmental terms, as it reduces the environmental impact and creates profits for the two newest coal power plants (shown in both cases).

o Still all technologies strongly rely on price incentives from the government, especially solar power. Therefore even if the IRR`s for solar might be higher at the moment this can change fast due to legislative changes. Therefore we want to keep a balance between the different renewables sources.

o Also onshore wind power is much further developed both in terms of technology as maturity and maybe soon reaches the point when it can compete on the market without subsidies, and therefore provides a lower risk due to legislative changes. The growth rate of this technology was quite stable of the recent years, making it a more predictable source63. But still problems arising from balancing the power is a problem that has to be improved.

o We based our analysis on the actual available technologies plus biomass co- firing and offshore wind power, as it is very likely that this will be the only sources available on a large scale. Nevertheless if rapid improvements are made in other technologies like biogas, geothermal or marine power Iberdrola would have to adjust to them as well. Nevertheless we assumed that none of them will reach a significant share until 2030. But still very important is the investment in R&D independent of the scenarios.

63 Asociación Empresarial Eólica, Potencia Instalada España, http://www.aeeolica.es/contenidos.php?c_pub=10

92 o Another important factor that should be invested in terms of R&D should be electricity storage capacity, as it facilitates the usage of the unpredictable renewable electricity sources and might provide large benefits in financial terms but also environmental terms, as it could decrease the need for thermal back-up power.

93 5. Recommendation for a sustainable and profitable future of Iberdrola

We will base our suggestions on the sustainability analysis is oriented in the general Spanish framework developed by PWC with the four different models for the Spanish market. As described earlier we excluded one of the scenarios, the one with the construction of three additional nuclear power plants, as we considered the probability of the realization of this scenario under the actual circumstances (low electricity prices and resistance in the population after the accident in Japan) as very low. The three other scenarios are all reasonable, depending on the priority the Spanish governments gives to issues like environment or economy. Therefore the Spanish government has a strong influence on the generation mix, as it can give price incentives to the different technologies and increase the shares, as seen for the renewable energy sources within the last decade. So the most important decision are taken by the government to aim for example for a certain percentage of renewable energy sources. But still the utilities have to find the most suitable solutions in terms of both sustainability as well as profitability within this context. We want to provide for each of the three scenarios one solution that in our opinion combines best the different factors of sustainability (environment, economy and society).

94 5.1. Iberdrola - Actual situation (2010)

We were differentiating the technologies running under the special regime versus the ones that operate over the market. For the thermal power plants we analyzed all power plants under operation of Iberdrola and the results are shown on the example of nuclear power plants in the following figure64.

Lifetime (y) MW Share Year 20110 20120 20130 20140 20150 20160 20170 20180 20190 20200 20210 20220 20230 20240 20250 20260 20270 Nuclear 40 466 50% Maria Garona 1971 2331 2331 2331 10 10 10 10 10 10 10 0 0 0 0 0 0 0 977 52,70% Almaraz I 1981 5151 5151 5151 5151 5151 5151 5151 5151 5151 5151 10 10 0 0 0 0 0 980 52,70% Almaraz II 1983 5161 5161 5161 5161 5161 5161 5161 5161 5161 5161 5161 5161 10 0 0 0 0 1092 100% Cofrentes 1984 10921 10921 10921 10921 10921 10921 10921 10921 10921 10921 10921 10921 10921 10 0 0 0 1087 15% Asco II 1985 1631 1631 1631 1631 1631 1631 1631 1631 1631 1631 1631 1631 1631 1631 10 10 0 1087 28% Vandellos II 1987 3041 3041 3041 3041 3041 3041 3041 3041 3041 3041 3041 3041 3041 3041 3041 3041 10 1066 48% Trillo 1988 512 512 512 512 512 512 512 512 512 512 512 512 512 512 512 512 512

Figure 52: Original analysis on the expected liftime of existent power plants under the ordinary regime of Iberdrola, Data: MITyC

So for nuclear power we were considering the typical lifetime of 40 years, which is actually as well defined to 40 years by the law in the case of Spain. As well the total power output of the plant as well as Iberdrola’s share and the name are given. To calculate the expected lifetime the first year of operation is provided and gives the period of operation. These lifetimes are of course just estimates and are under the control of the National Nuclear Security Agency. As the case of the plant of Garona shows, variations can be allowed through a legislative process with the parliament included in the decion-making process. For Gerona the lifetime was extend for further 4 years until 201365.

The same analysis was undertaken for all thermal power plants under the operation of Iberdrola. While for nuclear power plants a lifetime of 40 years was taken, for coal we assumed one of 50 years with in accordance that investments were already done in the past to increase their lifetime. The existing Fuel-Oil fired power plants were gradually replaced by gas-fired CCGT power plants. The running coal and nuclear power plants were all mainly build during the 1980’s.

64 Ministero de Industra, Turiso y Comercio - Secretario de estado de energia, Registro de instalaciones, Jun 2011

65 Ministerio de industria, tourismo y consumo (MITYC), La energia en espana 2009, 2009

95

Figure 53: Total installed termal capacity Iberdrola of currently under the ordinary regime working power stations in Spain, Data: MITyC

For the special regime due to the size of the individual power plants we didn’t analyzed them individually, but instead the yearly increase and an assumed lifetime of 20 years. Figure 22 (part special regime) shows the historic evolution of different renewable energy source for Iberdrola and makes clear that just onshore wind power contributes to a large extend.

After having the Installed capacity and the expected future output of the different technologies the first assumption of this analysis was that it would not be profitable to switch off any existing power plant prior to expire date.

The analysis takes the year 2010 as the basis. The installed capacity and generation for this year is shown in the following figures 54 and 55 for Iberdrola.

Figure 54: Original analysis on the installed capacity of Iberdrola 2010, Data: Iberdrola

96

Figure 55: Original analysis on the power generation of Iberdrola 2010, Data: Iberdrola

In accordance with the relation of installed capacity and generation the only technology that was running at a large number of hours within the Iberdrola production park was nuclear with and installed capacity of 13%, but a power generation output of 36%. This behavior is also represented in the effective annual hours for Iberdrola shown in figure 56 in comparison to the Spanish market. Especially the thermal power plants run at a low number of hours compared to the Spanish market, while only cogeneration is exceeding the Spanish market.

Figure 56: Effective anual hours of production for Spain and Iberdrola 2010, Data: REE and Iberdrola

97 5.2 Approach of the model

In the following subchapters we will try to identify the best scenario for Iberdrola taken the scenarios of PWC as given for the Spanish market. The selection of one of the models of PWC as mentioned earlier is subject to the Spanish government and its priorities in terms of sustainability. So for each of the scenarios of PWC we will provide a generation mix for Iberdrola which in our opinion is the most suitable in terms of sustainability as well as profitability.

We will first of all explain our approach how to increase the capacity due to factors like growing demand and overcapacity factor in general and how the different technologies will contribute to the generation mix.

Iberdrola in the year 2010 has a market share of its production park of approximately 30%, but the share varies between different technologies66. While it is larger for hydro and nuclear power, it is smaller for the renewables. We therefore assumed that Iberdrola is good in terms of management of these technologies (hydro and nuclear) and will keep its market share above the general company average. For new renewables they just have a share of 23,5%of the total market67. But this is also rational because the renewables are easier in terms of management, as the power do not have to be sold on the market and the investment volume is as well smaller. This leads to a higher competition. We assumed that for all technologies besides CCGT the increase in capacity is equivalent to the overall market and that Iberdrola in 2030 will still have a higher share of the market for hydro power and nuclear (for the scenarios were an enlargement is done), while the share in the field of renewables will be lower. CCGT in our opinion are the most adequate option for thermal back-up and the amount should be adjusted to the need, while the renewables should be increased continuously. Our approach for this was taken the overcapacity factor for the Spanish market. The overcapacity factor is the potential output of the power plants to the generation needed. The higher the share of renewables is, the higher the amount of back-up power is and the higher the overcapacity factor. We considered that additional CCGT power plants are needed if the overcapacity factor falls below a certain threshold, which depends on the scenario and the share of renewables electricity sources. We were given preference to CCGT power plants due to the better sustainable performance as well as profitability compared to coal power plants. For the field of renewables we were

66 Ministerio de industria, tourismo y consumo (MITYC), La energia en espana 2009, 2009

67 Red Eléctrica Corporación, Annual Report,summary document 2010, 2011

98 assuming that all technologies should be increased as the incentives given by the government also depend of the development on the installed capacity of the different technologies. If the investments would just go into wind power for sure actions would be taken by the government to increase the incentives for solar technologies and decreases in the subsidies for wind power.

With the investment costs and NPVs for the different technologies it was possible to calculate the yearly evolution of both on a company level as comparison between the different scenarios of PWC.

Furthermore we assumed that wind offshore power will just be a solution from 2020 onwards and therefore the increase in wind power should be undertaken by onshore wind. From 2020 old onshore wind farms should be replaced by new ones and the additional capacity needed should be used from offshore wind farms. This assumption is in accordance with the PANER68.

For solar power mix of both photovoltaic and solar thermal to us seems the best approach, as both depend on the prices incentives given by the government and therefore a diversification is considered positive and we choose a mix of both technologies.

With the increase of installed capacity the calculation of the generation of electricity could be calculated for each year and technology under the assumption that the effective annual hours are increasing or decreasing from actual levels (2010) to assumed numbers from the model of PWC in 2030.

And with the yearly development of power production it was possible to calculate the yearly CO2, SO2 and NO emission for each scenario.

In the following chapters the results will be provided and finally the conclusions will be given which scenario of PWC is favorable to Iberdrola in terms of investment cost, profits and environmental impact.

68 Ministerio de industria, tourismo y consumo (MITYC) and Instituto para la Diversification y Ahorro de la energia (IDAE), PLAN DE ACCIÓN NACIONAL DE ENERGÍAS RENOVABLES DE ESPAÑA (PANER) 2011 - 2020, Jun 2010

99 5.3. Analysis of Scenario 1

The first scenario proposes to have an installed capacity in 2030 of 50% renewable energies, and the progressive closing down of the nuclear power plants when their useful lifetime expires.

Here we are going to present the results of our model.

Evolution of the installed capacity:

Figure 57: Original analysis on the evolution of the installed capacity for Iberdrola under scenario 1 in MW

We can see that the amount of renewable energies has to increase constantly until 2023- 2024. The hydro power, as explained before, does not have much room to increase, it just increase at a low level. The CCGT power starts increasing by 2023, to compensate the closing down of nuclear power plants. Indeed, it acts as backup to renewable energy. The decision of this was based on the overcapacity factor for the Spanish market and its timely evolution due to the expected increasing demand, the construction of the renewable energies and the close down of nuclear and coal power plants.

100 Figure 58: Original analysis on demand increase and production capacity without new thermal power plants under scenario 1

Figure 59: Original analysis on the evolution on the overcapacity factor with and without new CCGTs under scenario 1

The final result of the energy mix of Iberdrola will be the following one in 2030:

Figure 60: Original analysis on the installed capacity for Iberdrola under scenario 1

When we consider hydro and new renewables (thermo solar, phtovoltaic, onshore and offshore wind, cogeneration and biomass co-firing) together, the share of total renewables reaches 66%. The thermal power (coal and gas) represents 34%, and the nuclear disappeared.

101 Evolution of the generation

The following graph represents the evolution by technology of the generation from 2010 until 2030:

Figure 61: Original analysis on the evolution (2010 -2030) of the generation mix for Iberdrola under scenario 1

The generation follows the same trend as the installed capacity: increase of the power generation by the renewable energies, increase of the CCGT around 2024, decrease of the nuclear from 2020 onwards, and slight increase of the hydro-electricity produced.

The following graph represents the same data but only for 2030:

Figure 62: Original analysis on the generation mix for Iberdrola in 2030 under scenario 1

We can see, that in 20 years, under this scenario, 46% of the electricity will be produced by CCGT (gas) and 54% by renewable energy (hydro included).

102 Financial analysis:

The investment costs needed per year to reach the previous results in the following graph:

Figure 63: Original analysis on the yearly investment cost evolution under scenario 1

From 2023 on, the investments costs increase a lot due to the new installed capacity of CCGT needed to cover the demand and to keep an overcapacity factor at a minimum level. Indeed, as in 2023 and the following 4 years, the nuclear power plants expire, new CCGT back up as to be build to substitute it.

The following two graphs represent the evolution of the NPV for both cases of power price increase:

Figure 64: Original analysis on the yearly investment cost evolution in € under scenario 1 taken case 1 with a yearly power price increase of 2%

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Figure 65: Original analysis on the yearly investment cost evolution in € under scenario 1 taken case 2 with a yearly power price increase of 5%

The NPV increases more since 2023, because of the CCGT as already explained, but also because new offshore wind farms start to be build since 2021 and so on. As described in the sustainability analysis for each technology, offshore wind is really profitable considering the tariffs provided by the government. So the larger increase in power prices for case 2 results in better financial results from 2021 onwards due to the increased investment in new CCGTs.

The total investments needed for the 20 years would be 75.5 Bio. €, leading to a total NPV over the 20 year period of 50.1 Bio. € for case 1 and 81.68 Bio. € for case 2.

104 GHG emissions:

The following graph represents the evolution of the CO2, SO2 and NO emissions:

Figure 66: Original analysis on the evolution of GHG-emissions associated with the power generation under scenario 1

The CO2 emissions increase mostly from 2023 because of the emissions caused by the new installed CCGT power plants. The emissions of the other gases are increasing constantly during the considered period. As coal is responsible for most of the SO2 emissions, there is a decrease in 2014 because of the closing of the power plant of Guardo I and in 2017 Pasajes and Lada III.

The total of the GHG emissions during the whole period will be:

Total tCO2 190.919.292,35 Total tSO2 29.579,67 Total tNO 84.066,86 Table 53: Total emissions during 2011-2030 under scenario 1

105 5.4. Analysis of Scenario 2

This scenario includes a covering of the demand with 50% of renewable energies and the enlargement of the useful life of the nuclear power plants by 20 years, which means from 40 years to 60 years,

Evolution of the installed capacity

Figure 67: Original analysis on the evolution of the installed capacity for Iberdrola under scenario 2

We can see in this graph that the amount of renewable energies is increasing constantly like in the first scenario. The amount of nuclear is constant until 2030 because as we see in our nuclear investment analysis, it is no profitable to build new nuclear power plants, while the enlargement of the old ones is. CCGT installed capacity increases by 2020 to maintain the overcapacity factor at a low level, such in the first scenario.

Figure 68: Original analysis on demand increase and production capacity without new thermal power plants under scenario 2

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We can see in figure 68 the evolution of the prediction of the supply and the demand.The following graph represents the overcapacity factor with and without CCGT:

Figure 69: Original analysis on the evolution on the overcapacity factor with and without new CCGTs under scenario 2

We see clearly from the graph that, in 2018, more CCGT capacity is needed to maintain the overcapacity factor up to a level of 1,26. The final result of the energy mix of Iberdrola will be the following one in 2030:

Figure 70: Original analysis on the installed capacity for Iberdrola under scenario 2

The thermal energies (coal and CCGT) will cover 30% of the demand. The amount of renewables (hydro and the others) will cover in total 62%. The installed capacity of the nuclear will remain the same, but as the general generation park has increased, the share is much lower, at a level of 6%.

107 Financial analysis:

We can see the investment costs needed per year to reach the previous results in the following graph:

Figure 71: Original analysis on the yearly investment cost evolution in Mio. € under scenario 2

The investment costs increase mainly by 2020, where more CCGT capacity is need, and when the offshore wind mills will start to be built. As well for the years 2021, 2023, 2024, 2025, 2027 and 2028 the peaks are caused by the investment cost for enlargement of nuclear power plants.

The following two graphs represent the evolution of the NPV for both cases of power price increase:

figure 72: Original analysis on the yearly investment cost evolution in € under scenario 2 taken case 1 with a yearly power price increase of 2% 108

Figure 73: Original analysis on the yearly investment cost evolution in € under scenario 2 taken case 2 with a yearly power price increase of 2%

This graph follows the same trend as the investment costs. As we already described in the first scenario, the offshore wind as a really good NPV, which increases the total NPV.

The total investments costs for the whole period would reach 77.4 Bio. €, with the total NPV being 52.4Bio. € for case 1 and 58,47 Bio. € for case 2.

109 GHG emissions:

The following graph represents the evolution of the CO2, SO2 and NO emissions:

Figure 74: Original analysis on the evolution of GHG-emissions associated with the power generation under scenario 2

The level of CO2 increases mainly in 2020 because of the new CCGT power plants. The level of NO, mainly caused by biomass and coal increases constantly, and the level of SO2 slightly decreases in 2017 because of the closing down of the two coal power plant Pasajes and Lada III.

The total amount of GHG emissions during the period 2010-2030 is summarized in the following table:

Total tCO2 143.568.062,01 Total tSO2 29.450,13

Total tNO 82.537,80

Table 54: Total emissions during 2011-2030 under scenario 2

110 5.5 Analysis of Scenario 3

The third scenario proposes to have an installed capacity in 2030 of 30% renewable energies, and the enlargement of the old nuclear power plants up to 60 years.

Here we are going to present the results of our model.

Figure 75: Original analysis on the evolution of the installed capacity in MW for Iberdrola under scenario 3

Evolution of the installed capacity:

We can see that the amount of renewable energies is increasing constantly over the whole period. The hydro power, as explained before, does not have much room to increase, but increases at a low level. The CCGT power starts increasing by 2018, to compensate the increased customer demand. Indeed, it acts as well as backup to renewable energy. The decision of this was based on the overcapacity factor for the Spanish market and its timely evolution due to the expected increasing demand, the construction of the renewable energies and the close down of nuclear and coal power plants.

111

Figure 76: Original analysis on demand increase and production capacity without new thermal power plants under scenario 3

Figure 77: Original analysis on the evolution on the overcapacity factor with and without new CCGTs under scenario 3

112 The final result of the energy mix of Iberdrola will be the following one in 2030:

Installed Capacity Iberdrola 2030

Hydro

27% 24% Nuclear

Coal 7% Fuel-oil CCGT 2% 38% 2%

0% Cogeneration New Renewables

Figure 78: Original analysis on the installed capacity for Iberdrola under scenario 3

When we consider hydro and new renewables (thermo solar, photovoltaic, onshore and offshore wind, and cofiring) together, the share of total renewables reaches 53%. The thermal power (coal and gas) represents 40%, and nuclear still having a share of 7% in terms of installed capacity.

Evolution of the generation

The following graph represents the evolution by technology of the generation from 2010 until 2030:

Figure 79: Original analysis on the evolution (2010 -2030) of the generation mix for Iberdrola under scenario 3

113 The generation follows the same trend as the installed capacity: steady increase of the power generation by the renewable energies, increase of the CCGT from around 2018 due keep up with the increasing demand and stable evolution of the nuclear and hydro power. The following graph represents the same data but only for 2030:

Figure 80: Original analysis on the generation mix for Iberdrola in 2030 under scenario 3

In 20 years, under this scenario still nuclear participates with 19%. 45% of the electricity will be produced by CCGT (gas), while renewable energy (hydro included) account for 36%.

Financial analysis:

We can see the investment costs needed per year to reach the previous results in the following graph:

114 Figure 81: Original analysis on the yearly investment cost evolution in Mio. € under scenario 3

From 2018 on, the investments costs increase a lot due to the new installed capacity of CCGT needed to cover the demand and to keep an overcapacity factor at a minimum level.

The following graph represents the evolution of the NPV:

Figure 82: Original analysis on the yearly investment cost evolution under scenario 3 taken case 1 with a yearly power price increase of 2%

Figure83: Original analysis on the yearly investment cost evolution under scenario 3 taken case 2 with a yearly power price increase of 2%

The NPV increases for the same reasons as more capacity is build in CCGT but also in wind offshore power. As described in the sustainability analysis for each technology, offshore wind is really profitable considering the tariffs provided by the government. As described in scenario 2 the peaks are resulting from the enlargement of the nuclear power plants.

The total investments needed for the 20 years would be 40,55 Bio. € and the total NPV would reach 22,55 Bio € for case 1 and 29,32 Bio. € for case 2.

115 GHG emissions:

The following graph represents the evolution of the CO2, SO2 and NO emissions:

Figure 84: Original analysis on the evolution of GHG-emissions associated with the power generation under scenario 3

The CO2 emissions increase mostly from 2018 because of the emissions caused by the new installed CCGT power plants. The emissions of the other gases are increasing constantly during the considered period. As coal is responsible for most of the SO2 emissions, there is a decrease in 2014 because of the closing of the power plant of Guardo I and in 2017 because of Pasajes and Lada III.

The total of the GHG emissions during the whole period will be:

Total tCO2 208.658.342 Total tSO2 26.635,07

Total tSO2 82.630,71

Table 55: Total emissions during 2011-2030 under scenario 3

116 5.6. Conclusions

Comparison of the scenarios in terms of financial and environmental sustainability

In the last chapter we have developed the best generation mix for Iberdrola in terms of sustainability and profitability for each of the scenarios from PWC except the one with new nuclear power. Now we want to compare the different models to each other out of the companies perspective. The following table 56 summarizes the different results for the three generation mixes for the scenarios analyzed in terms of profitability and sustainability:

Scenario 1 Scenario 2 Scenario 3 NPV (Mio €) Case 1 50.029,70 52.339,24 22.472,45 NPV (Mio €) Case 2 55.086,11 58.471,86 29.315,11 Investment costs (Mio €) 75.496 77.404 40.553 tCO2 emissions 190.919.292 143.568.062 208.658.342 tSO2 emissions 29.579,67 29.450,13 26.635,07 tNO emissions 84.066,86 82.537,80 82.630,71

Table 56: Comparison of the 3 scenarios

Table 56 shows that the second scenario is the one in which Iberdrola pollutes less. This was expected because of its high share of renewable energies (50%) and the use of nuclear power as base-load power. The first scenario needs to use thermal back up, CCGT mostly.

On the other hand, the second scenario is the one requiring the highest investments, to develop the high amount of installed capacity of renewable energy, and to enlarge the useful life of the nuclear power plant, but at the same time it is also the scenario with the highest return (measured by the NPV) for both cases of future price increase. For the case of Spain it will be interesting if the country as well as Iberdrola as Spanish company will be able to afford the large investments.

The following graph represents the comparison of evolution of the investments needed for the three scenarios:

117 Figure 85: Original analysis on the time evolution (2011-2030) of the investment costs for the scenarios

Both scenarios 1 and 2 require relatively low investments within 2011-2020 for the steady increase of installed capacity of renewable energies. From 2020 (Scenario 2) respectively 2023 (Scenario 1) back-up power in from of CCGT is needed. For scenario 2 large investments for the enlargement of nuclear power is needed and results in the peaks shown in the graph.

Scenario 3 requires less investment, as it uses only 30% renewable energies and the nuclear power is enlarged. These investments increase constantly with peaks from the investment in nuclear lifetime enlargement. The investment in thermal backup is done from 2019 onwards.

The following graph represents the evolution of the CO2 emissions for all the scenarios:

Figure 86: Original analysis on the time evolution (2011-2030) of the yearly CO2 emissions for the scenarios 118 As already said before, scenario 2 has the lower level of emissions, this level increasing by 2020 because of the thermal back up, but at a lower rate as the other scenarios.

The CO2 emissions increase later in scenario 1 than in scenario 3 because the thermal back up is built later.

Recommendations

As already said in the comparison, we would recommend scenario 2 to Iberdrola, as it is the most profitable and the less pollutant one (in terms of CO2 and NO emissions). However, this model has two limitations.

First of all, it is the one that requires the highest amount of initial investment. Indeed, it represents almost the double compared to the third scenario. It will depend on the capacity of Iberdrola to raise fund to apply this scenario or another one less costly.

The second restriction is about the future of the nuclear energy in Spain. Indeed, this scenario involves the enlargement of the lifetime for 20 years of the power plants. Today, nobody can predict what is going to happen in a short term with the nuclear. Is Spain going to take the decision to go out from nuclear power as soon as Germany (until 2022)? If an enlargement is not possible the company should focus on our solution for the first scenario.

We have already avoided the possibility to build new nuclear plants, but the enlargement of the existing one represents a good compromise for the country, as the plants are already depreciated and therefore represent a cheap electricity source, always keeping in mind the environmental risks.

On the other hand, scenario 2 fulfills the three requirement considered for a good energy mix. It is the most cost efficient, and the most environmental friendly, as already discussed. Concerning the security of supply, Spain having enough uranium and coal, it will only depend on the importation of gas, which represents only 25% of its installed capacity (compared to 46% in scenario 1 and 45% in scenario 3).

So what should Iberdrola do to be successful in convincing the Spanish government to implement this second scenario? Lobbying the government directly and give the previously mentioned arguments, but not just directly but also lobby through the autonomous regions which would profit from e.g. the enlargement of nuclear power plants. Also other relevant stakeholder groups should be consulted during the process. For the renewable energies

119 Iberdrola could animate other actors to move in the same direction if large investments are made in this sector, which could lead to lower production prices and therefore provide benefits to the company.

But what could be the risks? As the renewable technologies rely on the regulation set by the government in form of price incentives a huge risk lies in a reduction of the tariffs which would make them unprofitable. But still this risk might be considered low as Spain need to reach the 20-20-20 target. Therefore it is also in the advantage for Iberdrola to diversify their portfolio in terms of renewable energy source to be less dependent on the decisions of the government. For new nuclear power plants and even for the enlargement of old ones large initial investment costs are needed and always the risk of shutting them down due to social reasons is present (seen just recently in Switzerland and Germany).

Iberdrola as well should emphasize on wind power as it is world leader in terms of onshore power which can provide the company with a competitive advantage, the reduction of operational costs due scale effects and bargaining power with suppliers in terms of new investments. For off-shore wind Iberdrola as well is already active in the North Sea (in Germany and in the UK) and could use its know-how to implement it more effectively compared to the competitors in Spain.

Another important point might be the enlargement of the interconnecting power with neighboring countries. Iberdrola should lobby for the enlargement as the power prices in Spain a rather low compared to the other large European markets (France, Germany, Italy and the UK) and the company would be able to increase the power sold in the foreign countries, and exporting the overcapacity.

120 Part II: Energy efficiency for Bono Social beneficiaries as the means toward Iberdrola’s profitability and sustainability

Introduction Iberdrola, a focus on sustainability In 2001, Ignacio Sánchez Gálan became the CEO of Iberdrola. He reoriented the strategy of the company towards a more sustainable direction, choosing to invest increasingly in renewable energies1. Focusing on wind energy, but also investing in solar and hydro power, Iberdrola became a leading player in the booming clean energy sector within a few years. Sustainability is also embedded in Iberdrola’s corporate governance policy. Indeed, this strong commitment is reflected in the Board of Directors itself. The latter is made out of one executive committee and 3 consultative ones, among those a Corporate Social Responsibility committee2.

Besides, Iberdrola’s practices have been awarded by many sustainability indexes, such as the Dow Jones Sustainability Index for instance among many others3.

Talking about sustainability, it is also crucial to draw a parallel with profitability. To really be sustainable, a company must be profitable as it cannot be made at the expense of its shareholders. What does sustainability mean if the strategy leads to losses and even worse, to bankruptcy? Contrary to green-washing, a real sustainability strategy will take this into account while committing to large investments. Although renewable energies would not be profitable without the support from the State through subsidies and the electricity market regulation, this heavy investment toward environmental sustainability has not have any negative impact on Iberdrola. So far, with the shift initiated by Gálan at the beginning of this century, Iberdrola Group could experience a solid growth and also expand to America and the United Kingdom. Still in 2010, Iberdrola SA made a bit more than € 2,9 billion profit in Spain4.

1 Accenture, Real Substance: Sustainability at Iberdrola, 2010 2 Iberdrola S.A., General Corporate Governance Policy of Iberdrola SA, May 2011 3 Iberdrola S.A., Índices de Sostenebilidad, http://www.iberdrola.es/webibd/corporativa/iberdrola?IDPAG=ESWEBRESINDSOS&codCache=13078097917621236, retrieved 28.04.2011 4 Iberdrola S.A., Cuentas consolidadas, 2010

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The particular situation in Spain Since 1997 and the adoption of a law (54/1997) liberalising the production and the commercialisation of electricity in Spain, the Government had established the electricity price, the price to be paid by the end customer was lower than the cost supported by the energy companies5. This led to a € 14 billion deficit, mainly supported by Endesa, Iberdrola and Gas Natural Fenosa 6 (estimate November 2010). The energy companies themselves had to contract loans to face this situation.

The market deregulation started in 2009, and will lead to the progressive increase of electricity prices. However, the Spanish Government kept some areas regulated to protect small customers: The so-called “trifa de ultimo recurso” (T.U.R) – last resort rate (this will be developed more in detail further in this part). Within this tariff, the “Bono Social” frozen tariff was created to protect the most vulnerable citizens. The bono social was agreed between the government, and the energy companies and it is valid until 2013. This social measure is a new source of deficit for the energy companies. This is particularly true for Iberdrola since with 1,26 million “Bono social” contracts7, the group has the highest number of customers under this measure.

A source of losses as a possible business opportunity? How could this Bono social account become balanced if not positive? Energy efficiency is certainly part of the solutions, and a sustainable one! Sustainability is based on three pillars: the economic, the social and the environmental ones. By addressing this issue, all three dimensions can be tackled. First of all from an economic point of view, if these customers could save energy and decrease their electricity bills, this would reduce the deficit the company has for this segment. The Spanish State and the Spanish tax payers too could fully benefit of improvements in this field as the debt keeps increasing, especially with the financial crisis.

5 Iberdrola S.A., Cuentas consolidadas, 2010 6Expansion.com, La luz costará 6.000 millones extra por deudas con Endesa, Iberdrola y Fenosa, http://www.expansion.com/2010/11/22/empresas/energia/1290464793.html, retrieved 05.05.2011 7Fotocasa.es, Iberdrola y Endesa superan por separado el millón de clientes con bono social, http://hogar.fotocasa.es/suministros/luz/iberdrola-y-endesa-superan-por-separado-el-millon-de-clientes-con-bono- social__hogar_4903.aspx, retrieved 07.05.2011

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From a social point of view, taking into account that the Bono Social measure will only be valid until the end of 2013 and that there might be a government change for the next elections in 2012, it would be appropriate if those customers could be helped to decrease their consumption. This would prevent them of maybe accumulating debts once this protection measure disappears. Letting the costumers benefit from energy efficiency measures will make them less dependent from the electricity companies.

Finally, from an environmental point of view, better energy efficiency means less energy wasted, and as a matter of fact less CO2 released in the atmosphere. This is a global concern and this is also part of Spain’s national plan in the framework of its commitment to international treaties (e.g. 20-20-20 targets). The fight against climate change is a key issue, and the power sector being one of the main contributors to C02 emissions, plays a very important role in the approach to decrease emissions. As sustainability is a key issue to Iberdrola, focusing on this specific group is in line with the company’s statements. Besides, it can give a long-term added value for society as a whole. To come up with viable alternatives, we will first present the context and analyse the Bono social beneficiaries’ profiles. We will then check related initiatives by energy companies abroad to offer duplicable solutions for Iberdrola Bono Social customers.

1. Evolution of the Spanish electricity market 1.1 The last resort rate (TUR) 1.1.1 Legal framework for a liberalised electricity market.

In 1996, the European Union started shaping the internal electricity market by adopting the 96/92/CE Directive. Seven years later on June 26, 2003, the European Parliament and the Council repealed that first directive and adopted the 2003/54/CE directive. The latter aimed at liberalising the energy markets. The fostered competition was thought to offer European citizens better efficiency, better prices, more alternatives and also a better quality of service.8.

8 Journal Officiel de l’Union Européenne, Directive 2003/54/CE du Parlement Européen et du Conseil, 26 juin 2003

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On July 4, 2007, Spain transposed the Directive into its national system with the 17/2007 law, thus modifying the 54/1997 law (1997/11/27). The liberalisation of the Spanish electricity market was then planned to start July 1, 2009. However, the liberalisation was limited to some extent since as the possibility given in the European Directive, the national law created a last resort rate (“tarifa de último recurso”, TUR) applicable to domestic customers. This was established in order to offer some kind of protection to domestic customers. Finally on April 3, 2009, the Real Decreto 485/2009 defined an action plan for the liberalisation of the Spanish electricity market and as well as the application of the last resort rate.

Figure 1: Evolution of the legal framework in the electricity sector

1.1.2 Nominated energy operators in the market (CUR) On July 1, 2009, the Spanish electricity market consisted in the coexistence of a liberalised part market and a regulated one. To operate the TUR the Spanish Parliament nominated 5 energy companies (“comercializadores de último recurso”, CUR) in the article 2 of the Royal decree 485/20099: – Endesa Energía XXI, S. L. Iberdrola Comercialización de Último Recurso, S. A. U. – Unión Fenosa Metra, S.L. – Hidrocantabrico Energía Último Recurso, S. A. U. – E.ON Comercializadora de Último Recurso, S. L.

The revision of the nominated companies takes place at least every 4 years10. Those 5 companies are the main electricity companies in Spain and as the following map clearly shows, Iberdrola and Endesa are the two most important ones when it comes to the representation in the regions. This distribution is due to the historic

9 Ministerio de Industria, Turismo y Comercio, Boletín Oficial del Estado, Real Decreto 485/2009, 04.04.2009 10 Ministerio de Industria, Turismo y Comercio, Boletín Oficial del Estado, Real Decreto 485/2009, 04.04.2009 124 evolution and where each company started. It is important to highlight the lack of competition existent in this sector due to high barriers of entry and an overcapacity of the Spanish electricity system.

Figure 2: Map of the geographical distribution of electricity companies in Spain, Source: Groupe Cahors

Actually, Iberdrola is the main provider in 25 of the 50 provinces, followed by Endesa, which is present in 17 provinces (including the islands).

1.1.3 Prices

Comercial Production Cost Access Tax Cost

Figure 3: Composition of the TUR Price, Source: Iberdrola, La regulación del suministro de último recurso y del Bono Social

The TUR Price is determined by three factors: the production cost which implies the cost of producing the electricity, the access tax for the distribution system and the commercial cost of the offer. We will now proceed to explain the breakdown factors of the commercial cost.

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Figure 4: Composition of the comercial energy cost, Source: Comisión Nacional de Energía, Informe “Comercialización del último recurso 2010”

The price of the TUR is established depending on the type of offer you apply under. There are two available offers; one makes a differentiation between the price of energy during the day and the night, and the other one makes no discrimination (uses the day prices only).

As we can see the price in such tariff is defined by taking into account different factors: the estimated cost of energy, the risk it undertakes, the losses, adjustment to the demand and the cost of balancing the demand (related to the adjustment of the demand). These factors are defined by the government and are fixed for a certain time period. Whereas commercial offers have pricing methods which are determined and calculated by the companies.

If you apply for the TUR with changes between day and night your final price is lower than that without time change. This is due to the decrease in price during the night as well as a decrease of the adjustment to the demand; this is all due to the general decrease in demand experienced during night.

Therefore the price of the TUR is said to be stable to certain extent thanks to the factors that define it.

However due to the financial crisis and the unavoidable increase in the price of energy production as a result of an increase in the price of raw materials, the TUR has experienced a 2% rise in 2009. This rise of the price is said to be produced by the increase in prices of raw materials, changes in consumers’ habits (between peak and base hours) and the cost that involves putting into place a directive to regulate the inclusion of the consumption of the national coal in the country.

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According to the Ministry of Industry electricity bills rose 9.8% in 200911 for households and Small and Medium Enterprises (SMEs) under the TUR, affecting 17 million people for electricity and 7 million for gas12. This increase in the bills is due to the lack of a well structured system that has accumulated since the year 2000 a deficit of € 20.000 million (the equivalent to 2 points of GDP)13. This 9.8% raise means that an average electricity consumer with an installation of 5 kW, will have to pay € 4,20 more each month.

1.1.4 Comparison in bill pricing for the TUR and the Bono Social

We have used from the National Commission of Energy an application to calculate the total price of the electricity bill14 under the TUR tariff and the social allowance. However before doing so we have established what are the main features a bill takes in account, the power charge and the energy charge. The main difference between them is that the power charge is the price you pay for the contracted power you have and the energy charge is the price you pay for your electricity consumption. For the TUR and the Social Allowance the price taken in account is different. The following table shows the prices for each.

Bono Social Power charge €/kW Energy charge €/kWh Less 3kw 0 0.112 Less than 1kw 0.40 0.089 Between 1kw/10kw 1.64 0.1124

Table 1: Bono Social pricing, Source: Comisión Nacional de Energía, Comparador de ofertas de energía

So as we can see only the social allowance that have less than 3kW installed will pay zero euro for the power charge and a higher price for the energy charge. The TUR tariff price is fixed for all clients under 10kW. The prices are as the following table shows.

11 Prensalibre.com, Tarifa social de electricidad sube entre 25-30 prociento a finales de Mayo 2010, http://www.prensalibre.com/economia/Tarifa-social-ciento-partir-mayo_0_252574937.html?commentsPage=1, retrieved 07/05/2011 12 Prensalibre.com, Tarifa social de electricidad sube entre 25-30 prociento a finales de Mayo 2010, http://www.prensalibre.com/economia/Tarifa-social-ciento-partir-mayo_0_252574937.html?commentsPage=1, retrieved 07/05/2011 13Vidasostenible.org, Precios de la tarifa eléctrica, http://www.vidasostenible.org/observatorio/f2_final.asp?idinforme=1391, retrieved 14.05.2011 14 Comisión Nacional de Energía, Comparador de ofertas de energía, http://www.comparador.cne.es/comparador/comp2.cfm, retrieved 27.05.2011 127

TUR Power charge €/kW Energy charge €/kWh Below 10kw 1.719 0.117

Table 2: TUR tariff pricing, Source: Endesa online

Besides these two different pricing rates for the power and energy consumption we have the electric tax 5.117% and the VAT 18% to add to the bill for both cases. In order to illustrate how this works we have used the simulator to compare the difference in price for the same amount of power contracted 5kW and the same amount of energy consumption 5000kWh. All data is given in euros a year.

TUR Bono Social €/year €/year

Power charge 103.17 98.54 Energy consumption 700.35 545.53 Electric tax 41.08 32.93 total 844.59 677 IVA 18% 152.03 121.86 total 996.62 798.86

Table 3: Comparison of Bono Social and TUR tariffs

As we can see the main difference between both tariffs is the price of the power charge and the energy consumption. As we have seen before the prices are fixed for the TUR tariff and for the bono social it corresponds to the clients between 1 and 10kW. Besides this difference, the social allowance conditions establish that the first 12,5 kWh are free. Both clients consume the same but the difference is of € 197,76 a year. Therefore this is the amount that a client under the Bono Social would save due to the fixed price the bono social offers. Under the TUR the price established may change due to the conditions of the electric sector. Not as much as for the liberalized market but as we saw before it may vary according to the different components of its pricing. Therefore the social tariff fixes a price in order for its clients to be able to pay for an electric bill that should not change if they consume the same each month.

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1.1.5 Customers eligible for the TUR: low voltage electricity customers

The customers benefiting from the TUR are those having a contract for less than 10 KW with one of the 5 energy companies mentioned above (CUR)15 within the regulated market.

The low-voltage clients are mainly domestic customers and small businesses. Besides, they have not applied for any commercial offer.

Figure 5: Spanish electricity market, own creation

In April 2011, 20 million clients benefited from the last resort rate. Within those, 17 millions clients were in the TUR only and 3 other millions benefited from the “Bono social” social tariff16.

1.2 The “Bono social” 1.2.1 The creation of the bono social freezing electricity prices

This social tariff was defined by the article 2 of the Real Decreto 6/2009 and came into force on July 1, 2009 with the TUR. This social allowance is financed by several companies from the Spanish electricity sector. The contribution fee and the relation between the differences between the different companies is established in the Reall Decreto 6/2009.

15 Ministerio de Industria, Turismo y Comercio, Tarifa de último recurso, La liberación del sistema regulado al sistema liberalizado, http://www.mityc.es/energia/Tur/Queestur/Paginas/LiberacionSistemaRegulado.aspx, retrieved 07.05.2011 16 iultimasnoticias.com, La tarifa de gas natural sube un 4,1%, mientras la luz no varía, http://www.iultimasnoticias.com/la-tarifa-de-gas-natural-sube-un-41-mientras-la-luz-no-varia/, retrieved 07.05.2011 129

Company Tax paid %

Figure 6: Social tax paid by energy companies to the Spanish government, Source: Energia y Sociedad : « el bono social, financing »

Initially, this social measure was to end at the beginning of 2013. In December 2010, the Government extended it until December 31, 2013 by the Real Decreto 14/201017, thus freezing the electricity prices for one more year for the targeted population.

1.2.2 The beneficiaries of the Bono Social

The Bono social is aimed at the customers (domestic customers) being part of the TUR and is applicable to the contract for the main residence only. All customers with contracts for less than 3 KW are automatically included in this system.

As this measure was supposed to help the less well-off, the Spanish Government defined 4 categories of customers eligible for the bono social based on their income18:

17Ministerio de Industria, Turismo y Comercio, Boletín Oficial del Estado, Real Decreto 14/2010, 24.12.2011 18 Comisión Nacional de Energía, Bono/Tarifa Social, http://www.cne.es/cne/contenido.jsp?id_nodo=407&&&keyword=&auditoria=F, retrieved 05.05.2011 130

- households with a contract for less than 3 KW (automatically included) - Social Security pensioners who are aged 60 or older receiving the minimum amount pensions - large families (defined below) - households in which all members are unemployed.

This allowance is valid for two years and has to be renewed afterwards. A customer who would no longer fulfill the requirements is supposed to inform the electricity company so that the latter can offer another tariff. The law establishes that if someone is known to fail the requirements of the allowance, the company would rebill the total amount from the day of the breach and will be applied a surcharge of 10% to that price. When the Bono Social was created, the Government expected 5 million customers to successfully apply for it19. Over the last 1,5 years, the number of registered beneficiaries has proved to be rather stable around 2,9 million customers, which makes about 11,3% of the TUR customers20. The different categories are represented as follows21:

Figure 7: Bono Social beneficiaries, own creation

19 Os Cuento, Como acogerse al bono social electrico, http://oscuento.wordpress.com/2009/06/30/como-acogerse-al- bono-social-electrico/, 05.05.2010 20 lagacetaeconomica.es, Las primas al régimen especial aumentarán un 2,2% en 2011, según la CNE, http://almeria.lagacetaeconomica.es/2011/05/04/las-primas-al-regimen-especial-aumentaran-un-22-en-2011-segun-la- cne/, retrieved 10.05.2011 21 http://almeria.lagacetaeconomica.es/2011/05/04/las-primas-al-regimen-especial-aumentaran-un-22-en-2011-segun- la-cne/ 131

This division is valid for the whole of Spain. However, electricity companies do not disclose their client division data, but only the total number of Bono Social customers. With 1,26 million Bono social customers, Iberdrola is most important frozen tariff electricity provider, followed by Endesa (1,14 million) and GN-Fenosa (512.000 customers).

These figures are very relevant given that Endesa is the company with the biggest low-voltage power share of the market, and the one that has the biggest contribution fee to the finance of the Bono Social. Iberdrola, besides remaining in second position for these two factors mentioned, has 0,12 million social allowance clients more than Endesa.

1.3 Who the beneficiaries are

In this section we will cover a deeper analysis on who are the two main groups of Bono Social beneficiaries consuming less than 10 kW in order to clearly identify their needs and circumstances when offering eco-efficient solutions for them.

1.3.1 Clients contracting less than 3 KW

Within the four categories of clients eligible for this special tariff, low-voltage clients are the only ones that do not have to go through a bureaucratic procedure. Immediately once the social tariff was put in place, people covering these characteristics benefited from it.

A typical household with 3kW of installed capacity consists in the usual main 4 appliances (fridge, television, washing-machine, cooker) and light22. To give an impression on typical households we will provide some examples in the following paragraph.

Companies’ simulators establish that for the use of lights, a fridge, a heater, a washing machine and a vacuum cleaner the minimum recommended power is of 4,6 kW. If you decide to as well include a dishwasher, an electric oven, a dryer and other

22 Fotocasa Decoración y Reformas 2010 http://hogar.fotocasa.es/suministros/luz/como-calcular-la-potencia- electrica__hogar_6669.aspx retrieved 09/05/2011 132 small appliances your power should be around 7 kW. Electric heating and air conditioning would require an installed capacity of 9 kW23.

However, the low electricity consumption is the only common characteristic to all clients in this segment. Although this group represents 84% of the 3 million people benefiting from the Bono Social and is as such an important group to tackle, it is also a very heterogeneous group. Therefore, it is also difficult to plan very specific actions.

Figure 8: Low-voltage Bono Social customers, own creation

According to the Instituto de Ingenieros de Barcelona 82% of the total Spanish homes have more than 3kW of power24. This leaves only 18% of the total homes in Spain up for the Bono Social.

23Fotocasa, Decoración y Reformas. 2010 http://hogar.fotocasa.es/suministros/luz/como-calcular-la-potencia- electrica__hogar_6669.aspx, retrieved 09/05/2011 24 Economia La opinion de la coruña, 06/06/2006 133

Figure 9: Domestic equipment in Spanish homes, Source: Ministerio de Indutria, Turismo y Comercio

This data is relevant as to demonstrate that this reduced group of people, taking into account that above 90% of families have a fridge, a washing machine and TV. Therefore those homes under 3 kW of capacity will probably have a television and a washing machine.

This is relevant to have in mind in order to offer recommendations to this group towards energy efficiency. Homes with 2 major appliances (television and washing machine), a part from the house lighting. The majority of them with access to at least one digital service.

1.3.2 Pensioners

This segment with 11% currently represents the second most important group within the Bono social system. Taking into account that those are minimum amount pensioners, it is in the interest of both Iberdrola and the pensioners to find a way to help those customers reducing their consumption. For Iberdrola, Energy efficiency measures will increase profitability, at the same time improving the environmental impact. For those pensioners, the reduction of their bill will help them from a financial and social point of view. Furthermore, from a demographic point of view, with life expectancy increasing and baby-boomer generation at retirement age, this group is growing fast and is

134 definitely meant to be one of the most important customer groups for Iberdrola in the future. With the current problems around pension financing, the sustainability of the system is no longer ensured. Therefore, addressing the electricity consumption issue for this specific population is a real challenge for all protagonists. Acquiring expertise in that field now will definitely be an advantage in the decades to come. We will first deal with the conditions for pensioners to benefit from the Bono social electricity initiative before learning more in detail about who the pensioners are.

Which pensioners are eligible?25

To define which pensioners are eligible for the Bono social tariff, two main criteria have been taken into account: the age and the pensioner’s status, which is closely linked to his economic resources.

The age: being 60 and older In Spain, the legal age for retirement is 65 years. By law, workers can start retiring from 60 on in specific situations and with specific conditions26. It is also important to mention that some pensioners get a pension according to their situation, like it is the case for widows for instance. In that case, the person receiving the pension is not the one who paid the contributions. Setting the age at 60 and also taking the status of the person into account enable to target the most vulnerable people more efficiently.

The pensioner’s status and resources Social security status and personal situation define a pensioner’s economic resources. This is why those parameters were taken into account when creating the Bono social allowance. Furthermore, in the Spanish context, another dimension has to be considered. The beneficiaries of two different pension schemes are entitled to benefit of the Bono social electricity measure: pensioners being part of the current Social Security pensioner scheme and those who belong to the former pension scheme.

25 Iberdrola España, Social Allowance for Deprived Customers 2011 https://www.iberdrola.es/webibd/corporativa/iberdrola?cambioIdioma=ESWEBCLIHOGELESUMSBS, retrieved 08/06/2011 26 Ministerio de Trabajo e Inmigración. Seguridad Social 2010 http://www.seg- social.es/Internet_1/Trabajadores/PrestacionesPension10935/Jubilacion/RegimenGeneral/Jubilacionordinaria/Requisito s/index.htm retrieved 03/05/2011 135

Pensioners part of the residual pension scheme SOVI (until 1967) 27

Pensioners are classified according to three criteria: old age, disability and widowhood. Apart from the widowhood situation, one must have contributed 1800 days to the Compulsory Elderly and Disability Insurance before January 1, 1967 to receive a SOVI pension. This corresponds to approximately five years. To simplify the picture, SOVI pensions are mostly incompatible with any other grant or pension from the Social Security, except for widows. Since 2005, widows can receive another pension, as long as the total amount received per month does not double the SOVI pension. Those pensions are very low. After the last revaluation in January 2011, a pensioner receives € 5383,- a year split into 14 payments of € 384,50 – the equivalent of € 448,58 on a 12 month basis (Annex 30). This is the reason why SOVI pensioners are part of the Bono social without any exceptions.

Social Security pensioners receiving minimum amounts

Contrary to the SOVI scheme, not all pensioners within the current Social Security pension scheme are eligible for the Bono social. Only beneficiaries of the minimum amounts for old age, permanent disability or widowhood can receive this social allowance. Their personal situation is also taken into account: only pensioners with dependent spouses or those living alone can be eligible, since this naturally has an impact on their income. Considering all those parameters, minimum amount pensioners get pensions between € 562,50 and € 910,- a month for a single person and € 695,40 and € 1113,- a month for a pensioner with a dependent spouse28 (Annex 31). Here again, pensions are paid over 14 months.

27Ministerio de Trabajo e Inmigración. Seguridad Social 2010 http://www.seg- social.es/Internet_6/Trabajadores/PrestacionesPension10935/PensionesdelSeguroO10970/index.ht retrived 03/05/2011 28 Ministerio de Trabajo e Inmigración: Seguridad Social 2007 http://www.seg- social.es/Internet_6/Pensionistas/Revalorizacion/Cuantiasminimas2007/index.htm retrieved 08/05/2011 136

Figure 9: Conditions for pensioners to benefit from the Bono Social, own creation

It is also important to mention that to be entitled to receive these minimum amount pensions, pensioners shall not exceed € 6.923,90 for a single person and € 8.076,80 for a pensioner with a dependent spouse of extra incomes.

Pensioners: main charateristics

To be able to come up with value-adding solutions in the following chapter, it is necessary to better apprehend the reality of Spanish pensioners. Unless specifically mentioned, the information developed below is from a report published in March 2008 by the Ministry of Labour and Social aid about the way pensioners manage their incomes and charges29.

Are Spanish pensioners really poorer than the average European pensioners? Widespread ownership, the Spanish particularity

In 2006, Eurostat published statistics according to which 22% of the Spaniards older than 65 were considered to be poor. This was 3 points higher than the 19% European average. As a matter of fact, the Bono Social beneficiaries get low pensions as mentioned above. However, other parameters are to be taken into account when analysing Spain. Indeed, contrary to what can be observed in other countries where renting is very common, housing ownership is a really widespread practice in Spain: in 2010, 83% of pensioners were reported to own the place where they live30.

29 Comas Arnau, Ministerio de Trabajo y Asuntos Sociales, Gestión de los Ingresos y los Gastos de los Pensionistas Españoles 2005 30Ministerio de Sanidad y Politica Social. Encuesta a Mayores 2010 137

This is definitely a particularity of the Spanish market which has an impact on the available revenues of pensioners. Actually, it is estimated that the costs they would have to bear for renting a flat or a house would be higher than the pensions they receive. This point is particularly interesting for Iberdrola. Indeed, most of the Bono Social pensioners are likely to have some money left to invest in energy efficiency measures allowing savings on their bills. When designing our new business model, we can take those potentially available resources into account: charging a low amount to implement some measures. (Unfortunately, no specific information could be found about the Bono Social beneficiaries. We will assume that this trend can be applied in the same proportion to those pensioners too)

Other sources of income: an unexpected spectrum

If they constitute the main source of income, pensions are not the only source of income.

Depending on the pensioners’ age – mainly below 70-75, some financial assets may be a source of extra revenues.

There are also some intangible sources of income which cannot really be quantified because they are not declared. For example, it is a common practice to offer some rooms for rent. With the improvement of health, pensioners (mainly the younger ones) can also provide services for money to their neighbours and friends. The importance of a parallel economy must be taken into account when screening the sources of income and the possible available revenues of this population.

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Figure 10: Pensioners’ resources, own creation

Consumption patterns

Importance of the historical background on mentality: different drivers for purchasing

Two main groups of consumers are identified within the elderly people: those younger than 80 and those older. This is linked to the different experiences done by those groups and the development steps of the country.

Older than 80: saving as a result of harsh times

The oldest pensioners lived the war and post-war periods, which were austerity times. There were only limited goods available. They then started working before 1960. They could hardly enjoy the benefits of the Spanish economic development taking place in the 1980s: they used to work hard, had low incomes and had to save money all their lives. As a result, those pensioners rather adopt a rational attitude toward what they consume. Desiring a product is not a good enough reason to buy it, need is the main driver for purchasing. Therefore, we can assume that the appliances they own are rather energy inefficient ones since the latter will only be changed once they are broken.

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However, concerning energy and electricity in particular, these older people tend to focus more on saving, being aware that resources should not be wasted. They are sensitive to arguments in favour of sustainable development and against pollution. This is definitely a point on which to focus to make more energy efficient appliances enter those households.

Below 80: consumption upon desire

The youngest pensioners, those aged between 60 and 75-80 have another perception of consumption. They lived different times and could experience the emergence of the Spanish middle-class. With it, they could benefit from the country’s economic growth in the 1980s and the mass-consumption society, consumption being perceived as the motor for more economic growth. Those consumers are considering their needs to buy a product, but at least as important is their desire to get the product. This behaviour, if it is not necessarily the most sensible from an economic point of view, could turn out to be an advantage if willing to do some changes in the households. Indeed, new appliances mean more comfort and innovation. As those customers are more likely to be receptive to such arguments, this should make energy efficiency reforms easier to spread and implement.

Also, related to consumption in general and to electricity consumption in particular, the possible inclusion of those younger pensioners as Bono social beneficiaries could have an impact on both sustainability and profitability for the energy company. Quality of life is one of the variables which do really matter to them: they tend to consume more and to care less for resource scarcity than the previous group.

Also, with life expectancy increasing, those beneficiaries will be customers of energy companies for approximately 10 to 15 years. Therefore, it is important for Iberdrola as well as for themselves to find a way to manage their consumption in one way or another: the Bono social measure may come to an end in 2014 and they would then have to pay the normal price of electricity –. At this moment, either they will keep on consuming and will not be able to pay or they will have to reduce their comfort. This is why it is all the most crucial to focus on this group since their impact is a long-term one.

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Purchasing priorities and attitudes toward new products

As it is easily understandable, price remains the most important driver when making a purchasing decision, above all for the oldest pensioners who also happen to be the poorest ones. Generally speaking, according to the Insituto Nacional del Consumo again, a majority of pensioners looks for discounts and special offers (44% always do and only 21% never do), which corroborates the fact that price is a central element in their decision-making process.

What is also interesting is that after the quality of food, the second point pensioners consider as a need are electro domestic appliances. Therefore, this should definitely a need to take into account when developing recommendations to improve Iberdrola’s figure while “greening” consumers.

Besides, Iberdrola should adopt a very proactive attitude when it comes to giving information, all the more as elderly people tend to distrust what they can perceive as advertising: they usually do not ask for information (only 38% of them declare to always ask for details about the products or services they want to buy). There again, the difference is done between younger and older pensioners, a decreasing trend being observed for pensioners older than 80.

However, it is crucial to know more about the personal situation of customers since it has been observed that pensioners living alone tend to have a defensive attitude toward advertising for instance. Also, they are usually not keen on making decisions related to innovations. The situation is slightly different for pensioners living with younger people. In the proposal to improve their energy situation as well as Iberdrola’s financial situation, it will be essential to find a way to build up a relationship based on trust. This will be the key to have a chance to make the Bono Social pensioners willing to understand what improvements possible changes in their homes could bring in their bills and environment.

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1.3.3 Focus on two out of four beneficiary groups for better results

According to the previous characteristics of each of the groups and their projection in the future, we have decided to focus only on those two groups. Power less than 3kW and pensioners are the two major components of the Bono Social, furthermore their future projection is stable.

However, the situation is different for large families and the unemployed. Indeed, the definition of a large family according to the Spanish law (40/2003 law of November 2003) takes a greater complexity into account than just the number of children, which can vary from two to three and more depending on the household constellation. Also, the fecundity rate has been decreasing sharply over the last decades, so that the real large families may not be that numerous anymore. Above all, the children of those families are getting adults, so that implementing measures would be difficult and would be an investment without any expected return.

Concerning the unemployed, if the unemployment rate stays stable or even increases, there is some movement among the people behind the rate. Actually, being unemployed is supposed to be a short-term situation, a matter of months, or of one or two years in the worse case. Also, for the Bono social, all family members in working age must be unemployed to benefit from the measure. The probability is rather low that this happens in the long-term. As this population is not a stable one either for the reasons mentioned, no in depth work can be carried out to improve energy efficiency, this is why it will not be part of this analysis.

Now that we know who the beneficiaries are and the characteristics we shall keep in mind to reach better results in term of energy efficiency, we will present the new business opportunity we could build up on what had been a loss for Iberdrola so far. This intends to offer a three tier solution: making Iberdrola profitable on a deficit segment, making customers win in terms of money and comfort (thus preserving Iberdrola’s quality brand) and having a positive impact on the environment by reducing CO2 emissions.

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2. Energy efficiency in the national policy and energy sector contexts

After having been enlarged by the current left-wing government, the social allowance will officially ends in 2014. The change of government approaching Spain increases the possibilities of definitive extinction of such an allowance.

Therefore these 2.9 million households in the whole of Spain will see their electricity bills increase and might not be able to afford electricity the way they do now. Furthermore, if the government also suppresses the TUR tariff, not only will they not have access to a regulated market, but they will have to switch to the commercial offers. Without the government and therefore public institutions’ support, these nearly 3 million families may have to face difficulties in paying their bills to the energy companies, which might turn out into debts for the most vulnerable of them.

One solution to ensure that the Bono Social beneficiaries will not have to possibly resort to debt to maintain the same level of comfort and to guarantee the payment of the consumed electricity to the energy company, is to invest energy efficiency. Energy efficiency is part of the Spanish government’s strategy and taking into account the creation by Iberdrola in May 2010 of Iberdrola Servicios Energeticos SA to deal with this issue, we can assume that both the State and the company share the same interest in working on that field.

We will now briefly go through Spain’s national strategy to understand to which framework the different actors have to orientate themselves. Knowing that, we will then check what energy efficiency measures Spanish energy companies offer to consumers. We will first look at Iberdrola and compare it with its two main competitors which are Endesa and Gas-Natural Fenosa.

2.1 Spain’s action plan and strategy toward sustainability31

The Spanish national strategy for energy saving and energy efficiency (2005-2007) was first approved on November 28, 2003. It aims at moving toward a more

31 Ministerio de Industria, Turismo y Fomento. Instituto para la diversificación y Ahorro de Energía 2008 143 sustainable system and is based on three main objectives: security of supply, environmental protection and country competitiveness.

To achieve those goals and to decrease its CO2 emissions by 188,5 Mt between 2008 and 2012 (as per the 2008-2012 PAE4 action plan), Spain identified which sectors were responsible for the most emissions. As a result, actions were designed to improve energy efficiency and tackle CO2 emissions in seven sectors, among those the energy sector. Even more relevant in the framework of this analysis, the potential energy and CO2 emission savings planned for electro domestic appliances and buildings. The following table clearly shows the economic impact of reductions in energy intensity and CO2 emissions - since the Kyoto Protocol came into force in 2005, CO2 emissions are traded between countries and have a market value to electricity companies in Spain by the EU ETS.

Table 3: Accumulative economic benefits of energy efficiency actions, Source: Ministerio de Industria, Turismo y Comercio, (in million Euros)

In the framework of this analysis on energy efficiency applied to the Bono Social beneficiaries, two pillars of the strategy are particularly relevant because they address private persons: first, the action plan related to electro domestic equipment and secondly, the one linked to buildings. Those two areas of action are also the ones receiving the most public funds (56,5%) to reach the national target as represented on the next graph:

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Figure 11: Original analysis on distribution of public funds within the saving and energy efficiency strategy, Source: Ministerio de Industria, Turismo y Comercio

The strategy in these two areas is implemented through two main plans: the Plan Vivienda (housing plan) and the plan Renove de Electrodomésticos (renewal of electro domestic appliances), both managed by the autonomous communities. The focus on appliances via a special plan is particularly interesting. Actually, appliances such as a fridge for instance can highly contribute to energy savings for an affordable investment by private persons. The same principle of light investment for energy efficiency can be found concerning the lighting in the Plan Vivienda. Those two examples show that at a national strategy level, all light to implement measures are also pushed forwards to reach the target: the easiest, the better. This is the basic principle we will try to keep in mind to formulate our recommendations toward energy efficiency for the Bono Social beneficiaries and Iberdrola.

2.2 The energy sector and energy efficiency: a very limited offer

We already know who the Bono Social users are in detail and the dilemma they imply for Iberdrola. In order to formulate pertinent recommendations, the next step is to determine what Iberdrola is doing regarding eco-efficiency for households and to check what its main competitors offer.

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2.2.1 Iberdrola Servicios Energéticos: Energy efficiency offers for the liberalised market

Iberdrola’s strategy has been focused on sustainability for years, developing different key indicators to measure its impact internally. In our specific case, we will focus on energy efficiency on the demand side since this is the tool with which we believe Iberdrola can approach the Bono social users, improving both the company’s economic figures and the beneficiaries’ situation in the long-term.

Iberdrola’s commitment to energy efficiency

The company collaborates with the Instituto para la Diversificación y Ahorro de la Energía (IDEA) on different energy related campaigns, leads various commercial actions and participates to sector events.

Iberdrola also invests in several projects that help in the research and development of programs addressing energy efficiency.

Getting deeper into households, one of the main projects in which Iberdrola enrolled itself was the Active Demand Management (GAD) project32, which aims at optimising electricity consumption for low- and medium-voltage customers. With the development of the necessary technology to provide real-time information to consumers they wanted to help them taking decisions on their consumption, depending on the cost and environmental impact. They also aim at optimising the consumption management of home appliances and other electrical appliances with the submission of automatic signals in the home to achieve optimum levels.

The GAD project, among other environmental and social benefits, contributes to reducing emissions to the atmosphere, facilitating the integration of distributed generation (among which we can highlight renewable energy sources) and improving consumption behaviours and balancing out fluctuation in power demand.

Iberdrola lead the project consortium with 15 other Spanish companies and 14 research centres from 2007 to 2010.

32Ministerio de Ciencia e Innovación, Gestión Activa de la Demanda y Consumo Eficiente 2007-2010 http://www.proyectogad.es/, retrieved 04/06/2011 146

This € 23,3 million project received funding from the Ministry of Industry, Tourism and Commerce. This clearly shows the interest of the Spanish government in finding solutions to improve energy efficiency, thus strengthening its commitment to the European targets for 2020. From Iberdrola’s part, this is an investment to make energy efficiency one of the pillars of sustainability in the Spanish society. This is for the common good and this is also one of the reasons why we thought of addressing the Bono Social customer issue via the improvement of energy efficiency.

Specific products and services for the liberalised market

In order to address the demand side, Iberdrola designed a new business. IBERDROLA Servicios Energéticos, S.A. was launched in 2010 to promote energy efficiency and related savings for homes, companies and government administrations.

In order to do this, they offer products or services in two main areas. First of all, directly concerning energy efficiency, Iberdrola offers a wide range of products allowing to reduce the electricity consumption. This includes solutions such as luminosity regulators or efficient motors for instance. It is interesting to notice that they also offer services such as energy audits or energy managers to help clients toward more efficiency. Being one of the leaders in renewable energies, the company also offers its expertise through facilities like photovoltaic solar energy or thermal solar energy installation, together with the related services.

These products and services are available for the liberalised market. Therefore only clients under a commercial offer can access and benefit from them. It is a pity that the clients under the regulated market, and a fortiori the Bono Social clients, cannot benefit from such solutions. The TUR and Bono Social clients merely have access to advices on the company’s webpage.

Iberdrola’s webpage as a platform for tips on energy efficiency

Through this channel, Iberdrola mainly gives tips to reduce energy consumption, also trying to raise awareness among its clients. Customers can find information about

147 how to use more efficiently their appliances, about what to check when buying new ones or how to respect more the environment on their day to day life. As only technological input on Iberdrola’s part, a calculator application permits them to calculate their C02 emissions.

However, this tool is not necessarily the most efficient one to have a real impact on behaviours. First of all, it implies that people have a computer and an internet access. Most of the people do have that, but maybe that the Bono Social pensioners do not for instance, and they could be the ones benefiting the most of a reduction in their electricity bill. Besides, for this to be an agent of change, it requires that people have an interest and first go on the website. Then, browsing Iberdrola’s webpage can be a bit complicated.

Energy efficiency would help the Bono Social customers to save energy and money, which could be a significant help for some as we could see in the previous chapter. Also, this would benefit to Iberdrola, which would reduce its losses due to the regulated gap between electricity price and cost.

2.2.2. Competitors’ actions upon energy efficiency for households

To have an overview of the initiatives taken by the energy sector in Spain, it is interesting to analyse what Iberdrola’s main competitors offer to their clients. Endesa and Gas Natural-Fenosa are, with Iberdrola, the main actors in the Spanish electricity market. This is all the more important since one of the goals of any company is to be a leader in its field. By checking the undertaken actions, we will better be able to figure out how to provide the company a significant competitive advantage.

Endesa: a webpage on energy efficiency, but no specific advice on electro domestic appliances

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Endesa as the main competitor of Iberdrola has also addressed eco-efficiency as one of the main environmental issues. Therefore they equally focus on their distribution and production infrastructure, the demand side and their buildings.

Just like for Iberdrola, the services and products upon efficient lighting and renewable energies access are focused on their commercial tariff clients.

However, they go further and have a separate webpage : http://twenergy.com where they address household tips and advices in order for households to be more efficient. These tips and advices vary widely from a computer management to driving procedures in order to reduce petrol consumption. They do not address specific issues of the appliances at home or how to manage correctly and more efficiently your energy systems at home.

To sum-up, there is no real innovation on Endesa’s side compared with Iberdrola’s offers.

Gas Natural-Fenosa: a more reader-friendly webpage

Gas Natural-Fenosa practically addresses households in the same way as the other two but the main difference is that this disclosure of information on the webpage is way more attractive and explicative.

They disclose a two page document that explains what the situation is with the energy at home, what the main problems are, and what to do with the different appliances and in what percentage that will help. They also disclose different documents on environmental education towards consumption habits at home.

There again, there is no special innovation as far as energy efficiency is concerned.

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2.2.3 Spanish energy companies: basic information, but no real measures offered to clients in the regulated market

Energy companies in Spain tackle the demand side involving households by disclosing information focused mainly on new habits of consumption at home. This does not only involve changing major practises but optimising the existing ones. For example: using switch regulators for lighting or reducing the number of times the fridge opens and closes, among others.

Figure 12: Examples of advices given by the three main Spanish electricity companies, own creation

The only communication means of these three major electricity companies is through their webpage and through single advertisement campaigns done in the press or on TV. But none of them offers to the regulated tariff users a solution or a concrete help in order to make the most out of their consumption patterns.

This is definitely an opportunity Iberdrola should grasp! This area is really poorly tackled by energy companies in Spain and great impacts in terms of environmental sustainability can be achieved there. The social and economic pillars of sustainability could also be addressed: energy efficiency would help the Bono Social customers to save energy and money, which

150 could be a significant help for some as we could see in the previous chapter. Also, this would be beneficial to Iberdrola, which would reduce its losses due to the regulated gap between electricity price and cost.

This could clearly constitute a new sector where Iberdrola, through its newly created Iberdrola Servicios Energéticos, would be a pioneer and would bring into practice many of the research programs the company participates in and attract new customers. This is what we will now demonstrate through the new business opportunity we developed taking into account this very particular context.

3. Bono Social: from burden to business opportunity through energy efficiency

As we could understand along the previous chapters, there is no concrete energy efficiency measures offered by Iberdrola – or by any of its competitors in Spain – in general and also more specifically to customers belonging to the regulated tariffs, may it be the TUR or the Bono Social. Still, implementing some efficient measures in that field would allow the energy company to conciliate both profitability and sustainability.

Indeed, since those clients pay an electricity price inferior to the electricity production price, this leads to a millions euros loss burden for Iberdrola. Helping them to reduce their energy consumption would also decrease the amount of money the company has to auto finance.

The environmental impact of energy intensity has to be taken into account as well. For each kilowatt of electricity that could be saved, primary energy resources used for the production of electricity could be saved, thus reducing the supply dependency of the country. .

For all those reasons, it is important for the company to take action in the very near future! Therefore, we have developed a proactive approach linking both profitability and sustainability. The new business model we have thought of for Iberdrola and its

151 customers is inspired by the national strategy recommendations and aims at making both the company and the Bono Social beneficiaries save energy and money.

To come up with concrete proposals, we will first analyse which posts impact energy consumption the most. We will then describe our three step model toward energy efficiency before explaining how we will turn the current loss into a business opportunity for Iberdrola. We will finally evaluate the different impacts of our solution on all engaged stakeholders.

3.1 Energy consumption posts: Fridge and illumination as the biggest energy saving potentials.

As we could understand and as the summary of all the advices given by Spanish companies clearly shows, habits play an important role in energy consumption. Small changes can lead to big savings if they are integrated in the daily life. However, behavioural changes are generally the most difficult ones to achieve. This is all the more true for pensioners who have developed habits over several decades. Another parameter must be taken into account for Bono Social customers: why bother to change habits when the price paid is not that high. The efforts to change could only result in small savings and the incentive may therefore simply not be there.

This is why chose to opt for measures which do not demand any efforts and which can have a significant impact on electricity consumption, even improving customers’ comfort to some extent.

To have the greatest impact possible, it is necessary to know the main areas of electricity consumption of households.

The graph below shows the shares of the different forms of energy use in a household. We can clearly distinguish uses we could classify in two categories.

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Fig 13: Original analysis on average energy consumption, Source: IDEA

On the one hand, some uses are linked to the building, the insulation and the different installations. They are represented by heating and cooling activities, which account for 68% of the total energy consumption. (In our own analysis, we will not consider lighting as part of the building like it is the case in the Plan Vivienda. We will rather consider it as belonging to the appliances because we take into account the bulbs, and not the electric system).

On the other hand, electro domestic appliances, cookers and lighting rather belong to appliances in general. All together, they account for the left 32% of the energy consumption in an average flat or a house.

It is important to mention that although heating and cooling activities represent the biggest share, energy consumption does not necessarily mean electricity consumption. Actually, most of the houses have central heating , which works with gas or fuel. In warmer regions where heating is not really necessary, like on the

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Canary Island for instance, electric radiators are used in case of cold weather conditions, but this does not entail massive electricity consumption33. Focusing on Iberdrola, the five Autonomous communities where the company is present are rather cold in winter, with temperatures varying between 4°C in Castilla y Leon and 11°C in Valencia34. Thus, heating and cooling represent much less of the average electricity bill. And logically, appliances represent a higher share than it appears on the graph. For appliances, it is important to underline the fact that although a cooker makes up to 11% of the energy consumption, more than 56% of cookers in Spain work with gas35, which takes this appliance out of our scope for this work.

Furthermore, we made the distinction between two categories on purpose: buildings and appliances. There is the issue of ownership. . This dilemma does not exist when referring to appliances since people are usually more likely to own the furniture and appliances in the place they live in. Also, if the aim is to target the Bono Social customers in particular, focusing on energy efficiency in buildings makes it more complex. There is not one building in which only this type of customers live. Heating installations are usually common to all inhabitants of a building and getting positive results implies taking measures for all. Even though from an environmental point of view, the goal is to reduce energy intensity on a global scale, it is important to keep in mind who the target group is to come up with suitable solutions.

For all those reasons, we chose to focus on appliances. But which ones? Changing appliances definitely has a cost and as a matter of fact, it is far more expensive than modifying habits. But which cost can be bearable for Bono Social customers: the cost for one, two appliances, for all? To make our decision, we chose to analyse the electricity consumption of the basic appliances which can be found in any households. It is also interesting to underline that this is a sample of the typical appliances used by the Bono Social low-voltage customers (consumption inferior to 3 KW):

33Ministerio de Industria, Comercio y Fomento: Plan de Acción para la diversificación de Energía, 2008 34Clima de España, temperaturas de España, http://es.kyero.com/weather, data retrieved on 13/03/2011 35 Ministerio de Industria, Comercio y Fomento: Plan de Acción para la diversificación de Energía, 2008 154

Appliance kW Hours per month Television 0.07 62 Washing Machine 0.182 12 Illumination 0.72 140 Computer 0.15 28 Fridge 0.375 720

Figure 14: Total consumption per appliance and hours of use, own creation36.

Two appliances make a big difference by the KW they consume per hour as well as by the number of hours they are used: the fridge and the illumination.

Let us also remember that pensioners are not very keen on innovation. At the same time, after food, electro domestic appliances are the second most important purchases to them. Thus, making a proposal based on renewing their fridge and bulbs allows to combine technological innovation and well-known appliances: they use those devices already. This is of major importance if we want the offered measure to be successful within this segment of customers since the easier the measure will be, the easier it will be to convince them. Besides being easy to implement, it is also essential that customers get to see the results of their investments quickly: changing fridges and bulbs allows quick returns for the Bono Social beneficiaries. For Iberdrola as well, those changes will be quickly translated in an increase in profitability, which in this case also goes together with sustainability.

Before going into figures, we will now develop the idea making those potential achievements possible.

36 Consumo de Energía de Electrodomesticos 2008http://www.dforceblog.com/2008/06/08/consumo-de-energia-en-los- electrodomesticos/ retrieved on 16/05/2011

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3.2. Leading Iberdrola toward profitability and sustainability: a three step model proposal for Bono Social beneficiaries

As explained previously, we chose to focus on two target groups: the less than 3 KW customers, representing 84% of the Bono Social customers and minimum amount pensioners, representing 11% of them.

To reach those beneficiaries, get them engaged in this initiative and make them work hand in hand with Iberdrola toward energy efficiency, we have developed a model in three steps.

Figure 15: Three step business model, own creation

The first step is the contact phase. Obviously, both concerned segments being very different, it will be necessary to approach them in different ways. The second step will then focus on education and awareness-raising to engage those Bono Social customers before finally reaching the third step which is the actual renewal of appliances.

Let us first see on which assumptions we built this model!

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3.2.1 Assumptions

Assumption 1: time scope – optimal results for an implementation before 2012

For this plan to reach optimal results both for Iberdrola and the customers, the actual renewal of appliances planned in the third step should be implemented at the beginning of 2012. The reason for this is that the Bono Social will come to on December 31, 2013. The aim of this initiative is to make those customers reduce their electricity consumption not to find themselves in precarious financial situations at the end of the Bono Social, the latter should have finished paying the new appliances by the beginning of 2014. Moreover, we must keep in mind that this plan shall be attractive for them to commit to it: the monthly instalments to be paid shall be the most affordable possible so that they can benefit from the changes without having to make sacrifices.

Thus, it would be good to start the steps 1 and 2 around September 2011 to get the best results both for Iberdrola - being able to resell the electricity not consumed at the market price - and for the clients. Starting the program in autumn also leaves time to Iberdrola to negotiate appliances prices with different possible suppliers to find the best partner.

Assumption 2: Best available prices and one unique direct distributor for logistic reasons

In the framework of this proposal, we have assumed that a partnership would be done with one unique supplier – a producer - for the logistic reasons developed in the next paragraphs.

First of all, Iberdrola is a large company, which confers it the possibility to buy directly from electro appliances producers, without having to go through an intermediary. This will also allow Iberdrola to benefit from better prices to offer its Bono Social customers the best deals on the market which will help convincing them to renew their appliances.

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For the producer, this is the opportunity to gain a new client, and on top of this, one of the three main Spanish energy companies. As Iberdrola is present in 40 countries, this collaboration could also open this partner more markets than just the Spanish one. This is also a great way to do public relations since Iberdrola will communicate about this action to get positive impacts in term of image and reputation. These positive impacts will affect the collaborating brand as well. A partnership would definitely be a win-win situation for Iberdrola and its customers as well as for the appliance producer.

Also, everyday, energy efficient appliances get cheaper because of technological progress. We based ourselves on the best available prices in May 2011. In a few months, more energy efficient appliances will be available at the same price, which could make us go from a category A to a category A++ without extra cost for instance. This is why we chose to check the prices of different brands in this work: Bosch and Philips. However, when negotiating, provided that the chosen partner can offer both fridges and bulbs, Iberdrola should try to purchase both from the same producer to increase its bargaining power and get better prices for the Bono Social beneficiaries.

Assumption 3: pre-selection and a target of 10% of approached clients engaged

Before starting steps 1 and 2, it will be necessary to first select the target customers since the company has to prioritize. For the low-voltage customers, their power consumption could be an indication. We will assume that Iberdrola will first address those having a consumption at the edge of 3KW, which means those who be switched to the TUR if they consume a bit more. For the pensioners, we will assume that a preliminary phone call will help to determine the category of appliances they have so that only those with appliances of categories inferior to A can be targeted.

To monitor the implementation of this measure and take more actions if necessary, we thought an objective of 10% conversion until December 31, 2011 would be realistic.

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Assumption 4: additional costs and revenue streams for Iberdrola

For this plan to work, this first implies that Iberdrola allocates more human resources to its Iberdrola Servicios Energéticos branch. This has a cost in terms of wages, training as well as in terms of marketing to the company. We will not evaluate it in the framework of this analysis.

In the financing plan, we have focused on the electricity saved through the implementation of the energy efficiency pack and the resale of the latter on the liberalised market.

Nevertheless, some additional revenue streams can be assumed depending on the terms stipulated in the client and supplier contracts. In the optimal situation, we thought that the customer would pay the first instalment one month before having the appliance pack delivered, which also works as a guarantee for Iberdrola. As this depends on contract conditions, we have not taken it into account in our revenue forecast.

3.2.2 Three step model

Step 1 and 2: different target groups, difference approaches

The two groups we think it would be worth for Iberdrola working with toward energy efficiency are very different.

Indeed, low-voltage customers form a very heterogeneous group. The only common point they have is their electricity consumption. Still, this does not tell that much about them, apart from the fact that they do not have many appliances at home. Is this because they live in a small flat, because they cannot afford more appliances? Are they young students in a studio, older vulnerable people in a small flat, successful single professionals? This is very difficult to know. As we could not find any detailed information, we will try to reach the greatest number of customers in a general way.

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As for minimum amount pensioners, they have one main characteristic in common: from an economic point of view, they are vulnerable assets – let us remind that some of them (the SOVI pensioners) live with € 458,- a month!

We will now explain how we long to establish contact to engage with those two customer segments.

Low-voltage customers: a broader approach

For this segment, Iberdrola has to deal with a very heterogeneous population and only the electricity consumption bill could be a criteria (close to going beyond 3KW, thus changing category).

Step 1: establishing contact

We believe it is important to design actions to reach customers in a direct as well as in an indirect way.

First of all, the best way to contact them would be through the electricity bill Iberdrola sends since this mail always draws clients’ attention. Beside the amount to pay, writing the potential energy and money savings thanks to the implementation of the specially designed energy efficiency package would be a first teaser. An attached document would then explain more about this measure and give tips about energy efficiency in general. The Bono Social customers would as well have the possibility to call a free number to get more information from the Iberdrola Servicios Energéticos Team.

With the bill, the Bono Social beneficiaries would find an invitation to an event around energy efficiency initiatives. For this purpose, we would use the Iberdrola bus.

Illustration 1: The Iberdrola bus, Source: Iberdrola

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Iberdrola already reaches 14.000 persons a year with this bus going from city to city37. Using it in this framework would enable the company put forward its corporate identity and to be more flexible (no need for renting a place – subject to availability, it is only necessary to ask the City Hall services for parking permission, which is also cheaper).

Those bus events would also include exhibition and snacks (tapas) in tents outside the bus, which always works very well to foster participation.

In addition, we would also try to raise awareness among the Bono Social customers as well as the broader public through leaflets and posters, like in a doctor’s office for instance. There too, Bono Social beneficiaries could find the free phone number to contact Iberdrola.

Step 2: engaging customers by raising awareness and education

For those customers calling Iberdrola, the expertise of the sales team is crucial. It is essential that each client can clearly understand the benefits he can get by opting for the energy efficiency package. First, the sales team should underline that the client will get new energy efficient appliances at a price which is better than what the ones he or she, as a single customer could not get. Those appliances will also bring him more comfort (maybe more space in the fridge or freezer than what he currently has, brighter light with the new bulbs… etc). Then, this measure will reduce his or her electricity bill, save CO2 emissions

The Iberdrola Team should also really try to use this conversation to give tips so that people can be more aware and also understand that they could also save much money by changing a few habits.

Knowing that a client is rather unlikely to contract this offer at the first phone call, a follow-up call will be necessary to get the commitment after a few days. Should there still be some doubts, the sales person could actually invite the client in question to the closest Iberdrola bus event to his home. The client would then get a

37A.González, 2011, El autobus de Iberdrola: Campaña Sostenible en Movimientohttp://www.gasnaturalonline.es/el- autobus-de-iberdrola-campana-sostenible-en-movimiento/ , retrieved 15/05/2011 161 special invitation card which he shall present the bus team so that they can know that this person has done the extra step of calling for information, which definitely shows a strong interest.

Generally speaking, the Iberdrola bus event would enable the company to use the smart and interactive tools it has to explain people about energy efficiency. It is actually much easier to assimilate new concepts when they are communicated in play. The objective would clearly be to convince as many customers as possible. Here again, as this implies an investment, it will be important to take the customers’ contact details to do a follow-up and finally get them to commit to the measure

This would also be the opportunity for Iberdrola’s partner for appliances to show the fridges which are in the offer for instance. A great advertising tool for that brand too.

Minimum amount pensioners: added value from the contact phase beyond energy efficiency

Thinking of elderly people, every one of us thinks of how challenging daily tasks become, for people above 75.

In this model, we wanted to develop a holistic approach. Of course, it is about energy efficiency and energy is the core business of Iberdrola. Nevertheless, we think there is space to make this measure an even more comprehensive one. This is why we tried to design an initiative which could align energy efficiency and a social contribution to society.

As a matter of fact, Iberdrola can provide expertise in the energy field, but what about the knowledge about those specific customers? How to reach them? Will those pensioners let them reach them too? Contrary to the low-voltage customers, to have an impact, extra information cannot simply be sent with the bill. Indeed, as we could see in the chapter about pensioners, they seldom ask for extra information, a trend which gets stronger with the age,

162 above all over 75. Although Iberdrola offers a special deal at a discounted rate, the company would not be very likely to get feedback from its Bono Social pensioners. This is why we believe it would make sense to involve a third party which could be the link and make this action about energy efficiency have an even greater meaning to all engaged stakeholders. Doing research to find a potential partner, we discovered the existence of the Unión Democrática de los Pensionistas y Jubilados de España association, which we identified as the most suitable collaborator for this mission.

Step 1: establishing contact

Unión Democratica de los Pensionistas (UDP)38, a publicly recognised partner

The UDP is the most important Spanish confederation of elderly people. With 2300 associations at a local level as well as a net of volunteers, it is present in all regions of Spain, and a fortiori in the five autonomous communities in which Iberdrola is present.

It is also recognised to be of public utility for its actions aimed at the elderly, which underlines the key role it plays in the Spanish society.

This association organises its activities around different programs aimed at the elderly such as assistance programs, awareness-raising and group activity ones for instance.

For 2012, date at which we would recommend Iberdrola to launch this plan for pensioners in order to have an impact before the end of the Bono Social measure in 2014, the UDP has a special program in 12 points to emphasise the importance of this year which will also happen to be the European year for Active Aging.

38 Unión Democrática de Pensionistas, http://www.mayoresudp.org/portal/portada_dir/portada.aspx retrieved 18/04/2011 163

2012, the year of synergy and shared expertise for more added value

The most important point is to speak the same language and to understand the needs. The elderly people do not have the same mentality as younger people. And already between those younger than 75 and those older, there are some differences. Most of the time too, they suffer from diseases they are not aware of, as it can be the case at the beginning of the Alzheimer illness for instance, and it can therefore be very difficult to communicate with them in an effective way.

Professionals and trained volunteers in this field know how elderly people think, they can better apprehend their needs and they are more able to find the right words to reach them. This is all the more true for pensioners above 75-80. This is why a collaboration between Iberdrola and the UDP is as relevant to adopt the necessary proactive attitude so as to have a greater impact.

It is also interesting to see that for the European Year of Active Aging in 2012, the UDP has planned a 12 point program called “Doce cosas” (“twelve things”)39, four measures of which finding a particular echo in the framework of the energy efficiency initiative we have developed:

- 4. for a specific plan of housing adaptation - 8. for an easy and cheap access to new technologies - 9. for the defence of the elderly people’s rights as specific consumers - 11. for the fostering of trainings after getting retired.

Looking at those measures, we can easily understand that both Iberdrola and the UDP are going on the same path and both can benefit from the expertise of the other to reach their goals: a win-win situation.

For Iberdrola too, the crossing of its Bono Social pensioner data base with the UDP member data base would be a first step to select a first group of beneficiaries to start with. This would also be the opportunity for the UDP collaborators to get familiarised with the plan and with the Iberdrola employees while working with people they already

39 Unión Democrática de Pensionistas y Jubilados de España: Programa 12 Causas, 2011 http://www.mayoresudp.org/portal/programas_dir/main_programas.aspx?id=36 retrieved 19/04/2011 164 know in the framework of their program “Contigo en Casa” for instance (“At Home with You”).

Other pensioners could then be reached by word of mouth, whether through pensioners already benefiting from this plan or through the association volunteers. The most effective way to work then would be to concentrate efforts on one neighbourhood before starting to work with the next one, thus saving time and money. It is important to plan those actions so as to save the company’s resources to maximise the return on investment

Step 2: engaging people by building trust and raising awareness

We designed this program thinking that a team consisting in one Iberdrola collaborator and one UDP representative would go together to visit the selected pensioners after having agreed an appointment with them.

This constellation is important as it allows both parties to apprehend the specific needs of the customer in question and to answer his or her doubts in an accurate and appropriate manner. For Iberdrola, this will above all mean to understand the needs in terms of energy efficiency. Of course, the company goes on site and intervenes to propose the designed energy efficiency package. There, just like for the low-voltage customers, it is crucial to clearly explain why Iberdrola focuses on energy efficiency and which benefits the pensioners would get by contracting the offered solution. As we can remember, pensioners are very sensitive to prices. Emphasising the fact that Iberdrola could negotiate better rates to provide a great deal to its customers and that the offered package will contribute to reduce their electricity bills should help them to commit. The scheme created for them to pay the package too is an advantage as we will see in the financial part. It was designed to enable as many Bono Social beneficiaries as possible to afford this solution by setting instalments as expensive as about 5 kilos tomatoes for instance. Putting the price down to common goods the pensioners buy is a sales trick that normally help the clients to realise that this is definitely an investment they can afford. As we can remember as well, older pensioners are more environmentally aware because they grew up in a less polluted environment and they also had to live with limited resources. With them, using this argument will be an extra point in favour of

165 renewing their appliances. Generally speaking, it is also crucial to use this appointment to explain what energy efficiency is, why it is so important and also give information about little things which can be done easily and can bring a lot.

Besides, this appointment is the opportunity for the Iberdrola employee to take notes of all possible sources of energy saving which could be implemented. This information could be used to offer extra possible reductions on bills to those who might be interested later on. This would enable Iberdrola to make extra profit by selling appliances and making Bono Social customers reduce their consumption.

For the UDP, energy efficiency is of course a topic, but beyond that, it will be a way to maybe discover special needs of the pensioner to better help him or her afterwards, thus playing this social role it has been recognised for. Indeed, if more than half the pensioners know about the social services that exist, only a very small minority actually uses them: 49.9% of pensioners knew services which could help them to adapt their houses to their needs in 2010, but only 2% did use them. The same trend is valid for technical assistance or tele-assistance for instance40. By meeting those pensioners, the UDP worker will be able to check the potential needs, check if the pensioners know about the services that could help them. Above all, he will have the opportunity to explain to them how those services work as not knowing might be the reason why they do not use them. As well, the UDP contact person could offer them to help them with the administrative procedures to make sure that they get the help they need and they are entitled to.

Moreover, as mentioned in the chapter about pensioners’ characteristics, the latter tend to distrust sales persons. The intervention of Iberdrola and UDP as a team would allow the pensioner to see Iberdrola embodied by one of its employees. If this obviously has a cost for the company, it will also definitely show the client that he or she matters. He will also probably feel more at ease to ask questions since the meeting will take place in an environment he knows well: his home. It will be the opportunity for Iberdrola to build up a trust capital, which is a real asset in term of reputation. In the long-term, this is usually reflected in the financial results of a company.

40Ministerio de Sanidad y Politica Social. Encuesta a Mayores 2010 166

This phase is determining since the success of the operation relies on this appointment and on the motivation of the elderly person to participate in the energy efficiency plan, which obviously implies an investment for changing fridge and lighting. Raising awareness about energy efficiency but also about the situation change for Bono Social beneficiaries in 2014 is key to get pensioners engaged.

Step 3: Renewal of appliances

Once the low-voltage customer or the pensioner has understood the stakes and benefits of such an initiative and once he or she has committed to subscribe to this plan, we can consider that the most important part has been successfully achieved.

To design this third phase of the plan implementation, we focused on three main points: a reliable supplier, the appliances themselves and the recycling of the older ones.

A reliable supplier: geographical scope and economies of scale

To supply Iberdrola in the five autonomous communities in which the company is active, we thought a partnership with an international producer would be more advantageous, mainly for two reasons.

First, this allows us to see “big” and to make sure that the partnership can happen in a uniform way on the whole territory. This would also be the possibility to have one contact at the national level, which is always an asset since it enables to gain time and also to develop a more personal relationship. This always makes business easier.

Secondly, by negotiating directly with the producer (no intermediary), Iberdrola could get better deals thanks to economies of scale, as the company would purchase in large quantities. The bargaining power of Iberdrola will have even more weight because of the crisis and the opportunity for the producer to sell a consequent number of devices. Not sure about thatThis would definitely be an advantage the Bono Social customers could enjoy in the commercial offer they would subscribe.

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Energy efficient appliances: category A, A+ and A++

We have oriented ourselves to the 2008-2012 national energy efficiency strategy principles, more specifically to the “Plan Renove de Electrodomésticos” (renewal plan for electro domestic appliances) to choose the kind of appliances to be offered.

To get the energy efficiency grant (between € 105,- and € 125,- for a fridge in Extremadura for instance41) from the autonomous community to buy a new fridge, the rule stipulates that only appliance from category A or superior are eligible for public aid42.

This classification corresponds to the EU energy labelling on the product. The energy efficiency of a product is represented by a letter and a colour. A (in green) stands for energy efficient and G (in red) stands for energy intensive.

Concerning the two items we chose to focus on changing average lights and fridges for category A ones trigger off consequent energy savings43. For light bulbs for instance, replacing incandescent bulbs (categories E and F because part of the electricity needed is lost in heat) by energy saving ones can help save up to 80% energy. The light issue is a tricky one since people fear that energy saving might go with less brightness, which is not the case. Consumers generally tend to misunderstand watts, which correspond to the quantity of electricity to produce light and lumen, which is the measurement for the brightness of the light44. For fridges, the classification goes up to A+ and A++ to take into account technological innovation. A category A fridge consumes about 40% less electricity than the average fridge (category D), a A+ fridge about 55% less and a A++ about 80% less electricity.

Replacing incandescent bulbs and average fridges by category A ones would therefore trigger off savings between 50% and 80% in electricity, and therefore in money for Iberdrola and the Bono Social consumers.

41Air Conditioning Machines Plan Renove Extremadura, 2011 http://www.afec.es/en/plan-renove-extremadura.asp retrieved 05/05/2011 42Ministerio de Sanidad y Politica Social. Encuesta a Mayores 2010 http://www.idae.es/index.php/mod.pags/mem.detalle/id.10/relmenu.87, retrieved 17/05/2011 43General directive on labelling and standard product information 2011http://www.energy.eu/focus/energy-label.php, retrieved on 04/05/2011 44Ente Vasco de la Energía, La energía en el hogar 2010

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Actual substitution and recycling

The last phase of this third step the substitution of the energy intensive appliance: the old item shall be withdrawn to make sure it is not used as a backup or sold as a second-hand to decrease the investment. Of course, withdrawal goes with recycling.

3.2.3 Financing

Public subsidies: an option to be offered to maximise impact

As part of its national strategy plan, Spain grants public funds to citizens to improve the energy efficiency inside their households via two channels: the housing plan (Plan Vivienda) and the appliance renewal plan (Plan Renove de Electrodomesticos), the appliance plan being the most relevant one for this work. As we could see above, households can get up to € 125,- subsidy for a fridge. We believe it is important to offer that option to the targeted Bono Social beneficiaries since this will probably one key argument for them to invest.

Iberdrola, as a company, can request the grant on behalf of its customers45, just like any other supermarket does. This would also make administrative procedures easier for the clients, which is another advantage of contracting the energy efficiency package with Iberdrola. This extra help is particularly important for those pensioners who are more vulnerable, from a financial point of view of course, but also from an administrative point of view: not everybody feels comfortable with filling up documents.

However, if we recommend Iberdrola to do its best to provide those grants, we developed our business model independently on those funds. Indeed, Iberdrola cannot ensure it can get this financial help since the way the aid is designed could be a limitation. Each autonomous community sets up an opening and a closing date. Between those dates, usually less than six months, shops have a direct

45Instituto para la diversificación y Ahorro de la Energía.Plan renove de electrodomesticos 2008-2012, http://www.idae.es/index.php/mod.pags/mem.detalle/idpag.58/relcategoria.1161/relmenu.68 169

IT access to the local authority’s data base to check if grants are still available46. As this measure is definitely an effective selling tool, grants are usually spent within one or two months as it was the case for 2010 in Extremadura47, region where Iberdrola is present.

Also, we recommend the program to start so that the actual renewal takes place in 2012. Nevertheless, more clients will enrol gradually and some might start in 2013 for example. The point is that those funds will be available until 2012. With the probable government change next year, it is not sure that such a measure will still be available in 2013.

For those two main reasons, we designed a viable model without those funds, offering the most affordable solutions for both the low-voltage customers and the pensioners. However, we believe it is important to offer this option to customers as long as the aid is available. For Iberdrola, offering help to get this State grant is very likely to improve the conversion rate, and therefore the results in terms of profitability and sustainability.

Financing plan between Iberdrola and the Bono Social customers

The third step of the action plan involves Iberdrola Servicios Energéticos financing energy efficiency devices to the Bono Social clients. With this help, the clients would reduce their consumption, and consequently reduce the price they pay for the bill. Iberdrola as a company can purchase goods and offer a financing plan to the clients in order for these to be able to payback for the appliances. The company would benefit from selling the energy not consumed anymore (reduction due to efficient measures) in the commercial market, at a higher price.

Beside this income generation, the company will contribute to implementing energy efficiency in homes, optimising the demand curve and the awareness of its clients towards energy.

46 Instituto para la diversificación y Ahorro de la Energía.Plan renove de electrodomesticos 2008-2012, http://www.idae.es/index.php/mod.pags/mem.detalle/idpag.58/relcategoria.1161/relmenu.68, retrieved 17/06/2011 47Air Conditioning Machines Plan Renove Extremadura, http://www.afec.es/en/plan-renove-extremadura.asp, retrieved 05/05/2011 170

In order to establish this financing measure we have done a research which we will explain in detail.

Main characteristics of the clients we are tackling

We have two main groups of the bono social which we will tackle: pensioners and less than 3kW installed power. The energy appliances they have along with their consumption are described below. According to these figures we will calculate the total price they have to pay for their bills and the total energy consumption they have.

These figures are our baseline in order to quantify the reductions they will have in terms of energy consumption and upon the price of their bills when implementing the changes.

Pensioners: Less than 3kW power: Appliance kW Appliance kW TELEVISION 0,07 TELEVISION 0,07 WASHING MACHINE 0,182 WASHING MACHINE 0,182 ILLUMINATION 0,42 ILLUMINATION 0,42 COMPUTER 0,15 COMPUTER 0,15 FRIDGE 0,375 FRIDGE 0,375 MICROWAVE-OVEN 0,640 VACUUM CLEANER 0,675 TOTALS 1,197 IRONING 0,600 AIRCONDITIONING 1,013

TOTALS 4,125

Table 4: Electricity consumption of the different appliances, Source: Comisión Nacional de Energía

Efficiency measures that need to be taken

In order to address a significant reduction in energy consumption we have targeted those areas which account for a big part of the total consumption of a home.

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Furthermore these areas have to be easily implemented and so, following this criterion we will tackle: illumination, appliances and regulators. Specifically for each of the three areas, we will install the following.

1. Change light bulbs into LED (60% less consumption than normal ones)

2. Change fridge to a class A efficient fridge (30-40% less consumption than class D-F)

3. Install stand-by regulators. (15% less consumption)

As Iberdrola is a big company it has access to wholesaling, so not only it can purchase goods at a reduced market price but as well it can purchase large quantities of them. We made a research in the Spanish market and the devices can be bought at a reasonably low price. For the illumination, a wide variety of LED bulbs can be purchased in SoloStocks48 where special offers are made for companies that buy in large quantities. Regarding the fridges, they can be purchased from a well known brand like Bosch49 and the stand-by regulators can be bought to a Spanish company, for example Ecologicbarna50 . The total price for the illumination, taking in account seven bulbs for both groups makes a total of € 30,-; the fridges can be purchased for € 300,- and the regulators for € 10,-. The total investment required for these measures is € 370,-.

Savings in price and energy in the different situations

Once we have determined what we are changing, we have to quantify how much this influences in the price of the bill and the total energy consumption. We have taken in account a typical home for less than 3kw and a typical home for a pensioner. Therefore having the normal consumption of both groups, we can calculate the differences in price and in energy consumption that they have with the implementation of these measures. In order to have another comparison figure and prove that small changes can make a difference, we have also studied the evolution of both, price of the bill and consumption, if all of the appliances were changed into the most efficient ones.

48 The Market Place, Solo Stock, Industria LED http://www.solostocks.com/empresas/led_b, retrieved 06/05/2011 49Electrodomésticos Blanco y Negro 2005 http://www.blancogris.com/frigorificos-bosch-c-11-m-98.html, retrieved 03/04/2011 50 Ecologic Barna, Sistemas y Accesorios dedicados para la protección medioambiental http://www.ecologicbarna.com/productos8a.html, retrieved 02/06/2011 172

The following tables show the price that clients would pay under the TUR tariff and the social allowance tariff, in each of these three situations:

1. Present situation: what they pay currently.

2. Change all appliances to high efficiency ones.

3. Change the illumination, fridge and install stand-by regulators.

Furthermore they also show the monetary savings clients would make a year when implementing the measures. We can also see in kwh the amount of energy saved and therefore the income Iberdrola does by selling this energy in the commercial market. The price in the commercial market is 0.045 Euros/kwh, a higher price than that from the regulated price. This is one of the direct benefits that Iberdrola would have from implementing the measures.

Pensioners: 5kw-4125kwh 1. ACTUAL SITUATION TUR 844,6 SOCIAL 676,79

2.CHANGE ALL APPLIANCES (1702KWH) TUR 423,65 SOCIAL 338,75 MONETARY SAVING A YEAR TUR 420,95 SOCIAL 338,04 ENERGY SAVINGS 1954 IBERDROLA BENEFIT MARKET 87,93

3,FRIDGE + ILLUMINATION+standby (3579kWh) TUR 673,48 SOCIAL 539,37 SAVING A YEAR TUR 171,12 SOCIAL 137,42 ENERGY SAVINGS 550 IBERDROLA BENEFIT MARKET 24,75

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Less than 3kW capacity: 1.5kw-1197kwh 1. ACTUAL SITUATION TUR 284,73 SOCIAL 219,4

2.CHANGE ALL APPLIANCES (480KWH) TUR 160,17 SOCIAL 119,37 MONETARY SAVING A YEAR TUR 124,56 SOCIAL 100,03 ENERGY SAVINGS 632 IBERDROLA BENEFIT MARKET 28,44

3,FRIDGE + ILLUMINATION+standby (651kWh) TUR 189,88 SOCIAL 143,23 SAVING A YEAR TUR 94,85 SOCIAL 76,17 ENERGY SAVINGS 431 IBERDROLA BENEFIT MARKET 19,395

Table 5: Comparison of electricity bill prices under 3 different conditions, Source: Comisión Nacional de Energía

When implementing the measures we have selected, we can see a significant reduction in the bill price. In the case of pensioners, they saved € 11,45 a month whereas for the less than 3kw they save a total of € 6,34 monthly. In terms of energy savings translated into the income for Iberdrola in the liberalized market, we can determine that for pensioners it gains € 24,75 a year and € 19,39 a year for less than 3kw. These figures might not seem a huge benefit for Iberdrola or for the clients but we have to take into account that under the 3kw group, Iberdrola has 1 million clients and for the pensioners it has around 100.000 clients.

Financing plan

Iberdrola will purchase the appliances and have them installed in the homes for free. The financing procedure for both groups is different given that one group reduces more the energy consumption than the other. This difference is due to the difference in installed capacity that they have.

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Iberdrola will still charge the present price for both groups and with the reduction in the price it will have part of its return on investment. This is € 6,34 for <3kw and € 11,4 for pensioners monthly. This measure would have a complete ROI in around 5 years for <3kw and 3 years for pensioners so it is not enough as the bono social will end in 2 years. Therefore here is where the different systems are implemented.

Financing model for pensioners:

Given the risk that this group implies due to their advanced age, we have determined that they would have to pay € 8,- more per month during the first year in order to payback for the whole set of measures. This is explained in the following table.

Payback period: 2 YEARS Payment with saving in price € 11,40 /month 274 Payment with extra € 8/month 96 TOTAL 370

Table 6: Breakdown of the payback for Iberdrola’s investment for pensioners, own creation

Financing model for less than 3kW installed capacity:

This group reduces by less the energy consumption than the other one and therefore it would take them around 5 years to payback for the measure. The extra amount they have to pay a month is of € 9,- a month during the following 2 years. The following table explains this data:

Payback period: 2 YEARS Payment with saving in price € 6,34/month 152,34 Payment with extra € 9,07/month 217,66 TOTAL 370

Table 7: Breakdown of the payback for Iberdrola’s investment for low-voltage customers, own creation

With these measures the clients will be able to pay a significant amount each month on top of their normal bono social price. This effort can be afforded by them

175 regarding that the future conditions of their billing procedures will change. Therefore this economic effort now will bring them high benefits in the future.

The following tables illustrate the situation after the bono social ends. Assuming a 20 % increase in the TUR tariff for 2014 from its present price, due to the absence of the bono social, and a higher price for energy we can determine what these clients would pay if they do not change anything and what they would pay if they buy the measures Iberdrola offers. The actual situation represents the price they would pay monthly if they do not make any changes. The changes row represents what they would pay if they implement the measures offered by Iberdrola. The total year savings is very representative. As we can see pensioners will save up to € 204,48 a year and the less than 3kw will save up to € 159,98 a year.

Pensioners’ annual savings (€): Less than 3kw installed capacity annual savings (€): ESTIMATED FUTURE SAVINGS ESTIMATED SAVINGS FOR FUTURE ACTUAL SITUATION 84,38 ACTUAL SITUATION 28,43 CHANGES 67,34 CHANGES 15,10 DIFFERENCE 17,04 DIFFERENCE MONTH 13,33 YEAR SAVING 204,48 YEAR SAVING 159,98

Table 8: Estimated savings for both segments, own creation

These savings are very significant given that what they pay for the set of measures to reduce their consumption: the light bulbs, fridge and stand-by regulator, is € 217,60 for the less than 3kw and € 96,- for minimum amount pensioners. They would not have access to a better offer by themselves to purchase such devices. Moreover Iberdrola organises the installation and the provision of such devices.

This project therefore aims at making it easy for these clients to purchase energy efficient devices that will help them reduce their consumption and the price they pay monthly. Iberdrola offers them the financial support and takes advantage of these following years where these clients are better off due to the bono social.

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Iberdrola’s income

Besides providing the appliances, Iberdrola will have some income generation from the reduction in consumption. The total amount reduced can be sold in the liberalized market at a higher price. The figures might not seem very high but again, we have to remember that a million clients are under the less than 3kw installed capacity group and around 100.000 under the pensioners. We are not aiming this program at the whole lot of the clients under these two groups, but a significant amount of them will be tackled. When talking of a high number of clients the income generated by € 28,40 a year per client for pensioners is significant and € 19,30 a year per client with less than 3kW installed power as well notorious.

3.2.4 Different offers

In our three steps, the last step is to provide the appliances. We have already set the standard procedure we will follow, however we thought that we could create some pack offers. These offers that have different fridges and illumination sets aim at adjusting to the clients demands and needs. We have taken in account the research done when getting to know who these people are in order to adapt the options of the offer.

By giving the clients the chance to choose between several items we are actively engaging with them. When having the possibility to adapt your need with what is offered the clients feels more comfortable and willing to purchase if an offer really suits them. We have taken in account the information we have mentioned before regarding the different groups in order to establish which appliances best adapt to their needs.

When providing alternative options Iberdrola as a company has to be careful, given that the options need to be enough in order for the client to be satisfied but limited in order for economies of scale to be implemented. If Iberdrola wants to access the wholesaling as a measure to reduce the cost of the appliances for its clients it has to be careful that the demand for the appliances is enough in order to do so.

By offering these different possibilities more people will be attracted therefore more profitable will be the measure for Iberdrola. The more clients engaged the more

177 vulnerable people tackled and the more income for Iberdrola. As we mentioned before this measure aims for sustainability therefore all three pillars have to be addressed.

The different appliances will also promote the energy efficient items giving the brands publicity and making society more aware of which products are and how they look like. By seeing they are like normal appliances but more efficient, people will be more convinced towards implementing these kinds of measures.

Given that we will focus the options on the fridges and the illumination, we will first explain the different types of both items proposed and then proceed to determine the reductions in price and energy that they imply.

Therefore our pack offers the following possibilities:

Energy efficient offers for fridge renewal51

For the < 3kw power contracted given that we have no further information upon the characteristics of this Group of beneficiaries, we base our recommendations and available offers assuming the following characteristics:

1. Reduced space flat. 2. Low number of people living in it.

These assumptions imply that the fridge they would need and like, will need to be easily fixed in the space they have and will satisfy the capacity requirements of the place. The most suitable options seem to be an integrated fridge: those that are easily integrated in the available space of the characteristics of the infrastructure of the kitchen of the flat/apartment. They can also be placed inside cupboards therefore it is easily camouflaged if required.

Whereas for pensioners we have determined that they need a higher capacity fridge where things are accessible and easily organized. There homes are often bigger therefore the size of the fridge can be big. In Spain due to cultural habits, people tend to eat at their parents place, therefore the majority of pensioners require a

51 www.bosch.com 178 high capacity fridge because although not people live and sleep at the place they do eat and have dinner there.

Given this information we have three options of fridges: small, medium and big depending upon the capacity. The small and medium are mainly focused for the <3kw and the medium and big are focused on pensioners for the reasons stated before. An important characteristic to highlight is the freezer incorporated in the fridge. In order to store food by freezing it or because ice needs to be available many homes in Spain need a freezer. Due to the weather characteristics depending upon the region the freezer will be more or less demanded. How a freezer seems to be an essential item at some homes and for sure an added value appliance for the fridge we have chosen that two out of the three fridges selected have a freezer.

All fridges have been selected form the brand Bosch, being it a well known brand in Spain and a company that has a wide variety of appliances on their portfolio. SMALL FRIDGE

Fridge 1 door Integrated White

-Dimensions: 82 cm x 60 cm x 55 cm -Energy efficiency A+ (80% energy savings) -Easily integrated beneath a work surface. -Price: € 200

MEDIUM FRIDGE

Fridge 1 door Integrated White

-Dimensions: height cm 138 width 54 cm -Energy efficiency A+ (70% energy savings) - Reversible doors - Freezer incorporated -Price: € 259

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BIG FRIDGE

-Dimensions: Height 185cm width 60cm -Energy efficiency A+ (70% energy savings) - Double cold circuits independent - No-frost system. -Freezer autonomous. - Price: € 345

Energy efficient offers for lighting52

In order to choose the best lighting systems we have selected a series of options from Phillips: which offer a lifetime of 20000hours and an 80% in energy savings. Phillips is a well known brand in Spain, it offers a wide variety in terms of illumination systems and many other appliances. It is therefore a trusted brand for Spaniards and a highly efficient provider of LED light bulbs.

We have made a distinction between the uses of the different areas of a house and how the illumination should be different. Therefore the offer for the clients is between three different types of light bulbs. Having this information we must establish the number of rooms that require a direct illumination and those that would be better fitted with a diffuse type. The following information has been taken

52 http://www.philips.es/c/-/30016/cat/

180 into account when choosing the number of light bulbs of the different types offered for the clients:

<3kW Pensioners 2-3 bedrooms 3-4 bedrooms Kitchen Kitchen Living room Living room Bath room Bathroom Corridors/ other Corridor/other

Table 9: Comparison of typical home surface division for <3kW and pensioners, Source: Plan de Vivienda

Therefore taking in account the above information we will determine the types of light bulb that would best suit each of the areas of the home. As we have seen a minimum of 7 light bulbs are required to fulfill the illumination of the home, according to the number of rooms and spaces.

Direct illumination

Light bulbs for any room where good direct illumination is needed: good for living rooms, kitchens and bedrooms (Normal power).

Light bulb LED: white 5W Equivalent incandescent bulb: 25W Price: € 22,99

Light bulbs for any room where good direct illumination is needed and the connection required is not a normal bulb connection: good for living rooms, kitchens, bathrooms and bedrooms (High power).

Reflection lamp 3W Equivalent incandescent bulb: 25W Price: € 29,99

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Indirect illumination

Light bulbs for any room where diffuse illumination is needed: corridors, bathrooms, or rooms with other uses.

Candle bulb: 3W Equivalent incandescent bulb: 15W Price: € 19,49

Given the products we have specifically selected for the clients we created the different combinations. Selecting a fridge and the types of light bulbs we thought best suited the different clients’ characteristics. As by average seven light bulbs are required in a typical home therefore we have established the amount of light bulbs of each type for the different rooms and areas of the home according to the intensity and type of illumination each area requires.

The following table explains what each pack contains, the total energy reduction potential of each device and the final price of the offer. In order to calculate the price we have established that due to wholesale Iberdrola can purchase the different items at a better price than a single person in a store. We established the assumption that for the total price Iberdrola will be able to reduce in 30% the total price.

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Pack composition Pack composition for less than 3kW installed power

Offer Appliances Energy Final Price reduction potential 1 Small fridge 70% € 212,30 LED 5W (4) 80% LED 3W (3) 80% 2 Medium fridge 60% € 366.73 LED 5W (5) 80% LED Candle (2) 80%

Table 10: Different pack offers for <3Kw, own creation

Pack composition for pensioners

Offer Appliances Energy reduction Final price potential 1 Medium fridge 70% 386.3 euros LED 5W (4) 80% LED 3W (3) 80% 2 Big fridge 70% 425.7 euros LED 5W (5) 80% LED Candle (2) 80%

Table 11: Different pack offers for pensioners, own creation

We will now see how these offers will impact in the consumption patterns the clients have. We have to take in account we are not including the reductions from the stand by regulators which account for a 15% reduction that we included in the offer of the business plan model. The following table shows the percentage reductions from each of the offers compared to the consumption they have currently.

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Reduction in electricity consumption

Electricity consumption reductions 120

100

80

60

40

20

0 <3kw pensioners

current consumption offer 1 offer 2

Figure 16: Potential energy consumptions of the different offers, own creation.

The reductions are in line with the data presented before and the financial payback required is very similar to that described on the third step of the action plan. Two years paying their normal bono social price plus a significant amount of euros. The payback period is directly correlated with the price at which Iberdrola will be able to purchase the appliances. The lower this price the less payback period and extra monetary effort required from the clients. This is also affected by the total amount of aid form the government the clients can access to. Therefore the pricing and investment depends upon a series of factors and we have done an estimation of the best possible price.

3.2.5 Positive environmental impact

By tackling the demand side we not only help clients to reduce the bills they pay for electricity and make them aware of electricity consumption, but we contribute as well in CO2 reduction. This is very important given that the Spanish government is working hard upon measures to reduce these emissions. The importance climate change has been gaining throughout the years due to the Kyoto protocol and the co2 trading system it is very interesting for Iberdrola as an energy company to achieve a

184 significant amount of reductions by implementing energy efficiency. This could be considered a side effect or a co-benefit from our mainly social 3 steps action plan, but as Iberdrola is so keen upon sustainability measures, this is another “win “for the plan.

Vulnerable clients will have a better control, management and awareness upon their energy consumption patterns, this would tackle the problem in a more local and socially orientated solution. However as we will see this solution also contributes to Co2 emissions reduction that will tackle a national and global problem such as climate change and protection of the environment.

We have already determined the economic payback and income Iberdrola would make out of this initiative, therefore we are tackling with the three dimensions of sustainability: social, economic and environmental.

In order to calculate the CO2 emissions reductions coming from the change in appliances that Ibedrola facilitates the clients, we will take in account the total emissions the current energy mix of Iberdrola produces.

Given the energy mix present for Iberdrola at the moment is of 68.83 kgCO2/ kWh we have calculated the total emissions both bono social groups have. In order to have a comparison we have calculated the emissions they have currently (without any change), the total emissions they would have if they changed all the appliances to highly efficient ones, and the total emissions they will have when incorporating Iberdrola’s offers.

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Therefore according to the data we have been managing we can establish the following:

Consumption Co2 emissions co2 kWh grams Emissions kg <3KW POWER INSTALLED Current situation 1197 82.390 82,39 Change of all appliances 480 33.038 33,04 Change of fridge,illumination, standby 651 44.808 44,81 regulators

PENSIONERS Current situation 4125 283.924 283,92 Change of all appliances 1702 117.149 117,15 Change of fridge,illumination, standby 3579 246.126 246,13 regulators

Table12: CO2 emissions for both groups under the different conditions, own creation

By providing the appliances to the clients these would account for a 45.61% reduction in CO2 emissions for <3kw and 13.65% for pensioners in comparison with their current emissions. Therefore this initiative will not only influence in the price reduction the clients will have and their awareness, but it will also contribute to CO2 savings. As mentioned before this is a very important issue not only at a local level but globally.

Iberdrola’s plan only tackles a certain amount of appliances that will significantly change the consumption patterns but if we take in account the potential reduction these homes could have if they changed all of the appliances we see that the figures of CO2 reduced are very important.

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Potential CO2 Emissions Reduction

Potential CO2 reductions

300

250

200

<3kW 150

Pensioners KgCO2

100

50

0 Current situation Pack Iberdrola

Figure 17: CO2 emissions for both groups for the current situation and the changes in all appliances, own creation

As we can see for both cases more than half the emissions could be reduced, this is very important given the issue with climate change and the total reduction Spain has to achieve due to the Kyoto Protocol. Tackling the demand will have a higher repercussion than locally for the clients and their environment, but will as well contribute globally towards a change.

3.2.6 Three steps for a win-win-win situation

When we started our research about Iberdrola and the Bono Social customers, the major objective was to improve energy efficiency with a focus on the company’s financial figures. It quickly clearly appeared to us that we could have an even broader impact if adopting a holistic approach. Involving different stakeholders, we wanted all of them to fully benefit from any measures we would implement.

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Designing this plan the way we did, we of course thought of the results we could achieve. Here is how Iberdrola, its Bono Social customers and the Society as a whole come to a win-win-win situation.

Iberdrola: when profitability meets sustainability

For Iberdrola, this operation would of course mean an investment in marketing, staff members and also prepayment for the appliance pack. However, from a financial point of view, this is also an opportunity for new revenue streams.

Indeed, the first point is that by engaging its Bono Social customers in implementing those energy efficiency measures, the company will limit the losses linked to the market regulation. By helping those customers to reduce their electricity consumption, the part Iberdrola must auto finance before getting paid by the Spanish State will be reduced. The interesting point is that the company will manage to sell the electricity not consumed at this social price to the market price, thus earning money with its product. Going back to our assumptions too, extra profit could be made by playing on interest rates and contract conditions with suppliers.

From an environmental point of view, reducing electricity consumption means needing less raw materials used to produce electricity, thus reducing pollution in general and also CO2 emissions in particular since priority is given to electricity produced by renewable energy sources in the grid. With the emission trading scheme, these CO2 emissions reduction also results in a monetary saving for the company as we will see later.

This proactive approach Iberdrola could adopt toward the Bono Social customers would make the company a pioneer allying energy efficiency (financial and environmental impacts) and social impact, thus strengthening the alignment of action and vision. This leading attitude will have an impact in term of image and reputation, above all if Iberdrola manages to install a trust relationship with those customers and succeeds in creating a community united around the same values. No doubt that this is a very optimistic forecast, but it is important to see big to achieve things!

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This initiative could definitely confer the energy company a competitive advantage based on trust and “like” capital, which can be translated into long-term earnings.

On top of the end of the Bono Social measure, the timing is also perfect for Iberdrola to make this action a communication one since it coincides with the European Year for Active Aging.

Bono Social customers: cheaper bills, more comfort and new contacts

The Bono Social customers grasping the opportunity to be part of this plan will benefit in different ways.

The most obvious one is naturally the savings on their electricity bills thanks to the energy efficiency pack offered by Iberdrola. This will enable them to switch from the Bono Social tariff to the TUR tariff in a softer way. The awareness-raising initiatives in the program should also help them to be more involved and to proactively operate slight changes in their behaviours, which would also impact their bills.

Changing appliances will also mean more comfort: a less noisy fridge or a brighter lighting always contribute to improve quality of life.

For all, this could also be a new network, new contacts. For pensioners in particular, this program could definitely have an added value from a social point of view. By involving a pensioner association such as the UDP, Iberdrola could indirectly help these pensioners in their everyday life. Helping pensioners is also a moral support to families.

Society, benefits in economic, social and environmental fields

By helping the most vulnerable like it is the case for minimum amount pensioners for instance, Iberdrola would do a positive contribution to society, helping to break vicious circles of poverty for some specific clients. This initiative, by involving different stakeholders (Iberdrola, its customers but also associations), would also help giving more importance to the energy efficiency issue at a national level. This would contribute to raise awareness even more in order to

189 reach the goals the government set in its action plan about energy efficiency and the related CO2 emissions, which are also part of the European target for 2020.

From an economic point of view, this model would, if not release a bit the increasing burden on tax payers since for each KW consumed by Bono Social beneficiaries, the State will have to refund the difference between this tariff and the TUR one to the energy companies.

As a conclusion, we can say that the successful implementation of this model would have positive long-term impacts in the economic, but also in the environmental and social fields, conciliating profitability for Iberdrola and sustainability for the company but also for Society. One of the strengths of this project would also be the involvement of different actors.

The information that will be available not only comes from the different stakeholders in the deal at a planning stage, but once it is implemented as well. Iberdrola will have a better understanding and control of the consumption patterns of its clients, being able to optimize the curve of demand and therefore the production of energy.

If this plan were to be continued and expanded to all of the clients this would constitute the start of smart gridding and better management standards for the sector. A better control of the production, distribution and demands system will be achieved. Therefore this plan is not only important for the direct impacts it has upon the bono social clients Iberdrola has and upon the debts they might cause for the company, but it brings along the start of future evolution into smart grids.

As energy company Iberdrola produces, distributes and supplies energy to its customers, therefore it is mainly a company that provides a service. This means that its main priority is its clients, by addressing these bono social clients Iberdrola is strategically retaining clients. Providing efficient appliances will reduce their consumption and this may seem like a loss for Iberdrola, but in the long term it is a significant number of clients that remain in the company. Given that competition is low it is important for Iberdrola to maintain them.

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Conclusions

When trying to tackle sustainability among the electricity sector we have found a big difference between the production and consumption. On the production side changes will lead to large scale impacts whereas for the demand side a big percentage of the population needs to be tackled to have visible results upon the issue. Besides all the efforts companies and customers can do, the government keeps playing a key role when tackling sustainability and the result it can achieve. For the production side, as the “clean” energies are ruled by the special regime, with fixed tariffs imposed by the government, companies are limited in the actions they can perform. As the electricity sector is concentrated around three main actors (Endesa, Iberdrola and Gas Natural Fenosa), each of them has a high negotiation power with the institutions. A company like Iberdrola can lobby directly the government due to its size, encouraging it to take the path towards sustainability. We have developed a sustainable solution for Iberdrola for all of the scenarios of PWC. We emphasized the fact that the cleanest scenario for Iberdrola, with 50% of renewable energies and enlargement of the life time of the nuclear power plants, was also the most profitable one. The main assumptions for this scenario were that the government would allow keeping nuclear power plants running, and would keep high feeding tariffs. The latter represents a trade off the government has to deal with. Indeed, the high tariffs represent a high cost to society, while electricity companies make high profits, but at the same time increase the security of supply as well as the environmental performance. Even if it is not cost-efficient it provides the optimum mix of all three factors mentioned. On the other hand, from a company point of view, due to the tariffs set by the government this scenario is the most profitable. The government will set regulations regarding resource availability and economic situation of the country. As we have seen, the best scenario in terms of profitability and sustainability also requires the largest amount of investment and the funds may not be accessible to implement the measures

191 needed. Therefore energy policies take into account many factors which can sometimes be antagonist. For the consumption side, however, even if the regulation is put in place, more investment has to be put in order to change consumption patterns and awareness. This requires much more time and efforts therefore is a long term issue with long term results. Moreover, technological innovation, research and development need to be emphasized in order to have higher impacts on the make it easier for companies and clients to implement measures. Moreover the question is how the government can set incentives to Iberdrola to decrease the energy consumption of its customers. This under the current system is working against the core business of the company and would lead to decreased profits. Due to the temporarily regulation of the Bono Social we were able to come up with a solution to decrease electricity consumption while increasing the profits of the company and engaging with clients. At the same time GHG-emissions can be reduced and a social issue is tackled. As for the production side Iberdrola will be dependent on actions from the government to be able to implement measures that are sustainable and profitable at the same time.

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198

Appendix – Part 1

Appendix 1: Business Case Nuclear Power Plant – Case 1

Year Cash Flow NPV Power Price NPV Production costsYearly insurance costs 0 -4.313.000.000 -4.313.000.000 48,70 -4.313.000.000 17,50 1 178.691.078 165.726.063 49,68 -4.147.273.937 21,23 50000000 2 181.244.900 155.898.409 50,67 -3.991.375.528 21,66 52020000 3 184.869.798 147.478.869 51,68 -3.843.896.658 22,09 53060400 4 188.567.194 139.514.040 52,72 -3.704.382.618 22,53 54121608 5 192.338.538 131.979.364 53,77 -3.572.403.254 22,98 55204040,16 6 196.185.308 124.851.610 54,85 -3.447.551.644 23,44 56308120,96 7 200.109.015 118.108.802 55,94 -3.329.442.842 23,91 57434283,38 8 204.111.195 111.730.150 57,06 -3.217.712.692 24,39 58582969,05 9 208.193.419 105.695.986 58,20 -3.112.016.706 24,88 59754628,43 10 212.357.287 99.987.708 59,37 -3.012.028.998 25,37 60949721 11 216.604.433 94.587.714 60,55 -2.917.441.285 25,88 62168715,42 12 220.936.522 89.479.355 61,76 -2.827.961.930 26,40 63412089,73 13 225.355.252 84.646.881 63,00 -2.743.315.049 26,93 64680331,52 14 229.862.357 80.075.393 64,26 -2.663.239.656 27,46 65973938,15 15 234.459.604 75.750.795 65,55 -2.587.488.861 28,01 67293416,92 16 239.148.796 71.659.753 66,86 -2.515.829.108 28,57 68639285,25 17 243.931.772 67.789.655 68,19 -2.448.039.453 29,15 70012070,96 18 248.810.408 64.128.568 69,56 -2.383.910.885 29,73 71412312,38 19 253.786.616 60.665.203 70,95 -2.323.245.682 30,32 72840558,63 20 258.862.348 57.388.883 72,37 -2.265.856.799 30,93 74297369,8 21 264.039.595 54.289.506 73,81 -2.211.567.293 31,55 75783317,19 22 269.320.387 51.357.515 75,29 -2.160.209.777 32,18 77298983,54 23 274.706.795 48.583.872 76,80 -2.111.625.906 32,82 78844963,21 24 280.200.931 45.960.023 78,33 -2.065.665.883 33,48 80421862,47 25 285.804.949 43.477.879 79,90 -2.022.188.003 34,15 82030299,72 26 291.521.048 41.129.788 81,50 -1.981.058.215 34,83 83670905,72 27 297.351.469 38.908.509 83,13 -1.942.149.706 35,53 85344323,83 28 303.298.499 36.807.193 84,79 -1.905.342.513 36,24 87051210,31 29 309.364.469 34.819.363 86,49 -1.870.523.150 36,96 88792234,51 30 315.551.758 32.938.888 88,22 -1.837.584.262 37,70 90568079,21 31 321.862.793 31.159.971 89,98 -1.806.424.291 38,46 92379440,79 32 328.300.049 29.477.128 91,78 -1.776.947.163 39,23 94227029,61 33 334.866.050 27.885.169 93,61 -1.749.061.994 40,01 96111570,2 34 341.563.371 26.379.187 95,49 -1.722.682.807 40,81 98033801,6 35 348.394.638 24.954.537 97,40 -1.697.728.270 41,63 99994477,63 36 355.362.531 23.606.828 99,34 -1.674.121.443 42,46 101994367,2 37 362.469.782 22.331.904 101,33 -1.651.789.539 43,31 104034254,5 38 369.719.177 21.125.834 103,36 -1.630.663.705 44,17 106114939,6 39 377.113.561 19.984.900 105,43 -1.610.678.805 45,06 108237238,4 40 384.655.832 18.905.584 107,53 -1.591.773.221 45,96 110401983,2

199

Appendix 2: Business Case Coal Power Plant – Case 1

Year CF NPV Power Price NPV Production costs CO2 emissions in ton CO2 Price CO2 Eur/ton 0 -2.821.000.000 -2.821.000.000 52,33 -2.821.000.000 45,27 15,03378 1 -15.205.401 -14.102.166 53,38 -2.835.102.166 46,17 2319925,837 15,3344556 2 -15.509.509 -13.340.557 54,45 -2.848.442.723 47,09 2319925,837 15,64114471 3 -16.559.940 -13.210.602 55,54 -2.861.653.324 48,04 2319925,837 16,27304696 4 -16.891.139 -12.497.142 56,65 -2.874.150.467 49,00 2319925,837 16,5985079 5 -17.228.962 -11.822.214 57,78 -2.885.972.681 49,98 2319925,837 16,93047806 6 -17.573.541 -11.183.737 58,93 -2.897.156.418 50,98 2319925,837 17,26908762 7 -17.925.012 -10.579.742 60,11 -2.907.736.159 52,00 2319925,837 17,61446937 8 -18.283.512 -10.008.366 61,32 -2.917.744.525 53,04 2319925,837 17,96675876 9 -18.649.182 -9.467.848 62,54 -2.927.212.373 54,10 2319925,837 18,32609393 10 -19.022.166 -8.956.522 63,79 -2.936.168.896 55,18 2319925,837 18,69261581 11 -19.402.609 -8.472.811 65,07 -2.944.641.707 56,28 2319925,837 19,06646813 12 -19.790.661 -8.015.224 66,37 -2.952.656.930 57,41 2319925,837 19,44779749 13 -20.186.475 -7.582.349 67,70 -2.960.239.279 58,56 2319925,837 19,83675344 14 -20.590.204 -7.172.852 69,05 -2.967.412.131 59,73 2319925,837 20,23348851 15 -21.002.008 -6.785.471 70,43 -2.974.197.602 60,92 2319925,837 20,63815828 16 -21.422.048 -6.419.011 71,84 -2.980.616.612 62,14 2319925,837 21,05092144 17 -21.850.489 -6.072.342 73,28 -2.986.688.954 63,38 2319925,837 21,47193987 18 -22.287.499 -5.744.396 74,74 -2.992.433.350 64,65 2319925,837 21,90137867 19 -22.733.249 -5.434.160 76,24 -2.997.867.510 65,94 2319925,837 22,33940624 20 -23.187.914 -5.140.680 77,76 -3.003.008.190 67,26 2319925,837 22,78619437 21 -23.651.672 -4.863.049 79,32 -3.007.871.240 68,61 2319925,837 23,24191825 22 -24.124.706 -4.600.413 80,90 -3.012.471.652 69,98 2319925,837 23,70675662 23 -24.607.200 -4.351.960 82,52 -3.016.823.613 71,38 2319925,837 24,18089175 24 -25.099.344 -4.116.926 84,17 -3.020.940.538 72,81 2319925,837 24,66450959 25 -25.601.331 -3.894.585 85,86 -3.024.835.123 74,26 2319925,837 25,15779978 26 -26.113.357 -3.684.251 87,57 -3.028.519.374 75,75 2319925,837 25,66095577 27 -26.635.624 -3.485.278 89,32 -3.032.004.652 77,26 2319925,837 26,17417489 28 -27.168.337 -3.297.050 91,11 -3.035.301.702 78,81 2319925,837 26,69765839 29 -27.711.704 -3.118.987 92,93 -3.038.420.689 80,39 2319925,837 27,23161156 30 -28.265.938 -2.950.542 94,79 -3.041.371.231 81,99 2319925,837 27,77624379 31 -28.831.256 -2.791.193 96,69 -3.044.162.424 83,63 2319925,837 28,33176866 32 -29.407.882 -2.640.450 98,62 -3.046.802.874 85,31 2319925,837 28,89840404 33 -29.996.039 -2.497.848 100,59 -3.049.300.722 87,01 2319925,837 29,47637212 34 -30.595.960 -2.362.948 102,61 -3.051.663.670 88,75 2319925,837 30,06589956 35 -31.207.879 -2.235.333 104,66 -3.053.899.004 90,53 2319925,837 30,66721755 36 -31.832.037 -2.114.611 106,75 -3.056.013.614 92,34 2319925,837 31,2805619 37 -32.468.678 -2.000.408 108,89 -3.058.014.022 94,18 2319925,837 31,90617314 38 -33.118.051 -1.892.373 111,06 -3.059.906.395 96,07 2319925,837 32,5442966 39 -33.780.412 -1.790.172 113,29 -3.061.696.567 97,99 2319925,837 33,19518253 40 -34.456.020 -1.693.491 115,55 -3.063.390.058 99,95 2319925,837 33,85908618

200

Appendix 3: Business Case CCGT Power Plant – Case 1

Year CF NPV Power Price NPV Production costs CO2 emissions CO2 Price 0 -280.840.000 -280.840.000 52,28 -280.840.000 28,80 15,03378 1 19.195.607 17.802.861 53,33 -263.037.139 29,38 349909,9005 15,3344556 2 19.579.519 16.841.389 54,39 -246.195.750 29,97 349909,9005 15,6411447 3 19.971.109 15.931.843 55,48 -230.263.907 30,56 349909,9005 15,9539676 4 20.370.532 15.071.419 56,59 -215.192.488 31,18 349909,9005 16,273047 5 20.777.942 14.257.463 57,72 -200.935.025 31,80 349909,9005 16,5985079 6 21.193.501 13.487.466 58,88 -187.447.559 32,44 349909,9005 16,9304781 7 21.617.371 12.759.054 60,05 -174.688.504 33,08 349909,9005 17,2690876 8 22.049.719 12.069.982 61,25 -162.618.523 33,75 349909,9005 17,6144694 9 22.490.713 11.418.123 62,48 -151.200.400 34,42 349909,9005 17,9667588 10 22.940.527 10.801.469 63,73 -140.398.930 35,11 349909,9005 18,3260939 11 23.399.338 10.218.119 65,00 -130.180.811 35,81 349909,9005 18,6926158 12 23.867.324 9.666.273 66,30 -120.514.538 36,53 349909,9005 19,0664681 13 24.344.671 9.144.231 67,63 -111.370.307 37,26 349909,9005 19,4477975 14 24.831.564 8.650.382 68,98 -102.719.925 38,00 349909,9005 19,8367534 15 25.328.196 8.183.205 70,36 -94.536.720 38,76 349909,9005 20,2334885 16 25.834.760 7.741.258 71,77 -86.795.462 39,54 349909,9005 20,6381583 17 26.351.455 7.323.179 73,20 -79.472.283 40,33 349909,9005 21,0509214 18 26.878.484 6.927.679 74,67 -72.544.604 41,14 349909,9005 21,4719399 19 27.416.054 6.553.539 76,16 -65.991.065 41,96 349909,9005 21,9013787 20 27.964.375 6.199.605 77,69 -59.791.461 42,80 349909,9005 22,3394062 21 28.523.662 5.864.785 79,24 -53.926.675 43,65 349909,9005 22,7861944 22 29.094.135 5.548.048 80,82 -48.378.627 44,53 349909,9005 23,2419183 23 29.676.018 5.248.417 82,44 -43.130.210 45,42 349909,9005 23,7067566 24 30.269.538 4.964.968 84,09 -38.165.242 46,33 349909,9005 24,1808918 25 30.874.929 4.696.827 85,77 -33.468.415 47,25 349909,9005 24,6645096 26 31.492.428 4.443.168 87,49 -29.025.247 48,20 349909,9005 25,1577998 27 32.122.276 4.203.207 89,24 -24.822.040 49,16 349909,9005 25,6609558 28 32.764.722 3.976.206 91,02 -20.845.833 50,14 349909,9005 26,1741749 29 33.420.016 3.761.465 92,84 -17.084.368 51,15 349909,9005 26,6976584 30 34.088.417 3.558.321 94,70 -13.526.047 52,17 349909,9005 27,2316116 31 34.770.185 3.366.149 96,59 -10.159.898 53,21 349909,9005 27,7762438 32 35.465.589 3.184.354 98,52 -6.975.544 54,28 349909,9005 28,3317687 33 36.174.900 3.012.378 100,49 -3.963.166 55,36 349909,9005 28,898404 34 36.898.398 2.849.690 102,50 -1.113.476 56,47 349909,9005 29,4763721 35 37.636.366 2.695.788 104,55 1.582.313 57,60 349909,9005 30,0658996

201

Appendix 4: Business Case Onshore Wind Farm – Case 1 + 2

Year CF NPV Power Price NPV Production costs 0 -127.700.000 -127.700.000 79,17 -127.700.000 13,77 1 12.532.372 11.886.563 80,36 -115.813.437 14,05 2 12.707.082 11.431.201 81,56 -104.382.236 14,33 3 12.884.146 10.993.215 82,79 -93.389.021 14,62 4 13.063.596 10.571.944 84,03 -82.817.077 14,91 5 13.245.461 10.166.752 85,29 -72.650.325 15,21 6 13.429.773 9.777.027 86,57 -62.873.298 15,51 7 13.616.562 9.402.181 87,87 -53.471.117 15,82 8 13.805.859 9.041.649 89,18 -44.429.468 16,14 9 13.997.697 8.694.884 90,52 -35.734.584 16,46 10 14.192.108 8.361.364 91,88 -27.373.219 16,79 11 14.389.123 8.040.584 93,26 -19.332.635 17,13 12 14.588.777 7.732.059 94,66 -11.600.576 17,47 13 14.791.101 7.435.323 96,08 -4.165.254 17,82 14 14.996.131 7.149.926 97,52 2.984.672 18,17 15 15.203.899 6.875.437 98,98 9.860.110 18,54 16 15.414.440 6.611.441 100,47 16.471.550 18,91 17 15.627.788 6.357.537 101,97 22.829.088 19,29 18 15.843.980 6.113.342 103,50 28.942.430 19,67 19 16.063.050 5.878.486 105,05 34.820.916 20,07 20 16.285.034 5.652.612 106,63 40.473.528 20,47

Appendix 5: Business Case Offshore Wind Farm – Case 1 + 2 Year CF NPV Power Price NPV Production costs 0 -1.823.808.000 -1.823.808.000 136,12 -1.823.808.000 11,84 1 176.716.376 167.606.573 138,16 -1.656.201.427 12,08 2 179.282.454 161.274.717 140,24 -1.494.926.710 12,32 3 181.885.329 155.181.670 142,34 -1.339.745.040 12,57 4 184.525.521 149.318.439 144,47 -1.190.426.601 12,82 5 187.203.554 143.676.368 146,64 -1.046.750.233 13,08 6 189.919.960 138.247.126 148,84 -908.503.107 13,34 7 192.675.279 133.022.697 151,07 -775.480.410 13,61 8 195.470.059 127.995.366 153,34 -647.485.045 13,88 9 198.304.853 123.157.707 155,64 -524.327.337 14,16 10 201.180.224 118.502.576 157,97 -405.824.762 14,44 11 204.096.742 114.023.095 160,34 -291.801.667 14,73 12 207.054.983 109.712.646 162,75 -182.089.021 15,02 13 210.055.534 105.564.861 165,19 -76.524.159 15,32 14 213.098.988 101.573.611 167,67 25.049.451 15,63 15 216.185.946 97.732.996 170,18 122.782.447 15,94 16 219.317.018 94.037.340 172,74 216.819.787 16,26 17 222.492.822 90.481.180 175,33 307.300.968 16,59 18 225.713.983 87.059.260 177,96 394.360.227 16,92 19 228.981.138 83.766.518 180,63 478.126.745 17,26 20 232.294.929 80.598.087 183,34 558.724.832 17,60

202

Appendix 6: Business Case Photovoltaic Energy – Case 1 + 2

Year CF NPV Power Price NPV Production costs 0 -181.400.000 -181.400.000 248,99 -181.400.000 7,49 1 21.273.751 20.177.081 252,72 -161.222.919 7,64 2 21.589.544 19.421.017 256,52 -141.801.902 7,79 3 21.910.007 18.693.270 260,36 -123.108.633 7,94 4 22.235.210 17.992.778 264,27 -105.115.854 8,10 5 22.565.221 17.318.523 268,23 -87.797.331 8,26 6 22.900.113 16.669.521 272,26 -71.127.810 8,43 7 23.239.956 16.044.828 276,34 -55.082.983 8,60 8 23.584.824 15.443.532 280,48 -39.639.451 8,77 9 23.934.790 14.864.759 284,69 -24.774.692 8,95 10 24.289.929 14.307.664 288,96 -10.467.027 9,12 11 24.650.318 13.771.437 293,30 3.304.410 9,31 12 25.016.033 13.255.296 297,70 16.559.706 9,49 13 25.387.153 12.758.490 302,16 29.318.196 9,68 14 25.763.758 12.280.293 306,69 41.598.489 9,88 15 26.145.928 11.820.009 311,29 53.418.498 10,07 16 26.533.745 11.376.968 315,96 64.795.466 10,28 17 26.927.291 10.950.524 320,70 75.745.991 10,48 18 27.326.651 10.540.056 325,51 86.286.047 10,69 19 27.731.911 10.144.965 330,40 96.431.012 10,90 20 28.143.157 9.764.676 335,35 106.195.687 11,12 21 28.560.477 9.398.633 340,38 115.594.321 11,35 22 28.983.960 9.046.305 345,49 124.640.626 11,57 23 29.413.697 8.707.177 350,67 133.347.803 11,80 24 29.849.780 8.380.755 355,93 141.728.558 12,04 25 30.292.301 8.066.563 361,27 149.795.121 12,28

203

Appendix 7: Business Case Solar-Thermal Energy – Case 1 + 2

Year CF NPV Power Price NPV Production costs 0 -358.000.000 -358.000.000 291,91 -358.000.000 21,87 1 62.414.166 59.196.690 296,29 -298.803.310 22,31 2 63.324.972 56.964.397 300,74 -241.838.913 22,75 3 64.248.932 54.816.166 305,25 -187.022.747 23,21 4 65.186.233 52.748.836 309,83 -134.273.911 23,67 5 66.137.064 50.759.363 314,47 -83.514.548 24,14 6 67.101.619 48.844.819 319,19 -34.669.729 24,63 7 68.080.093 47.002.384 323,98 12.332.656 25,12 8 69.072.682 45.229.348 328,84 57.562.003 25,62 9 70.079.588 43.523.097 333,77 101.085.101 26,14 10 71.101.014 41.881.121 338,78 142.966.222 26,66 11 72.137.166 40.301.001 343,86 183.267.223 27,19 12 73.188.253 38.780.409 349,02 222.047.632 27,73 13 74.254.487 37.317.106 354,25 259.364.738 28,29 14 75.336.083 35.908.936 359,57 295.273.674 28,86 15 76.433.258 34.553.825 364,96 329.827.499 29,43 16 77.546.234 33.249.775 370,43 363.077.274 30,02 17 78.675.233 31.994.866 375,99 395.072.140 30,62 18 79.820.484 30.787.247 381,63 425.859.387 31,23 19 80.982.216 29.625.140 387,36 455.484.527 31,86 20 82.160.662 28.506.831 393,17 483.991.357 32,50 21 83.356.060 27.430.671 399,06 511.422.028 33,15 22 84.568.648 26.395.074 405,05 537.817.103 33,81 23 85.798.669 25.398.514 411,13 563.215.617 34,48 24 87.046.371 24.439.520 417,29 587.655.137 35,17 25 88.312.003 23.516.679 423,55 611.171.816 35,88

204

Appendix 8: Business Case Biomass Co-Firing – Case 1

Year CF NPV Power Price NPV Production costs CO2 savings tCO2 Price CO2 Eur/ton 0 -12.000.000 -12.000.000 7,82 -12.000.000 7,32 71382 15,0 1 1.132.835 1.050.642 7,93 -10.949.358 7,46 71382 15,3 2 1.152.043 990.933 8,05 -9.958.425 7,61 71382 15,6 3 1.171.583 934.624 8,17 -9.023.802 7,77 71382 15,9 4 1.191.461 881.519 8,30 -8.142.283 7,92 71382 16,2 5 1.211.683 831.436 8,42 -7.310.847 8,08 71382 16,6 6 1.232.256 784.203 8,55 -6.526.643 8,24 71382 16,9 7 1.253.186 739.658 8,67 -5.786.985 8,41 71382 17,2 8 1.274.478 697.647 8,80 -5.089.338 8,57 71382 17,6 9 1.296.139 658.026 8,94 -4.431.312 8,75 71382 17,9 10 1.318.177 620.659 9,07 -3.810.653 8,92 71382 18,3 11 1.340.597 585.417 9,21 -3.225.236 9,10 71382 18,7 12 1.363.406 552.180 9,34 -2.673.056 9,28 71382 19,0 13 1.386.611 520.832 9,48 -2.152.224 9,47 71382 19,4 14 1.410.219 491.267 9,63 -1.660.957 9,66 71382 19,8 15 1.434.238 463.383 9,77 -1.197.573 9,85 71382 20,2 16 1.458.674 437.084 9,92 -760.489 10,05 71382 20,6 17 1.483.535 412.281 10,07 -348.208 10,25 71382 21,0 18 1.508.829 388.887 10,22 40.678 10,45 71382 21,4 19 1.534.563 366.822 10,37 407.500 10,66 71382 21,9 20 1.560.745 346.012 10,53 753.512 10,87 71382 22,3

Appendix 9: Business Case Nuclear Power Plant Lifetime Enlargement – Case 1

Year CF NPV Power Price NPV Production costs Insurance costs 0 -1.100.000.000 -1.100.000.000 44,99 -1.100.000.000 16,17 1 161.275.207 149.573.808 45,89 -950.426.192 19,61 50.000.000 2 163.480.711 140.618.482 46,81 -809.807.709 20,01 52.020.000 3 166.750.325 133.024.159 47,75 -676.783.550 20,41 53.060.400 4 170.085.332 125.839.979 48,70 -550.943.571 20,81 54.121.608 5 173.487.038 119.043.793 49,68 -431.899.779 21,23 55.204.040 6 176.956.779 112.614.645 50,67 -319.285.134 21,66 56.308.121 7 180.495.914 106.532.713 51,68 -212.752.421 22,09 57.434.283 8 184.105.833 100.779.246 52,72 -111.973.176 22,53 58.582.969 9 187.787.949 95.336.503 53,77 -16.636.672 22,98 59.754.628 10 191.543.708 90.187.705 54,85 73.551.032 23,44 60.949.721 11 195.374.583 85.316.975 55,94 158.868.008 23,91 62.168.715 12 199.282.074 80.709.297 57,06 239.577.305 24,39 63.412.090 13 203.267.716 76.350.464 58,20 315.927.770 24,88 64.680.332 14 207.333.070 72.227.037 59,37 388.154.807 25,37 65.973.938 15 211.479.731 68.326.302 60,55 456.481.109 25,88 67.293.417 16 215.709.326 64.636.232 61,76 521.117.341 26,40 68.639.285 17 220.023.513 61.145.450 63,00 582.262.791 26,93 70.012.071 18 224.423.983 57.843.194 64,26 640.105.985 27,46 71.412.312 19 228.912.463 54.719.281 65,55 694.825.266 28,01 72.840.559 20 233.490.712 51.764.080 66,86 746.589.345 28,57 74.297.370

205

Appendix 10: Business Case Coal Power Plant – Case 2

Year CF NPV Power Price NPV Production costs CO2 in tCO2 Price tCO2 (€) 0 -2.821.000.000 -2.821.000.000 55,46 -2.821.000.000 47,97 15,93 1 -16.586.902 -15.383.431 58,23 -2.836.383.431 50,37 2319926 16,73 2 -17.416.247 -14.980.643 61,14 -2.851.364.074 52,88 2319926 17,56 3 -20.426.294 -16.294.964 64,20 -2.867.659.039 55,53 2319926 19,36 4 -21.447.609 -15.868.309 67,41 -2.883.527.348 58,31 2319926 20,33 5 -22.519.989 -15.452.825 70,78 -2.898.980.173 61,22 2319926 21,35 6 -23.645.988 -15.048.220 74,32 -2.914.028.393 64,28 2319926 22,42 7 -24.828.288 -14.654.209 78,03 -2.928.682.602 67,50 2319926 23,54 8 -26.069.702 -14.270.514 81,93 -2.942.953.117 70,87 2319926 24,71 9 -27.373.187 -13.896.866 86,03 -2.956.849.983 74,41 2319926 25,95 10 -28.741.847 -13.533.001 90,33 -2.970.382.984 78,13 2319926 27,25 11 -30.178.939 -13.178.663 94,85 -2.983.561.647 82,04 2319926 28,61 12 -31.687.886 -12.833.603 99,59 -2.996.395.250 86,14 2319926 30,04 13 -33.272.280 -12.497.578 104,57 -3.008.892.828 90,45 2319926 31,54 14 -34.935.894 -12.170.351 109,80 -3.021.063.178 94,97 2319926 33,12 15 -36.682.689 -11.851.691 115,29 -3.032.914.869 99,72 2319926 34,78 16 -38.516.824 -11.541.376 121,05 -3.044.456.245 104,71 2319926 36,51 17 -40.442.665 -11.239.185 127,11 -3.055.695.430 109,94 2319926 38,34 18 -42.464.798 -10.944.907 133,46 -3.066.640.336 115,44 2319926 40,26 19 -44.588.038 -10.658.333 140,13 -3.077.298.670 121,21 2319926 42,27 20 -46.817.440 -10.379.264 147,14 -3.087.677.934 127,27 2319926 44,38 21 -49.158.312 -10.107.501 154,50 -3.097.785.435 133,64 2319926 46,60 22 -51.616.227 -9.842.854 162,22 -3.107.628.288 140,32 2319926 48,93 23 -54.197.039 -9.585.136 170,33 -3.117.213.424 147,33 2319926 51,38 24 -56.906.891 -9.334.166 178,85 -3.126.547.590 154,70 2319926 53,95 25 -59.752.235 -9.089.767 187,79 -3.135.637.358 162,44 2319926 56,65 26 -62.739.847 -8.851.768 197,18 -3.144.489.125 170,56 2319926 59,48 27 -65.876.839 -8.620.000 207,04 -3.153.109.125 179,09 2319926 62,45 28 -69.170.681 -8.394.300 217,39 -3.161.503.425 188,04 2319926 65,57 29 -72.629.215 -8.174.510 228,26 -3.169.677.935 197,44 2319926 68,85 30 -76.260.676 -7.960.475 239,68 -3.177.638.410 207,31 2319926 72,30 31 -80.073.710 -7.752.044 251,66 -3.185.390.454 217,68 2319926 75,91 32 -84.077.395 -7.549.070 264,24 -3.192.939.525 228,56 2319926 79,71 33 -88.281.265 -7.351.411 277,46 -3.200.290.936 239,99 2319926 83,69 34 -92.695.328 -7.158.927 291,33 -3.207.449.863 251,99 2319926 87,88 35 -97.330.095 -6.971.483 305,89 -3.214.421.347 264,59 2319926 92,27 36 -102.196.600 -6.788.947 321,19 -3.221.210.294 277,82 2319926 96,88 37 -107.306.430 -6.611.191 337,25 -3.227.821.485 291,71 2319926 101,73 38 -112.671.751 -6.438.088 354,11 -3.234.259.573 306,30 2319926 106,81 39 -118.305.339 -6.269.518 371,82 -3.240.529.091 321,61 2319926 112,15 40 -124.220.606 -6.105.362 390,41 -3.246.634.453 337,69 2319926 117,76

206

Appendix 11: Business Case Nuclear Power Plant – Case 2

Year CF NPV Power Price NPV Production costs Yearly insurance costs 0 -4.313.000.000 -4.313.000.000 56,30 -4.313.000.000 20,23 1 222.134.740 206.017.650 59,11 -4.106.982.350 25,26 50000000 2 230.616.477 198.365.537 62,07 -3.908.616.814 26,53 55125000 3 242.147.301 193.171.684 65,17 -3.715.445.130 27,85 57881250 4 254.254.666 188.113.823 68,43 -3.527.331.307 29,25 60775313 5 266.967.399 183.188.393 71,85 -3.344.142.914 30,71 63814078 6 280.315.769 178.391.927 75,44 -3.165.750.988 32,24 67004782 7 294.331.558 173.721.047 79,22 -2.992.029.941 33,86 70355021 8 309.048.135 169.172.467 83,18 -2.822.857.474 35,55 73872772 9 324.500.542 164.742.983 87,33 -2.658.114.491 37,33 77566411 10 340.725.569 160.429.478 91,70 -2.497.685.013 39,19 81444731 11 357.761.848 156.228.914 96,29 -2.341.456.099 41,15 85516968 12 375.649.940 152.138.334 101,10 -2.189.317.765 43,21 89792816 13 394.432.437 148.154.859 106,16 -2.041.162.906 45,37 94282457 14 414.154.059 144.275.684 111,46 -1.896.887.222 47,64 98996580 15 434.861.762 140.498.079 117,04 -1.756.389.143 50,02 103946409 16 456.604.850 136.819.384 122,89 -1.619.569.759 52,52 109143729 17 479.435.093 133.237.009 129,03 -1.486.332.751 55,15 114600916 18 503.406.847 129.748.432 135,48 -1.356.584.319 57,91 120330962 19 528.577.190 126.351.197 142,26 -1.230.233.122 60,80 126347510 20 555.006.049 123.042.913 149,37 -1.107.190.210 63,84 132664885 21 582.756.351 119.821.250 156,84 -987.368.960 67,03 139298130 22 611.894.169 116.683.941 164,68 -870.685.018 70,38 146263036 23 642.488.877 113.628.777 172,92 -757.056.241 73,90 153576188 24 674.613.321 110.653.607 181,56 -646.402.633 77,60 161254997 25 708.343.987 107.756.337 190,64 -538.646.296 81,48 169317747 26 743.761.187 104.934.927 200,17 -433.711.369 85,55 177783634 27 780.949.246 102.187.390 210,18 -331.523.979 89,83 186672816 28 819.996.708 99.511.793 220,69 -232.012.186 94,32 196006457 29 860.996.544 96.906.251 231,73 -135.105.935 99,04 205806780 30 904.046.371 94.368.931 243,31 -40.737.004 103,99 216097119 31 949.248.690 91.898.047 255,48 51.161.043 109,19 226901975 32 996.711.124 89.491.858 268,25 140.652.901 114,65 238247073 33 1.046.546.680 87.148.671 281,66 227.801.572 120,38 250159427 34 1.098.874.014 84.866.836 295,75 312.668.408 126,40 262667398 35 1.153.817.715 82.644.747 310,53 395.313.155 132,72 275800768 36 1.211.508.601 80.480.840 326,06 475.793.995 139,36 289590807 37 1.272.084.031 78.373.590 342,36 554.167.585 146,32 304070347 38 1.335.688.232 76.321.515 359,48 630.489.100 153,64 319273864 39 1.402.472.644 74.323.171 377,46 704.812.271 161,32 335237558 40 1.472.596.276 72.377.149 396,33 777.189.420 169,39 351999436

207

Appendix 12: Business Case CCGT Power Plant – Case 2

Year CF NPV Power Price NPV Production costs CO2 emissions tCO2 Price (€) 0 -280.840.000 -280.840.000 55,40 -280.840.000 30,52 15,93 1 20.939.641 19.420.355 58,17 -261.419.645 32,05 349910 16,73 2 21.986.623 18.911.868 61,08 -242.507.777 33,65 349910 17,56 3 23.085.954 18.416.694 64,13 -224.091.083 35,33 349910 18,44 4 24.240.252 17.934.485 67,34 -206.156.599 37,10 349910 19,36 5 25.452.264 17.464.902 70,71 -188.691.697 38,95 349910 20,33 6 26.724.878 17.007.614 74,24 -171.684.083 40,90 349910 21,35 7 28.061.122 16.562.300 77,95 -155.121.783 42,95 349910 22,42 8 29.464.178 16.128.645 81,85 -138.993.139 45,09 349910 23,54 9 30.937.386 15.706.345 85,94 -123.286.794 47,35 349910 24,71 10 32.484.256 15.295.102 90,24 -107.991.692 49,71 349910 25,95 11 34.108.469 14.894.626 94,75 -93.097.066 52,20 349910 27,25 12 35.813.892 14.504.637 99,49 -78.592.430 54,81 349910 28,61 13 37.604.587 14.124.858 104,47 -64.467.571 57,55 349910 30,04 14 39.484.816 13.755.024 109,69 -50.712.548 60,43 349910 31,54 15 41.459.057 13.394.872 115,17 -37.317.675 63,45 349910 33,12 16 43.532.010 13.044.151 120,93 -24.273.524 66,62 349910 34,78 17 45.708.610 12.702.613 126,98 -11.570.911 69,95 349910 36,51 18 47.994.041 12.370.017 133,33 799.106 73,45 349910 38,34 19 50.393.743 12.046.130 139,99 12.845.237 77,12 349910 40,26 20 52.913.430 11.730.724 146,99 24.575.960 80,98 349910 42,27 21 55.559.101 11.423.575 154,34 35.999.535 85,03 349910 44,38 22 58.337.056 11.124.469 162,06 47.124.004 89,28 349910 46,60 23 61.253.909 10.833.194 170,16 57.957.198 93,74 349910 48,93 24 64.316.605 10.549.546 178,67 68.506.744 98,43 349910 51,38 25 67.532.435 10.273.325 187,61 78.780.069 103,35 349910 53,95 26 70.909.056 10.004.336 196,99 88.784.405 108,52 349910 56,65 27 74.454.509 9.742.390 206,84 98.526.795 113,95 349910 59,48 28 78.177.235 9.487.302 217,18 108.014.097 119,64 349910 62,45 29 82.086.097 9.238.894 228,04 117.252.991 125,63 349910 65,57 30 86.190.401 8.996.990 239,44 126.249.981 131,91 349910 68,85 31 90.499.921 8.761.420 251,41 135.011.401 138,50 349910 72,30 32 95.024.917 8.532.017 263,98 143.543.418 145,43 349910 75,91 33 99.776.163 8.308.621 277,18 151.852.039 152,70 349910 79,71 34 104.764.972 8.091.075 291,04 159.943.114 160,34 349910 83,69 35 110.003.220 7.879.224 305,59 167.822.338 168,35 349910 87,88

208

Appendix 13: Business Case Biomass Co-Firing – Case 2

Year CF NPV Power Price NPV Production costs Savings in tCO2 Price €/tCO2 Yearly savings 0 -12.000.000 -12.000.000 8,05 -12.000.000 7,53 71382 15,0 1070735,002 1 1.167.591 1.082.876 8,41 -10.917.124 7,91 71382 15,8 1124271,752 2 1.222.315 1.051.378 8,79 -9.865.746 8,31 71382 16,5 1180485,339 3 1.279.610 1.020.802 9,18 -8.844.944 8,72 71382 17,4 1239509,606 4 1.339.598 991.120 9,60 -7.853.824 9,16 71382 18,2 1301485,087 5 1.402.406 962.306 10,03 -6.891.517 9,62 71382 19,1 1366559,341 6 1.468.166 934.336 10,48 -5.957.182 10,10 71382 20,1 1434887,308 7 1.537.018 907.182 10,95 -5.049.999 10,60 71382 21,1 1506631,673 8 1.609.108 880.823 11,44 -4.169.176 11,13 71382 22,2 1581963,257 9 1.684.588 855.235 11,96 -3.313.942 11,69 71382 23,3 1661061,42 10 1.763.618 830.394 12,50 -2.483.548 12,27 71382 24,4 1744114,491 11 1.846.366 806.279 13,06 -1.677.269 12,89 71382 25,7 1831320,215 12 1.933.006 782.868 13,65 -894.401 13,53 71382 26,9 1922886,226 13 2.023.723 760.142 14,26 -134.260 14,21 71382 28,3 2019030,537 14 2.118.709 738.079 14,90 603.819 14,92 71382 29,7 2119982,064 15 2.218.166 716.660 15,57 1.320.479 15,66 71382 31,2 2225981,168 16 2.322.303 695.867 16,27 2.016.346 16,45 71382 32,7 2337280,226 17 2.431.343 675.680 17,01 2.692.026 17,27 71382 34,4 2454144,237 18 2.545.516 656.083 17,77 3.348.109 18,13 71382 36,1 2576851,449 19 2.665.065 637.058 18,57 3.985.167 19,04 71382 37,9 2705694,021 20 2.790.244 618.587 19,41 4.603.754 19,99 71382 39,8 2840978,723

Appendix 14: Business Case Biomass Co-Firing – Case 2

Year CF NPV Power Price NPV Production costs Insurance costs 0 -1.100.000.000 -1.100.000.000 46,32 -1.100.000.000 16,65 1 173.885.924 161.269.549 48,63 -938.730.451 20,78 50.000.000 2 179.955.220 154.789.087 51,06 -783.941.364 21,82 55.125.000 3 188.952.981 150.736.207 53,62 -633.205.158 22,92 57.881.250 4 198.400.630 146.789.444 56,30 -486.415.714 24,06 60.775.313 5 208.320.662 142.946.020 59,11 -343.469.694 25,26 63.814.078 6 218.736.695 139.203.230 62,07 -204.266.464 26,53 67.004.782 7 229.673.530 135.558.438 65,17 -68.708.026 27,85 70.355.021 8 241.157.206 132.009.078 68,43 63.301.052 29,25 73.872.772 9 253.215.066 128.552.652 71,85 191.853.705 30,71 77.566.411 10 265.875.820 125.186.727 75,44 317.040.432 32,24 81.444.731 11 279.169.611 121.908.933 79,22 438.949.364 33,86 85.516.968 12 293.128.091 118.716.961 83,18 557.666.326 35,55 89.792.816 13 307.784.496 115.608.566 87,33 673.274.892 37,33 94.282.457 14 323.173.721 112.581.559 91,70 785.856.451 39,19 98.996.580 15 339.332.407 109.633.809 96,29 895.490.260 41,15 103.946.409 16 356.299.027 106.763.240 101,10 1.002.253.500 43,21 109.143.729 17 374.113.978 103.967.832 106,16 1.106.221.333 45,37 114.600.916 18 392.819.677 101.245.617 111,46 1.207.466.950 47,64 120.330.962 19 412.460.661 98.594.679 117,04 1.306.061.629 50,02 126.347.510 20 433.083.694 96.013.150 122,89 1.402.074.779 52,52 132.664.885

209

Appendix 15: Scenario 1 – Evolution of Installed Capacity 2011-2020

Total Capacity Total New Capacity Total old Capacity New Renewables new total New new renewables New Renewables Cogeneration total Cogeneration new Cogeneration Thermal Total Thermal new Thermal CCGT total CCGT new CCGT new oil Fuel Fuel-Oil Coal New Cofiring Coal cofiring less Coal Nuclear Total Nuclear New Nuclear Hydro Total Hydro Cumulative New Capacity Hydro Installed Capacity (MW) Dec 2010 25589 7303 5696 5893 1253 3344 8847 399 157 Share 22% 29% 23% 13% 35% 2% 1% 5% 6103,688422

25.845 25.317 7033,08 7033,08 8.847 5819,08 5819,08 407,69 418,95 100,40

528 19,95 5696 1214 3341 3341 8847 2011 0,00 0,00 399 0 0 0 0 6540,556943

26.403 25.247 439,8975 7033,08 6963,68 1.156 9.048 40,8975 5819,08 5819,08 844,56 1144,6 200,79 69,40 5696 1214 3341 3341 8847 2012 0,00 69,4 399 0 0 0 7008,694116 461,892375 62,892375

26.996 25.247 7033,08 6963,68 1.748 9.150 1312,69 5819,08 5819,08 1144,6 303,47 5696 1214 3341 3341 8847 2013 69,4 0,00 69,4 399 0 0 0 7510,337979 484,9869938 85,98699375

27.236 24.859 6878,08 6808,68 2.377 9.254 1814,34 5819,08 5819,08 407,31 989,6 5696 1059 3108 3108 8847 2014 69,4 0,00 69,4 399 0 0 0 8047,886757 509,2363434 110,2363434

27.903 24.859 6878,08 6808,68 3.044 9.359 2351,89 5819,08 5819,08 512,33 989,6 5696 1059 3108 3108 8847 2015 69,4 0,00 69,4 399 0 0 0 8623,910326 534,6981606 135,6981606

28.611 24.859 6878,08 6808,68 3.752 9.466 2927,91 5819,08 5819,08 618,54 989,6 5696 1059 3108 3108 8847 2016 69,4 0,00 69,4 399 0 0 0 9241,162501 561,4330686 162,4330686

28.995 24.492 6511,08 6441,88 4.503 9.573 3545,16 5819,08 5819,08 725,96 622,8 5696 3108 3108 8847 2017 69,2 0,00 69,2 399 692 0 0 0 589,5047221 190,5047221 9902,5942

29.793 24.492 6511,08 6441,88 5.301 9.682 4206,59 5819,08 5819,08 834,59 622,8 5696 3108 3108 8847 2018 69,2 0,00 69,2 399 692 0 0 0 10611,36755 618,9799582 219,9799582

30.641 24.492 6511,08 6441,88 6.149 9.791 4915,37 5819,08 5819,08 944,46 622,8 5696 3108 3108 8847 2019 69,2 0,00 69,2 399 692 0 0 0 11370,87101 649,9289561 250,9289561

31.543 24.492 6511,08 6441,88 7.051 9.903 5674,87 5819,08 5819,08 1055,58 622,8 5696 3108 3108 8847 2020 69,2 0,00 69,2 399 692 0 0 0

210

Appendix 16: Scenario 1 – Evolution of Installed Capacity 2021-2030

Total Capacity Total New Capacity Total old Capacity New Renewables new total New new renewables New Renewables Cogeneration total Cogeneration new Cogeneration Thermal Total Thermal new Thermal CCGT total CCGT new CCGT new oil Fuel Fuel-Oil Coal New Cofiring Coal cofiring less Coal Nuclear Total Nuclear New Nuclear Hydro Total Hydro Cumulative New Capacity Hydro Installed Capacity (MW) Dec 2010 25589 7303 5696 5893 1253 3344 8847 399 157 Share 22% 29% 23% 13% 35% 2% 1% 5% 12184,73555 682,4254039 283,4254039

31.986 23.976 10.015 6511,08 6441,88 8.009 6488,74 5819,08 5819,08 1167,95 622,8 5696 2593 2593 8847 2021 69,2 0,00 69,2 399 692 0 0 0 13056,85206 716,5466741 317,5466741

33.006 23.976 10.129 6511,08 6441,88 9.029 7360,85 5819,08 5819,08 1281,61 622,8 5696 2593 2593 8847 2022 69,2 0,00 69,2 399 692 0 0 0 13991,38987 752,3740078 353,3740078

8009,295 1567,415 35.072 11.613 23.459 10.244 7317,295 6441,88 8295,39 1498,22 5819,08 1396,55 622,8 5696 2075 2075 8847 2023 69,2 399 692 0 0 0

14992,81678 789,9927082 390,9927082

36.632 14.266 22.366 10.360 9507,51 3065,63 6441,88 9296,82 8815,51 2996,43 5819,08 1512,79 622,8 5696 8847 2024 69,2 399 692 982 982 0 0 0

16065,92033 829,4923436 430,4923436 11005,725 10313,725 4563,845 39.197 16.995 22.202 10.477 10369,92 6441,88 4494,65 5819,08 1630,36 622,8 5696 8847 2025 69,2 399 692 818 818 0 0 0

17215,83074 870,9669608 471,9669608 12503,94 42.005 19.803 22.202 10.596 11519,83 11811,94 6062,06 6441,88 5992,86 5819,08 1749,26 622,8 5696 8847 2026 69,2 399 692 818 818 0 0 0

18448,04543 914,5153088 515,5153088 14002,155 13310,155 7560,275 44.594 22.697 21.897 10.717 12752,05 6441,88 7491,08 5819,08 1869,50 622,8 5696 8847 2027 69,2 399 692 513 513 0 0 0

19768,45528 960,2410742 561,2410742 15500,37 47.067 25.683 21.384 10.838 14072,46 14808,37 9058,49 6441,88 8989,29 5819,08 1991,12 622,8 5696 8847 2028 69,2 399 692 0 0 0 0 0

21183,37282 1008,253128 609,253128 16998,585 10556,705 16306,585

50.151 28.767 21.384 10.961 15487,37 10487,51 6441,88 5819,08 2114,11 622,8 5696 8847 2029 69,2 399 692 0 0 0 0 0

1058,665784 659,6657844 22699,5624 12054,92 53.341 31.957 21.384 11.085 17003,56 11985,72 18496,8 6441,88 17804,8 5819,08 2238,50 622,8 5696 8847 2030 69,2 399 692 0 0 0 0 0

211

Appendix 17: Scenario 2 – Evolution of Installed Capacity 2011-2020

Total Capacity Total New Capacity Total old Capacity New Renewables new total New new renewables New Renewables Cogeneration total Cogeneration new Cogeneration Thermal Total Thermal new Thermal CCGT total CCGT new CCGT new oil Fuel Fuel-Oil Coal New Cofiring Coal cofiring less Coal Nuclear Total Nuclear New Nuclear Hydro Total Hydro Cumulative New Capacity Hydro Installed Capacity (MW) Dec 2010 25589 7303 5696 5893 1253 3344 8847 399 157 Share 22% 29% 23% 13% 35% 2% 1% 5% 6103,675737 25.842 25.317 7033,08 7033,08 5819,08 5819,08 8.847 407,68 418,95 525 19,95 97,75 5696 1214 3341 3341 8847 2011 0,00 0,00 399 0 0 0 0 6540,529759 439,8975 26.397 25.247 7033,08 6963,68 40,8975 5819,08 5819,08 1.150 9.043 844,53 1144,6 195,51 69,40 5696 1214 3341 3341 8847 2012 0,00 69,4 399 0 0 0 7008,650421 461,892375 62,892375 26.987 25.247 7033,08 6963,68 1312,65 5819,08 5819,08 1.740 9.142 1144,6 295,42 5696 1214 3341 3341 8847 2013 69,4 0,00 69,4 399 0 0 0 7510,275549 484,9869938 85,98699375 27.225 24.859 6878,08 6808,68 1814,28 5819,08 5819,08 2.366 9.243 396,44 989,6 5696 1059 3108 3108 8847 2014 69,4 0,00 69,4 399 0 0 0 8047,803134 509,2363434 110,2363434 27.889 24.859 6878,08 6808,68 2351,80 5819,08 5819,08 3.030 9.346 498,58 989,6 5696 1059 3108 3108 8847 2015 69,4 0,00 69,4 399 0 0 0 8623,802797 534,6981606 135,6981606 28.594 24.859 6878,08 6808,68 2927,80 5819,08 5819,08 3.735 9.449 601,84 989,6 5696 1059 3108 3108 8847 2016 69,4 0,00 69,4 399 0 0 0 9241,028071 561,4330686 162,4330686 28.975 24.492 6511,08 6441,88 3545,03 5819,08 5819,08 4.483 9.553 706,24 622,8 5696 3108 3108 8847 2017 69,2 0,00 69,2 399 692 0 0 0 589,5047221 190,5047221 9902,42957 29.770 24.492 6511,08 6441,88 4206,43 5819,08 5819,08 5.278 9.659 811,80 622,8 5696 3108 3108 8847 2018 69,2 0,00 69,2 399 692 0 0 0 10611,16908 618,9799582 219,9799582 30.615 24.492 6511,08 6441,88 4915,17 5819,08 5819,08 6.123 9.766 918,53 622,8 5696 3108 3108 8847 2019 69,2 0,00 69,2 399 692 0 0 0 7405,445455 963,5654545 11370,63471 649,9289561 250,9289561 6713,445455 32.408 24.492 6441,88 5674,63 5819,08 1026,43 7.916 9.873 894,37 622,8 5696 3108 3108 8847 2020 69,2 399 692 0 0 0

212

Appendix 18: Scenario 2 – Evolution of Installed Capacity 2021-2030

Total Capacity Total New Capacity Total old Capacity New Renewables new total New new renewables New Renewables Cogeneration total Cogeneration new Cogeneration Thermal Total Thermal new Thermal CCGT total CCGT new CCGT new oil Fuel Fuel-Oil Coal New Cofiring Coal cofiring less Coal Nuclear Total Nuclear New Nuclear Hydro Total Hydro Cumulative New Capacity Hydro Installed Capacity (MW) Dec 2010 25589 7303 5696 5893 1253 3344 8847 399 157 Share 22% 29% 23% 13% 35% 2% 1% 5% 8299,810909 1857,930909 12184,45702 682,4254039 283,4254039 7607,810909 34.258 10.281 23.976 6441,88 6488,46 1788,73 5819,08 1135,53 9.983 622,8 5696 3108 2593 8847 2021 69,2 399 692 516 0 0 9194,176364 2752,296364 13056,52645 716,5466741 317,5466741 8502,176364 36.169 12.192 23.976 10.093 6441,88 7360,53 2683,10 5819,08 1245,83 622,8 5696 3108 2593 8847 2022 69,2 399 692 516 0 0 10088,54182 3646,661818 13991,01189 752,3740078 353,3740078 9396,541818 38.145 14.686 23.459 10.204 6441,88 8295,01 3577,46 5819,08 1357,35 622,8 5696 3108 1033 2075 8847 2023 69,2 399 692 0 0 10982,90727 4541,027273 14992,38059 789,9927082 390,9927082 10290,90727 40.191 17.825 22.366 10.317 6441,88 9296,38 4471,83 5819,08 1470,10 622,8 5696 3108 2126 8847 2024 69,2 399 692 982 0 0 11877,27273 5435,392727 16065,41953 829,4923436 430,4923436 11185,27273 10369,42 42.312 20.110 22.202 10.431 6441,88 5366,19 5819,08 1584,10 622,8 5696 3108 2290 8847 2025 69,2 399 692 818 0 0 12771,63818 6329,758182 17215,25832 870,9669608 471,9669608 12079,63818 11519,26 44.513 22.311 22.202 10.546 6441,88 6260,56 5819,08 1699,35 622,8 5696 3108 2290 8847 2026 69,2 399 692 818 0 0 13666,00364 7224,123636 914,5153088 515,5153088 12974,00364 18447,3937 12751,39 46.799 24.903 21.897 10.663 6441,88 7154,92 5819,08 1815,89 622,8 5696 3108 2596 8847 2027 69,2 399 692 513 0 0 14560,36909 8118,489091 19767,71583 960,2410742 561,2410742 13868,36909 14071,72 49.177 27.794 21.384 10.781 6441,88 8049,29 5819,08 1933,70 622,8 5696 3108 3108 8847 2028 69,2 399 692 0 0 0 15454,73455 9012,854545 21182,53642 1008,253128 14762,73455 609,253128 15486,54 51.654 30.270 21.384 10.900 6441,88 8943,65 5819,08 2052,82 622,8 5696 3108 3108 8847 2029 69,2 399 692 0 0 0 22698,61896 1058,665784 659,6657844 17002,62 54.235 32.851 21.384 11.020 16349,1 9907,22 6441,88 15657,1 9838,02 5819,08 2173,26 622,8 5696 3108 3108 8847 2030 69,2 399 692 0 0 0

213

Appendix 19: Scenario 3 – Evolution of Installed Capacity 2011-2020

Total Capacity Total New Capacity Total old Capacity New Renewables new total New new renewables New Renewables Cogeneration total Cogeneration new Cogeneration Thermal Total Thermal new Thermal CCGT total CCGT new CCGT new oil Fuel Fuel-Oil Coal New Cofiring Coal cofiring less Coal Nuclear Total Nuclear New Nuclear Hydro Total Hydro Cumulative New Capacity Hydro Installed Capacity (MW) Dec 2010 25589 7303 5696 5893 1253 3344 8847 399 157 Share 22% 29% 23% 13% 35% 2% 1% 5% 5915,876825

25.657 25.317 7033,08 7033,08 8.847 5819,08 5819,08 219,88 418,95 100,87

341 19,95 5696 1214 3341 3341 8847 2011 0,00 0,00 399 0 0 0 0 6144,241329

26.007 25.247 439,8975 7033,08 6963,68 9.049 40,8975 5819,08 5819,08 448,24 1144,6 201,74

760 5696 1214 3341 3341 8847 2012 69,4 0,00 69,4 399 0 0 0 6381,421152 461,892375 62,892375

26.370 25.247 7033,08 6963,68 1.123 9.152 5819,08 5819,08 685,42 1144,6 304,91 5696 1214 3341 3341 8847 2013 69,4 0,00 69,4 399 0 0 0 6627,756584 484,9869938 85,98699375

26.356 24.859 6878,08 6808,68 1.496 9.256 5819,08 5819,08 931,76 409,25 989,6 5696 1059 3108 3108 8847 2014 69,4 0,00 69,4 399 0 0 0 6883,601049 509,2363434 110,2363434

26.741 24.859 6878,08 6808,68 1.882 9.362 1187,60 5819,08 5819,08 514,78 989,6 5696 1059 3108 3108 8847 2015 69,4 0,00 69,4 399 0 0 0 7149,321615 534,6981606 135,6981606

27.139 24.859 6878,08 6808,68 2.280 9.469 1453,32 5819,08 5819,08 621,52 989,6 5696 1059 3108 3108 8847 2016 69,4 0,00 69,4 399 0 0 0 7425,299518 561,4330686 162,4330686

27.183 24.492 6511,08 6441,88 2.690 9.576 1729,30 5819,08 5819,08 729,48 622,8 5696 3108 3108 8847 2017 69,2 0,00 69,2 399 692 0 0 0 7711,930713 589,5047221 190,5047221

27.607 24.492 6511,08 6441,88 3.114 9.686 2015,93 5819,08 5819,08 838,66 622,8 5696 3108 3108 8847 2018 69,2 0,00 69,2 399 692 0 0 0 8009,626436 618,9799582 219,9799582

29.006 24.492 7473,29 1031,41 6441,88 4.514 9.796 2313,63 6781,29 5819,08 962,21 949,09 622,8 5696 3108 3108 8847 2019 69,2 399 692 0 0 0 649,9289561 250,9289561 8318,8138

30.420 24.492 1993,62 6441,88 5.928 9.908 2622,81 1924,42 5819,08 1060,78 8435,5 7743,5 622,8 5696 3108 3108 8847 2020 69,2 399 692 0 0 0

214

Appendix 20: Scenario 3 – Evolution of Installed Capacity 2021-2030

Total Capacity Total New Capacity Total old Capacity New Renewables new total New new renewables New Renewables Cogeneration total Cogeneration new Cogeneration Thermal Total Thermal new Thermal CCGT total CCGT new CCGT new oil Fuel Fuel-Oil Coal New Cofiring Coal cofiring less Coal Nuclear Total Nuclear New Nuclear Hydro Total Hydro Cumulative New Capacity Hydro Installed Capacity (MW) Dec 2010 25589 7303 5696 5893 1253 3344 8847 399 157 Share 22% 29% 23% 13% 35% 2% 1% 5% 8639,936407 682,4254039 283,4254039

31.849 23.976 10.021 9397,71 2955,83 6441,88 7.873 2943,94 8705,71 2886,63 5819,08 1173,75 622,8 5696 3108 2593 8847 2021 69,2 399 692 516 0 0 8973,454978 716,5466741 317,5466741

10359,92 33.293 23.976 10.135 3918,04 6441,88 9.317 3277,45 9667,92 3848,84 5819,08 1288,00 622,8 5696 3108 2593 8847 2022 69,2 399 692 516 0 0 9319,848024 752,3740078 353,3740078

11322,13 34.753 11.294 23.459 10.251 10630,13 4880,25 6441,88 3623,85 4811,05 5819,08 1403,55 622,8 5696 3108 1033 2075 8847 2023 69,2 399 692 0 0

9679,612524 789,9927082 390,9927082 12284,34 36.230 13.864 22.366 10.367 11592,34 5842,46 6441,88 3983,61 5773,26 5819,08 1520,42 622,8 5696 3108 2126 8847 2024 69,2 399 692 982 0 0

10053,26464 829,4923436 430,4923436 13246,55 37.723 15.521 22.202 10.486 12554,55 6804,67 6441,88 4357,26 6735,47 5819,08 1638,62 622,8 5696 3108 2290 8847 2025 69,2 399 692 818 0 0

10441,34047 870,9669608 471,9669608 14208,76 39.235 17.033 22.202 10.605 13516,76 7766,88 6441,88 4745,34 7697,68 5819,08 1758,18 622,8 5696 3108 2290 8847 2026 69,2 399 692 818 0 0

10844,39679 914,5153088 515,5153088 15170,97 40.764 18.868 21.897 10.726 14478,97 8729,09 6441,88 5148,40 8659,89 5819,08 1879,09 622,8 5696 3108 2596 8847 2027 69,2 399 692 513 0 0

11263,01188 960,2410742 561,2410742 16133,18 42.313 20.929 21.384 10.848 15441,18 6441,88 5567,01 9622,10 5819,08 2001,38 9691,3 622,8 5696 3108 3108 8847 2028 69,2 399 692 0 0 0

11697,78633 1008,253128 609,253128 17095,39 10653,51 43.882 22.498 21.384 10.972 16403,39 10584,31 6441,88 6001,79 5819,08 2125,07 622,8 5696 3108 3108 8847 2029 69,2 399 692 0 0 0

12149,34393 1058,665784 659,6657844 11615,72 45.471 24.087 21.384 11.097 11546,52 18057,6 6441,88 6453,34 17365,6 5819,08 2250,17 622,8 5696 3108 3108 8847 2030 69,2 399 692 0 0 0

215

Appendix 21: Scenario 1 –evolutions of CO2 emissions2011-2020 Generation (GWh) 2010 2011 2012 2013 2014 2015 2016 Hydro 39.638 38.889 39.006 38.675 38.330 37.973 37.603 Nuclear 52.222 52.182 52.182 52.182 48.543 48.543 48.543 Coal 958.928 929.081 929.081 929.081 810.459 810.459 810.459 CCGT 3.778.962 3.881.845 4.032.131 4.182.416 4.332.701 4.482.987 4.633.272 Cogeneration 39.480 40.921 42.407 43.940 45.520 47.148 48.825 New Renewables 115.710 124.400 133.742 143.783 154.576 166.179 178.650 Total 4.984.940 5.067.319 5.228.549 5.390.076 5.430.130 5.593.288 5.757.352

2017 2018 2019 2020 2021 2022 2023 37.220 36.823 36.412 35.987 35.548 35.095 34.626 48.543 48.543 48.543 48.543 40.487 40.487 32.406 529.592 529.592 529.592 529.592 529.592 529.592 529.592 4.783.558 4.933.843 5.084.129 5.234.414 5.384.699 5.534.985 7.149.034 50.552 52.329 54.158 56.039 57.972 59.959 62.000 192.054 206.463 221.950 238.597 256.489 275.721 296.391 5.641.518 5.807.593 5.974.784 6.143.172 6.304.788 6.475.838 8.104.048

2024 2025 2026 2027 2028 2029 2030 Total CO2 34.142 33.643 33.128 32.597 32.050 31.486 30.905 749.779 15.337 12.775 12.775 8.006 0 0 0 710.843 529.592 529.592 529.592 529.592 529.592 529.592 529.592 13.591.829 8.840.469 10.609.292 12.455.501 14.379.097 16.380.080 18.458.449 20.614.205 169.166.070 64.094 66.244 68.448 70.706 73.020 75.388 77.810 1.196.958 318.608 342.487 368.152 395.737 425.384 457.247 491.493 5.503.814 9.802.243 11.594.033 13.467.596 15.415.735 17.440.125 19.552.162 21.744.005 190.919.292

216

Appendix 22: Scenario 1 –evolutions of SO2 emissions2011-2020

Generation (GWh) 2010 2011 2012 2013 2014 2015 Hydro 99,10 97,22 97,52 96,69 95,83 94,93 Nuclear 78,33 78,27 78,27 78,27 72,81 72,81 Coal 817,60 792,15 792,15 792,15 691,01 691,01 CCGT 44,33 45,53 47,30 49,06 50,82 52,59 Cogeneration 31,58 32,74 33,93 35,15 36,42 37,72 New Renewables 254,56 273,68 294,23 316,32 340,07 365,59 Total 1.325,50 1.319,60 1.343,40 1.367,65 1.286,96 1.314,66 2016 2017 2018 2019 2020 2021 2022 2023 94,01 93,05 92,06 91,03 89,97 88,87 87,74 86,57 72,81 72,81 72,81 72,81 72,81 60,73 60,73 48,61 691,01 451,54 451,54 451,54 451,54 451,54 451,54 451,54 54,35 56,11 57,87 59,64 61,40 63,16 64,93 83,86 39,06 40,44 41,86 43,33 44,83 46,38 47,97 49,60 393,03 422,52 454,22 488,29 524,91 564,28 606,59 652,06 1.344,27 1.136,48 1.170,37 1.206,64 1.245,47 1.274,96 1.319,49 1.372,23

2024 2025 2026 2027 2028 2029 2030 Total SO2 85,36 84,11 82,82 81,49 80,13 78,72 77,26 1.874,45 23,01 19,16 19,16 12,01 0,00 0,00 0,00 1.066,26 451,54 451,54 451,54 451,54 451,54 451,54 451,54 11.588,65 103,70 124,45 146,11 168,67 192,14 216,52 241,81 1.984,35 51,28 52,99 54,76 56,57 58,42 60,31 62,25 957,57 700,94 753,47 809,93 870,62 935,84 1.005,94 1.081,28 12.108,39 1.415,82 1.485,73 1.564,32 1.640,90 1.718,07 1.813,03 1.914,14 29.579,67

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Appendix 23: Scenario 1 –evolutions of NO emissions2011-2020

Generation (GWh) 2010 2011 2012 2013 2014 2015 Hydro 59,46 58,33 58,51 58,01 57,50 56,96 Nuclear 52,22 52,18 52,18 52,18 48,54 48,54 Coal 817,60 792,15 792,15 792,15 691,01 691,01 CCGT 144,07 147,99 153,72 159,45 165,18 170,91 Cogeneration 1.845,03 1.912,37 1.981,83 2.053,45 2.127,29 2.203,37 New Renewables 173,57 186,60 200,61 215,67 231,86 249,27 Total 3.091,94 3.149,63 3.239,00 3.330,92 3.321,38 3.420,06

2016 2017 2018 2019 2020 2021 2022 2023 56,40 55,83 55,23 54,62 53,98 53,32 52,64 51,94 48,54 48,54 48,54 48,54 48,54 40,49 40,49 32,41 691,01 451,54 451,54 451,54 451,54 451,54 451,54 451,54 176,64 182,36 188,09 193,82 199,55 205,28 211,01 272,54 2.281,74 2.362,44 2.445,51 2.530,98 2.618,88 2.709,24 2.802,09 2.897,45 267,97 288,08 309,69 332,93 357,90 384,73 413,58 444,59 3.522,31 3.388,80 3.498,61 3.612,42 3.730,39 3.844,60 3.971,35 4.150,47

2024 2025 2026 2027 2028 2029 2030 Total NO2 51,21 50,46 49,69 48,90 48,08 47,23 46,36 1.124,67 15,34 12,78 12,78 8,01 0,00 0,00 0,00 710,84 451,54 451,54 451,54 451,54 451,54 451,54 451,54 11.588,65 337,03 404,46 474,84 548,18 624,46 703,69 785,88 6.449,15 2.995,35 3.095,79 3.198,79 3.304,34 3.412,46 3.523,12 3.636,32 55.937,83 477,91 513,73 552,23 593,60 638,08 685,87 737,24 8.255,72 4.328,38 4.528,76 4.739,86 4.954,57 5.174,61 5.411,46 5.657,34 84.066,86

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Appendix 24: Scenario 2 –evolutions of CO2 emissions2011-2020 Generation (GWh) 2010 2011 2012 2013 2014 2015 Hydro 39.638 38.856 38.915 38.537 38.146 37.741 Nuclear 52.222 52.182 52.182 52.182 48.543 48.543 Coal 958.928 929.081 929.081 929.081 810.459 810.459 CCGT 3.778.962 3.745.417 3.759.274 3.773.131 3.786.988 3.800.845 Cogeneration 39.480 40.921 42.407 43.940 45.520 47.148 New Renewables 115.710 124.375 133.687 143.695 154.451 166.011 Total 4.984.940 4.930.831 4.955.546 4.980.566 4.884.107 4.910.747

2016 2017 2018 2019 2020 2021 2022 2023 37.323 36.890 36.444 35.984 35.508 35.018 34.513 33.992 48.543 48.543 48.543 48.543 48.543 48.543 48.543 48.543 810.459 529.592 529.592 529.592 529.592 529.592 529.592 529.592 3.814.702 3.828.559 3.842.416 3.856.274 4.464.952 5.077.889 5.695.086 6.316.543 48.825 50.552 52.329 54.158 56.039 57.972 59.959 62.000 178.434 191.785 206.133 221.553 238.124 255.932 275.069 295.635 4.938.286 4.685.921 4.715.458 4.746.103 5.372.757 6.004.946 6.642.762 7.286.304

2024 2025 2026 2027 2028 2029 2030 Total CO2 33.456 32.903 32.334 31.749 31.147 30.527 29.890 739.511 48.543 48.543 48.543 48.543 48.543 48.543 48.543 1.034.002 529.592 529.592 529.592 529.592 529.592 529.592 529.592 13.591.829 6.942.259 7.572.235 8.206.471 8.844.965 9.487.720 10.134.734 10.786.007 121.515.431 64.094 66.244 68.448 70.706 73.020 75.388 77.810 1.196.958 317.735 341.485 367.006 394.432 423.903 455.572 489.604 5.490.332 7.935.679 8.591.001 9.252.393 9.919.987 10.593.924 11.274.356 11.961.446 143.568.062

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Appendix 25: Scenario 2 –evolutions of SO2 emissions2011-2020

Generation (GWh) 2010 2011 2012 2013 2014 2015 Hydro 99,10 97,14 97,29 96,34 95,36 94,35 Nuclear 78,33 78,27 78,27 78,27 72,81 72,81 Coal 817,60 792,15 792,15 792,15 691,01 691,01 CCGT 44,33 43,93 44,10 44,26 44,42 44,58 Cogeneration 31,58 32,74 33,93 35,15 36,42 37,72 New Renewables 254,56 273,62 294,11 316,13 339,79 365,22 Total 1.325,50 1.317,86 1.339,85 1.362,31 1.279,82 1.305,71

2016 2017 2018 2019 2020 2021 2022 2023 93,31 92,23 91,11 89,96 88,77 87,55 86,28 84,98 72,81 72,81 72,81 72,81 72,81 72,81 72,81 72,81 691,01 451,54 451,54 451,54 451,54 451,54 451,54 451,54 44,75 44,91 45,07 45,23 52,37 59,56 66,80 74,09 39,06 40,44 41,86 43,33 44,83 46,38 47,97 49,60 392,56 421,93 453,49 487,42 523,87 563,05 605,15 650,40 1.333,50 1.123,86 1.155,89 1.190,29 1.234,20 1.280,89 1.330,56 1.383,43

2024 2025 2026 2027 2028 2029 2030 Total SO2 83,64 82,26 80,84 79,37 77,87 76,32 74,73 1.848,78 72,81 72,81 72,81 72,81 72,81 72,81 72,81 1.551,00 451,54 451,54 451,54 451,54 451,54 451,54 451,54 11.588,65 81,43 88,82 96,26 103,75 111,29 118,88 126,52 1.425,40 51,28 52,99 54,76 56,57 58,42 60,31 62,25 957,57 699,02 751,27 807,41 867,75 932,59 1.002,26 1.077,13 12.078,73 1.439,72 1.499,70 1.563,63 1.631,79 1.704,52 1.782,12 1.864,98 29.450,13

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Appendix 26: Scenario 2 –evolutions of NO emissions2011-2020

Generation (GWh) 2010 2011 2012 2013 2014 2015 Hydro 59,46 58,28 58,37 57,81 57,22 56,61 Nuclear 52,22 52,18 52,18 52,18 48,54 48,54 Coal 817,60 792,15 792,15 792,15 691,01 691,01 CCGT 144,07 142,79 143,32 143,84 144,37 144,90 Cogeneration 1.845,03 1.912,37 1.981,83 2.053,45 2.127,29 2.203,37 New Renewables 173,57 186,56 200,53 215,54 231,68 249,02 Total 3.091,94 3.144,34 3.228,38 3.314,98 3.300,11 3.393,45

2016 2017 2018 2019 2020 2021 2022 2023 55,98 55,34 54,67 53,98 53,26 52,53 51,77 50,99 48,54 48,54 48,54 48,54 48,54 48,54 48,54 48,54 691,01 451,54 451,54 451,54 451,54 451,54 451,54 451,54 145,43 145,96 146,49 147,01 170,22 193,59 217,11 240,81 2.281,74 2.362,44 2.445,51 2.530,98 2.618,88 2.709,24 2.802,09 2.897,45 267,65 287,68 309,20 332,33 357,19 383,90 412,60 443,45 3.490,36 3.351,49 3.455,94 3.564,38 3.699,62 3.839,33 3.983,66 4.132,78

2024 2025 2026 2027 2028 2029 2030 Total NO 50,18 49,35 48,50 47,62 46,72 45,79 44,84 1.109,27 48,54 48,54 48,54 48,54 48,54 48,54 48,54 1.034,00 451,54 451,54 451,54 451,54 451,54 451,54 451,54 11.588,65 264,66 288,68 312,86 337,20 361,70 386,37 411,20 4.632,55 2.995,35 3.095,79 3.198,79 3.304,34 3.412,46 3.523,12 3.636,32 55.937,83 476,60 512,23 550,51 591,65 635,85 683,36 734,41 8.235,50 4.286,88 4.446,13 4.610,74 4.780,89 4.956,82 5.138,72 5.326,84 82.537,80

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Appendix 27: Scenario 3 –evolutions of CO2 emissions2011-2020

Generation (GWh) 2010 2011 2012 2013 2014 2015 Hydro 39.638 38.803 38.833 38.411 37.975 37.524 Nuclear 52.222 52.182 52.182 52.182 48.543 48.543 Coal 958.928 929.081 929.081 929.081 810.459 810.459 CCGT 3.778.962 3.878.236 4.024.913 4.171.589 4.318.266 4.464.942 Cogeneration 39.480 40.921 42.407 43.940 45.520 47.148 New Renewables 115.710 120.827 126.167 131.739 137.553 143.619 Total 4.984.940 5.060.050 5.213.582 5.366.942 5.398.315 5.552.235

2016 2017 2018 2019 2020 2021 2022 2023 37.058 36.576 36.078 35.564 35.034 34.487 33.923 33.342 48.543 48.543 48.543 48.543 48.543 48.543 48.543 48.543 810.459 529.592 529.592 529.592 529.592 529.592 529.592 529.592 4.611.619 4.758.295 4.904.972 5.886.960 6.917.455 7.996.458 9.123.968 10.299.985 48.825 50.552 52.329 54.158 56.039 57.972 59.959 62.000 149.949 156.554 163.445 170.635 178.136 185.962 194.128 202.646 5.706.452 5.580.111 5.734.958 6.725.452 7.764.799 8.853.015 9.990.113 11.176.107

2024 2025 2026 2027 2028 2029 2030 Total CO2 32.743 32.126 31.491 30.837 30.164 29.472 28.760 728.842 48.543 48.543 48.543 48.543 48.543 48.543 48.543 1.034.002 529.592 529.592 529.592 529.592 529.592 529.592 529.592 13.591.829 11.524.509 12.797.541 14.119.079 15.489.125 16.907.678 18.374.738 19.890.305 188.239.594 64.094 66.244 68.448 70.706 73.020 75.388 77.810 1.196.958 211.533 220.803 230.475 240.564 251.088 262.067 273.519 3.867.117 12.411.014 13.694.849 15.027.627 16.409.367 17.840.085 19.319.799 20.848.529 208.658.342

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Appendix 28: Scenario 3 –evolutions of SO2 emissions2011-2020

Generation (GWh) 2010 2011 2012 2013 2014 2015 Hydro 99,10 97,01 97,08 96,03 94,94 93,81 Nuclear 78,33 78,27 78,27 78,27 72,81 72,81 Coal 817,60 792,15 792,15 792,15 691,01 691,01 CCGT 44,33 45,49 47,21 48,93 50,65 52,37 Cogeneration 31,58 32,74 33,93 35,15 36,42 37,72 New Renewables 254,56 265,82 277,57 289,82 302,62 315,96 Total 1.325,50 1.311,48 1.326,21 1.340,36 1.248,45 1.263,69

2016 2017 2018 2019 2020 2021 2022 2023 92,64 91,44 90,20 88,91 87,59 86,22 84,81 83,36 72,81 72,81 72,81 72,81 72,81 72,81 72,81 72,81 691,01 451,54 451,54 451,54 451,54 451,54 451,54 451,54 54,10 55,82 57,54 69,06 81,14 93,80 107,03 120,82 39,06 40,44 41,86 43,33 44,83 46,38 47,97 49,60 329,89 344,42 359,58 375,40 391,90 409,12 427,08 445,82 1.279,51 1.056,47 1.073,53 1.101,04 1.129,81 1.159,87 1.191,24 1.223,95

2024 2025 2026 2027 2028 2029 2030 Total SO2 81,86 80,32 78,73 77,09 75,41 73,68 71,90 1.822,11 72,81 72,81 72,81 72,81 72,81 72,81 72,81 1.551,00 451,54 451,54 451,54 451,54 451,54 451,54 451,54 11.588,65 135,18 150,12 165,62 181,69 198,33 215,54 233,32 2.208,09 51,28 52,99 54,76 56,57 58,42 60,31 62,25 957,57 465,37 485,77 507,04 529,24 552,39 576,55 601,74 8.507,66 1.258,04 1.293,55 1.330,50 1.368,94 1.408,91 1.450,43 1.493,56 26.635,07

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Appendix 29: Scenario 3 –evolutions of NO emissions2011-2020

Generation (GWh) 2010 2011 2012 2013 2014 2015 Hydro 59,46 58,20 58,25 57,62 56,96 56,29 Nuclear 52,22 52,18 52,18 52,18 48,54 48,54 Coal 817,60 792,15 792,15 792,15 691,01 691,01 CCGT 144,07 147,85 153,44 159,03 164,63 170,22 Cogeneration 1.845,03 1.912,37 1.981,83 2.053,45 2.127,29 2.203,37 New Renewables 173,57 181,24 189,25 197,61 206,33 215,43 Total 3.091,94 3.144,00 3.227,11 3.312,05 3.294,76 3.384,86

2016 2017 2018 2019 2020 2021 2022 2023 55,59 54,86 54,12 53,35 52,55 51,73 50,89 50,01 48,54 48,54 48,54 48,54 48,54 48,54 48,54 48,54 691,01 451,54 451,54 451,54 451,54 451,54 451,54 451,54 175,81 181,40 186,99 224,43 263,72 304,85 347,83 392,67 2.281,74 2.362,44 2.445,51 2.530,98 2.618,88 2.709,24 2.802,09 2.897,45 224,92 234,83 245,17 255,95 267,20 278,94 291,19 303,97 3.477,62 3.333,62 3.431,87 3.564,79 3.702,43 3.844,85 3.992,08 4.144,19

2024 2025 2026 2027 2028 2029 2030 Total NO 49,11 48,19 47,24 46,26 45,25 44,21 43,14 1.093,26 48,54 48,54 48,54 48,54 48,54 48,54 48,54 1.034,00 451,54 451,54 451,54 451,54 451,54 451,54 451,54 11.588,65 439,35 487,88 538,26 590,49 644,57 700,50 758,28 7.176,29 2.995,35 3.095,79 3.198,79 3.304,34 3.412,46 3.523,12 3.636,32 55.937,83 317,30 331,21 345,71 360,85 376,63 393,10 410,28 5.800,68 4.301,20 4.463,15 4.630,08 4.802,02 4.978,99 5.161,02 5.348,11 82.630,71

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Annex 30: SOVI pensions per category, sex and age

Monthly pension Pension Annual Men Women Total on a 12 scheme pension month basis Numbers Age Numbers Age Numbers Age SOVI € 458,58 € 5 383 Old age 52.502 78 312.015 76 364.530 77 Disability 1.290 82 21.928 85 23.218 85 Widowhood 1.327 82 35.038 83 36.370 83

Source: Own table based on the date of the Seguridad Social Española, figures updated in April 2011.

Annex 31: Summary of minimum amount pensions

Pension scheme Single With dependent spouse

Monthly Monthly Social Security pension on Annual pension on Annual Minimum amounts a 12 month pension a 12 month pension basis basis

Old age Above 65 € 701,63 € 8 419,60 € 865,67 € 10 388,00 Age 60-64 € 656,25 € 7 875,00 € 811,30 € 9 735,60 Permanent disability Above 65 € 701,63 € 8 419,60 € 865,67 € 10 388,00 Age 60-64 € 656,25 € 7 875,00 € 811,30 € 9 735,60 Widowhood Above 65 € 701,63 € 8 419,60 Age 60-64 € 656,25 € 7 875,00

Source: Own table based on the date of the Seguridad Social Española, figures updated in April 2011.

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Annex 32: Level of use and knowledge of Social Services

Source: Ministerio de Sanidad y Politica Social. Encuesta a Mayores 2010

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