Investing to Integrate Europe & Ensure Security of Supply PE

Home , Morava (river), TPP Kostolac, TPP Nikola Tesla

11/20/2014

Public enterprise "Electric power industry of Serbia"

Europe‘s 8th energy region: Investing to integrate Europe & ensure security of supply

Brussels, 19th November 2014

PE EPS is nearly a sole player in the Serbian electricity market

Hydro power 2,835 MW plants Thermal power 5,171 MW* 3,936 MW** plants Combined heat and power 353 MW plants Total 8,359 MW* 7,124 MW**

Electricity 37.5 TWh** Production Number of 3.5 mil ** customers Number of 33,335** employees Last power plant built in 1991.

*With K&M ** Without K&M, end of 2013 As of June 1999 PE EPS does not operate its Kosovo and Metohija capacities (K&M)

1 11/20/2014

EPS facing 1200MW capacity decommissioning until 2025

Due to aging fleet and strict EU environmental regulations1

Net available EPS generation capacity, MW Successful negotiation about 8,000 -1,218 MW LCPD and IED implementation 20 eased the timing of lignite 7,239 25 111 decommissioning 208 210 630 100 6,021 6,000 20 25 280 Old gas-fired CHP capacity decommissioning 612 • Current Novi Sad gas/oil CHP (210 MW) and EPS small HPPs 1,200 Zrenjanin gas/oil CHP (111 MW) to terminate CHP SREMSKA MITROVICA - 321 MW 1,230 production CHP ZRENJANIN 4,000 CHP NOVI SAD 1,560 TPP MORAVA Old lignite-fired capacity decommissioning 1,239 (capacities to be closed in 2023 latest and to operate TPP KOLUBARA 211 20ths hours in total between 2018-20231) 211 TPP KOSTOLAC B TPP KOSTOLAC A 1,126 • Kolubara A1-3, A5 (208 MW) 1,126 2,000 • Nikola Tesla A1-2 (360 MW) TPP NIKOLA TESLA B • Kostolac A1-2 (280 MW) TPP NIKOLA TESLA A HPP LIMSKE • Morava 1 (100 MW) - 897 MW 1,558 1,558 HPP DRINSKE HPP DJERDAP 0 2014 2024-2025

EPS facing generation fleet renewal in an unfavorable market environment

According to decision of the Ministerial Council of the Energy Community, 24 October 2013 based on the Large Combustion Plant Directive (2001 (2001/80/EC)) and Industrial Emission Directive (2010/75/EU) Source: EPS, AERS 3

In Europe, Serbia has the lowest household (and also industrial) tariffs

Electrical energy prices for households as of H1 2012 by countries in € cent per kWh 30.0 30

26.0

23.3 21.9 21.5 16.8 20.3 19.9 19.8 20 11.5 3.0 7.4 18.8 18.6 18.2 7.0 17.2 16.7 2 5.4 15.8 Benchmark average 7.2 5.3 3.5 0.7 15.5 15.4 8.9 5.4 3.2 15.0 14.2 14.1 13.9 13.9 -52% 3.9 3.5 2.6 13.2 4.6 12.6 12.1 3.1 3.3 2.5 11.6 4.3 2.7 2.2 11.0 10.5 11.53 2.4 1.9 10 9.1 18.5 3.3 2.6 8.5 8.0 16.0 1.3 15.9 14.9 1.4 6.9 14.4 14.3 13.6 14.7 14.0 1.2 13.1 13.1 13.2 12.4 1.1 5.6 11.1 12.0 10.9 11.9 11.1 11.4 9.9 10.7 10.5 10.4 9.7 9.7 0.9 8.0 7.7 7.8 7.1 6.8 5.9 4.8 0 Italy Spain Latvia Serbia France Turkey Poland Ireland Austria Greece Croatia Finland Estonia Albania Norway Sweden Belgium Bulgaria Slovakia Slovenia Hungary Portugal Romania Denmark Germany Lithuania Czech Rep. Czech Macedonia Bosnia and Bosnia Netherlands Montenegro Great BritainGreat Herzegovina

Tax and PDV Without tax and PDV

Note: Exchange rate used is 1EUR = 111,99 din, Prices according to the new Eurostat methodology . Typical household customers with consumption from 2500 kWh to 5000 kWh . Prices for Serbia are calculated according to the old methodology of Eurostat - up to 7500 kWh annual consumption, of which 2500 kWh in the lower rate Source: Eurostat 2012, Agentura za Energetiky 4

2 11/20/2014

More than two decades since the start of market reforms

• Three packages of market reforms since the early nineties energy markets operate more efficiently BUT... Low electricity prices - NO Secure electricity supply ??

• EU Energy Policy for 2020: GHG -20%; OIE +20%; EnEf +20%

• The economic crisis of 2008 ... lower energy consumption

One large electric power company Manager said: No one in their right mind would build the power plant (unless RES power plant)!

EU GOAL: common electricity market by 2014

European Commission: national market are small in order to develop competition

Since February 2014, 14 countries with share of 75% EU electricity is included within day-ahead market with Similar goals for gas also! fixed price. After 2015 would it be our region as well?

3 11/20/2014

Decreasing profitability putting high pressure on European utilities

Renewables and low demand bringing Leading utilities facing tremendous low profits for power plants share price drop

Share price index Q4 2013 price ( 01.01.2008 = 100 ) on 2008 index 120 DAX 30 114%

100 40%

80 36%

36% 60

34% 40

31% 20 19% 0 2008 2009 2010 2011 2012 2013

Low wholesale prices as the root cause of decreasing profitability

Without system-level services, assuming fuel prices unchanged Source: Eurelectric – Powerhouses of Innovation, Thomson Reuters Datastream; week-end data 7

Current wholesale price outlook requires careful consideration of especially generation investments

Prices decreasing in last years with baseload price forwards below 40 EUR/MWh

Spot base load price, EUR/ MWh EEX baseload spot and forward price 90 Serbian wholesale price approved in public supply tariff

70 Levelized cost of new lignite PP at 60 EUR/MWh w/o CO2 60

37 38 40 37 37 37

20 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Historic baseload spot prices (EEX) Price forwards (EEX1)

Long term EEX baseload price forwards still below 40 EUR/MWh (Serbian price ~3-5 EUR higher)

Average of yearly forwards of last 6 months (Aug 2013 – Jan 2014) Approved end-user price without taxes, transmission and distribution costs. RSD / kWh data for 2008-2013 are: 2.47, 2.54, 2.77, 2.97, 3.15, 3.11 Source: EEX, EPS, EIU 8

4 11/20/2014

Structure of electricity generation in some EU countries, SEE and Republic of Serbia

Electricity generation TWh Coal share % Serbia 38.000 70 SEE Region 167.000 55 EU 27 3.357.958 29 Poland 161.743 92 Czech… 84.361 59 Greece 60.789 53 Germany 636.600 42 Bulgaria 45.843 41 Romania 62.698 40 UK 398.327 38 Spain 303.007 22 Hungary 35.859 20 Italy 314.122 14 Belgium 85.535 8 France 574.473 4

0 10 20 30 40 50 60 70 80 90 100 Извор: EUROSTAT – Energy / Yearly Statistics 2006 coal nuclear gas oil others (hydro/biomass) WB - GIS: EPS 2010 High impact of CO2 emission on electricity generation costs in the Republic of Serbia and in the region 9

EU – Serbia: TPPs – capacities usage

Serbia: data for 2009, rest: data for 2007

Germany, TPP per lignate 79,2%

Greece, TPP on lignate 73,8%

Serbia, TPP on lignate (all TPP) 72,2% 75.4% in 2013

EU, TPP on lignate 69,2%

Poland, TPP on lignate 66,4%

Czech Republic, TPP on lignate 58,1%

Bulgaria, TPP on lignate 52,0%

EU, all TPP 46,0%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

High level of capacities usage considerably reduces production costs

5 11/20/2014

Potential overcapacities in the region according to ENTSO-E Available capacities above seasonal peak on a day in January @ 19:00 pm 2

Based on ENTSO-E scenario "best Net export capacities in the region estimate" for 2020 and for 20301 2013 2020 2025

-0.1 -2.0 -1.4

0.5 0.2 -0.3 -0.1 0.7 0.9

-1.3 1.0 1.1 2.7 2.2 0.3 1.7 0.1 0.4

0.0 0.4 -0.2 0.5 1.3 0.2 0.9 3.3 4.6 3.1

-0.2 0.1 0.2 0.0 0.6 0.5

-0.2 1.2 1.4 x Net exporters, >0.2GW x Balanced (gen vs demand) x Net importers < -0.2GW

1 2030 scenario "Vision 1" used. In this scenario RES targets are revised due to their less attractive financial viability. 2. Defined as remaining capacity minus adequacy reference margin Source: ENTSO-E 11

Significant new-build capacity plans with low and converging price levels in the region

Regional power exchange prices below Example: Nuclear capacities in the new-built lignite level and converging to pipelines in the region EEX

Nuclear projects planned with significant EUR/MWh capacities in the following decades 80 Potential lignite prices well Selected projects in the region: above market price levels • Temelin (2,000 MW), 2022-25, CZ, CEZ • Dukovany (1,000 MW), 2032-35, CZ, CEZ 60 • Paks V (1,200 MW) 2025, HU, MVM • Paks VI (1,200 MW) 2026, HU, MVM • NPP (2x3,000 MW) 2020, PL, PGE • Cernavoda 3-4 (2x720 MW), RO, SNN 40 • Mochovce 3-4 (2x440 MW), 2015, SK, SE • Bohunice V3 (2,400 MW), 2025, SK, Javys 20

Most projects calculate with HUPX spot EPEX spot significant export Opcom day-ahead EEX spot 0 2012/01 2012/04 2012/07 2012/10 2013/01 2013/04 2013/07 Months

Source: Power exchanges, Factiva 12

6 11/20/2014

However there is a significantBackup regional supply-demand gap, if only committed projects as of today are considered

Based on conservative ENTSO-E scenario for 2020 and 2030 2013 2020 2025

-0.1 -5.0 -2.9

0.5 -0.4 -0.6 -0.1 0.2 0.7

-1.3 -1.1 0.1 -2.0 -0.2 0.2 1.7 -0.5 0.1

-0.1 0.4 -0.2 -0.4 1.3 -0.3 0.9 3.3 3.3 2.4

-0.2 -0.1 0.1 0.0 0.1 0.3

-0.7 1.0 x Net exporters, >0.2GW 1.4 x Balanced (gen vs demand) x Net importers < -0.2GW

Uncertainty of regional gap paired with limited EPS financing capability to be handled with conservative approach to develop capacities aiming mostly export 13

Projects of Energy Community Interest (PECI) Electricity Generation

Contracting Project party AL Hydro Power Plant Skavica

AL Wind Park Dajc-Velipoje

BiH Combined Heat and Power Plant KTG Zenica

BiH Hydro Power Plant Dabar

BiH + HR Hydro Power Plant Dubrovnik (Phase ll)

Hydro Power Plants upper (HPP Buk Bijela, HPP Foča, HPP Paunci, HPP Sutjeska) and Middle Drina (HPP Tegare, BiH + RS HPP Rogacica, HPP Dubravica)

Kosovo * Kosova e Re Power Plant (KRPP)

ME Hydro Power Plants Lim River

RS Combined Heat and Power Combined Cycle Gas Turbine Plant in Pancevo, Serbia

RS Thermal Power Plant Kolubara B

RS Thermal Power Plant Nikola Tesla 83

RS Combined Heat and Power Plant Novi Sad

RS Hydro Power Plants lbarske (10 HPPs)

RS Hydro Power Plants Velika Morava (HPP Ljubicevo, HPP Trnovce, HPP Svilajnac, HPP Mijatovac, HPP Varvarin)

7 11/20/2014

How to encourage the power plants construction and ensure supply security?

Disunity and differences in EU regarding incentives capacities mechanisms

EU has just started to consider these incentives! 15

How to encourage the power plants construction and ensure supply security? Could capacities market compensate financial losses and encourage the construction?

Income

Would it be harmonized EU approach, if not a model?

8 11/20/2014

Is it time for region/Serbia to seek new solutions to encourage power plants investments?

Unfavorable circumstances: • Uncertainty of EU regulation conditions • Uncertainty of regulation conditions in Serbia after negotiations for EU accession • Uncertainty of financing – especially regarding coal projects

This will increase the price for the construction of new power plants

EEX Baseload Year Futures EPS Wholesale current prices

Serbia, till 31.dec.2012 17

Thank you for your attention

PE Electric Power Industry of Serbia 13 Balkanska Street, 11000 Belgrade, Serbia Phone: +381 11 20 24 600 E-mail: [email protected]