Overview of the Italian Energy Market (Updated to 2013)

Milan, December 2014 Agenda

1.1 Main features of the Italian energy market

. Market size . Offer and demand; market players . Market infrastructure

2. The wholesale market

3. The retail market

4. Market prices and margins

DISCLAIMER - This document has been prepared by A2A for convenience purposes only and for the benefit of investors and analysts solely and is based on public information. However this document shall not give rise to any liability of A2A or any of its subsidiaries, directors, officers, employees or consultants as per the truthfulness, accuracy, completeness and updating of such information. This document does not constitute an offer or invitation to purchase or subscribe any shares or other securities and neither it nor any part of it shall form the basis of or be relied upon in connection with any contract or commitment whatsoever.

This information was prepared by A2A and it is not to be relied on by any 3rd party without A2A’s prior written consent. 2 The European energy market sizes

TWh600 European electricity demand - 2012 TWh1000 European gas demand -2012 551 909 900 855 490 500 793 800

700 400 358 328 600 492 300 271 500 426 242 400 363 200 300 143 142 177 130 115 200 179 85 80 145 100 69 63 107 59 58 54 52 96 86 40 100 55 33 33 33 27 53 50 47 39 38 13 34 31 30 11 8 8 7 5 2 15 14 13 8 7 0 0 0 0 l l s . s y c y a a k g a y a a s e a a a a n s n e a d d y d y y a k a g y y a a a a e a n a n d e a i d l d K d i i i i a i i i i i m m l i r r i t i i a r i i i l i i c m d i r c p u t r r n l n t c n e d r r e a c n u a n n l v n g e r k n n r n n n a n a r U a v o u g u k n n n t b e a n a e r n n a u u a t a a a t i d a t e a k a n m n t a a d a t a i a a a a g a a u I p l o l e l s p w a a d g b u I p r l l a o a e a u l e l s a R p g g o o t e a a v t a e l a v r g g S l m y e e u r t r o n m v t l r n l g u v M r L l r S y m e r o u l n r r u n m p i s u M r L r r b o n m r m i s o F e w o u r C h r h P u e n o n l I A o G l o C F w e e T u F E C P h e u o l I t A o i e G e l z e F E c S e o t B B S e e i m N S H P S h R B t B S i K R x S H P e D G h L i R t

e D G L t z u h d x e w L e c C e u N S e t N L i z n C U

. Italian market is no.4 in the European electricity market ranking, and no.3 in gas market ranking. . The Italian electricity demand in 2012 stands at the same level of 2004. . The Italian gas demand in 2012 is below the level of 2003.

Source: Eurelectric early statistics 2012; Eurogas statistical report 2013. EU27, including Norway and Turkey

This information was prepared by A2A and it is not to be relied on by any 3rd party without A2A’s prior written consent. 3 The historical trend of Italian electricity demand

CAGR CAGR 1.55% -1.27% 350

340

330

320 TWh 310

300

290

280 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

+2.1% +1.9% +3.2% +1.5% +1.6% +2.1% +0.7% -0.1% -5.7% +3.2% +1.3% -1.9% -3.0% -2.9%

. Electricity demand in 2013 amounts to 318 TWh. . Electricity demand is still downward in 2013, mainly due to the economic crisis. . In 2014 is decreasing further.

Source: AU website; Terna website, REF

This information was prepared by A2A and it is not to be relied on by any 3rd party without A2A’s prior written consent. 4 Final consumption by sector and GDP

400 0.2% 0.0% 0% -0.1% -0.2% -0.2% 350 -0.6% -5% 300 -10% 68 70 69 70 69 66 250 -15% -20% TWh 200 94 95 96 98 101 100 -25% 150 -30% 100 131 -35% 151 131 138 140 125 50 -40% 6 6 6 6 6 6 0 -45% 2008 2009 2010 2011 2012 2013

Agriculture Industry Services Households % change GDP

. Services consumption grew between 2008 and 2012 (+6 TWh). . Drop in industrial sector: -26 TWh in 6 years (-17.5%). . From 2008 to 2013 industrial consumption decreased much more than electricity demand (-1.27%) and GDP (-1.9%).

Source: GME’s 2013 annual report.

This information was prepared by A2A and it is not to be relied on by any 3rd party without A2A’s prior written consent. 5 The electricity demand

* Liberalized market - retailers' market share* 40% 35% 30% 25% 20% 15% 10% 5% 0%

REGULATED MARKET

. AU (Acquirente Unico – Single Buyer): state owned body responsible for the electricity supply to the regulated market. . AU sources electricity from the wholesale forward market (mainly by auctions) and from the spot power exchange. . Volumes managed by AU in 2013: approx. 70 TWh.

* Sales to wholesalers and resellers not included. Source: GSE website; AU website

This information was prepared by A2A and it is not to be relied on by any 3rd party without A2A’s prior written consent. 6 Gas consumption in Italy

Hystorical gas consumption 90 80 -32.14% 70 Thermoelectric 60 consumption 2008 2013 50 bcm 40 30 -19.2% 20 Industrial 10 consumption 2008 2013 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Industrial Household Thermo Other

. Gas consumption in 2013 (67 bmc) is below the level of 2003, due to the drop of thermoelectric demand and, secondarily, to the decrease in industrial consumption.

Source: Snam rete gas.

This information was prepared by A2A and it is not to be relied on by any 3rd party without A2A’s prior written consent. 7 The mix of electricity production

100% 4% 4% 5% 4% 5% 5% 7% 9% 12% 90% 17% 15% 16% 14% 14% 12% 15% 20% 18% 80% 18% 16% 14% 12% 15% 70% 18% 17% 18% 28% 22% 11% 10% 9% 288 TWh 9% 60% 14% 13% National 14% 8% 14% 14% 13% 15% production 50% 15% 16% 13% 16% in 2013 40% 30% 55% 54% 49% 50% 50% 51% 48% 20% 40% 43% 43% 38% 10% 0% 2003 2004 2005 2006 2007 2008 2009 2010 2001 2012 2013

Natural Gas Coal Oil & other Hydro Renewable

. The relative importance of thermoelectric generation (gas, oil and coal) decreased from overall 83% in 2007 to 62% in 2013. . Huge decrease of CCGT production volumes: in 2013 the national load factor has been about 1,800 hours.

Source:; AEEG annual report 2012; Terna preliminary data.

This information was prepared by A2A and it is not to be relied on by any 3rd party without A2A’s prior written consent. 8 Major companies’ contribution to the electricity gross production

Year 2013 40% 35% 30% 25% 20% * 15% * * 10% 5% 0% l i r * z s n s n a g n o A r n i e r e r e a o e n 2 e n O n r r e E E . u w s I e i A e a h E r w o t E S d r g o

S i p r f i O E T P o d d S G E

. The national incumbent is still the main player. Many medium-sized players have emerged after liberalization. . Consolidation process is now expected due to economic crisis.

(*) TirrenoPower: Sorgenia (39%), GdFSuez (50%), Hera (5.5%), Iren (5.5%) Source: AEEG annual report 2012; Preliminary data from Terna

This information was prepared by A2A and it is not to be relied on by any 3rd party without A2A’s prior written consent. 9 The generation capacity increases while the electricity consumption is slowing

Installed generation capacity [GW] vs. Electricity consumption [TWh] 200 360

180 340 ] W ] h G [

160 320 W y t T i [ c a n p o

140 300 i a t c p

n m o u i

t 120 280 s r 25 28 n a

20 o e c

n 10

7 y e 100 260 5 t i g 4

3 22 i d 22

22 22 r

2 22 22 t e l 2 21 c l 80 240 21 e a l

t 21 E s 21 n I 60 80 81 220 72 76 77 78 79 62 65 68 40 200 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Under-capacity Thermo Hydro Other renewable Electricity consumption [right scale] Over-capacity

. Starting from 2005 huge investments in the thermoelectric sector have been on stream to increase the capacity after a critical period. . Additional renewable capacity, subsidized by the tariffs, has been developed from 2009. . The electricity consumption dropped in late 2008 and the recover is lingering. . The balance between generation capacity and consumption load is normally cyclical and should reverse in the next few years. . The peak reserve margin in 2013 ranged from 33.5% (winter period) to 45.9% (summer period).

Source: Terna

This information was prepared by A2A and it is not to be relied on by any 3rd party without A2A’s prior written consent. 10 Italian renewable electricity gross production mix

120 2013 100

80 53 Solar TWh 20% 60 Hydro 110 22 Wind 40 48% TWh 14% 15 Geothermic 20 Biomass 5% 14 13% 0 6 0 1 2 3 4 5 6 7 8 9 0 1 2 3 0 0 0 0 0 0 0 0 0 0 1 1 1 1 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2 2 2 2 2 2 2 2 2 2 2 2 2 2

Geothermic Biomass Wind Solar Hydro

. Hydroelectric production accounts for nearly half of total renewable sources. . Huge increase in solar and wind production, due to the EU 20-20-20 Targets and thanks to a generous incentive scheme.

Source: GSE; AEEGSI. 2013 interim data.

This information was prepared by A2A and it is not to be relied on by any 3rd party without A2A’s prior written consent. 11 Distributed generation in 2012

Volumes breakdown by source

Technology n° plants Gross Capacity Volumes Non Renwable Solar # MW TWh 31% 31% Hydro 2,628 3,754 11 Wind 841 2,283 4 Solar 478,277 15,682 18 Thermo 3,166 8,655 25 Total 484,912 30,374 57 Wind Biomass, 7% biogas Hydro 12% 19%

. Distributed Generation (DG) is the total amount of power plants connected to the distribution system. . In 2012 the energy gross production of DG amounted to 57 TWh, about 19% of national production, through more than 480,000 plants. . 69% of the energy comes from renewable sources, especially from solar power plants.

Source: AEEGSI

This information was prepared by A2A and it is not to be relied on by any 3rd party without A2A’s prior written consent. 12 Renewable power installations

Installed capacity by Source 60

50 3.80 40 16.35 18.42 GW 30 8.56 20 7.97

10 18.20 0 2008 2009 2010 2011 2012 2013*

Hydro Wind Solar Geothermic Biomass

• RENEWABLE INSTALLED CAPACITY IN 2012: 47 GW • TOTAL CAPACITY IN 2012: 128 GW

. Huge increase in new renewable installations from 2009 due to high public incentives. . About 10 b€ of incentives in 2012 (collected through the tariffs) were allocated to renewables, whereof more than 6 b€ for solar energy. . New installed “green” capacity has more than doubled between 2000 and 2011. A slower growth rate is expected over the next years due to the reduction of incentives.

(*) Provisional data Source: GSE website; Terna

This information was prepared by A2A and it is not to be relied on by any 3rd party without A2A’s prior written consent. 13 Electricity interconnection capacities

. Since 2005 the interconnection capacities have been allocated to the market participants through explicit auctions. . The use of capacities (import-export flows) strongly depends on the price spreads between AU SW the adjacent markets.

FR SL . In 2011 market coupling has been launched on 630 the Italian-Slovenian border. In 2015 it is expected to be established with the rest of northern MNE borders. Net Italian import: break down by countries - [TWh] 60

40 GR 30 20

Interconnection capacities [MW] 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 -10 . Main imports come from Switzerland and France. France Switzerland Austria Slovenia Greece . Import reductions by Terna to maintain the system security. 43TWh . Flows from Slovenia and Greece hard to optimize due to the local illiquid markets. Import . New Montenegro-Italy and France-Italy interconnections are expected to be commissioned volumes in 2013 in 2017 and 2019 respectively. Source: AEEG annual report 2012

This information was prepared by A2A and it is not to be relied on by any 3rd party without A2A’s prior written consent. 14 Gas interconnection capacities

. Interconnection capacities are allocated to the market participants through Netherlands explicit auctions and through long-term Norway contracts Russia . The gas in the pipelines is normally in- flowed (except Gorizia) Tarvisio Gries pass Gorizia . New LNG Terminal in Livorno started to Rovigo operate in September 2013 Panigaglia 62bcm Livorno LNG LNG Import Storage volumes in 16 2013 TAP Gas imports breakdown 100% Lecce 80%

Mazara del Vallo 60%

Gela 40% Algeria 20%

0% Lybia 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Interconnection capacities [bcm/year] Gries pass Tarvisio Gorizia Gela Mazara del Vallo Panigaglia (LNG) Rovigo (LNG) Other

Source: AEEG annual report 2012; SNAM website

This information was prepared by A2A and it is not to be relied on by any 3rd party without A2A’s prior written consent. 15 Italian electricity chain

Players along the value chain:

TRANSMISSION DISTRIBUTION Regulated business 1 main TSO (Terna) + 11 minors 138 local distributors 65,000 km tr. lines

GENERATION WHOLESALE/TRADING SALES RETAIL MARKET Liberalized business ~ 12 main producers ~ 40 active traders ~ 20 main sales companies ~ 37 Mil. customers

Institutional bodies:

. MSE Ministry of Economic Development: defines the political and strategic guidelines for the management and security of the national electric system.

AEEGSI . Regulatory Authority for Electricity Gas and Water: sets the regulated tariffs; promotes and controls the competitiveness and efficiency of the energy sector. Independent of the government.

. Transmission System Operator: owner of the national transmission grid through a concession and Terna responsible for the security and for the optimal dispatching. Listed company.

GME . Market operator: organizes the day ahead market and MTE.

GSE . Responsible for the promotion and coordination of renewable sources.

AU . Single Buyer: responsible for the electricity supply to the regulated market.

This information was prepared by A2A and it is not to be relied on by any 3rd party without A2A’s prior written consent. 16 Terna’s energy demand forecast 2013-2023

Demand Forecast 400 . In the ‘’Baseline Scenario’’, a decrease of the electric intensity of 0.5%/year is assumed, due to the compliance with the energy 350 efficiency goals. Demand foreseen in 2023: 338.5 TWh (+0.3%

TWh average YoY).

300 . In the ‘’Development Scenario’’’, an increase of the electric intensity of 0.3%/year is assumed . Demand foreseen in 2023: 370

250 TWh ( +1.1% average YoY). 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Baseline scenario Development scenario

400 400 . In the Baseline Scenario, the 350 350 industry’s contribution to consumption growth is negative. 300 75 300 71 70 69 70 71 Positive the growth of services (+1.5% 250 Residential 250 year). h 134 h

W 200 Terziary 200 W T 101 108 119 101 113 T 150 Industry 150 . In the Development Scenario, an Agricolture 100 100 increase of the share of consumption 131 121 124 131 127 135 50 50 in the service is foreseen at the 0 6 6 6 6 6 6 0 expense of the industrial sector. 2012 2018 2023 2012 2018 2023 Baseline Scenario Development Scenario

Source: Terna, November 2013.

This information was prepared by A2A and it is not to be relied on by any 3rd party without A2A’s prior written consent. 17 Agenda

1. Main features of the Italian energy market

2.2 The wholesale market

. Spot market (IPEX, MSD)

. Forward/futures market

3. The retail market

4. Market prices and margins

This information was prepared by A2A and it is not to be relied on by any 3rd party without A2A’s prior written consent. 18 IPEX: Italian Power Exchange

MSD MGP MI dispatching service (3 sessions) Intraday day ahead (4 sessions) MB balancing

DAY AHEAD MARKET INTRADAY MARKET DISPATCHING SERVICES MARKETS (ancillary services) . Purchasing and sale of . Purchasing and sale of electricity on an hourly basis electricity in order to adjust DISPATCHING BALANCING . Players: producers, traders, the MGP’s program . Purchasing and sale of . Purchasing and sale of consumers . Players: producers, traders, power by TSO for power by TSO for real- . System Marginal Price consumers congestion resolution and time balance (zonal market for the . Discretionary reserve . Players: relevant . producers) . System Marginal Price Players: relevant producers producers . . Bilateral contracts are . Counterparty: GME Pay as Bid allowed . Pay as Bid . Counterparty: TERNA . Counterparty: GME . Counterparty: TERNA

MGP

MI1 MI2 MI3 MI4

MSD1 MSD2 MSD3

h.9.15 h.12.30 h.14.40 h.16.40 h.21.00 h.07.30 h.10.00 h.11.45 h.14.05 h.21.00 Bidding RUN D-1 D

This information was prepared by A2A and it is not to be relied on by any 3rd party without A2A’s prior written consent. 19 MSD dispatching services MGP MI day ahead intraday MB The day ahead market balancing

. 6 geographical zones North AUSTRIA SWITZERLAND Center-North SLOVENIA Center-South NORTH South FRANCE Sicily Sardinia Transport capacity limits exist among CENTER-NORTH the market zones and are cleared CORSICA . 6 virtual zones CENTER-SOUTH GREECE France through the market algorithm (see SOUTH SARDINIA Switzerland next slide) Austria Slovenia

SICILY Corsica Greece

. Limited production poles

. Hourly clearing price for each market zone ZONAL PRICES . Reference price for producers and importers

. Unique National Price: average of the zonal prices weighted on the zones’ volumes PUN . Reference price for consumers

This information was prepared by A2A and it is not to be relied on by any 3rd party without A2A’s prior written consent. 20 MSD dispatching services MGP MI day ahead intraday MB The day ahead market algorithm balancing

The electricity price is calculated through a demand-offer equilibrium algorithm:

The algorithm runs the first for each zone time at national level. If the

NORTH capacity limits among the zones Cumulative are not breached, the outcome €/MWh CENTER-NORTH DEMAND is an equal price for all the CENTER-SOUTH zones. Cumulative SOUTH OFFER SARDINIA If any capacity limit breach

SICILY occurs, the market is split into one or more zones. The P algorithm is repeated at zone level and the resulting prices are different among the zones.

Q MWh

The electricity imported and the Renewable capacity installed electricity produced from renewable shaves peak prices sources are bid at zero (price takers).

This information was prepared by A2A and it is not to be relied on by any 3rd party without A2A’s prior written consent. 21 The Ancillary Services Market (MSD)

. Terna (TSO) procures through the Ancillary Service Market (MSD) the resources necessary to guarantee the balance of the power system and to release the intra-zonal congestions, that characterize Italian electricity market, which is a very complex physical market. . The MSD is cleared through a pay as bid algorithm. Terna is the central counterparty which accepts bids/offers from market participants related to different reserve and balancing services. . The market is divided into: • «ex-ante MSD»: consists of 3 sub-sessions, where Terna trades energy and balancing services in order to release congestions and to create reserve margins (secondary and tertiary reserve); • «Balancing Market» (MB): consists of 5 sub-sessions, where Terna trades real-time balancing services to restore secondary/tertiary reserve and to maintain the balance of the grid. . Each player admitted to the market must provide bids and offers for each of the following services: • Secondary Reserve; MSD ex ante volumes • Terziary Reserve; 20 14 15 15 15 13 • Start-up; 12 11 9 • Shut-down; 10 6 5 • Change of plant configuration. 5 . After the last update of the dispatching rules in 2011 TWh 0 volumes in MSD drastically dropped, due to the -5 -4 introduction of new market sessions and the creation of -5 -5 -10 -7 a more cost reflective offer structure. Thereafter the -15 -12 -12 -12 -13 balancing needs increased because of the diffusion of -15 intermitting renewable sources. -20 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: GME Ascending Descending

This information was prepared by A2A and it is not to be relied on by any 3rd party without A2A’s prior written consent. 22 The wholesale futures and forward markets

. Bilateral forward market currently supported by 8 brokers . Trading of standard products: baseload, peakload, off-peak Bilateral and . Physical and financial transactions under bilateral master brokered market agreements (i.e. EFET, ISDA) . Credit risk managed by collaterals (PCG, Bank Guarantee) . High liquidity available, from day-ahead until 2 years-ahead

. Centralized power exchange Futures/ . Trading of standard futures products (baseload, peakload) IDEX, EEX . Financial transactions with unique counterparty Forward market . Credit risk managed by margin calls system (clearing house) . Medium liquidity

. Centralized power exchange managed by the GME . Trading of futures products with physical delivery (standard: baseload and peakload) MTE . Unique counterparty. Automatic scheduling . Credit risk managed by bank guarantee and/or cash deposit . Low liquidity

This information was prepared by A2A and it is not to be relied on by any 3rd party without A2A’s prior written consent. 23 The futures/forward market segmentation

1.7x Italian Wholesale traded volumes market size 600

500 550 500 480 400

TWh 300 300 200

100 125

40 0 2008 2009 2010 2011 2012 2013

. Wholesale futures/forward market size is steadily around 500 TWh since 2011. . One of the most liquid power market in Europe . OTC physical forward market is the main wholesale channel.

Source: A2A internal analysis

This information was prepared by A2A and it is not to be relied on by any 3rd party without A2A’s prior written consent. 24 Expected evolution of the market regulation

Until 2017, the temporary regime provides for an equal remuneration (CAP) for all and a Capacity supplementary one (S) linked to actual revenues. In 2013 the total remuneration for the payment mechanism was equal to 155 M €. With the resolution 320/2014, AEEG introduced an auction mechanism to remunerate the flexible capacity for the period 2015-2017.

Terna will secure through central auctions the system adequacy and flexibility. The organization of the capacity market is expected at the end of 2015. The auctions will be open to participants Capacity with new or existing programmable and not subsided capacity; in exchange of a fixed amount of market money (which will be the auctioned item), market participants shall ensure capacity plant availability and shall return the difference, if positive, between a reference price (MGP or MSD) and the strike price linked to an open cycle gas turbine overall cost.

The imbalances regime has been reviewed in November 2014. The Authority defined the new Imbalances mechanism of imbalance settlement, with different thresholds for different kind of renewables, of intermitting and a fee within the threshold in order to avoid cost socialization. If producers do not accept this renewables mechanism they will pay the same cost of the non relevant but programmable units.

Starting from 2015 Italy should gradually join the European Price Coupling, which simultaneously determines volumes and prices in all relevant zone, using a single algorithm based on the Market marginal pricing that meets the requirement of efficient allocations of the cross border capacity. coupling Some important differences in the market structure have to be removed: gate closure at 9.15 instead of 12.00, two months settlement instead of two weeks, negative prices.

This information was prepared by A2A and it is not to be relied on by any 3rd party without A2A’s prior written consent. 25 Agenda

1. Main features of the Italian energy market

2. The wholesale market

3.3 The retail market

. Distribution service . Switches to liberalized market . Electricity prices for retail customers

4. Market prices and margins

This information was prepared by A2A and it is not to be relied on by any 3rd party without A2A’s prior written consent. 26 Distribution service

Distribution market shares (volume) >>1.000 12%100% 4 6 86% 10% 138 distributors 8%

6% 3,9% 4% 3,3% 3,2%

2% 1,4% 0,9% 0,7% 0,6% 0% Enel A2A Acea AEM Hera Set AGSM Others >100.000 Torino

Number of distributors

. The incumbent is still predominant. . Most of the distributors are pretty small, with . Besides A2A and Acea, competition is spread only local distribution network and small size across many small players. customers.

Source: AEEG annual report 2013

This information was prepared by A2A and it is not to be relied on by any 3rd party without A2A’s prior written consent. 27 The captive customers progressively switch to unregulated tariffs

Market segmentation by tariff

100% 90% 24% 33% 80% 40% 43% 48% 50% 55% 70% 63% 70% 73% 60% 75% 74% 77% 79% 80% 50% 40% 76% 67% 30% 60% 57% 52% 50% 45% 20% 37% 30% 27% 26% 10% 25% 23% 22% 20% 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Regulated Liberalized

1999: start of Liberalization Liberalization for liberalization for SMEs households

. Market liberalization started in 1999 involving only big industrial customers, then progressively extended to the smaller industrials. . From 2007 the market liberalization process has been completed involving the residential customers. . In the last years households and SMEs have been the main switchers.

Source: AU website

This information was prepared by A2A and it is not to be relied on by any 3rd party without A2A’s prior written consent. 28 Who’s switching to the liberalized market

Most of the Others 33% Most of the customers customers switching to Others reluctant to the liberalized 91% switch to the market are liberalized non- Household household 67% market are Household households 9%

Customer base - 2013 100% 80% . Few suppliers are prepared to % 60% % % % 0 0 0 % % % serve households due to high 7 0 0 0 1 % 0 % 0 % % 9 1 1 1 9 0 9 9 9 8 40% 8 8 7 7 7

% acquisition and commercial costs. 9

20% 4

Others Household Source: AEEG annual report 2013; A2A internal analysis

This information was prepared by A2A and it is not to be relied on by any 3rd party without A2A’s prior written consent. 29 The cost of renewables financed by the domestic bill

The V incentive scheme ceased to apply on 6/07/2013, when the The cumulative cost cumulative annual cost of incentive can not exceed 5.8 of € 6.7 billion has been reached. billion €/year. In 2013 more than 305 MW of PV came into operation without incentives (grid parity); while in 2014 an additional 1 MW is expected.

Over the past two years, the weight of the energy component within the regulated tariff has dropped from 60% to 53% and, conversely, the system charges significantly increased (moving from 9% to 19%), mainly due to the increase of the incentives to renewable sources.

25 Regulated market: electricity tariff's breakdown

20 2,5 2,6 2,6 2,6 2,5 2,6 2,5 2,6 2,5 2,5 2,4 15 2,3 2,3 2,3 3,1 3,2 3,3 3,4 3,6 3,6 3,7 4,0 2,2 2,4 4,1 4,1 1,5 1,9 2,2 2,3 c€/kWh 2,6 2,6 2,6 2,8 2,6 2,8 2,8 2,8 2,8 3,0 10 2,5 2,5 2,5 2,5 3,0

10,9 10,9 11,0 5 9,4 9,5 9,5 9,4 10,0 10,4 10,0 10,2 10,0 9,8 9,4 9,3

0 2011-I 2011-II 2011-III 2011-IV 2012-I 2012-II 2012-III 2012-IV 2013-I 2013-II 2013-III 2013-IV 2014-I 2014-II 2014-III

energy costs network cost system cost (inlc. RES incentives) taxes

Source: GSE – AEEG data- (*) Solar Energy Report 2014 of Politecnico di Milano

This information was prepared by A2A and it is not to be relied on by any 3rd party without A2A’s prior written consent. 30 Agenda

1. Main features of the Italian energy market

2. The wholesale market

3. The retail market

4.4 Market prices and margins

This information was prepared by A2A and it is not to be relied on by any 3rd party without A2A’s prior written consent. 31 Italian prices are the highest in Europe

Baseloadprices 100 87 . Italian prices higher than European prices. 75 80 69 72 . Heavy decrease of prices from 2008 due to 66 64 64 63 the financial world crisis and to local 60 51 47 49 47 43 44 43 43 €/MWh 39 38 generation overcapacity. 40 . Increase of price from 2011 due to higher 20 oil costs, despite the enduring overcapacity

0 conditions and the significant increase of 2008 2009 2010 2011 2012 2013 renewables. Germany France Italy

Marginal Technology*

Import Coal Other 12% 6% RES 2% 2% Oil CCGT variable costs 6% are the main reference . CCGT is still the main marginal price especially during technology. Idro the peak hours 10% . New renewable sources (besides hydro) are emerging.

Nat. Gas 62%

* Technology which set the price for a single hour Source: AEEG; A2A internal analysis

This information was prepared by A2A and it is not to be relied on by any 3rd party without A2A’s prior written consent. 32 Spot price hourly shape

PUN hourly shape 40 . Typical peak hours shifted from 30 morning hours to h.19-21, because of 20 the strong impact of PV production 10 occurring in the central hours, along with steep reduction during the €/MWh 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 evening hours not matched by load -10 decrease. Therefore CCGTS are able to -20 set System Marginal Price in evening -30 hours with high margins to recover -40 their fixed costs.

2009 2013 Peak/Base ratio 1,4

1.30 1,3 1.29 . Ratio between peak and baseload 1,2 1.19 1.14 hours has decreased over the last 4 1.13 1.12 1,1 years. . This is due to overcapacity and low 1,0 demand scenario, together with 0,9 remarkable solar generation increase.

Source: A2A internal analysis

This information was prepared by A2A and it is not to be relied on by any 3rd party without A2A’s prior written consent. 33 The Italian spot gas market

PB-GAS PBGAS-TTF €/MWh PSV (PB-GAS) TTF spread 34

2012 Q1 31.0 23.7 7.3 32 Q2 28.3 24.2 4.1 30 Q3 27.2 24.6 2.6 Q4 27.6 27.0 0.6 28 €/MWh Y2012 28.5 24.9 3.6 26 2013 Q1 26.8 28.2 -1.4 24 Q2 28.5 27.2 1.3 22 Q3 27.8 25.9 1.9 Q4 28.3 26.8 1.5 20 Y2013 27.9 27.0 0.8 1 2 3 4 5 6 7 8 9101112 Y2013 vs.Y2012 -0.7 2.1 -2.8 2012 2013

. The Italian Gas Balancing Market (PB-GAS) is a daily spot gas market where the market participants can offer their storage resources to the balancing operator (Snam Rete Gas) in order to solve the contingent imbalances of the system. . In 2013, 41 TWh were traded at an average price of 27.86 €/MWh, aligned with PSV (Italian virtual exchange point), with a correlation of 89%. . In 2013, the spread between PBGas and TTF drop from 3.65 to 0.83 €/MWh gas.

Fonte: dati GME e analisi interna.

This information was prepared by A2A and it is not to be relied on by any 3rd party without A2A’s prior written consent. 34 The Italian forward electricity market

2014 80

€/MWh 65

50 1/1/12 1/4/12 1/7/12 1/10/12 1/1/13 1/4/13 1/7/13 1/10/13

Baseload Peakload

. On the forward electricity market, the Calendar 2014 quotation drops from 75 €/MWh level of beginning of 2012 to 69 €/MWh at the end of the year, and then to 62 €/MWh at the end of 2013. This was due to a progressively huge decrease in the electricity spot prices. The 2014 price is now equal to 52.5 €/MWh. . The decrease in energy consumption, the increase in the renewable installed capacity, the high hydraulicity levels are the main causes of this slump in the electricity prices.

Source: internal analysis

This information was prepared by A2A and it is not to be relied on by any 3rd party without A2A’s prior written consent. 35 The Italian forward gas market

2014 30 5 ] 28 4 h ] W h M / W € [ M

26 3 / d € a [

r F p T s T

24 2

, F T V T S / P V

22 1 S P

20 0 1/1/13 1/3/13 1/5/13 1/7/13 1/9/13 1/11/13

PSV TTF Spread

. On the forward market, in 2013 PSV and TTF remained highly correlated. . In the first months of 2013 the spread between PSV and TTF fell below 0.5 €/MWh due to a particular gas shortage in Northern Europe. It then recovered to a stable level of 1.5 €/MWh, that represents the transport cost from TTF hub to PSV hub.

Source: internal analysis; GME Annual Report

This information was prepared by A2A and it is not to be relied on by any 3rd party without A2A’s prior written consent. 36 ETS at The beginning of the Phase III

EUA 2014 12

€/t 6

0 1/1/12 1/4/12 1/7/12 1/10/12 1/1/13 1/4/13 1/7/13 1/10/13 1/1/14 1/4/14 1/7/14

. The huge excess of credits at European level and the lack of regulation caused an important collapse in the EUA price from 2008 to 2013. In April 2013 EUA dropped to the minimum level of 2.73 €/ton. . The approval of Backloading and the Market Stability Reserve gave some support to the price that reached a relative maximum level 7.2 €/t in March 2013.

This information was prepared by A2A and it is not to be relied on by any 3rd party without A2A’s prior written consent. 37 Clean Spark Spread Clean Spark spread - Baseload 30 Clean Spark Clean Spark Spread Spread 20 €/MWh Baseload Peakload 10 2012 2012 Q1 3.1 20.0 €/MWh 0 2013 Q2 1.8 8.0 1 2 3 4 5 6 7 8 9101112 Q3 12.2 17.0 -10

Q4 -5.2 5.6 -20 Y2012 3.0 12.6 2013 Q1 1.2 5.0 Clean Spark spread - Peakload

Q2 -7.6 -5.8 30 Q3 1.2 -0.3 20 Q4 -1.7 4.2 10 2012 Y2013 -1.7 0.8 €/MWh 0 2013 Y2013 vs.Y2012 -4.7 -11.8 1 2 3 4 5 6 7 8 9101112 -10

-20 . The Clean Spark Spread (CSS) measured using baseload and peakload electricity prices is an indicator of CCGT profitability. The CSS are calculated as the difference between i) the power spot price and ii) the PB-Gas price and the environmental costs related to CCGT production (i.e. CO2 and Green Certificates). . The profit has hugely decreased in the last 2-3 years, becoming negative on baseload in Q2 2013 (- 7.6 €/MWh), due to the important presence of renewable sources coupled with low demand level.

(*) In the 2012due to free allocations, the CO2 cost is set as revenues.. Source: A2A internal analysis

This information was prepared by A2A and it is not to be relied on by any 3rd party without A2A’s prior written consent. 38