Recovery on the Horizon? European P&U Report Q3 2020

Recovery on the horizon?

Insights about the European power & utilities industry

KPMG Global Energy Institute

Q3 2020 Contents

1 Executive summary 1

2 Prices & margins: Signs of recovery? 2

3 Financial performance: How have European P&U companies performed? 7

4 Mergers & acquisitions: Higher activity, steady valuations 10

5 Looking forward: A more resilient European P&U industry 12

While the effect of COVID-19 was immediately felt in the first quarter, t he deeper repercussions were felt in the second quarter of 2020. Revenues and EBITDA of top 20 P&U European companies fell by ~18 percent and ~14 percent in 2Q20 from 1Q20, on an average. While some metrics like Net Debt/EBITDA increased indicating an increase in the debt position, others like capex declined. Despite the lackluster second quarter, the European P&U industry has witnessed good recovery in the third quarter of 2020. Electricity prices rose as Europe emerged from the impact of the first wave of COVID-19. Input prices also witnessed a steady recovery from the lows of last quarter. And while clean spark and dark spreads witnessed slight declines, the EUROSTOXX utilities index was up on an average.

This recovery was supported by easing restrictions on travel and businesses resuming operations after the coronavirus-imposed lockdown. The COVID-19 pandemic not only accelerated the investments in green initiatives, and drafting of decarbonization plans, but also augmented European utilities’ digital drive.

While it may be too early to surmise how the 3Q20 performance of these companies might be – as by the time this report is getting published 3Q20 results are not out yet - early indications and forecasts from analyst reports don’t paint a negative picture. In fact, the M&A activity in the industry has increased in 3Q, with companies focusing on expanding their renewables portfolio, increasing geographic footprint, achieving net zero goals and acquiring waste-to-energy projects. However, recent increases in COVID-19 cases in few countries have led to renewed government-imposed restrictions that may lead to downward revisions in some of the key metrics as well as electricity prices in major European markets.

It is expected that the rest of 2020 might witness a partial recovery for most P&U players in Europe as price hedges are in place and companies which have a heavy renewables presence will likely recover faster. Also, with the Green Deal and other similar stimulus measures from the European governments, it is likely that the COVID-19 pandemic will succeed in accelerating the pace of energy transition & decarbonization as well as digital transformation, with European P&U players at the center of it.

2 Prices & margins: Signs of recovery?

Electricity price evolution: Increasing demand amid signs of economic recovery Base load electricity prices in Spain and France averaged around EUR41.0/MWH and EUR43.3/MWH in 3Q20, reflecting 60 percent and 85 percent rise compared to 2Q20, respectively. Prices in Germany and the UK averaged around EUR 38.2/MWH and EUR 38.8/MWH during 3Q20 reflecting 37 percent and 43 percent increase compared to 2Q20, respectively. Power consumption in Europe has witnessed gradual recovery as the whole continent gradually emerged from the impact of coronavirus.

Base load electricity prices in France and Spain remained fairly stable during July and August, revolving around EUR 38/MWH, supported by resumption of activities after coronavirus-imposed lockdown. Electricity prices in France and Spain witnessed upward trend in September 2020, reaching nearly EUR 50/MWH by end of month. Peak and base load prices in Germany and the UK averaged around EUR 34/MWH during July and August, followed by steep rise throughout September, reaching nearly EUR 46.4/MWH in the UK and EUR 50.3/MWH in Germany by end of September.

Electricity prices during the quarter were driven by lower projections of renewable power generation1, limited output from lignite plants, lower nuclear availability in France (due to potential cooling issues at French reactors2) and several maintenance outages throughout the quarter. However, prices were offset due to revised projections of warmer temperature and higher wind and solar output. Renewables produced more than 50 percent of electricity in Germany during the first half of 2020.

Figure 1: Electricity prices (Base load and peak load), EUR/MWh, January 2017 to September 2020

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Note: For individual country-level data/graph, please refer to the APPENDIX. Source(s): Reuters, 2020.

© 2020 Copyright owned by one or more of the KPMG International entities. 2 KPMG International entities provide no services to clients. All rights reserved. Fuel price evolution: Recovery in crude oil and gas prices as well Brent and WTI crude oil prices continued to recover through July and August reaching US$44.3 per barrel and US$42.4 per barrel respectively at the end of August. Average Brent and WTI crude prices during 3Q20 increased 36 percent and 47 percent respectively, vs. 2Q20. Recovery was supported3 by easing restrictions on travel and businesses resuming operations after the coronavirus- imposed lockdown.

Brent and WTI prices declined in September due to rising crude inventories.4 Oil prices were put under pressure due to concerns about fuel demand recovery, as the number of COVID-19 infections continued to rise and led to new restrictions in several countries across the globe.

During early September, Brent and WTI crude oil prices fell to less than US$40 per barrel and then began to stabilize from mid-September through October 1, trading at an average level of US$42 per barrel. Some of the initial decline in oil prices came as a result of announcements5 that opposing parties in Libya had agreed to lift the export blockade which had reduced production in the country.

EIA estimates6 that the rate of global oil demand growth slowed in August and September, compared with the recovery in June and July. June and July’s global oil demand increased by 6.0 million barrels per day (b/d) and 3.1 million b/d, respectively, whereas EIA estimates August and September demand increased by 0.6 million b/d and 1.3 million b/d, respectively. Recent increases in COVID-19 cases in few countries have led to renewed government-imposed restrictions, although to a much lesser extent than that in March and April 2020, thus contributing to the downward pressure on crude oil prices.

Figure 2: Crude oil and natural gas prices, January 2017 to September 2020

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Notes: Gas prices in the UK are commonly referenced to the UK National Balancing Point (NBP) price. Source(s): World Bank commodities price data (The Pink Sheet), July 2020; Reuters, July 2020.

EU, Henry Hub and NBP natural gas prices continued to increase during 3Q20 averaging at US$2.9/MMBTU, US$2.0/MMBTU and GBP22.0/Therm respectively, primarily supported by lower renewables generation, rise in carbon prices and recovery in crude markets. The prices were offset by rising inventories amid speculations of second pandemic wave.

In September 2020, however, the US Henry hub natural gas price decreased as a series of hurricanes and tropical storms in the US Gulf Coast limited operations at some LNG export facilities.7

EIA estimates8 that US Henry hub natural gas production declined to 89.4 Bcf (billion cubic feet) per day in September, 5.3 Bcf per day lower than that in September 2019. Despite falling production in

© 2020 Copyright owned by one or more of the KPMG International entities. 3 KPMG International entities provide no services to clients. All rights reserved. 2020, falling LNG exports have contributed to high natural gas inventories. EIA estimates that US natural gas inventories at the end of September reached a record high for the month of September and forecasts that inventory levels at the end of October could be the highest on record for any month.

Carbon and coal price evolution: Better recovery in carbon prices but coal prices remain mostly flat After an initial rise in the first week of July driven by speculative and technical trading and increased 9 industrial demand , Carbon prices averaged at EUR27 per ton of CO2 in July and August 2020. In the second week of August, carbon prices fell to EUR26/tCO2 (lowest in 3Q20) mostly due to high auction volumes, combined with clean dark spreads in deep negative territory and due to resurgence of number of COVID-19 infections leading to economic concerns. On an average, the carbon prices during the quarter increased by 30 percent from 2Q20.

Carbon prices rose in September driven by reduction in auction supply10, rebound in industrial production, and warmer temperature (which stimulated the power demand for cooling). Prices continued to rise till mid of September reaching EUR30 per ton of CO2 , and then started to decline mostly due to high auction volumes, weak level of market activity amid expectations of abundant supply, accompanied by fears regarding a second pandemic wave in Europe.11

Figure 3: Carbon and coal prices, January 2017 to September 2020

Carbon price — EU ETS Coal(a)

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Note: (a) The World Bank has not published the Colombian coal prices since Q3 2018, — therefore the Colombian coal prices are not included in the report. Coal API 2 price assessment is the benchmark price reference for coal imported to northwest Europe (Rotterdam pricing). Source: World Bank commodities price data (The Pink Sheet), September 2020; Reuters, September 2020.

Australian coal prices averaged around US$50.9/mt in July and August, followed by rise in September reaching average price of US$54.6/mt for the month.

Average prices for Coal API2 declined throughout most of the quarter averaging at US$59.7/mt in July, followed by US$56.7/mt in August. The prices increased in September averaging around US$58/mt. Coal API2 prices increased by 7.5 percent in 3Q20 compared to 2Q20.

The South African coal prices continued to increase throughout the quarter, averaging at US$56.6/mt in July, US$57.4/mt in August and US$57.5/mt in September. The average prices during the quarter gained 0.4 percent compared to 2Q20.

Coal price movements during the quarter was supported by higher freight rates, rise of carbon prices, supportive influence of competitive gas prices, and the rise of European stock markets. European coal prices were particularly driven by the announcement of a decline in Colombian coal

© 2020 Copyright owned by one or more of the KPMG International entities. 4 KPMG International entities provide no services to clients. All rights reserved. production, as the country is one of the main suppliers for Europe. The coal prices were also influenced by the announcement of production decline this year in Russia, Colombia and Indonesia.12

Coal prices during the quarter were offset by weak level of physical demand and abundant regional supply (as stock levels in Europe remained relatively high at ports and plants), amid concerns about ongoing disruptions to Colombian output. Prices were also impacted by weak Asian demand and low level of market activity amid fears regarding a second pandemic wave in Europe.13

Clean dark and clean spark spreads: Slight decline from previous quarter Clean spark spreads – measuring the profitability of gas-fired generation by taking into account variable costs – remained above clean dark spreads for the entire 3Q20 in Germany, Spain and France, respectively averaging EUR(3.1)/MWh, EUR12.3/MWh, EUR(6.2)/MWh, implying that gas- fired generation was profitable in the biggest markets of continental Europe, thus supporting coal switching for most of the period. In the UK, clean spark spreads averaged EUR10.8/MWh in 3Q20. Gas prices declined towards the end of September, although low wholesale electricity prices and increasing emission allowance prices, helped in improving the profitability of gas fired electricity generation. Higher clean spark spread in Spain and France, compared to that in Germany, was primarily owing to higher wholesale electricity prices in these two markets. Gas prices are expected to remain low for the rest of 202014, thus coal to gas switching is expected to continue.

Figure 4: Clean spark and clean dark spreads, January 2017 to September 2020

Clean dark spread Clean spark spread

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Notes: (a) The spread is used for estimating the profitability of a power plant. It is the difference between the input fuel costs and the market price of electricity. For electric power generation using natural gas as fuel, this difference is called the spark spread, while for coal-based power plant, the difference is called the dark spread; (b) The spark spread is calculated using daily spot prices of natural gas and electricity at various trading points. Clean spark and Clean dark spreads are calculated by subtracting the carbon price per ton (accounting for emissions intensity factor) from spark and dark spread. Source(s): Reuters, 2020. Regulatory developments in 3Q20: Key takeaways

In this quarter, regulatory developments within the European P&U sector were focused primarily on Green transformation that has accelerated in the wake of COVID-19 pandemic:

— UK, for example, is planning to allocate GBP3 billion package of green investment as part of the government’s COVID-19 economic recovery plan, of which GBP2 billion will be used towards a new green homes grant. The government is also planning to relax planning legislation, making it easier to construct large batteries to store renewable energy.

— Spain started the public consultation period of the Spanish Long-Term Decarbonization Strategy draft, which is a continuation of the Spanish National Energy and Climate Plan (NECP) and a consequence of the commitments acquired with the Paris Agreement and the European Green Deal. The government also launched the hydrogen roadmap draft for public consultation, aimed to foster consumption, production and technological development of green hydrogen in the country.

— The French Energy Regulatory Commission (CRE) aims to actively take part in deliberations within the European Commission to work on modalities to achieve the goals of the European Green Pact.

For more details, please refer to the APPENDIX section titled: Regulatory developments in the European P&U sector, 3Q20

3 Financial performance: How have European P&U companies performed?

EUROSTOXX index and share prices: Growth in share prices in 3Q20 The EUROSTOXX index witnessed a steady rise from mid-May to mid-July, due to easing lockdowns and hopes of recovery. In 3Q20, the index touched a high of 368.85 on 21 July and witnessed a marginal decline to 338.54 on 22 September. The index averaged 353.65 in 3Q20, vs. 315.01 in 2Q20 and 330.20 in 3Q19. Quarterly average share price of most KPMG P&U 20 companies witnessed a q-o-q increase in 3Q20, except for Veolia Environment and National Grid. On y-o-y basis, Suez, Verbund, EDF, Engie, Fortum, Naturgy, CEZ and Veolia Environment witnessed decline in average share price. (see Share price evolution: Overview (3Q20) in APPENDIX). There was no change in the credit ratings of the companies in 3Q20 vs. the previous quarter, with S&P maintaining a BBB+ for most companies. (see Credit ratings: Overview (3Q20) in APPENDIX).

Figure 5: EUROSTOXX utilities index, January 2017 to September 2020

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May-20 Aug-20 Sep-20 Note(s): (a) The EUROSTOXX indices use the market standard ICB Industry Classification Benchmark, and companies are categorized according to their primary source of revenue. This categorization is then used for accurate classification of companies in their respective business environments. (b) The EUROSTOXX utilities index comprises of the following 20 P&U companies: IBERDROLA, ENEL, E.ON, ENGIE, RWE, EDP ENERGIAS DE PORTUGAL, VEOLIA ENVIRONNEMENT, TERNA, FORTUM, ENDESA, RED ELECTRICA CORPORATION, Naturgy Energy Group, EDF, SUEZ ENVIRONNEMENT, UNIPER, ELIA GROUP, VERBUND, HERA, ITALGAS, A2A. Source(s): Capital IQ, 2020.

Revenue and EBITDA: Continued decline in 2Q20 For a detailed financial performance study of the European P&U industry, KPMG has shortlisted 20 P&U companies based on revenues and market capitalization — collectively known as KPMG P&U 20. Financial performance of these companies depicts a cyclical pattern with revenue and EBITDA falling in the second quarter of every year and then moving back on track to improved performance in the fourth quarter. The industry financials follow the changes in prices of electricity, coal and other fuels driven by demand, production changes and weather conditions. In 3Q20, these prices showed signs of recovery especially towards the second half of the quarter.

© 2020 Copyright owned by one or more of the KPMG International entities. 7 KPMG International entities provide no services to clients. All rights reserved. Figure 6: Industry revenue and EBITDA quarterly growth (based on median values) of KPMG P&U 20

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Note(s): KPMG P&U 20 includes 20 European P&U companies: CEZ, E.ON SE, Energias de Portugal (EDP), Electricité de France (EDF), EnBW Energie Baden- Württemberg, Endesa, Enel, Engie, Fortum Oyj, Iberdrola, National Grid, Naturgy Energy Group, Ørsted A/S, Public Joint Stock Company Inter RAO UES, RWE Aktiengesellschaft, SSE, Suez SA, Uniper, Veolia Environment and Verbund AG. In June 2020, Innogy was incorporated into E.ON Group and hence is no more a part of KPMG P&U 20. Effective 3Q20, Verbund AG replaced Innogy in KPMG P&U 20 list. Source(s): Capital IQ, 2020.

EDF, Engie and E.ON are the leading entities, in terms of revenue, in the European P&U market. In 2Q20, most companies in KPMG P&U 20 experienced a continued decline in revenue and EBITDA values. However, Fortum Oyj reported a significant jump in revenue, due to the consolidation of Uniper‘s income statement in 2Q20. As of 18 August 2020, Fortum holds 75% equity stake in Uniper.15

European utilities have shown more resilience to the impact of the coronavirus pandemic, compared to other sectors due to the essential services that they provide, a regulated or long-term contracted nature of a portion of their activities, and their relatively better access to capital markets.16 The pandemic has accelerated European utilities’ digital drive. For instance, Italy-based Enel has created the world’s largest virtual telecommunications infrastructure, which connects over 1,000 sites across three continents and in over 10 countries, in partnership with Accenture, CISCO and Sirti Digital Solutions. This project has allowed Enel to significantly reduce go-to-market times and optimize cost efficiency.17 In May 2020, Germany-based E.ON Group announced EUR500 million of additional investment climate-friendly upgrades of energy infrastructure to support energy transition.18 Furthermore, after the onset of the pandemic, E.ON has increased its use of drones by 50% and is now leveraging automated image recognition software for inspecting high-voltage power lines.19

Other key financial metrics: P&U players continued to weather the COVID-19 crisis in 2Q20 P&U players continued to weather shocks of the COVID-19 pandemic in 2Q20, however rise in investments in renewables and carbon-neutral future will contribute to the overall financial resilience of the sector.

In 2Q20, the median Net Debt to EBITDA for KPMG P&U 20 companies stood at 13.49 up from 10.67 in 1Q20 and 7.95 in 2Q19, as a result of a rise in net debt and fall in EBITDA for most companies due to COVID-19. Verbund, CEZ, EDF, Endesa and Uniper continued to report Net Debt to EBITDA ratio below the industry median in 2Q20.

Due to the COVID-19 pandemic, most companies continued to report a decline in their Capex in 2Q20. However, companies such as EDP, EnBW, Fortum and PJSC Inter RAO reported increased Capex in 2Q20, vs. 1Q20 — implying continued focus on critical projects (particularly renewables) to drive business growth. In 2Q20, EnBW’s capital investments focused on the completion of its Hohe

See and Albatros offshore wind farms, grid expansions and replacement expenditure in the distribution grid.20. In 2020, Fortum’s capital expenditure, including maintenance but excluding acquisitions, is expected to be approximately EUR 700 million. The company plans to invest approximately EUR 200 million in solar and wind projects during the year.21

Figure 7: KPMG P&U 20: Key financial metrics – Industry median

Net debt to EBITDA Capex to EBITDA

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Note(s): Net debt = Total debt – Total cash and short-term investments; Return on capital employed = EBIT/(Total assets – Current liabilities); TEV = Market capitalization + Book value of total debt + Book value of preferred stock + Book value of minority interest – Cash & short term investments. Effective Q3 2020, industry median has been considered for the above key financial metrics, due to wide variations in financial data of KPMG P&U 20 companies. Source(s): Capital IQ, 2020

The median ROCE (Return on Capital Employed) of KPMG P&U 20 companies fell to 0.82% in 2Q20, vs. 1.51% in 1Q20. Verbund, Endesa and PJSC Inter RAO maintained high ROCE in 2Q20 — above industry median.

In 1H20, Ørsted and National Grid were the leading companies in the market in terms of their valuation (TEV/EBITDA). E.ON, EnBW and SSE have seen a substantial growth in their Total Enterprise Value and EBITDA during 2Q19–2Q20, as these firms increase focus on reducing their carbon emissions. In 2020 E.ON announced new ambitious climate target to reduce its Scope 1 and 2 emissions by 75% by 2030 and by 100% by 2040 (vs. 2019).22 EnBW has committed to becoming climate-neutral by 2035.23 SSE aims to reduce its direct Scope 1 GHG emissions by 60% to 120 gCO2e/kWh by 2030 from a 2018 base year (300 gCO2e/kWh), stretching its previous target to reduce carbon intensity by 50% to 150 gCO2e/kWh.24

4 Mergers & acquisitions: Higher activity, steady valuations

As the European P&U industry is showing signs of recovery from the COVID-19 pandemic, there is also noted increase in the M&A deal activity. 3Q20 witnessed an increase in the total M&A deal value to EUR8,767 million, from EUR5,217 million in 2Q20 — a rise of 68 percent. However, compared with 3Q19, the total deal value in this quarter decreased by EUR4,103 million.

The total number of deals in the quarter increased from 66 in 2Q20 to 86 in 3Q20 - still lower than the 114 deals reported in 3Q19. The number of domestic and inbound deals in the quarter also increased to 72 from 63 in 2Q20. The number of outbound deals in the quarter increased significantly from 3 in 2Q20 to 14 in 3Q20.

The top 15 deals, which valued at EUR8,039 million — accounting for 92 percent of the total deal value — focused on expansion in renewables portfolio and strengthening presence in the renewables space. Through the deals, the P&U players also planned to increase geographic footprint in other markets, achieve net zero goals and focus on waste-to-energy projects. But it’s just not about the P&U players only; companies from outside the industry like BP are also acquiring renewable energy assets (e.g., wind energy) outside of Europe. This is part of the European oil & gas majors’ strategy to diversify their asset and revenue base in order to prepare for the impending energy transition and peak oil demand.

Figure 8: Number and value of M&A deals in the European P&U sector, 1Q18 to 3Q20

Deal value (EUR million) Quarter-on-Quarter | Year-on-Year

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Note(s): M&A deals include Domestic, Inbound and Outbound deals. Domestic M&A deals are those for which both target and buyer companies are within Europe; Inbound M&A deals are those for which target company is in Europe but the buyer company is outside Europe; Outbound M&A deals are those for which target company is outside Europe and buyer company is in Europe. Source(s): MergerMarkets, 2020.

Among the target countries, most M&A deals were focused on Spain, followed by the UK, France and Norway. Outside of the region, the primary target country for the European P&U companies was the US.

© 2020 Copyright owned by one or more of the KPMG International entities. 10 KPMG International entities provide no services to clients. All rights reserved. Figure 9: Target countries, by total number of deals, 3Q20

Target countries, within Europe Target countries, outside Europe

Spain 15 USA 5

Brazil 2 United Kingdom 9 Singapore 1 France 8 Mexico 1

Norway 6 Japan 1

Denmark 4 India 1 Chinese Taipei 1 Czech Republic 4 Chile 1 Others 26 Australia 1

Source(s): MergerMarkets, 2020.

The inclination of P&U companies toward renewable energy in Europe is expected to increase further as the region is steering to achieve its green ambitions. It is expected that Solar power could be Europe’s biggest energy source in terms of installed capacity by 2025.25 As per Eurelectric (a body representing European national electricity associations and leading national electricity companies) estimates, 80 percent of European Union’s electricity could be fossil-fuel free, by 2030.26 Because of the drive towards green power, the European P&U sector would most likely witness an increase in inbound and domestic deals, primarily in the renewables space.

© 2020 Copyright owned by one or more of the KPMG International entities. 11 KPMG International entities provide no services to clients. All rights reserved. 5 Looking forward: A more resilient European P&U industry

According to the latest estimates from leading analysts, electricity prices will recover only partially throughout the rest of 2020 in Europe as electricity demand remains on the lower side, there is a higher supply from renewables and low-cost fuels remain as main inputs to electricity production27. Despite this impending situation, most European P&U companies are better placed in terms of absorbing the demand shock from the COVID-19 pandemic, thanks mostly to the price hedges.

Also, going forward, given the Green Deal and with most P&U companies focusing on their renewable energy portfolio (including the higher M&A deal activity in the renewables space), the trend of energy transition and decarbonization will play an even bigger role in determining the performance and valuation of most European P&U players.

Appendix

Contents

Electricity prices (Base load and Peak Load) 14

Top 15 M&A deals in European P&U sector, 3Q20 16

Share price evolution: Overview (3Q20) 17

Credit ratings: Overview (3Q20) 17

Regulatory developments in the European P&U sector, 3Q20 18

Electricity prices (Base load and Peak Load)

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Jul-18

Jul-19 Jul-20 Jan-18 Jan-19 Jan-20 Mar-17 Mar-18 Mar-19 Mar-20 Sep-17 Nov-17 Sep-18 Nov-18 Sep-19 Nov-19 Sep-20

Aug-20 Sep-20

Jan-18

Jan-19 Jan-20

May-17 May-18 May-19 May-20

Mar-17

Mar-18

Mar-19

Mar-20

Aug-20

Sep-20

Sep-17

Nov-17

Sep-18

Nov-18

Sep-19

Nov-19

Sep-20

May-17

May-18 May-19 May-20

United Kingdom

Base load Peak load Base load

120 120

100 100

80 80

60 60

€/MWh €/MWh

40 40

20 20

0 0

Jul-17

Jul-18

Jul-19

Jul-20

Jul-17

Jul-18

Jul-19

Jul-20

Jan-18

Jan-19

Jan-20

Mar-17

Mar-18

Mar-19

Mar-20

Sep-17

Nov-17

Sep-18

Nov-18

Sep-19

Nov-19

Sep-20

Jan-18

Jan-19

Jan-20

Aug-20

Sep-20

May-17

May-18

May-19

May-20

Mar-17

Mar-18

Mar-19

Mar-20

Aug-20

Sep-20

Nov-17

Nov-18

Nov-19

Sep-17

Sep-18

Sep-19

Sep-20

May-17

May-18 May-19 May-20

Source(s): Reuters, 2020.

Top 15 M&A deals in European P&U sector, 3Q20

Source(s): MergerMarkets, 2020.

Share price evolution: Overview (3Q20)

Note: Includes KPMG P&U 20 companies. Currency is in EUR. Source: S&P Capital IQ, 2020.

Credit ratings: Overview (3Q20)

Note(s): (a) The date of publication of latest report (company release, market/industry/peer report) or latest update on S&P Capital IQ/Moody’s/Fitch website, from which the rating has been sourced. (b) On 15 February 2018, RWE ended its rating by the agency S&P’s. Source: S&P Capital IQ/Moody’s/Fitch, 2020.

© 2020 Copyright owned by one or more of the KPMG International entities. 17 KPMG International entities provide no services to clients. All rights reserved. Regulatory developments in the European P&U sector, 3Q20

United Kingdom

Sunak to unveil GBP3 billion green package as part of coronavirus stimulus 6 July 2020 Rishi Sunak will announce a GBP3 billion package of green investment as part of Government’s Covid-19 economic recovery plan. GBP2 billion will be used towards a new green homes grant, while the remaining GBP1 billion will be used for insulating public buildings. These measures will help the UK meet its target of becoming a net zero carbon economy by 2050.

Link I

UK Government to relax planning legislation, making it easier to construct large batteries to store renewable energy 14 July 2020 UK government will be relaxing planning legislation to allow the UK to maximise its energy storage and to create hundreds of new jobs. Removing the barriers could treble the number of batteries serving the electricity grid, bringing about storage cells that are five times bigger than those currently available. Flexible technologies such as batteries will support the integration of more low carbon power technologies which are estimated to save the UK energy system up to GBP40 billion by 2050.

Link II

Ofgem proposes cutting energy companies’ returns by half 9 July 2020 Ofgem has stated that from April 2021, it plans to set a baseline rate of return at 3.95 percent for energy network companies, a significant decrease from the current 7–8 percent. These proposals are expected to save consumers GBP3.5 billion over the next five years. This announcement has sparked an outcry with network companies stating that these changes would risk their ability to deliver reliable services.

Link III

BEIS and Ofgem call for support of offshore transmission infrastructure 24 August 2020 BEIS and Ofgem have published an open letter setting out the actions to be taken by both parties to increase the level of coordination in offshore transmission infrastructure. They have called for views to support the offshore transmission network review, which they will use to capitalize on early opportunities to deliver benefits to consumers and the wider energy system, and inform future policy development related to an enduring regime for connections beyond 2030.

Link IV

BEIS publishes report surrounding CCUS 17 August 2020 A report published by BEIS outlines the response to the Government’s recent consultation on business models for individual areas of the CCUS (carbon capture, usage and storage) value chain, including providing a CCUS delivery action plan with updates on commercial frameworks and a value for money methodology. The report focused on transport/storage, industrial capture and power generation.

Link V

Long-term Decarbonization Strategy Draft On 23 July 2020, the public consultation period of the Spanish Long-Term Decarbonization Strategy (ELP) draft was started. The ELP is the continuation of the Spanish NECP and a consequence of the commitments acquired with the Paris Agreement and the European Green Deal. The draft sets out the guideline to reach GHG emissions' neutrality in Spain by 2050. In addition to highlighting the role of renewables, the government announced that the decarbonization process will be economic reactivation lever in the context of the Covid-19 crisis. The consultation period ended on 30 September 2020.

Link I

National Self-consumption Strategy Draft In the NECP 2021–30, the Spanish government pledged to promote shared consumption formulas and to favor the involvement of consumers in the production of renewable energy. The National Self-Consumption Strategy will establish the instruments to implement these objectives. The draft proposes formulas such as energy communities to promote the shared use of energy and announces that it will enable the implementation of these applications in different areas such as the industrial or service sector. The public consultation period has been from 30 July to 18 September 2020.

Link II

Hydrogen Roadmap Draft The government launched the hydrogen roadmap draft for public consultation on 29 July 2020. The consultation period closed on 11 September 2020. The document aimed to provide signals to foster the consumption, production and technological development of green hydrogen in Spain. In this line, it established targets to be achieved by 2030 as 4GW of installed electrolysis capacity. Besides, it contains a set of 57 measures, including the introduction of a 100 percent renewable origin guarantee system.

Link III

New Circular that establishes the methodology for natural gas tolls On 22 July 2020, the National Commission of Markets and Competition (CNMC) published the Circular 6/2020 that establishes the methodology for the calculation of tolls for basic access services to the gas transport, gas distribution and regasification infrastructures. In line with the article 9 of Regulation (EU) 2017/460, the new Circular established a 13.9 percent discount in transport tolls, based on capacity to apply to entries from LNG facilities, to increase the security of supply. The new Circular also established a 100 percent discount in transport tolls, based on the capacity of application to entrances and exits, to or from underground storage facilities.

Link IV

France

ENGIE – Monthly evolution of ENGIE’s regulated gas sales tariffs On 1 September 2020, ENGIE regulated prices increased by 0.6 percent on a m-o-m basis, primarily reflecting a 7 percent increase on tariffs for gas used for home heating. Overall, the regulated gas sales tariffs have fallen by 24 percent since 1 January 2019. In June 2020, the French regulation commission (CRE) announced, a strong increase of regulated tariffs, for the second half of the year. This is the consequence of the rebound in gas prices.

Link I

The French regulation commission (CRE) approved the French electricity grid evolution project, proposed by RTE (the French electric transporter), for 2035 The project’s objective is to renovate and adapt the electricity grid to the energy transition. The main orientations (non-exhaustive) are modernization and optimization of the grid, reinforcement of the numeration of the grid, doubling of the exchange capacity with the neighbouring countries and deployment of a sea grid.

Link II

The new European guidelines on energy infrastructure: contribution of the French regulation commission (CRE) The European Commission has published its guidelines to review the European energy infrastructures. The European Green Pact wants to make Europe the first carbon neutral continent. The CRE aims to actively take part to the brainstorming on the required changes in regulation to achieve this transition.

Link III

EDF – Evolution of EDF’s regulated electricity sales tariffs As of 1 August 2020, the regulated electricity sales tariffs increased by 1.81 percent (excluding tax) for the ‘blue’ tariffs and by 1.21 percent (excluding tax) for the ‘green’ tariffs. According to the French code of energy, this increase considers the evolution of the tariff for the use of the electricity public network (TURPE) as of 1 August 2020, as well as the financial counterpart received by the suppliers for client’s management on behalf of the grid operator.

Link IV

CRE – Easing of Power Capacity Mechanism Rules The French Regulation Commission (CRE) issued a recommendation ‘Délibératon” to ease the Power Capacity Mechanisms Rules in order to increase the Power Supply Security. The related modifications are suppressing penalties for late declaration of increased power availabilities and suppressing penalties for late certification of new sites of power load shedding.

Link V

New Regulation for Renewable Energy Communities With the Delibera 318/2020/R/eel, published on 4 August 2020, ARERA has defined the modalities and economic regulation related to electricity shared in buildings or condominiums (Renewable energy self-consumers acting collectively) or as part of renewable energy communities. Through this resolution, ARERA has established a new incentive scheme which allows economic recognition of the benefits derived from the virtual on-site self-consumption of locally produced electricity, even without any further technical equipment, connections or new local networks.

Link I

Ultra-fast frequency regulation scheme On 6 July 2020, Terna, the Italian TSO, published the regulation containing the technical requirements and procedures for the provision of the ultra-fast frequency regulation service. The scheme provides a fixed remuneration to be awarded by pay-as-bid auctions, with a cap equal to EUR80,000 per MW per year, for the capacity made available to the ultra-fast frequency regulation service. The Assignee is required to guarantee the availability of the assigned capacity for 1,000 hours per year.

Link II

Netherlands

Shell and Eneco to build third unsubsidized Dutch offshore wind farm CrossWind, a consortium comprising Shell and Eneco, is going to build and operate the third unsubsidized wind farm in the Dutch North Sea, in the Hollandse Kust (noord) Wind Farm Zone (HKNWFZ). The wind farm will have a capacity of over 750MW and its construction will mean that by 2023, offshore wind power will provide 16 percent of the Netherlands' electricity needs. During the assessment of the tenders for this wind farm permit, one of the aspects focused on was the use of innovative applications.

Link I

Burning biomass is not sustainable The Netherlands should phase out the use of biomass for generating electricity as soon as possible, the advisory board of the Dutch government said in a report presented in July. Biomass is an “indispensable” resource for the circular economy, but burning it is wasteful which is the main message of the report issued on 8 July by the Socio-Economic Council (SER), an independent advisory board of the Dutch government consisting of entrepreneurs, employees and independent experts.

Link II

State Secretary Van Veldhoven launches new campaign to combat packaging waste Along with manufacturers, the Netherlands State Secretary, Van Veldhoven (Environment) has launched a new campaign to combat packaging waste. The campaign is aimed at reducing the use of packaging, promoting the re-use of packaging, and enhancing the quality of collection and recycling processes. In addition to the implementation of the European recycling targets, the State Secretary has set down agreements with the packaging sector regarding specific circular targets until 2025, comprising re-use, in addition to recycle.

Link III

© 2020 Copyright owned by one or more of the KPMG International entities. 21 KPMG International entities provide no services to clients. All rights reserved. Stimulus packages make driving a hydrogen vehicle in Arnhem more accessible Since December 2019, over 70 new hydrogen-powered vehicles have appeared on the streets of Arnhem, Netherlands. This has been possible thanks to the H2-Drive initiative, implemented jointly by the municipality of Arnhem and the province of Gelderland. Both authorities have been promoting sustainable energy in various ways, including subsidies, with the objective to improve air quality in the region.

Link IV

Russia and CIS

Russia: Energy Strategy for the period until 2035 has been approved The Energy Strategy of the Russian Federation for the period until 2035 has been approved by the Russian Federation Government Order No. 1523-r of 09.06.2020. The goal of the new Energy Strategy is to strengthen the Power industry, structurally and qualitatively, in order to promote the dynamic socio-economic development and ensure national security of Russia. This goal is planned to be achieved in four ways: — Ensure adequate overall output and export of products and services of the fuel and energy sector to meet the needs of Russia’s socio-economic development — Ensuring spatial and regional development of the energy sector — Achieve the technological independence and competitive growth of the energy sector — Improve state management and developed international relationships. The Energy Strategy addresses: — An increase in efficiency, reliability, accessibility and quality of meeting the internal demand for all power resources, technologies and services in the area of energy industry — Further development of LNG — Development of production and consumption of hydrogen and helium — Development of gas transportation infrastructure in Eastern Siberia and the Far East increase in innovative activities of companies operating in the fuel and energy industry — Introduction of digital technologies in governance — Creation and implementation of smart metering and grid management systems — Implementation of the EnergyNet National Technology Initiative

Link I

Russia: Conclusions from the survey on Cross subsidization According to KPMG analysts’ conclusion post their survey titled ‘Cross Subsidization in Russia’s Power Industry. International Benchmarking’, Cross subsidization remains a poorly regulated part of the Russian market. However, it can play the key role in supporting low-carbon generation, fostering the implementation of best available techniques and supporting the ‘energy-poor’ population and energy-intensive consumers. Therefore, the reconfiguration of this instrument is required instead of liquidating it.

Link II

© 2020 Copyright owned by one or more of the KPMG International entities. 22 KPMG International entities provide no services to clients. All rights reserved. Russia: New initiatives to drive RES use Chairman of the Government of the Russian Federation has signed Resolution No. 1298 ‘on encouraging the use of renewable energy sources (RES), amending some acts of the Russian Federation Government, and holding void individual provisions of some acts of the Russian Federation Government’. The amendments have introduced an integrated approach to the selection and implementation of projects of building RES generation facilities in the retail markets. The Ministry of Energy believes that these innovations may drive large-scale introduction of RES facilities with a capacity of less than 25MW in the retail markets of electric power. This will in turn increase the power supply reliability, by diversifying the energy sources, give rise to innovative activities and implementation of new types of generation suitable for local environment and be instrumental in achieving the Paris Agreement and Sustainable Development Goals.

Link III

Kazakhstan: Green bonds To move towards Green transformation, Kazakhstan listed and issued green coupon bonds at the stock exchange in Astana International Financial Centre. This step is intended to boost micro, small and medium-sized businesses engaged in green projects.

Link IV

Azerbaijan: RES auctions Azerbaijan is discussing opportunities of implementing RES projects in 15 regions with high solar energy potential by holding RES auctions. The related land allocation issues are also being discussed. There are plans to implement about 1,000 additional megawatts through auctions, by 2030.

Link VI

Azerbaijan: Small HPP development The Ministry of Energy of Azerbaijan will prepare a small HPP development strategy. In accordance with the Letter of Intent signed in October 2018 between the Ministry of Energy and BP, they formed a working group and engaged SNC-Lavalin's Atkins to appraise the efficiency of constructing small-HPPs in Azerbaijan.

Link VII

Uzbekistan: Plans to resume a full-scale integrated power system in Central Asia Uzbekistan is determined to resume a full-scale work of the integrated power system in Central Asia by connecting Tadjikistan and Turkmenistan to it. Export and import operations of the integrated power system in Central Asia will grow every year. Currently, Kazakhstan, Uzbekistan and Kyrgyzstan are conducting full-scale work in the integrated power system. The work related to connecting of Tadjikistan is currently in progress. It is expected to be completed by 2021. The Deputy Minister of Energy stated that the short-term plan is to erect a new power transmission line to the border with Tadjikistan. As to Turkmenistan, technical groups have developed modalities to continue the work in parallel.

Link VIII

© 2020 Copyright owned by one or more of the KPMG International entities. 23 KPMG International entities provide no services to clients. All rights reserved. Ukraine: RAB-rate has been approved On 26 August 2020, National Power and Utilities Regulatory Commission approved the Regulatory Asset Base (RAB) rate. As of 2021, it will apply to all electricity distribution system operators in the country. The regulator has essentially changed the regulatory framework in the power transmission and distribution segments. It has set different rates of return for power transmission line operators applicable to the ‘old’ and to the ‘new’ asset base until 2024. The RAB regulation must fundamentally change the approach to encouraging regional power distribution companies. The companies will have to reinvest half the revenue gained from the old asset base in the electrical grid on an annual basis. Every year the regulator will set objectives for regional power distribution companies to reduce SAIDI and electric power losses on the grid. The more engaged the companies will be in reducing process losses of electric power, the larger portion of the rate they will be able to keep.

Link IX

Ukraine: Study on the Ukrainian Electrical Power System Development Plan As part of the ESP projects, USAID together with Ukrainian National Energy Company Ukrenergo, have initiated a study which will provide a bedrock for the Ukrainian Electrical Power System Development Plan to be implemented in 2022–32. The purpose of the study is to prepare a well- reasoned plan of Ukrainian power supply system based on the technical and economic analysis of the electric power conditions and the necessary strengthening thereof for the future period. The plan will include an overview of the current power supply system and a map of the integrated power system (IPS) and will provide a number of its development scenarios. The plan will also include the IPS compliance in the process of its integration in ENTSO-E and the assessment of the grid’s compliance, security and stability. In addition, as part of the cooperation, a Manual will be prepared for power transmission system operators and for distribution system operators to facilitate their integration into the RES network.

Link X

Ukraine: Green bonds regulation The Government of Ukraine has passed a law ‘on capital markets and regulated commodity markets’ which, inter alia, regulates the procedure for the use of green bonds. The issue of green bonds will allow to fund energy saving projects, green power projects, conservation of natural resources, etc. The Ukrainian Government, banks (both public and private), and other authorised financial organisations will be able to issue bonds. One green bond may be used for funding several projects at a time. Link XI

Georgia: Regulations of wholesale electricity market have been approved Georgian National Energy and Water Supply Regulatory Commission (GNERC) has approved the regulations of wholesale electricity market in accordance with European standards, which is planned to be formed in 2021. These regulations apply to all market players including owners of power plants, major consumers, traders and suppliers of electricity. The regulations prohibit potential conflicts of interest and cross subsidization in the market.

Link XII

© 2020 Copyright owned by one or more of the KPMG International entities. 24 KPMG International entities provide no services to clients. All rights reserved. Georgia: New RES support mechanism has been approved Georgian Government has approved a new RES support mechanism, for the purposes of development of small and mid-sized HPPs. As part of the energy reform, the authorities established a power exchange where energy will be traded on an hourly basis. Investors willing to invest in small and mid-sized HPPs will be trading at this power exchange. In addition to the revenue they may gain at the stock exchange, the Government will pay them US$0.015 per kWh sold. According to the Ministry of Economics, 13 new power projects are going to be launched in the country, including construction of eight HPPs, and 14 new HPPs are going to be commissioned.

Link XIII

Armenia: Creation of the first PV plant IFC, EBRD and EU announced that they support the creation of the Armenia’s first production-scale solar power station. Fotowatio Renewable Ventures (FRV) (a branch office of Abul Latif Jameel Energy) is building the station.

Link XIV

KPMG's ENR EMA Region report: KPMG Global Energy Institute Main contacts

Ted Surette - [email protected] Valérie Besson - [email protected] Valerie Besson - [email protected] Alexis Majnoni d’Intignano - [email protected] Cécilie Timestit - [email protected]

Country contacts Acknowledgements

France Valerie Besson The report sponsors would like to acknowledge [email protected] the efforts of the following members of the Global Clients & Markets team (KPMG Global Germany Michael Salcher Services): [email protected] — Shovana Sahu Italy Francesco Galgliardi — Siddharth Gupta [email protected] — Prajit Goswami — Sandeepan Mondal Netherlands Jaap Van Roekel [email protected]

Portugal Susana Abreu [email protected]

Spain Alberto Martin Rivals [email protected]

UK Simon Virley [email protected]

Russia and CIS Maria Borovikova [email protected]

Hungary Edina Pazstor [email protected]

Global Energy Institute (GEI) Launched in 2007, KPMG’s GEI is a worldwide knowledge-sharing platform focusing on current issues and emerging trends within the energy industry. This vehicle for accessing valuable thought leadership, studies, events, and webcasts about key industry topics and trends provides a way for energy executives to share perspectives on the challenges and opportunities facing the energy industry –arming them with new tools to better navigate the changes in this dynamic industry. Update your subscription to the GEI to receive targeted email updates on the Oil & Gas, Power & Utilities, Renewables and Chemicals industries by visiting Global Energy Institute #KPMGGEI

1 Weekly intelligence report week 28, 08 July 2020, Energy market price 2 Weekly intelligence report week 28–40, 30 September 2020, Energy market price 3 Short term energy outlook, 6 October 2020, EIA 4 Crude oil – Short term energy outlook, 6 October 2020, EIA 5 Crude oil – Short term energy outlook, 6 October 2020, EIA 6 Crude oil – Short term energy outlook, 6 October 2020, EIA 7 Natural Gas – Short term energy outlook, 6 October 2020, EIA 8 Natural Gas – Short term energy outlook, 6 October 2020, EIA 9 Crude oil – Short term energy outlook, 6 October 2020, EIA 10 Weekly intelligence report week 28, 08 July 2020, Energy market price 11 Weekly intelligence report week 28–40, 30 September 2020, Energy market price 12 Weekly intelligence report week 28–40, 30 September 2020, Energy market price 13 Weekly intelligence report week 28–40, 30 September 2020, Energy market price 14 Quarterly report on European gas market, October 2020, DG Energy 15 Shareholder Structure, 18 August 2020, Uniper 16 EMEA Utilities Should Withstand COVID-19 Better Than Most Sectors, 24 March 2020, S&P Global 17 Enel Beyond the Cloud: More Than a Thousand Sites Connected by One of the World’s Largest Network Virtualization Projects, 23 July 2020, Accenture 18 E.ON plans additional infrastructure investments for climate protection and economic stimulus, 12 May 2020, E.ON 19 Coronavirus accelerates European utilities' digital drive, 10 August 2020, Reuters 20 EnBW at a glance, 30 June 2020, EnBW 21 Fortum Quarterly Financials Report, 2Q20, Fortum 22 E.ON Climate and Environment webpage, accessed on 28 October 2020 23 EnBW underpins its sustainable corporate strategy and aims to become climate-neutral by 2035, 6 October 2020, EnBW 24 SSE increases low-carbon ambition with new science based carbon targets, June 2020, SSE 25 Solar Could Be Europe’s Top Power Source In 5 Years, 29 September 2020, Oil Price 26 Europe's electricity could be 80% fossil fuel-free by 2030: industry group, 14 September 2020, Reuters 27 The Energy Transition and What It Means for European Power Prices and Producers: Midyear 2020 Update, 8 June 2020, S&P Global

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