IBERDROLA RENEWABLE ENERGIES Large-scale integration - toward 12% penetration in Europe - A reality? Athens, February 26, 2006 Pedro Barriuso Otaola General

IBERDROLA RENEWABLE ENERGIES

Large-scale integration - toward 12% penetration in Europe - A reality?

Athens, February 26, 2006

Pedro Barriuso OtaolaGeneral Director Renewable Energies, Engineering and Construction

IBERDROLA RENEWABLE ENERGIES 2

Index

Contents:

1. Renewable energies key aspects: environment, energy security and economic efficiency

2. Renewable support systems

3. Analysis of wind energy payment scheme

4. Other factors to consider for future wind development

5. Iberdrola at the renewable business

6. Main conclusions


Renewable energies key aspects

Sustainable power development

• Essential for competitiveness and performance in the global economy

• EU Green Paper on environmental issues

• Energy dependency in the EU has reached 50-60% (Spain at 78%)

• Limit climate change (Kyoto commitments)

• Sustainable use of natural resources

ECONOMIC

EFFICIENCY

ENERGY

SECURITY

ENVIRONMENT

• In order to achieve competitive and sustainable energy development, there are three basic pillars to be considered: the environment (sustainable use of natural resources), energy dependency (diversification of sources) and economic efficiency (competitiveness and technological development)

• Kyoto Protocol

5.2% reduction in CO2 emissions by 2010 with respect to 1990 total emissions. Basic role of wind energy.

• Renewable Energies EU Directive

12% of primary energy set to come from renewable sources in 2010.

22.1% of electricity demand to be met by renewable energy sources by 2010 (versus 13.9% in 1997)

Last September, the European Parliament agreed on new proposal for binding target of 20% regarding renewable energies in the total energy consuption by 2020 (equivalent to 33% electricity in 2020)

• EU countries

All EU countries have defined public targets for the development of renewable energies and support systems for their development


27%25%

15%13%

4%

0% 0%

-6%-6,5%

-7,5%

-12,5% -13%

-21% -21%

-28%

-8%

Po

rtu

ga

lG

reec

eS

pai

n

Irel

and

Sw

eden

Fin

lan

dF

ran

ceH

ola

nd

Ital

yB

elg

ium

UK

Au

stri

a

Den

mar

k

Ger

man

y

Lu

xem

bu

rgE

U

Emissions reduction effort distribution amongst EU countries.2008-2012 average, compared to 1990 emissions (Burden Sharing Agreement)


Environment: Kyoto commitment


“If no measures are taken, in the next 20 or 30 years 70% of the Union's energy requirements, as opposed to the current 52%, will be accounted for imported products”

This foreign dependency will affect every sector of the economy


Energy security: EU dependency

Source: Green Paper “Towards a European strategy for the security of energy suppy”, European Commission


1. Profitability: investments must offer sufficient profitability, allowing for the investments to deliver expected results

2. Stability: As industry grows and markets evolve, support systems can be reviewed, but should only apply to new assets

3. Predictability: remuneration must be defined for the entire life of the asset

An effective support system must consider three basic premises:


Economic efficiency

The selection of an adequate economic support system is KEY


• According to official EU data, the most effective countries delivering wind energy are Denmark, Germany, Spain and Greece, not surprisingly using feed-in tariffs.

• “For wind energy, countries with an effectiveness higher than the EU average use feed-in tariff systems. This type of system currently has the best performance for wind energy” (page 6 of the EU document*)

Feed-in tariffs vs. green certificates

Feed-in tariffs are more effective.

Green certificate systems now present significantly higher cost levels than feed-in tariffs. This is explained by the higher risk premium demanded by investors, administrative costs, together with an immature green certificate market

Effectiveness indicator for wind onshore electricity in the period 1998-2004

* Source: Communication from the Commission of the European Communities: “The support of electricity from renewable energy sources” (Brussels, 07-12-2005)

Renewable support systems


Renewable energy regulation

Spain has the second-highest accumulated installed capacity in the

world

MW

0

2.000

4.000

6.000

8.000

10.000

12.000

1998 1999 2000 2001 2002 2003 2004 2005

Installed wind capacity evolution in Spain

- Feed-in tariffs have proven to be the successful system

- Spain today has an excellent track record

Mechanisms

Countries

Feed-in Tariff

Green Certificates

Auctions Fiscal measures

Green Prices

Investment incentives

Austria

Belgium

Denmark

Finland

France

Germany

Greece

Ireland

Italy

Luxembourg

Holland

Portugal

Spain

Sweden

United Kingdom

Basic systems Complementary systems

Wind support systems in the EU

December 2005

Renewable support systems


Together with a stable and predictable support system, a rigorous analysis is essential to figure out the real yield of wind power production

Analysis of wind energy payment scheme

1. It is true that energy prices in 2005 were high. Nevertheless, a long term perspective is required in this business. Wind is a capital-intensive activity, taking up to 20 years to attain a reasonable IRR. In addition, some agents are discounting energy price level reductions in the years to come

2. In most countries, deviations of production over prediction mean lower income than expected

3. Investment costs, far from diminishing, have increased due to the larger size of wind turbines, meeting environmental requirements. These costs range today from 1,100 to 1,150 €/KW.

Also, high demand for machines in international markets actually means that price tensions will remain for a while


Analysis of wind energy payment scheme

Negative correlation between wind power production and market prices

• Given high wind production, the role played by traditional technologies is significantly smaller, since wind generation has guaranteed access to the grid. Therefore, the price of energy dramatically diminishes (up to 25%) in the markets. This effect will continue to grow since wind energy will account for a larger share of all energy produced in the future

• In addition, in some countries, wind energy participates in hourly output prediction, which may produce a further 5 - 10% income reduction


Negative correlation between wind power production and market prices: Spain as a showcase (I)


Negative correlation between wind power production and market prices: Spain as a showcase (II)

14-feb 15-feb 16-feb

Demand (MWh) 770.200 772.300 767.400

Total wind production (MW) 14.502 78.180 141.310

Average price weighed demand (€/MWh)

86,5 75,4 66,3

Wind weighed average price (€/MWh)

81,4 74,4 65,4

Wind weighed average price Average price weighed demand


Apart from economic efficiency, there are different determining factors required to achieve EU objectives

- Improved management and integration of wind energy in the operation systems and transport

networks should not be a limiting factor. Therefore, it is necessary to work on three main issues:

Other factors

1. Contribution of wind generation to network stability. – Management through control centres*, ready to follow intructions from system operators*– Other technical improvements: voltage dips and reactive power

2. Operation on real time.– Wind generation management on a real-time basis is required in order to reduce unnecessary and excessive safety margins

3. Infrastructures improvements.1. Improvement of electricity transport system and significant increase in interconnections between all EU members and border countries2. Improve integration and cooperation between different players (producers, transporters and distribution agents) and system operators*

in the EU.

- Coherence and coordination is essential between implied administrations. At a European, national,

and particulary regional level.

* Where existing


Iberdrola at the renewable business


Evolution of installed capacity and objective (MW)

Iberdrola is one of the world´s leading operatorsin renewable energies with 3,810 MW (3,494 wind) and with a target of 6,200 MW for 2008

Capacity breakdown (MW), Dec 2005

x 12,2

6.200

3.810

3.200

1.414

507

2000 …

2002 …

2004

…

200

5 (1

)

…20

08E (2

)

(1) Includes stakes in Rokas Group

(2) Latest forecast

91% 9% 100%

3,8103,494 316

Wind Minihydro TOTAL

5.000 MW national

1.200 of international development

Iberdrola at the renewable business


* Dec. 2005

Iberdrola: World leader in installed capacity in wind

MW

Renewable energies

3,494

3,193

1,694


Iberdrola´s presence and development worldwide

Countries with an Iberdrola presence

Germany

Brazil

Spain

France

Greece

Italy

Mexico

Poland

United Kingdom

Countries with Iberdrola officesCountries with Iberdrola offices


Iberdrola´s Renewable Energies Operations Centre, in Toledo, is designed to help bring these energies onto the electricity grid and to improve their efficiency

• Iberdrolas´s renewable energy operations centre (CORE) is a pioneer initiative in the industry due to its technology and scope.

• As mentioned before, it allows Iberdrola to improve the management and operation of renewable energy installations.

• The centre helps to bring these energies into the system and to eliminate possible obstacles to their development


Main conclusions

• A sustainable energy model requires fulfilment of three basic pillars: environment safety, energy dependency and economic efficiency

• The EU believes in renewable energies and defines ambitious objectives, with a basic role for wind energy

• Feed-in tariffs have proved to be the successful system, more efficient and effective than green certificates

• To meet targets, together with a stable and predictable support system, it is necessary to analize other factors that affect wind activity yield

– Investment costs have increased, reaching 1,100 to 1,150 €/KW – High wind energy production levels may cause energy prices in the market to drop by up to 25%

• Management and technical issues: – It is necessary to advance toward an integrated and agile management system, taking into account wind energy,

together with infrastructure improvement.

• Administrative issues: – The role of the UE is increasingly important, and it will have to take a proactive approach to the promotion of

renewable energies: · From the regulatory point of view; through the approval of Directives that guarantee economic and technical support

· From the political point of view; generating a climate of economic and environmental awareness– Further national involvement is required and, specifically, cooperation and coordination of regional and local

governments

IBERDROLA RENEWABLE ENERGIES

Large-scale integration - toward 12% penetration in Europe - A reality?

Athens, February 26, 2006

Pedro Barriuso OtaolaGeneral Director Renewable Energies, Engineering and Construction

Documents

IBERDROLA RENEWABLE ENERGIES Large-scale integration - toward 12% penetration in Europe - A reality? Athens, February 26, 2006 Pedro Barriuso Otaola General