RENEWABLE ENERGY IN EASTERN EUROPE

Dr. Willibald Plesser

Vienna Economic Forum, 10 November 2008

FACTS AND FIGURES

Freshfields Bruckhaus Deringer LLP is a leading international law firm with 28 offices worldwide and over 2,500 lawyers

Our practice groups are acknowledged to be market leaders in their respective areas of law

We have been active in the CEE region for many years

We offer commitment to close client relationship, providing tailored solutions for complex transactions

We have a Firm culture of confidence, commitment, respect and mutual trust

WHERE WE ARE

We advise on transactions in the following countries across the region:

Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Estonia, Hungary, Latvia, Lithuania, the former Yugoslav Republic of Macedonia, the Republic of Moldova, Poland, Romania, Serbia and Montenegro, Slovakia, Turkey and Ukraine

RENEWABLE ENERGY MARKET TRENDS

Global investment in sustainable energy broke all previous records, with $148.4 billion of new money raised in 2007

No great impact of the financial crisis. Overall global investment during the first half of 2008 has been just above what was seen in the first half of 2007

It takes on average 50% more energy to produce a unit of GDP in the CEE region than it does in western Europe

The EU-mandated renewable energy targets play a key role in stimulating demand of renewable energy in CEE

FUTURE POTENTIAL

Highest future potential in wind and hydroelectric power (Croatia and Slovakia for hydroelectric, Poland/Romania/Estonia for wind)- relatively cheap and benefits largely from the geographical characteristics

in the region- In the past 15 years, the cost of wind energy has more than halved, and its

production per unit of capacity has more than doubled- Often large (+ 200 MW) hydro schemes are developed in the form of

Public-Private Partnership

Good prospects for biomass and geothermal energy (Poland and Hungary)

Lower potential for biogas energy, solar energy and wave energy

No potential for landfill gas energy

OVERVIEW OF THE WIND ENERGY MARKET IN CEE

Poland 276 2,16013,600

Czech Rep. 116 6804,000

Bulgaria 70 1,6403,450

Hungary 65 5801,600

Romania 8 2,0204,000

Estonia

Wind capacity in main Eastern European countriesMW Installed Permitted &

2007 In planningPotential

Total 535 7,08026,650

Five countries – Poland, Bulgaria, Czech Republic,

Hungary and Romania – have

an estimated wind potential capacity

of 26.7GW and 535MW installed capacity at 2007

year end

Current announced

development pipelines total

c.7GW

Wind power capacity installed in Eastern Europe in 2007

Source: New Energy Finance, EWEA

Poland

Czech Rep.

Hungary

Romania

Bulgaria

Cumulated installed capacity at 2007 year end

Installed capacity during 2007

8

5

70

34

65

4

116

63

276

109

Overview of incentives in place in main EE countries

Slovakia

5

0

Croatia17

0

Lithuania 50

7

Latvia27

0

Estonia58

26

Country 2008 rates (€/MWh)Incentives

Green certificates value: €73/MWh

Current elec. prices: €76/MWhPoland

Green Certificate

s

Green certificates value: €42/MWh

Current elec. prices: €50/MWhRomania

Green Certificate

s

Fixed: €94-€125/MWh Premium: €71-€103/MWh

Czech Republic

Feed-in tariffs

€84-105/MWh Hungary Feed-in tariffs

€80/MWh (>2250 hr/yr) €90/MWh (<2250 hr/yr)Bulgaria Feed-in

tariffs

Duration

-

-

15 years

Plant lifetime

12 years

MACRO ENVIRONMENT

The macro environment for renewable energy has

improved in Eastern Europe since 2003 with electricity prices now in

line with the average price in the EU-15

These markets are now facing the same energy

supply and electricity price situation as other

European countries, creating a more

favourable environment for renewable energy

Electricity demand has remained relatively constant in Eastern

European markets with price increases being

driven by replacement of ageing conventional

fossil and nuclear capacity, rising gas

prices and price increases following

market liberalisation

20

40

60

80

100

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Bulgaria Romania Czech Republic Hungary Poland Estonia EU-15

Average industrial electricity prices 1996-2007

Electricity generation by source 2005

Note: Romanian domestic oil supply accounts for 20% of generation or 34% of the oil & gas segment shown here

Source: New Energy Finance

Hungary Bulgaria Romania Czech Republic Poland

Hydro & biomass

Oil & gas

Nuclear

Hard coal & lignite

10.1m toe 10.5m toe

27.4m toe32.4m toe

77.7m toe

€/MWh

MARKET CHARACTERISTICS AND TRENDS

Hungary and the Czech Republic lead the way

with the most generous tariff schemes

However Poland, Bulgaria and Romania appear to be the most likely targets for rapid,

large-scale expansion as they have reasonably high tariffs, pro-wind

governments and significant areas of good

wind resources

This environment has encouraged independent

developers and multinational power

companies to acquire and invest in

development pipelines often alongside their

acquisition of electricity generation and

distribution companies

3.012.72

2.54 2.45

1.95

1.44

1.82

2.82

Hungary Czech Republic Romania Poland Bulgaria Slovakia Germany UK

NPV of tariffs from 1MW of installed wind capacity1

€m/MW

(1) Net present value of tariffs per MW of installed capacity. Assumes a 25% capacity factor, an expected 6.5% real rate of return, inflation of 3% annually, project life of 20 years, and constant green certificate prices in Poland and Romania

Source: New Energy Finance

Foreign (32%)

Domestic (68%)

Foreign and domestic ownership of wind development pipeline assets in 20071

Total capacity 2.3 GW

Development through fragmented local developers Consolidation started in Poland Recent entrance of large European utilities players already

present in the region through their conventional power plant building programmes or acquisitions of local utilities

Partnership with local developers

Consolidation via major international players is likely to dominate the sector in the near future

Note: (1) Based on pipeline located in Bulgaria, Czech Rep, Hungary, Romania and Slovakia Source: New Energy Finance

AUTHORISATION PROCESS IN CEE COUNTRIES

Except Hungary where lead time

for overall procedure tends to exceed three

years, other countries have relatively short

lead times, below a year

For countries such as Hungary and

Slovakia, rejection rates exceed 70%

In most cases, missing grid

capacity represents a

crucial factor for rejections

Source: EU, March 2008, Report on promotion and growth of renewable energy sources

47%

27%

50%

80%

Bulgaria Czech Rep. Hungary Poland

Authorities involved in the permission procedure Lead time for the authorisation procedure

Average rate of permit rejections (%) Projects involving grid capacity problems

Share of projects with grid capacity problems (%)

6%

97%

1%

69%

Czech Rep. Hungary Poland Slovakia

0

10

20

30

40

Bulgaria CzechRep.

Hungary Lithuania Poland Slovakia

Number of authorities Lead time (months)

0

10

20

30

40

Bulgaria Czech Rep. Hungary Poland Slovakia

Lead time for overall procedure Lead time for grid connection

Rate of permit rejections (%)

WIND SOURCES IN EUROPE

Poland, Romania and Bulgaria offer

the best wind resources in

Eastern Europe

0 2 4 6 8 10

0 5 10 15 20

m/s

mph

POLAND

CZECH REP

SLOVAKIA

ROMANIA

BULGARIA

HUNGARY

LITHUANIA

LATVIA

ESTONIA

EU TARGETS IN RENEWABLE ENERGY

Source: EU Commission, 2008. Proposal for a directive of the European Parliament and of the Council on the promotion of the use of energy from renewable sources

7.0%

3.8%

1.8%

1.8%

1.7%

1.2%

1.1%

0.9%

0.5%

0.4%

0.4%

0.4%

0.0%

0.0%

11.8

%

Source: Eurostat EWEA

Source: EWEA, Eurelectric

Wind share of EU electricity demand (2007)

Wind capacity in the EU by end of 2007

kW /1000 inhabitants

Individual country targets

Share of renewable energy 2005

Gap to target 2020

341

270

114

46 42 39 39 15 12 11 9 7 7

MECHANISMS TO SUPPORT RENEWABLE ENERGY GENERATION IN EUROPE

Characteristics of mechanism: Strength/ Weakness:

• Electricity suppliers are obliged to have a certain proportion of their electricity from renewable sources

• Renewable Energy Certificate is a tradable commodity proving that certain electricity is generated using renewable energy sources (per MWh)

• Certificates are traded to fulfill renewable obligations

• Renewable power generators receive wholesale market price for generated power plus the value of the certificate

• Forces suppliers to take action to meet their obligation, market based system should drive costs down

• Lack of revenue certainty, cost of administration, failure to support immature technologies

Quota obligation & tradable certificates

• Renewable energy producers are paid a fixed tariff:– Instead of pool price

(Feed–in tariffs)– In addition to pool price

(Price premium)• Tariffs usually vary

depending on technology, capacity and age of power plant and are typically limited in time

• Price and investment certainty

• Political risk, cost to consumers, generators does not receive CO2 upsideFeed–in

tariffs

Main types of support mechanism

Quota obligation & tradable certificates

Feed–in tariffs

Source: EREF – Prices for renewable energies in Europe: Feed in tariffs versus quota systems – a comparison, 2006–200; Datamonitor – Are national policies sufficient to drive renewable investment? – April 2007; EC [52]; BMU (January 2007); FORRES 2020 – Analysis of the renewable energy sources‘ evolution up to 20020 (Fraunhofer et al, April 2005)

Estonia

Latvia

Lithuania

Poland

Slovakia

Czech Republic

Romania

Bulgaria

Hungary

FACTORS FOR RENEWABLE ENERGY PROJECTS IN THE REGION

Fast growing economies, meaning increased need for energy

Plentiful resources (geographical)

CO2 emission trading

EU law in EU member states (meaning similar basic parameters, but not all relevant laws have necessarily been adapted yet)

Support schemes / investment subsidies / tax incentives / other financial support schemes

Green energy trade

Legal conditions improving

Feed-in tariffs and purchase obligations

More support measures to be introduced

FACTORS AGAINST RENEWABLE ENERGY PROJECTS IN THE REGION

Grid capacity and access (limitation)

High investment costs

Political instabilities / political opposition led by environmental and social concerns (environmental protection legislations)

Regulatory transparency and a secure basis for investment (some states do not necessarily have a clear regulatory structure and transparent authorization procedures)

Planning reliability and investment protection (some states)

Often changing laws and regulations

Sometimes negative attitude to RES and no voluntary demand

Exhaustion of resources (like hydropower in Czech Republic)

Monopolistic structure of power markets

CURRENT RENEWABLE ENERGY PROJECTS

EVN AG (Austria) will build in cooperation with the Statkraft (Norway) several hydropower plants on the Drin river in Albania with a total installed capacity of 319 MW in a € 1 bln investment

Verbund (Austria) will build a 48.2 MW hydropower plant in Ashta, Albania in a € 160 mln investment

German HSH Nordbank recently announced it will finance the € 285 mln construction of four wind farms in Poland, which will later be sold to Danish energy company Scan Energy

German alternative energy company Wallenborn is planning to build a 48 MW wind power park in southwestern Hungary's Gyorkony in a € 74.7 mln investment

RWE Innogy GmbH, Essen, has secured access to wind power projects with a total capacity of 200 MW in Poland