Annual Report - EDP

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: strategic framework :EVOLUTION OF AVERAGE ANNUAL PRICES OF FUELS AND CO 2111 1121229293797062121723 2510 11 10 713 14 137Oil - Brent ($/bbl) Coal - API#2 ($/ton) Natural Gas - Zeebrugge (€/MWht) Natural Gas - Henry Hub (€/MWht) CO 2(€/ton)2009 2010 2011 2012Oil price (Brent, European index) held practicallyconstant in regard to 2011, at a historically highlevel. The price had a decreasing trend up to midyear,time at which the expectation of recovery ofthe world’s main economies and the rise in MiddleEastern geopolitical risk premium led to a newprice increase.Coal price (API#2, European index) registereda significant drop (-24%) in 2012, returning tolevels similar to those in 2010. The significantdecrease in coal demand for power generationin the US led to an increase of its exports. Sincethis increase in supply was not completelyabsorbed by demand in China and India, the pricedropped.In regard to natural gas, the decoupling betweenEuropean price (Zeebrugge index) and US price(Henry Hub index) deepened. In Europe, theindexation of most gas contracts to oil pricestranslated into a resiliency of the price of naturalgas, dictating an increase in comparison with2011 (11% to € 25/MWht). In the US, persistent andabundant shale gas production led to a furtherprice decrease in 2012 (-25% to € 7/MWht).EVOLUTION OF NATURAL GAS PRICE4020The MIBEL price decrease is owed, in part, to thedrop in demand in Portugal and Spain in regardto 2011. Another factor that contributed towardsthe price decrease was that coal thermalgeneration dominated price-setting in a yearwhen it had a low marginal cost due to thedecrease in fuel and CO 2prices: the marginalcost of coal plants was lower that of natural gasplants. The decrease in hydro production in 2012(it fell 46% in Portugal and 30% in Spain relativelyto 2011) was not sufficient to have the offseteffect of increasing the MIBEL price.In the US, electricity prices fell by more than20% in almost all regional markets. This pricereduction is mainly due to the low cost of naturalgas (via abundant local unconventional gas) andto the inexistence of a CO 2emissions cost.In Brazil, an auction was held in Decemberfor 574 MW of new power generation capacity(of which 292MW were hydro and 282MW wereonshore wind) to start operating in 2017/2018.The average price of this auction was BRL 91/MWh(~€ 34/MWh), with onshore wind presenting morecompetitive prices than hydro. In the spot market,the Difference Liquidation Price rose significantlyin regard to 2011 due to the low hydro capacityfactor that occurred during the year.EVOLUTION OF WHOLESALE SPOT PRICESOF ELECTRICITY MARKETS1670Jan/11Mar/11Mai/11Jul/11Set/11Nov/11Jan/12Mar/12NATURAL GAS - ZEEBRUGGE (€/MWHT)NATURAL GAS - HENRY HUB (€/MWHT)Mai/12Jul/12Set/12Nov/12Source: Bloomberg50 48 50 47 51 43 49 47 55 56 4837Portugal(€/MWh)Spain(€/MWh)Germany(€/MWh)2011 2012France(€/MWh)UnitedKingdom(€/MWh)USA($/MWh)30Brazil,PLD(R$/MWh)The EU ETS (European Union Emissions TradingSystem) CO 2market price had a sharp decreasein 2012 (-43% in relation to 2011). This decreasewas constant throughout the year and mainlyresults from the oversupply of allowances.It is estimated that there are more than one billionexcess allowances in the market. The EuropeanCommission will take the initiative of holdinga vote, in 2013, for the removal of 900 millionallowances from European auctions between2013 and 2015, reintroducing them between 2018and 2020. In parallel, during 2013, a discussionwill be launched on the options for structuralreform of the European CO 2market.As a result of fuel and CO 2price evolution,wholesale power market prices in Europeregistered, in their majority, slight decreases incomparison to 2011. In particular, in the Iberianmarket (MIBEL), prices decreased to € 48/MWh,in line with the remaining European markets.The price differential between Portugal and Spainremained low (€ 0.8/MWh), revealing the strongintegration that is already in place between thetwo markets.EDP - Annual Report 2012Note: The price in the United States refers to the average of the following markets -NEPOOL Mass hub, PJM West Pennsylvania, Entergy Louisiana and SP 15 - EZ California.2.1.3. RegulatoryframeworkEuropean EnergyPolicyOn October 25, 2012, the European Union adoptedthe Directive 2012/27/EU on energy efficiency,which establishes a common framework ofmeasures for the promotion of energy efficiencyin order to achieve the headline target of saving20% of the European Union primary energyconsumption by 2020 and to pave the way forfurther improvements beyond that date. Thislegislation also lays down rules designed toovercome market failures that prevents efficiencyin the supply and use of energy, and provides theestablishment of indicative national targets ofenergy efficiency for 2020.27
: strategic framework :Developmentsin PortugalThroughout the year of 2012, the legislativedevelopment of the electric sector has beenstrongly marked, as it was throughout 2011, bythe requirement of passing into law the measuresestablished in the Memorandum of Understandingagreed between the Portuguese authorities andofficials from, the European Commission, theEuropean Central Bank and the InternationalMonetary Fund.The Financial Assistance Program that Portugalrequested determined the extinction of the enduser regulated electricity tariffs as from January 1,2013, even though that extinction requirement wasalso provided in the Directive 2009/72/EC.To this end, the Decree-Law n. 75/2012, ofMarch 26, presented the calendar for the gradualextinction of the end user regulated tariffs fornormal low voltage (NLV) electricity customers,following the extinction of the tariffs for theremaining voltage levels that had occurred in 2010.The regulated tariffs extinction process shall becompleted until December 31, 2014 or December31, 2015, according to whether the customershave contracted power equal or over 10.35kVAor inferior to 10.35kVA, respectively. During thisperiod, transitory tariffs will be determined andquarterly updated by ERSE. The adopted modelaims at creating conditions for the liberalisedmarket growth, providing, however, the adoptionof safeguard mechanisms for the economicallyvulnerable customers, who can be supplied by anysupplier and, in last resort, by the supplier of lastresort, with the applicable discounts planned forthe social tariff and for the extraordinary socialbenefit for the consumer.Moreover, the sector’s framework laws wereamended, so that: (i) the special regime generation(SRG) can now also be remunerated throughmarket schemes, and is no more distinguishedfrom the ordinary regime generation by the factthat it has special remuneration schemes underpro-investment policies; (ii) the requirementsrelated to the independence and legal separationand ownership unbundling of the transmissionnetwork operator were reinforced (inconsequence, also, of the challenges createdby the privatization process); (iii) regarding thedistribution network operator, the legal separationrequirements were also clarified, with the aim ofassuring the independence and eliminating thenetwork access discrimination risk; (iv) concerningthe supply activity, it is provided that the supplierof last resort maintains the obligation of acquiringthe special regime generated power, but only whenthe generation benefits from a guaranteed feed-intariff,being equally created the figure of the MarketFacilitator Aggregator, to which will be attributedthe responsibility of acquiring this type of energy.It was also published the Decree-Law n. 256/2012,of November 29, that with the aim of advancingin the sustainability guarantee of the NationalElectric System and with the necessity slowingdown the costs that borne the final electricity billand that continuously increase the tariffs deficit,established measures that: (i) exceptionally deferthe annual adjustments of the compensationamount due, on the year of 2011, for the earlytermination of the Power Purchasing Agreements(PPA), in accordance with the Decree-Lawn. 240/2004, of December 27; (ii) defer theprovisional adjustment of the PPA’s electricityenergy acquisition over costs occurred in 2012;(iii) put into operation the deduction, in the allowedrevenues amounts related with the over costs ofelectricity energy acquisition of special regimegeneration, of the revenues legally allocated to thecompensation of those over costs.It is also worth mentioning the publishing of theDecree-Law n. 212/2012, of September 25, that28revises ERSE’s statutes with an emphasis in thereinforcement of the regulator’s independenceand powers, namely those of a sanctioning nature,in accordance with the Directives 2009/72/ECand 2009/73/EC.It is also noteworthy the publication of theOrdinance n. 140/2012, of May 14, that providedthe remuneration scheme for the electricitygeneration in cogeneration installations, inaccordance with the provisions in the Decree-Law n. 23/2010, of March 25.Finally, the capacity remuneration mechanismwas also modified which, shall assure theexistence of security of supply levels that arenot guaranteed by the regular mechanisms ofthe market, and can be of two natures, one thatincentivizes the availability, contributing to themaintenance of generation capacity availabilityand other that incentivizes the investment.Along the same line as for the electricity sector inPortugal, in the gas sector the end user regulatedtariffs were also extinct as from January 1, 2013.For that purpose, the Decree-Law 74/2012,of March 26, established the scheme aimed atgradually extinguishing all the end user regulatedgas tariffs, concluding the process initiated in2010, when the extinction of end user tariffsfor customers with annual consumption over10 000m 3 was determined. The end userregulated tariffs extinction process should beconcluded by December 31, 2014 andDecember 31, 2015, according to whether thecustomers have annual consumptions equal orover 500m 3 or inferior to 500m 3 , respectively.During this period, transitory tariffs will bedetermined and quarterly updated by ERSE.As is the case in the electricity sector, the enduser regulated gas tariffs extinction processwill be accompanied by safeguard mechanismsfor the economically vulnerable customers.Moreover, the sector’s framework laws wereamended, where: (i) the requirements relatedto the independence and legal separation andownership unbundling of the transmissionnetwork operator were reinforced; (ii) with theaim of assuring the independence and eliminatingthe network access discrimination risk, the legalseparation requirements were equally clarifiedfor all the remaining operators in the gas sector(LNG terminal, underground natural gas storageand distribution network operators); (iii) thestatutes of the supplying players were clarified,with particular reference to the suppliers of lastresort playing in the Natural Gas National System.It is noticeable that during 2012 ERSE revisedthe natural gas sector regulations in order toincorporate the changes provisioned in theabove identified legal acts. As mentioned in theelectricity sector chapter ERSE had its statutesrevised during 2012.TaxationIn Portugal, the 2013 State Budget, approved bythe Law n. 66-B/2012, of December 31, createdan excise duty for natural gas, establishedat € 2.84/GJ, when used as propellant, andat € 0.30/GJ, when used as fuel, exemptingthe gas consumptions for electricity generation,public transportation and the consumptionsof vulnerable customers.Developmentsin SpainTariff DeficitThe main regulatory developments in Spain weremarked by the tariff deficit. It is estimated anaccumulated total tariff deficit of EUR 25,000A World Full Of Energy
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