Approach to European Wind Power markets

by Henrik Balle

Senior Project Manager

Markets & Acquisitions – Wind power

DONG – Danish Oil and Natural Gas

Pro

Arc

DONG well situated between Scandinavia and Northern Europe

OsloKårstø

Stavanger

Kollsnes

Lübeck

London

Dunkerque

Dublin

Zeebrugge

Sleipner

Harald

Syd Arne

Den Helder

Tyra

TrondheimOrmen Lange

Easington

København

Göteborg

DONG marketDONG distributionNatural gas pipeline – owned by DONGTransmission net – owned by the Danish state

Natural gas storage owned by DONG

Natural gas pipelines partly owned by DONGGasled natural gas transmission system

250 km

Emden

St. Fergus

Nybro

Oil and gas prod.

Production today

Longer-term production

Near-term production

Bacton

• Currently 100% state-owned

• IPO scheduled for 2007

• State ownership to stay

above 50%

Pro

Arc

Integrated energy company with revenue of EUR 3.6 billion*

E&P

Electr. distribution

Gas distribution

1.2 billion*

0.5 billion*

1.5 billion*

Generation Infrastructure

0.4 billion

Effective and diversified conventional electricity production

6,200 MW capacity (coal, gas, and bio mass)

Reserve base of more than 350 million boe Hereof 40 bcm gas

Three focus areas The Danish part of the

North Sea Mid-Norway West of the Shetland

Isles

Large wind capacity in Denmark and abroad (600 MW)

Significant wind power projects in Denmark and abroad

Hydropower in Norway and Sweden (500 MW)

Two natural gas storages (760 million m3)

Gas distribution 100,000 customers

Electricity distribution 900,000 customers

International gas infrastructure (Sweden, Holland and Germany)

Sale of approx. 8 bn m3

natural gas and significant volume of power

1,000,000 customers in Denmark

Market leader in Denmark and Sweden

Niche player in Germany and Holland

Renewables

* DISCLAIMER: Based on arithmetic calculations. Figures include unaudited figures and DONG’s own estimates

and serve for illustration purpose only. Figures assume all agreed DONG acquisitions are successfully completed

Electr. & gas customers

Gas customers

Sales

INTERGAS SUPPLY

Integrated energy company with revenue of EUR 3.6 billion*

Offshore Wind

Onshore Wind

Hydropower

Pro

Arc

Wind assets following merger with Energi E2/Elsam

As part of the purchase of Elsam shares from Vattenfall DONG will swap assets, including wind farms

Zagorze, Wind power 30 MW

Poland: 30 MW

Wind power 29 MW

Sweden:

Wind power 19 MW

Greece: 19 MW

Vattenfall's assets

Other development projects within wind power

The new company's assets

BorkumRiff. 1, Wind power 360 MW

Germany: 108 MW*

Kentish Flats Wind power90 MW

UK: 90 MW

Wind power 167 MW

Spain: 167 MW

* Vattenfall takes over 30% of the 360 MW development project Borkum Riffgrund 1

Horns Rev*160 MW

Onshore wind power213 MW

Onshore wind power

143 MW

Offshore windpower

109 MW

Offshore windpower16 MW

Vattenfall's wind power assets

The new company's wind power assets

* Vattenfall takes over 60% of Horns Rev, incl. operating responsibility

Vattenfall will take over a number of wind energy assets, but the new wind business

will remain a major player

Pro

Arc

Portfolio of development projects in European growth markets

0

200

400

600

800

1000

1200

1400

1600

DE DK SE UK

MW

Off-shore pipeline for 2006-10 – around 2,300 MW (est.)

Offshore projects under development:

DE: Borkum Riffgrund 161+372 MW

UK: Scarweather Sands 45 MW

Walney 450 MW

London Array 333 MW

Shell flats 90 MW

West of Duddon Sands 167 MW

Burbo Bank 45 MW

DK: Nysted II 100 MW

Horns Reef II 200 MW

On-shore pipeline for 2006 only – around 200 MW (est.)

0

50

100

DE DK E F NO

MW

Existing pipeline is focused on European growth markets

Onshore projects under development:

Pipeline consists of several medium to large scale projects (>20 MW)

Pro

Arc

Strategic Market Approach / Risks

1. priority

2. priority

Home market

Basis will be a perception of markets in North West Europe:

A Central Nordic Footprint

Pro

Arc

Relevant market overview ~ Risk perspective

Factor

Market

Offtake Onshore/Offshore Wind Permitting process

Denmark +

Market based – terms not attractive at the

moment

++

Only option is offshore

++

Good and well known

regime

++

Known procedure – understanding

authorities

UK +++

Market based – terms attractive at the

moment

+++

Onshore and offshore potential

++

Good wind conditions in

general

++

Many interests involved

Germany ++

Feed-in tariff by law – Fixed price for 20 year

Expensive developments

+++

Onshore short term and offshore long term. Potential for

both

+/++

Onshore/-Offshore

++

Known procedure, but depending of local

influence

Norway + Market based – terms not attractive at the

moment

+

Only potential for limited nos. of

onshore

+++

Good wind conditions

++

Known procedure for concessions

Sweden +

Market based – terms not attractive at the

moment

+

Few large onshore-projects and only few

single offshore-projects

+

Offshore wind will be

more attractive

+

Very cumbersome procedure – more than

12 MW to high level decision

7 +

9-10 +

9 +

7 +

4 +

Total rating

Medium/high

Medium/low

Low

High

High

Risk rating

Pro

Arc

Other markets ~ Risk perspective

Factor

Market

Offtake Onshore/Offshore Wind Permitting process

France ++

Feed-in tariff - with correction factor

++

Only real option is onshore – so far

++

Regionally good, but

new regime

+

New procedures for authorities –

bureaucracy?

Spain +++

Feed-in tariff by law – Choice of regime High entry costs

++

Only onshore – but large potential

++

Regionally good

++

Recognised, but regional proces

Greece ++

Feed-in tariff by law

++

Only onshore

++

Regional differences

+

Known procedure, but locally influenced

7 +

9 +

7 +

Total rating

Medium/low

Low

Medium

Risk rating

Pro

Arc

WACC – Weighted Average Cost of Capital / Hurdle rates

Risk assessment

Systematic/generic risks (external risks)

Non-systematic / Project specific risks (internal risks)

To what extent does project survive relevant hurdle rate – if at all??

IRR

No Yes

Define WACC for each market Build into cash-flow projections

Pro

Arc

Definition of WACC/Hurdle rate

The definition of WACC for each market includes :

Impact of generic wind risk

Impact of Offtake/market risk (income)

General/average O&M risk (costs)

Relation/sensitivity between fixed and variable costs

General construction/completion risk

Average lending to investments (50-80%)

Long term interest risk impact

Credit risk margin

Pro

Arc

Stages of Project and relevance of risks

Phase 1Early Development

Phase 3Construction

Phase 4Operation

Phase 2Late Development

Wind

Technology

Political

O & MConstruction offshore

Grid interconnection

Construction onshore

Off-take

Wind

Political

Counterpart/-Credit

Grid interconnection

Technology

Counterpart/-Credit

Technology

Off-take

O & M

Photo by Gunnar Britse: Nysted Offshore Wind farm, Denmark

Pro

Arc

Examples of WACC/Hurdle rates

IRR/Return on relevant markets - Risk assessment/WACC = CREATION OF VALUE on investment !!

Country Project Phase IRR

(Total investment)

WACC Creation of Value

(IRR-WACC)

UK Onshore II/IIIpre-construction

8.5-9% 7.5-8.5% +++

Offshore II/IIIpre-construction

8.5-10.5% 8-9% +++

Germany Onshore II/IIIpre-construction

8-9% 6.5-7.5% ++

Onshore IV in operation

7-8% 6-7% ++

Offshore II/IIIpre-construction

8-10% 7.5-8.5% ++

Norway Onshore II/IIIpre-construction

9-9.5% 8.5-9% +

Sweden Onshore II/IIIpre-construction

9-9.5% 8.5-9% +

Pro

Arc

Thank you for listening!

?

Henrik BalleSenior Project Manager

DONG Renewables

Tel. +45 4517 1582Mob. +45 2096 1065 Fax. +45 4517 1282

heb@dong.dk