0

The Value of HydroAntónio Castro, EDP Produção Chief Development Officer

1

The Value of Hydro

• Hydro operating flexibility provides higher revenues per MWh than other technologies:

1. Capacity to concentrate output in periods of stronger demand

2. Major provider of ancillary services: gaining importance with wind power growth

3. Capacity to store energy through pumping (namely surplus/cheap wind power)

• Low operating costs: CO2 emissions free, zero marginal cost, low O&M costs;

• Long asset life: Low maintenance capex

The value of hydro assets is increasing and they are scarce:No significant greenfield growth opportunities in Europe and there are no assets for sale

2

Hydro achieves higher prices than the remaining technologies

Realized Price: Hydro vs. Other Technologies (€/MWh)(Example Spain 2007E)

Capacity Charge

Ancillary Services

Pool

Higher price than average justified by (1) ability to concentrate sales in peak-hours (2) capacity to compensate sudden changes in system balance (3) energy storage capacity through pumping

Source: EDP

Index

100

89

119

95

108

0

20

40

60

80

100

120

Final Price Nuclear Hydro Coal CCGT

3

50

55

40

58

50

60

Hydro is able to concentrate electricity sales in peak hours, which have better prices

Pumping: Capacity to store cheap and/or surplus energy (eg. wind output at night) and to sell it at higher prices in peak hours.

Reservoir

Imports

Run of River

Fueloil

CCGT

Coal

SpecialReg.

Consumption

Avg. hourly pool price 2H07

Pool Prices and Market Output 14.7.2007(Portugal)

Hours

Pumping Hours

Three categories of hydro plants:

Reservoir: Storage capacity between 1 week and 4-6 months. Concentrates production in peak- hours over the year

Run of River: EDP has run of river plants (éclusees) have a storage capacity up to ~6 hours allowing to sell at peak hours over the day 1

€/MWh

Source: REN/OMEL 1 Excludes Mini-hydros

0

1000

2000

3000

4000

5000

6000

0 2 4 6 8 10 12 14 16 18 20 22

MW

4

0

500

1000

1500

2000

2500

3000

3500

4000

4500

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

Hours

MW

Market Output by Technology at 14.7.2007 (PT)Portugal

Hydro is the main technology for ancillary services receiving revenues for assuring electricity system stability

Turbine start up time (min.)

Ancillary services market provides an important source of revenues: €375m in the Spanish market in 2007

Ancillary services market: balances electricity demand and supply close to real time, gaining relevant in moments of system instability

Cold Start

Reservoir

Run of River

Fueloil

CCGT

Coal

~450MW were suddenly out of

the system

180 360

60

600

90

15

3

15

Coal/Fueloil

CCGT

Gasoil

Hydro

Hydro and CCGTs are the key providers of ancillary services;

Hot StartSource: EDP

Warm Start

Extremely Expensive

Source: REN/OMEL Source: EDP

5

17%16%

19%

8%8%

4%

Portugal Spain Iberia Portugal Spain Iberia

2015E2007

Value of hydro rises with higher weight of wind in the system

Wind and Hydro Output (03.08.2007)Portugal

Hydro pumping storage: Matching intermittent wind output with demand needs*

Value of hydro increases with intermittent generation weight growth, namely wind

Source: REN/OMEL * Pumping price has to be 30% lower than selling price to compensate energy losses

Weight of wind in the Iberian Market (GWh)

Wind Output PriceHydro Output Hydro Pumping

Hours

Avg. Selling price: 82 €/MWh

Avg. Pumping price: 52 €/MWh

MW

-500

0

500

1000

1500

2000

2500

3000

1 3 5 7 9 11 13 15 17 19 21 23

6

39

4

24

11

3

Fuel

Gasoil

CCGT

Coal

Hydro

Hydro plants in operation have a long expected useful life

In Portugal: “Lei da Água” Allows the extension of the concession period between 20-25 years

In Spain: “Ley de la Água” The concession can be extended for 10 years if a significant refurbishment is done.

Hydro has the longest useful life and potential to extend it

Remaining Expected Useful Life of EDP’s Generation Capacity in Iberia by technology

Source: EDP estimates

2007

7

0,2

0,6

1,0

1,4

1,8

2,2

Hydro Wind CCGT

0

20

40

60

80

100

Hydro Nuclear Wind Biomass Coal CCGT

Fixed O&M Costs (€/kw)

Investment (M€/MW)

CCGTCoalBiomassWindNuclearNewPlant

Repowering

Valuation (M€/MW)

Hydro plants’ deserve higher EV/MW multiple than other technologies

Higher revenues per MWh, lower operating costs and longer useful life period justifies a valuation premium in terms of multiples vs. other technologies

0,6-0,8

1,6-2,01,9-2,1

1,2-1,4

2,4-2,6

0,9-1,1

0,4-0,5

Source: EDP estimates. Valuation multiples based on recent transactions

8

EDP’s Hydro Assets

9

45%

38% 37%31%

24%18%

edp Iberdrola ENEL (exc.Endesa)

Endesa PPC UnionFenosa

* **

* 2007E ** 2006

Hydro is key in EDP’s Generation Mix

Hydro Capacity in the Conventional Mix in Southern Europe Major Players in the Region (Sep-07)

EDP has the highest weight of hydro among major generation portfolios in Southern Europe

*** includes Alqueva

***

Source: EDP estimates and company reports

10

Today 80% of EDP’s hydro assets In the Iberian market are remunerated by PPAs/CMECs

Annual Depreciation

ROA 8.5% real pre-tax

Contracted O&M

+

+

(Values updated to inflation)

EDP’s Hydro Inst. Cap. in Iberia

LT Contracted

Plants: PPA/CMEC

(80%)

Merchant Plants (18%)

Total (Iberia)

168

909

4095

2008

5172

Remuneration

Until the term of the former PPA contract if not before Jun-17:

PPA/CMEC

Energy sold in the market

Fixed Tariffs: In 2006 €85/MWh (updated to inflation)

Plant Type

Mini-Hydro* (2%)

Reservoir 30%

Run of River 49%

Reservoir/pumping

21%

Reservoir/pumping

41% Run of river 44%

Reservoir 15%

* Includes 100% of Pebble Hydro

Energy to be sold in the market

CONTRACTED GROSS MARGIN:

After the term dates of PPA/CMEC or after Jun-17:

11

The value of the extension of the hydro domain

In Feb-07 EDP reached an agreement with the Portuguese government to operate hydro plants that where under PPAs beyond the end of these contracts and until the end of their useful life (2047 in average);

Main assumptions in the agreement: electricity price at €50/MWh (real) and WACC of 7.8%: Cash payment to be done by EDP: €759m;

Concession of hydro plants (years)

The extension of the Hydro Domain allowed edp to relaunch its repowering program

9

39

30

AverageDuration of MW under

CMEC

Averageduration ofMW theMarket

AverageDuration of

HydroAssets

2008 2047

Source: EDP.

12

Weight of EDP’s hydro capacity in the market will increase to 50% by 2015 and 100% by 2017

Hydro Installed Capacity Evolution in Iberia

EDP’s hydro assets retain the full upside of long term power prices

Hydro in Liberalised Market

Hydro with PPA/CMEC

MW

Liberalised Market

PPA/CMEC

Source: EDP.

6806

0

68066806680641423515312017931383909909909909

000266432913291409540954095409540954095

0

1000

2000

3000

4000

5000

6000

7000

8000

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

13

Growing in Hydro

14

Portugal has a high level of hydro potential undeveloped

Developed hydro potential in Europe

Hydro potential available

97%

86%

65%

France

86%Italy

Germany

78%Spain

Finland

Greece

PORTUGAL 46%

42%

Hydro potential developed

2020E

67%

-Why Portugal has lagged behind its Peers?

• System security reasons:

(1) High weight of hydro in Portuguese generation mix

(2) Low level of interconnection with Spain;

(3) volatility of annual hydro production in Iberia

• PPA term dates did not incentive repowering investments

• Ongoing 2x increase of interconnection capacity with Spain

• Start up of MIBEL

• Targets for renewables as a % of primary energy

• Increase, of oil, coal and CO2 prices

• Higher wind penetration increases the value of hydro due to:

(1) hydro’s storage capacity through pumping

(2) hydro’s ancillary services capability

-Growth drivers

Source: Ministry of Economy

15

5005

883

918234

Inst. Cap. in Iberia

Ongoing Investments

Repowering Projects

Potential Projects

18%

EDP expects to increase its hydro capacity by 36% until 2015 in the Iberian Market

Edp’s Investment Plans in Hydro

MW

36%

20202014/20152012/2013Dec-2007

Source: EDP.

16

Construction to start in 2Q08New Plant2013369170Baixo Sabor

856883TOTAL

Construction to start in 2008Repowering2012150240Alqueva II

Construction to start in 1Q09New Plant20137241Ribeiradio (@55%)

Construction to start in 2Q08Repowering2012130191Bemposta II

Under construction Repowering2012135241Picote II

StatusTypeTo enter in Operation

CapexMWHydro Plans

EDP’s ongoing hydro investments in Portugal:883 MWs, accumulated capex of €856m

Ongoing Investments

Commissioning of ongoing hydro investments concentrated in 2012-2013

Source: EDP.

17

918TOTAL

2015310Paradela II

201585Cabril II

201488Salamonde II

2014435Venda Nova III

To enter in Operation

MWHydro Plant

Repowering Projects in Advanced Stage of Study

EDP has repowering projects in advanced stage of study, which totals 918MW and operating by 2015

Hydro Plan Repowering Project

Old PlantNew Plant

• Repowering is the refurbishment of a plant by including a

new generator group taking advantage from the existing

reservoir.

•EDP has exclusive rights on repowering of its plants

•Lower Capex/MW; lower environmental restrictions

The IRR of Repowering is in average higher than the

IRR of a New PlantReservoir

Source: EDP.

18

Portuguese government announced intention to award 10 new hydro plants with a total of 1,096 MWs

EDP has a preference

rightHydro Plants Basin MW

To

be

Su

bje

ct t

o a

n in

tern

atio

nal

ten

der Fridão

Padroselos

Alvito

Gouvães

Foz Tua

Daivões

Girabolhos

Vidago

Almourol

Pinhosão

Douro

Douro

Tejo

Douro

Douro

Douro

Mondego

Douro

Tejo

Vouga

163

113

48

112

234

109

72

90

78

77

Total 1096

National Hydro Plant

• EDP already made a preliminary assessment of these projects and intends to compete for them in the international tender.

• EDP has a proven track-record on developing and operating hydro plants in Portugal.

• EDP will target attractive IRRs

EDP considers to be in a good position to be awarded a significant number of these projects

Source: EDP.

19

Hydro in Brazil

20

Brazil: Strong demand growth, tight reserve margin and high level of undeveloped hydro

• Brazil has a stable and clear regulation with 75% of hydro power being sold through long term PPAs with distributors;

• New large hydro plants are contracted through auctions (2 auctions scheduled for 2008);

• Mini-Hydro plants & Repowering: More flexible and lighter environmental licensing process with shorter construction period (~2 years);

System’s reserve margin (GW)

Source: PDEE 2007; Energias do Brasil

1.1 1.6 1.4 0.3

-2.4-5.2

-8.2

-12.0

-16.5

2008 2009 2010 2011 2012 2013 2014 2015 2016

Needs of additional capacity

Electricity Demand (CAGR)

2007-2011 2012-2016

5.0%

5.2%

Source: EPE

• Brazil expects an increase in hydro generation capacity of approximately 60 GW from 2005 to 2020;

• Investments in electricity are set to rise in the next years.

• The main bottleneck to Brazil’s Hydro growth is environmental licenses;

Source: EDP.

21

Avg. Price’07 (R$MWh)

EDP’s hydro capacity in Brazil: 1,043 MW in operation, 1,589 MW projects under study

EDP has a proven track-record on developing and operating hydro

plants in Brazil

EDP Hydro Capacity In Brazil

1,043TOTAL 2007

105.9Avg. 2023PPA & Merchant

16112 Mini-Hydro

74.7*131MW until 2012

50MW until 2037PPA181Mascarenhas

86.32012PPA250Lajeado

132.32016PPA452Peixe Angical

MaturityContract

TypeMWHydro Plants

Avg. Life of PPAs: 10 years

MWHydro Plants

EDP Hydro Development Projects

1,589TOTAL

1,560Under Study

1,02212 Hydro Plants

53824 Mini-Hydro Plants

<30 MW

29Under Construction

Studies - Concessions to be awarded through competitive auctions.

Hydro Development Under Study

Santa Fé – PPA contracted until 2038 (124.99 R$/MWh);

Under Development analysis - concession can be directly attributed to EDP by the Brazilian regulator (main restriction: environmental licence)

* Average price from 2008 onwards - R$121,92/MWhSource: EDP.

22

Conclusion: Hydro plays an important role in EDP’s generation portfolio and it should continue to increase

The value of hydro has been increasing in recent years, namely given the

increase of fossil fuels and CO2 prices and increasing penetration of wind

EDP has the highest weight of hydro in the generation mix in Southern Europe, 80%

of capacity is under PPA/CMEC but EDP retains full long-term market upside

Portugal has a 56% of undeveloped hydro power, which supports EDP’s unique

36% expected growth of hydro capacity in Iberian market in 2007-2015

In Brazil EDP is also looking for value enhancing growth opportunities in Hydro