1. © Vattenfall AB Managing the Business of Hydropower 2008-06-02 Nils Andersson, Vattenfall Group Function Communication

2. © Vattenfall AB Challenges Climate Change Technology Security of SupplyGlobalisation The functioning of EIM Hydropower fits well

3. © Vattenfall AB Hydropower in the Nordic Region JanFebMarAprMajJunJulAugSepOctNovDec Springtime flood-snow melting Wet year Dry yearr Winter persipitation as snow and ice GWh/ vecka 4000 3000 2000 1000 Normal year Inflow Winter-high electrisity demand Summer-low Electrisity demand 2000 1000 GWh/ vecka Demand of electrisity Inflow Filling reservoirsRedusing reservoirs Reservoir use Normal hydroyear production 2000 1000 GWh/ vecka 3000 Long term regulation

4. © Vattenfall AB Pricing of Electricity Before Deregulation Price = Cost + Profit After Deregulation Profit or Lost = Price – Cost Security of Supply Calculations Market Price

5. © Vattenfall AB The Fundamentals of the Electricity Market Price uncertainty Electricity is a very homogeneous product when using it, and is therefore easy to put under competition When using it is not possible to differ from which source the electricity is comming. The costs and the environmental impact on the other hand are very heterogenous Transport costs are normaly paid via nettariffs Inside different price areas the market price does not include any transport costs Marginal Cost Pricing is not a price model but the result of good competition

6. © Vattenfall AB Here producers and consumers meet The spotprice is set where supply and demand curves meet The spot price is set every hour The spot price reflects the marginal cost for the total system. Price Volume Demand Supply Nord Pool sets the Spot Price on the Nordic Market

7. © Vattenfall AB Hydropower Inflow - Norway & Sweden 100 120 140 160 180 200 220 19501955196019651970197519801985199019952000 TWh/ year Maximum variation in inflow (50 yaers) = 90 TWh Maximum production in Nordic nuclear = 90 TWh

8. © Vattenfall AB ETS 20€/t Market Price – normal hydro conditions 0 60 40 20 80 €/MWh TWh/år (capacity) 100 200300400 run of river hydro nuclear wind CHP Gasturbines and”peak hydro” Hydro & coalcondensing oil Supply and demand meet demand

9. © Vattenfall AB Hydrology and Price of Electricity

10. © Vattenfall AB Day before deliveryDay of deliveryDay after delivery Hour of delivery Balance regulation Regulation power - automatic - called bids 12.00 Balance settlement Balance power Spot market 12.00 Commercial trading Balance regulation & balance settlement

11. © Vattenfall AB Quantity Sell Quantity Buy Bids on the spot marked Price

12. © Vattenfall AB Quantity Sell Buy System price Turnover Price Prices/Turnover

13. © Vattenfall AB VAB int broker Supply & Trading Spot market (Nordpool...) Financial market (OTC, NordPool,..) End customer VAB Sales Generation VAB shares 37 TWh 33 TWh +/- 6 TWh Competitors – Sales PD Value chain – internal interface

14. © Vattenfall AB Price forecast

15. © Vattenfall AB Market Price on Nord Pool, pricearea Sweden

16. © Vattenfall AB Future trading To limit the risk with Vattenfall Generation portfolio Futures and forwards All handled via Vattenfall internal “Electricity Bank” where Electricity Sales can also trade NordPool, brokers and bilateral In real time all future contracts are “cleared” against NordPool physical spot prices

17. © Vattenfall AB Physical responsibility Svenska Kraftnät is responsible for the system Primary control, frequency, instantaneous reserves Secondary control, interchange area error Disturbance reserve Voltage control Other ancillary services Basically through agreements for utilization Owns gas turbines for fast disturbance reserve

18. © Vattenfall AB Secondary control Handled by Svenska Kraftnät Balance Service Bids for UP- and DOWN-regulation during the hour Full regulation within 10 minutes (fast regulation = 5 minutes) Requested regulation results in Requested regulation power, which is included in the settlement procedure Necessary regulation gives the price for Balance power

19. © Vattenfall AB Bids for regulation Balance regulation - physical balance Volume (+ MW) (– MW) Regulation price (down) If down-regulation called same for all called Regulation price (up) If down-regulation called same for all called Price (SEK/MWh) Market price

20. © Vattenfall AB Prices - regulating & balance power Market price + MW– MW Price (SEK/MWh) + MW– MW Price (SEK/MWh) Regulation price up or down Balance settlementBalance regulation

21. © Vattenfall AB Primary control Handled by Svenska Kraftnät Balance Service Demand in Sweden 2500 MW/Hz and approximately 600 MW momentary reserve Bids for frequency control capacity + reserve capacity are given by producers –weekly bids (for all hours next week) –hourly bids for the following 24 hours Automatic regulation power is calculated in the settlement procedure

22. © Vattenfall AB Measurement Network companies are responsible Measurement of physical components: –Generation –Consumption –Interchange toward neighboring network areas All measured values are used in the settlement procedure November 1999: Small consumers can switch suppliers using profiles and not hourly measurements

23. © Vattenfall AB Changes in Base Power 2007 – 2015 Denmark -5,6 TWh Wind 2,7 Decommissioning of coal condensing units -11,9 CHP, condensing 3,6 Sweden 23,3 TWh Wind5,5 Hydro1,7 Nuclear power upgrading9,0 Natural gas CHP*2,0 Biofuel CHP* 5,1 Decommissioning of nuclear units 0 Finland 11,4 TWh Wind0,3 Hydro0,3 CHP*3,7 Nuclear 12,0 Decommissioning of coal condensing units -4,9 Norway 18,0 TWh Wind 3,5 Natural gas 8,7 Hydro 5,8 47,1 TWh * CHP and back-pressure generation Increased electricity use 19,7 TWh

24. © Vattenfall AB Generation capacity and consumption in the Nordic countries The generation capacity does not include the contracted import from Russia and Estonia, about 11-15 TWh/year, and export to other countries.

25. © Vattenfall AB Managing the Business of Hydropower 2008-06-02 Nils Andersson, Vattenfall Group Function Communication Thank you!