Strategic Challenges for Energy Companies Dr Stefan ULREICH

Strategic Challenges for Energy Companies Dr. Stefan ULREICH, E. ON SE 25 th FORUM: ENERGY DAY IN CROATIA Zagreb, 18 th November 2016

Disclaimer This presentation may contain forward-looking statements based on current assumptions and forecasts made by E. ON Group Management and other information currently available to E. ON. Various known and unknown risks, uncertainties and other factors could lead to material differences between the actual future results, financial situation, development or performance of the company and the estimates given here. E. ON SE does not intend, and does not assume any liability whatsoever, to update these forward-looking statements or to conform them to future events or developments. 2

Agenda The German „Energiewende“ is just an example for other energy transitions taking place globally There is no way back: “Energiewende” is a now global trend driven by innovation not by politics – and digital is a key element The energy landscape becomes increasingly complex Utilities need to adopt their business models aggressively to this environment

Energy turnaround in Spain driven by gas and renewables 120, 000 Stagnation since financial crisis Installed Capacity in MW 100, 000 80, 000 60, 000 40, 000 20, 000 19901991199219931994199519961997199819992000200120022003200420052006200720082009201020112012201320142015 Hydro 4 Source: Red Eléctrica de España (Spanish TSO) Nuclear Coal Gas/Oil Others (CHP, waste, . . ) Wind PV CSP

Energy turnaround in the US driven by success of unconventional gas U. S. dry natural gas production billion cubic feet per day trillion cubic feet History 40 Projections 2013 100 35 90 30 80 25 70 Shale gas and tight oil plays 20 50 15 10 40 30 Tight gas Other lower 48 onshore 20 Coalbed methane 5 0 1990 60 Alaska Lower 48 offshore 1995 2000 2005 5 Source: EIA, Annual Energy Outlook 2015 Reference case 2010 2015 2020 2025 2030 2035 10 0 2040

Energy turnaround in China driven by dramatic economic growth China’s net electricity generation by fuel type, 1985– 2014 in TWh 6000 5000 4000 Nuclear Other (Coal, gas) 3000 Hydro Solar Wind 2000 Other RES 6 Source: BP Statistical Review of World Energy 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 0 1985 1000

Agenda The German „Energiewende“ is just an example for other energy transitions taking place globally There is no way back: “Energiewende” is a now global trend driven by innovation not by politics – and digital is a key element The energy landscape becomes increasingly complex Utilities need to adopt their business models aggressively to this environment

KNOWNS Dynamic innovation and technology are driving changes on energy markets Examples Price decreased by 20% each time the installed capacity doubled 1980 370 17 20 00 20 13 20 14 318 Global Wind in GW 177 139 Module price PV: cost decrease beyond expectations 1 Europe 2014: 72% of new installations (22% in 2000) USA 2015: 68% of new installations 20 00 20 13 20 14 Renewable energy: substantial size Global PV in GW 1990 2000 1990 2010 Cumulative production Shale gas: technology „Hydraulic fracturing” Increasing gas resources change global macro economics 8 Source: IEA PVPS, Bloomberg New Energy Finance 2012 Net importer with 42 bcm US Gas 2040 Net exporter with 165 bcm

KNOWNS Photovoltaic: Continuous cost reduction PV system price, Germany [<100 k. Wp System] PV electricity costs vs. end-customer costs [€ct/k. Wh] End-customer price Germany End-customer price Italy PV costs Germany Ja n- 09 Ju l-0 Ja 9 n 10 Ju l-1 Ja 0 n 11 Ju l-1 Ja 1 n 12 Ju l-1 Ja 2 n 13 Ju l-1 Ja 3 n 14 Ju l-1 4 PV costs Italy 2013 2017 2019 2021 2023 2025 Investment for customers with high own consumption positive without subsidies Dependency on subsidies reducing by further cost reductions and additional appliances increasing the own consumption. Source: http: //www. photovoltaik-guide. de/pv-preisindex

Batteries: Costs have reached the turning point Costs for batteries [€/k. Wh] Investment in PV + battery: positive Electric vehicles reduce costs for Li-ion batteries by > 50% by 2020. Market leader Tesla “Giga-factory” will produce more than the current global production volume Source: UBS, Tesla, Umicore KNOWN UNKNOWNS

Innovations will dynamically reinforce each other KNOWN UNKNOWNS “e-Home Energieprojekt 2020” Interdisciplinary field of research with technical & customer oriented questions: main research on VRDT* / batteries / customer satisfaction / e-Vehicles Photovoltaic Air conditioning E-mobility Smart metering Transparent energy consumption Intelligent local distribution system Battery storage Ad *: VRDT = Voltage regulated distribution transformer 11 Source: E. ON Innovation Center Distribution

Digitalization, Big Data & „Internet of things“: Integral part of our life in the future KNOWN UNKNOWNS Exploding data volumes New smart home Appliances and internet Intelligent thermostat Estimated annual data Improved automation DSO-grid Control center intelligent grid Improved „operations management“ OMS Roll-out of GIS in the grids Terminals & automated substations 3 rd generation of the internet – the „internet of things” connects 1 bn people via PCs 6 bn. People via mobile phones 28 bn. „things” in 2020 Smart home and end customer data Intelligent Power Meters Today Time 12 Source: based on EPRI (assuming a 1 million customers energy supply company incl. grid and sales activities)

Agenda The German „Energiewende“ is just an example for other energy transitions taking place globally There is no way back: “Energiewende” is a now global trend driven by innovation not by politics – and digital is a key element The energy landscape becomes increasingly complex Utilities need to adopt their business models aggressively to this environment

The future energy system is highly complex and will have implications on all our businesses Hydro Nuclear Power Gas Heat Customers CHP Energy Mgmt. Transm. P 2 G Via transm- or distr. grid System Mgmt Substation automation Wholesale - Price signalling Distr. MV/L V System Mgmt Industry Import/Export PV Solar thermal Energy Mgmt. E-mob. System Mgmt BG fermentation System Mgmt BG gasification Individual family houses, business premises & offices PV White goods Storage Gas mob. 14 Heat plant NG from DK, NO, RUS Mini-/micro CHP

Agenda The German „Energiewende“ is just an example for other energy transitions taking place globally There is no way back: “Energiewende” is a now global trend driven by innovation not by politics – and digital is a key element The energy landscape becomes increasingly complex Utilities need to adopt their business models aggressively to this environment

Challenge 1: build smarter energy systems 16

DSO as enabler of the energy turnaround Lions’ share of renewable integration takes place in the DSO-grid e. g. in the German case mainly in E. ONs DSO grids in GW TOP 5 comparison: Installed capacity in the DSO-grids of E. ON in Germany > 26 GW. 30. 0 25. 0 20. 0 15. 0 Wind & Solar PV. 10. 0 5. 0 0. 0 E. ON NB 1 NB 2 in % der GWh 50 40 NB 4 > 60 % in 2014 70 60 NB 3 Ziel der Bundesregierung für 2025: 40 % 30 20 10 This share is the German goal for 2025. 15% 0 2002 17 Ahead of the energy transition: E. ON Grid: 60% renewable share (2008) 2004 2006 2008 2010 2012 2014 Consequence: DSO best suited to steer system flexibility - intermittent generation dominantly connected to DSO-grid - future flexibility sources almost only DSO-connected - Proximity to customers = easy data exchange.

Sales providing customer solutions Strong regional presence with lots of experience Tailor-made customer-solutions Realized > 4, 000 decentral plants especially CHP and heat Operating over 220 local and district heating systems (heat sales: 3. 600 GWh) Again solid growth in 2015 Decentral solutions conventional Decentral solutions renewables 18 Local and District Heating system Further energy transition projects e. g. storage

Challenge #2: building smarter energy supply chains Europe +95 bcma North America 23 (+8) 21 (+21) 90 (-19) 38 (+38) Americas +21 bcma Middle East 10 (+7) 35 (+8) 4 (+1) Middle East +14 bcma Africa Latin America Global LNG trade growth 2013 -20 +49% Source: Wood Mackenzie 3 (-3) Atlantic Basin +29 bcma from 2013 Pacific Basin Asia 63 (-4) 15 (+3) +139 bcma from 2013 Asia +344 bcma 121 (+91) Oceania Seaborne LNG trade to 475 bcma by 2020 with Europe acting as a balancing market

Challenge 3: Consider Value of Integration Strategy Transformation New profiles 20 Empowering customers. Shaping markets. One 2 two: Best in both worlds Empowering customers Shaping markets

Thank you for your attention!