Report of the Chairman of the Board of Directors

Dr Eduard Rikli, Chairman of the Board of Directors:

“Thanks to its sound position and innovative capacity, Repower can master the current challenges.”

Challenging political and economic conditions

The persistently low electricity prices made 2013 a challenging year for protagonists in the energy market. Such an environment jeopardises the cost-effectiveness of existing conventional generating facilities and new projects. Hydropower in particular is under great pressure. From a strategic perspective, Repower consolidated its core business and continued to drive forward its activities for intelligent system integration in 2013.

Three factors in particular are behind the persistently low electricity prices: firstly, the market is distorted by the excessive subsidising of new renewable energies. The preferential feed-in of fully subsidised solar and wind energy is pushing non-subsidised plants – and in particular, the large-scale hydropower plants – out of the market. Secondly, electricity consumption in many countries remains low, which, in conjunction with the first point, leads to overcapacity. And thirdly, the CO2 and coal prices, which have a significant influence on the electricity price, are also very low.

The low EUR/CHF exchange rate also did nothing to help the situation in 2013, and there are no signs that it will rise significantly in the foreseeable future. Repower will take this into account and adjust to this situation. Regulatory uncertainties are also dampening market players' willingness to invest.

The introduction of capacity markets is currently a much-discussed topic. Such markets would not compensate power plant operators for feeding in electricity, but instead for holding reserve capacities in their flexibly deployable plants. From Repower's perspective, capacity markets are not a suitable way to bolster hydropower, which is currently being disadvantaged by the market. They would merely be an additional distortion to the market, as they would only combat the symptoms of current perturbations, rather than tackling their causes.

Hydropower is under pressure

The consequences of the challenging political and economic conditions described above are plain: existing power plants and new projects are falling in value, with particularly negative effects on large-scale hydropower plants. This is an extremely unwelcome development, as it endangers the viability of our valuable domestic hydropower, from which Switzerland generates around 60 per cent of its electricity, and with it the federal 2050 energy strategy, in which this energy source represents an important pillar.

Investments in non-subsidised new plants are not commercially viable at present, which has led to extensive value adjustments to all power plant projects of Repower. The company will therefore direct future investment more strongly at subsidised generation plants and furthermore expand into new, innovative business fields. Nonetheless, hydropower remains of key importance. Repower is convinced that the energy transition cannot be brought about without hydropower as its foundation.

Considered in light of the challenging environment, Repower's results are favourable at an operational level (see the Report of the CEO on pages 12 to 15).

A level playing field for Switzerland

An increased market orientation is essential in light of the current challenges in the electricity market. In order to improve the framework conditions for hydropower, pumped storage plants and other systemically relevant plants, Repower is campaigning for the replacement of the current compensation models for renewable energies – feed-in remuneration (KEV) in Switzerland and Renewable Energy Act (EEG) in Germany – by a market-based quota system. This would mean that the most efficient renewable plants would be constructed first. It may, however, be some time before such market models gain traction. In the interim, the interests of large-scale hydropower generation must be ensured as effectively as possible by adapting the current subsidy models. Priority should be given to renovating and expanding existing plants and projects of national importance.

Repower also takes the view that obliging utilities to make their customers save energy should be avoided. This would contradict the increased substitution of fossil fuels by electrical energy, which is something that is an express aspiration in terms of the energy transition. It would also be damaging to the economy, difficult to tally with the desire for market liberalisation and would hamper new, innovative offerings.

Reshaping of the energy system requires a pan-European perspective. Electricity flows do not end at national borders, so going it alone would be counterproductive. For Swiss companies that operate abroad, the basic preconditions for successful international activities are legal certainty and a level playing field.

Establishment of new business field “New Tech Business”

Repower consolidated its strategic orientation in its core business in 2013. It is based on vertical integration along the entire electricity value chain in the four key markets of Switzerland, Italy, Germany and Romania and on activities in the gas business. Cooperation with other energy providers is an integral component of the strategy to strengthen the company's position, a partnership model that is to be further extended.

In addition, Repower also devoted its energies to establishing a new business field “New Tech Business”. The changing energy environment increasingly requires technological innovations to drive change. Against the background of the energy transition, intelligent system integration, the inclusion of decentralised structures and increasing energy efficiency are becoming increasingly important. Repower will intensify its efforts in this area.

In terms of interests in coal-fired power plants, Repower will be adhering to the overall strategic approach formulated by the government of Canton of Graubünden, its majority shareholder. This owner strategy, combined with overall developments in the environment, has prompted a resolution from Repower's Board of Directors not to consider any more interests in coal-fired generation plants. Repower will withdraw from the Saline Joniche project on a controlled basis by the end of 2015 at the latest while complying with the contractual obligations that are in place.

The challenges in the energy sector will remain for some time. Thanks to its standing in key markets, its healthy balance sheet and its innovative capacity, Repower is well positioned to master them.