2011 Annual Report - OTCIQ.com

58 Risk Report
Capacity markets will play an important role for E.ON in a number
of the electricity markets where it operates. Russia and
Spain already have capacity markets, and Sweden has a peakload
reserve capacity market. France and Italy have decided to
create capacity markets, and the U.K. government has recommended
taking the same step. Germany is also weighing the
issue. This could result in market-design risks for E.ON, which
could face a competitive disadvantage, particularly if there is
a focus on specific generating technologies or if some existing
assets are not included.
The U.K. government is implementing a number of reforms to
the country’s wholesale power market with the aim of providing
incentives for investments in low-carbon generation and
to maintain a reliable supply of electricity. The introduction
of feed-in tariffs is intended to provide greater certainty of
revenues for new nuclear capacity, new renewables capacity,
and power plants equipped with carbon capture and storage.
The introduction of a capacity market is intended to support
investment in more flexible generating capacity that operates
at lower load factors to help maintain security of supply. It is
anticipated that the drafting of legislation to implement these
reforms will continue in the first half of 2012 and that the
measures will be fully implemented by the end of 2014. These
reforms could affect E.ON’s generation activities in the
United Kingdom.
In view of the current economic and financial crisis in many
EU member states, political and regulatory intervention
(such as additional taxes, price moratoriums, and changes to
support schemes for renewables) is becoming increasingly
apparent. Such intervention could pose a risk to E.ON’s operations
in these countries. In particular, the refinancing situation
of many European countries could have a direct impact on the
E.ON Group’s cost of capital, which could create the risk of
impairment charges.
Further risks could result from the European Commission’s
plans to change the regulation of derivatives traded over the
counter (“OTC”) and possibly to rescind energy-trading companies’
exemption from the Markets in Financial Instruments
Directive (“MiFID”). The Commission is considering introducing
mandatory clearing of energy OTC trades that exceed an
amount that has yet to be determined. This would increase
the margin requirements for such transactions, which could
lead to an increased liquidity risk. It could also have a negative
impact on E.ON’s economic net debt. Rescinding the MiFID
exemption for energy-trading companies would have effects
similar to the regulation of OTC transactions. These changes
could also result in increased capital requirements and disclosure
obligations for E.ON’s energy-trading companies.
Open Grid Europe (“OGE,” formerly E.ON Gastransport) is
supposed to have been subject to incentive-based regulation
since the start of 2010. In mid-2011, OGE made available to
the German Federal Network Agency (known by its German
acronym, “BNetzA”) documents the agency will use to set
OGE’s initial revenue cap for the second regulatory period
(2013–2017). We anticipate that the BNetzA’s cost analysis,
including the process of seeking clarifications from OGE, will
last until the summer of 2012. It will be followed by a new
efficiency benchmarking, and a new assigning to groups, of
Germany’s highly heterogeneous gas TSOs. The BNetzA will
derive the revenue caps for 2013–2017 from the individual efficiency
factor it calculates for each TSO. On November 2, 2011,
the BNetzA announced its decision regarding return on equity,
which will be reduced from the current 9.29 percent to 9.05 percent
for new assets and from 7.56 percent to 7.14 percent for
old assets.