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German Retail Strategyand OperationsDr. Andreas RadmacherBoard Member, Portfolio and Sales ManagementRWE Energy AG
October 26, 2006
RWE Energy Capital Market Day 2006
2
A. Radmacher | RWE Energy Capital Market Day | October 26, 2006
Today’s Topics
I Positioning of RWE Energy in the German energy marketafter the first phase of liberalisation
II RWE Energy's value-oriented retail strategy
III Efficiency enhancement as an additional value driver
3
A. Radmacher | RWE Energy Capital Market Day | October 26, 2006
Re-organisation of RWE Energy was implemented to meet customers’ needs
I Positioning in the German energy market
2003/2004 2005/2006
Re-organisationof RWE Group
Further enhancingRWE Energy's capabilities
Integrated offer of electricity, gas and water supply through RWE Energy Group
Merging RWE Plus, RWE Net and RWE Solutions into RWE EnergyIntegration of RWEGas and Thyssengasinto RWE EnergyEstablishment of a regional, customer-oriented organisation
Establishing RWE Key Account GmbH for focusedmarket positioning for large and sophisticated industrial customers
RWE Energy-wide portfolio optimisation throughcentral retail portfolio management
Integration of gas portfolio management for Germanyand Czech Republic
4
A. Radmacher | RWE Energy Capital Market Day | October 26, 2006
RWE Energy is responsible for the retail business within RWE Group
I Positioning in the German energy market
Wholesale/ production
Midstreambusiness
Retailbusiness Customers
Electricity
Power exchange
OTC
Gas
Contracts with gas producers
B2CPrivate andcommercial customers
B2BIndustrial and corporate customersDistributors
Retail businessof RWE Energy Group
Portfolio management Sales activities
Wholesalemarket/
wholesaleprices
Products,services
5
A. Radmacher | RWE Energy Capital Market Day | October 26, 2006
RWE Energy successfully defended its no. 1 position in the German electricity market
I Positioning in the German energy market
Market shares4 Germany 2004
Electricity Gas
Industrial/corporate
B2C
~ 7%~ 20%
~ 16% ~ 8%
External sales1 RWE Energy Germany 2005
Revenues (€ m) 7,4212/3 4,8803
Volumes (TWh) 1132 166
322
51
30 28
44
94Distributors
Industrial/corporate
Private/commercialB2C
B2B
GasElectricity
Munich
Berlin
Stuttgart
Frankfurt
Leipzig
Hamburg
Hanover
Saarbrücken Ludwigshafen
Augsburg
Dresden
Chemnitz
HalleEssen
Gelsenkirchen Dortmund
Osnabrück
Bad Kreuznach
Koblenz
Northern region
RWEKey Account
RWE RR
Süwag
VSE
LEW
enviaM
RWE WWE
Eastern region
Southern region
Central region
Western region
South-western region
1 Not including direct retail revenues and volumes from other RWE counterparties (electr. approx. 19 TWh; gas approx. 23 TWh) 2 Not including EEG/KWKG-revenues and volumes (approx. 23 TWh), EEG/KWKG are German laws referring to renewables/CHPs3 Not including electricity tax, gas tax and external grid revenues4 Comprising fully consolidated participations
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A. Radmacher | RWE Energy Capital Market Day | October 26, 2006
– Electricity Germany –
Volumes shifted away from retail with emerging wholesale market
1 1998: Comprising RWE (old) and VEW (Merger to RWE (new) in 2000)2 Total volume of 197 TWh excludes EEG-/KWKG-volumes of approximately 23 TWh, EEG/KWKG are German laws referring to renewables/CHPs
Development of sales structure
I Positioning in the German energy market
External sales External sales2
Declining share of direct retail
Retail100%
Retail64%
Wholesale36%
Pre-Market Opening (1998)
Competition(2005)
TotalGermany
RWEGroup1
520 TWh
197 TWh
453 TWh
167 TWh +18%
+15%
RWE kept up with growth of German electricity market
With liberalisation a liquid wholesale market developed, wholesale prices became transparent
Share of direct retail market decreased due to shift of volumes to wholesale
The challenge for RWE Energy is to retain retail customers with attractive services/products at positive profit margins
Emerging wholesale market
7
A. Radmacher | RWE Energy Capital Market Day | October 26, 2006
B2C electricity gross margin is a relevantvalue driver – but a cost driver as well
I Positioning in the German energy market
Before liberalisation (1998) Competition (2005)
1 Sales of other RWE counterparties 2 Not including EEG/KWKG-revenues and volumes (approx. 23 TWh), EEG/KWKG are German laws referring to renewables/CHPs3 1998: Comprising RWE (old) and VEW (Merger to RWE (new) in 2000)4 Gross margin: Revenues – (governmental charges + energy procurement + grid fees)
Electricity sales volumeRWE Group3 Germany
Electricity sales volumeRWE Group Germany
Electricity gross margin4
RWE Energy Germany
Industrial/corporate
72
B2C32
Distributors63
Others1 13
Distributors2
32
Wholesale71
Industrial/corporate
51
B2C 30
Industrial/corporate
33%
B2C60%
167 TWh
197 TWh 100%Approx. 165 customers
Approx.46,000 customers
Approx. 7.13 millioncustomers
Distributors 7%
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A. Radmacher | RWE Energy Capital Market Day | October 26, 2006
RWE Energy will continue tofocus on value above volume
* Gross margin: Revenues – (governmental charges + energy procurement + grid fees)
RWE Energy successfully implementeda value-oriented retail strategy
I Positioning in the German energy market
– RWE Energy Electricity Germany –
Development of volume and gross margin*
2003 2004 2005 ...
Gross margin
Sales volume
Value-oriented retail strategy
Portfolio adjustment led to reduced volume, especially in B2B-segments
Value-orientation results in increasing total margin
100%
9
A. Radmacher | RWE Energy Capital Market Day | October 26, 2006
Today’s Topics
I Positioning of RWE Energy in the German energy marketafter the first phase of liberalisation
II RWE Energy's value-oriented retail strategy
III Efficiency enhancement as an additional value driver
10
A. Radmacher | RWE Energy Capital Market Day | October 26, 2006
Main challenges going forward: Electricity
Segments Market trends Critical success factors
General High prices, volatility and liquidity dominate the market
Apply value-oriented sales policy,especially in periods of high energy prices
Benefit from market opportunities
B2C Increasing competition and churn rates in Germany
Enhance customer retentionby service leadership
Achieve process excellence& improve cost-to-serve
B2B Customers purchase more professionally. Increasing market know-how and demand for structured products
Intensify knowledge about customers
Market tailor-made products, increase product innovation rate, and improve time-to-market
Bundle know-how and processes
II Value-oriented retail strategy
11
A. Radmacher | RWE Energy Capital Market Day | October 26, 2006
Main challenges going forward: Gas
Segments Market trends Critical success factorsImport dependency increases, few players dominate the upstream business
Improve the position in the market
Increase portion of direct purchasefrom producers
LNG will play an important role Diversify purchase portfolio
Get access to projects & counterparties
Evolving of liquid hubs Centralise portfolio management
Get access to hubs & counterparties
B2C New market model in Germany sets the course for increasing competition and churn rates
Adapt to customer needs
Prepare for more intensive competition
General
B2B Customers purchase more professionally. Competition increases,especially in the distributor segment
Intensify knowledge about customers and market products according to customer needs
II Value-oriented retail strategy
12
A. Radmacher | RWE Energy Capital Market Day | October 26, 2006
Market environment for B2C in Germany differs from UK with developed competition
II
"Acquisition market" with high competition and switchingCompetition defines achievable retail marginsFocus on both– New customer acquisition– Customer retentionPlayers act nation-wideIn line with competitive gas market
Market environment B2C
Source customer switching and price: VDEW, Eurostat, Ofgem (2005)
So far "consolidation market" with limited churn rate and small retail margins – not attractive for new entrantsSo far focus on retaining customers, acquisition by focused market playersMany players act regional, some nation-wideCompetition in gas is expected to develop
Customer switchingsince 1999 (electricity)
Customer switchingsince 1999 (electricity)
UK
Ger
man
y
51%
5%
Neverswitched
Vendorswitchedat least once
Neverswitched
Vendorswitchedat least once
Value-oriented retail strategy
13
A. Radmacher | RWE Energy Capital Market Day | October 26, 2006
End of ex-ante price approval for B2C electricity may result in higher competition
In line with UK, the Netherlands, Austria, and the Scandinavian countriesGermany will also foster competition in the B2C market by abolishing ex-ante price approval as of July 2007
In markets with ex-ante price approval the sales gross margin is limitedby the difference between approved end-customer prices and initial costs (e.g. Germany: sales gross margin1 B2C 30 €/cust. p.a.2)
Market forces will decide the margin level in a de-regulated German electricity market. As a study shows, a pre-requisite for more intensive competition is a sales gross margin B2C of more than 60 €/cust. p.a.2
Experience from de-regulated markets abroad also shows that sales gross margins increase with the end of ex-ante price approval (e.g. UK: 100 €/cust. p.a.3, Sweden: 116 €/cust. p.a.4) and thus retail business becomes more attractive with more competitive activitiesby incumbents and new players
To retain customers and margins in such a competitive environment attractive products and high service quality are critical success factors
II Value-oriented retail strategy
1 Gross margin: Revenues – (governmental charges + energy procurement + grid fees)2 Source: Expertise of the University of Mannheim (Dec. 2005)3 Source: Eurostat, Ofgem (2005)4 Source: Eurostat, Nord Pool, Swedish Energy Agency (2005)
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A. Radmacher | RWE Energy Capital Market Day | October 26, 2006
With higher competition incumbentsare expected to lose B2C market share
1 Example of incumbents in UK and NL 2 1999 – 2002: price-caps for ex-Public Electricity Suppliers in core region
Few customers actively hunt for price and switch supplierSome more customers might be motivated to switch, if – Actively approached
by competitors– Dissatisfied with current
supplierThe majority will stay with their vendor, if he invests in– Sufficient customer
satisfaction– Active customer retention
Different customer types Experience from other countries
Outside core region:(in equivalents to market share in core region)
ExampleUK1
ExampleNL1
15%
5%
II
In core region:(market share)
Prices de-regulated
ExampleUK1
ExampleNL1
Since 20022
Since 2004
100%
85%
60% With increased competition after price de-regulation from July 2007German incumbents may lose some market share
Value-oriented retail strategy
15
A. Radmacher | RWE Energy Capital Market Day | October 26, 2006
B2C customers in Germany: Cost savings are important for return, but there are more levers
II
* Gross margin: Revenues – (governmental charges + energy procurement + grid fees)
Source: VDEW, VDN, RWE Energy (2005)
Price components private customers 2005(3,500 kWh/a, approx. 19.46 ct/kWh)
Cost of sales have a minor impact on market success (example Germany)
Sensitivity for 1% change of driver
Effective lever for margins (example Germany)
39%
35%
4%
22%
Sales
Electricityprocurement
Govern-ment
Regulated grid
Changeprice
Change no.of customers
Changecost of sales
Driver Effect on gross margin*
Value-oriented retail strategy
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A. Radmacher | RWE Energy Capital Market Day | October 26, 2006
B2C customer needs:Different customer groups have specific needs
Product Portfolio
Purely online product
Non-flexible payment policy
Long period tie-in
Light productNo frills
Short payment periods
Non-flexible payment policy
Basic tariffFixed price
Services, customer card, etc.
Individual communication
Non-flexible payment policy
Basic productFixed price
Services, customer card, etc.
Target-group specific services
More flexible payment policy
etc.
Comfort products
II Value-oriented retail strategy
Customer Service Needs
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A. Radmacher | RWE Energy Capital Market Day | October 26, 2006
B2C strategy:Customer retention and selective acquisition
Be the supplier of choice – retain and satisfy our customers
Satisfy customers in developing market with flawless, excellent service and customer care
Expand investment in customer retention to prepare for upcoming competition –prepare today for tomorrow's success
– Differentiated products and value-added services for different customer groups
– Trust and popularity for RWE/regional brands
– Established customer retention tools (loyalty cards, customer magazine, communication, events)
Ele
ctric
ityG
as/H
eatin
g Market cross-commodity heating services (gas, heat pump, etc.)
Tap potential from dual fuel
Develop the market on the basis of customer value: retain existing customers, acquire new ones
II Value-oriented retail strategy
18
A. Radmacher | RWE Energy Capital Market Day | October 26, 2006
Also sold indepen-dently of energy supply
B2C: Examples for customer retention instruments
II
* www.klima-sucht-schutz.de (oil: 5400 kg CO2/a, heat pump: 3500 kg CO2/a; full costs oil: 2700 €/a, heat pump: 1900 €/a)
Advantages for customers through service partnersBrand/value perception reinforcedSwitching less likely
Extra services: customer cards
Heat pump with ecological advantage– Saves 2 t CO2 p.a. compared to oil – Cost advantage of € 12,000 in 15 years*RWE Energy supports installation through its market partners (marketing, subsidies)Growing market in Germany– 100,000 units sales potential in the
next 3 years– Of which a market share of 25% is achievableRWE Energy achieves long-term customer retention and increase of market share in heating – especially compared to oil
Heat pump
Credit card function
Additional options
Value-oriented retail strategy
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A. Radmacher | RWE Energy Capital Market Day | October 26, 2006
Customers are acquired via perceivable price differenceRegionally different levels of prices and margins require regional offers
B2C electricity: Customer acquisition only by regionally competitive prices
Average gross margin*
Regional incumbents define required price offer
* Gross margin: Revenues – (governmental charges + energy procurement + grid fees)
For the time being, little interestof customers in switching
Only offers in selected regions are feasible– Prices as low as necessary– Focus on high-margin regions
allows profits
Competitive prices and differentiated offers require lean and flexible business models for acquisition
Standard nation-wide pricing and market approach are not promising
Incumbent Competitor
Requiredprice difference
II Value-oriented retail strategy
20
A. Radmacher | RWE Energy Capital Market Day | October 26, 2006
B2C gas: Customer acquisition activities will be pursued as market develops
Politicians ask for competition
Pressure on grid charges
Roadmap for implementation of switching processes
Competition in gas is expected to develop
Present market framework offers hardly any market potential for growth
– Significant handling costs do not allow profits
– Switching processes have to be implemented in industry-wide approach
RWE Energy is actively preparing for future competition
– Development of products and marketing strategies
– Implementation of billing/switching processes
As soon as value-oriented growth is possible in the market, RWE Energy will actively enter into developing competition
II Value-oriented retail strategy
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A. Radmacher | RWE Energy Capital Market Day | October 26, 2006
B2B: Customers’ energy market know-howdrives requirements
Corporate customersDemand full-energy supply
Relationship-oriented customers
Corporate customersand distributorsIncreasing interestin market pricedevelopmentNo structuring competency
Market-oriented customers
Sophisticated key accounts
Wholesale players
A B C D
Industrial customersand distributorsAdvanced energysector know-howIndividual products
Industrial customersand distributorsActive players in the wholesale marketStandard wholesale products
Cha
ract
eris
tics/
Req
uire
men
tsVo
l.
II
Approx. ≤ 2 GWh/a
Mar
ket
Tren
d
Approx. ≥ 2 GWh/a Approx. ≥ 20 GWh/a >> 20 GWh/a
Share of totalcustomers declining
Share of total customers rising
Share of total customers rising
Share of total customers stable
Value-oriented retail strategy
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A. Radmacher | RWE Energy Capital Market Day | October 26, 2006
B2B strategy:Differentiated approach for customer types
Carefully push full-energy supply
Relationship-oriented customers
Selectively market standardised structured products
Market-oriented customers
Bring innovative products quickly and efficientlyto the customers
Sophisticatedkey accounts
Wholesaleplayers
A B C D
Offer standardised products to satisfied customers – at low cost-to-serve
Selectively market individual structured products
Handle standar-dised wholesale products efficiently
Market additional energy-related services
Ele
ctric
ityG
as
Market standardised products to existingand to new customers as market develops
Market innovative products and portfolio services to existing and to new customersas markets and customers develop
Develop the market on the basis of customer value: retain existing customers, acquire new ones
II Value-oriented retail strategy
23
A. Radmacher | RWE Energy Capital Market Day | October 26, 2006
B2B: Standardised structured productsfor market-oriented corporate customers
II
Product example: Süwag Electricity Fund
Portfolio managementservices even for customerswith smaller energy volumes
Spreading the procurementrisk over time
Time-optimised procurement
Differentiation vis-à-vis customers
Volume,customer 1
Volume,customer 2
Volume,customer 3
Electricityfund
Furthercustomers
Several customers with individual contracts integrated in the electricity fundJoint manage-ment of the portfolio by Süwag
Energy volume split into tranchesIndividual tranches bought at different times by Süwag portfolio management Buying
tranches
Value-oriented retail strategy
24
A. Radmacher | RWE Energy Capital Market Day | October 26, 2006
B2B: Individual structured products for sophisticated industrial key accounts (1)
II
RWE Key Account Portfolio ManagementPortfolio monitoring and management is customers’daily business. Risk management gains importanceRWE Key Account supports their customers in developing, performing and monitoring individualrisk strategies
Product example
Customers are enabled to optimise their portfolio very flexibly– Products– Timeframe– Counterparties
"VIEW" as a professional internet tool to support portfolio management– Real-time portfolio analysis– Tracking of market
development– Support transaction and
risk management process
Customers' advantages
Value-oriented retail strategy
25
A. Radmacher | RWE Energy Capital Market Day | October 26, 2006
RWE Key Account Secure Catcher
Priceadjustment
Deliverystart
B2B: Individual structured products for sophisticated industrial key accounts (2)
II
RWE Key Account Power Casher
Product example Product example
RWE Key Account GmbH (KAG) buys from customers the right to use their assets flexibly –within defined limits Customers guarantee minimum availabilityKAG pays a fixed service premium for the assets to be kept availableWhen the assets are used, KAG pays an additional charge KAG organises market access processes for the customer
"Secure Catcher" allows customers to make a one-time adjustment to their contract prices and thus the opportunity to take advantage of declining market prices An option premium is charged for the possibility to adjust the contract
Market price in linewith OTC forwards
Price in line with"Secure Catcher"
(€/m)
Value-oriented retail strategy
26
A. Radmacher | RWE Energy Capital Market Day | October 26, 2006
Operating distribution system in line with EU unbundlingGrid development planningBudget planning / targets to operator
Distribution System Operator (DSO)
B2B: Energy supply and service offers for distributors are coordinated by regional KAM
II
Supplying electricity and gasPortfolio management electricity and gas
Sales unit of Regional Energy Company (REC) / Key Account Manager (KAM)
Comprehensive service offeringInformation platform (extranet) Offer of consulting services, tools
Network Partners Club (NPC)
Billing and balancingCustomer support
Customer ServiceCompany (CSC)
Operating grids and assets Metering data managementMedium voltage plants, inspection, maintenance, analysis of insulating oil
Grid Service Company (GSC)
Value chain distributor
… Grid Billing RPM Sales
REC
DSO GSC CSC Sales ...
Key Account Manager (KAM)
Value-oriented retail strategy
27
A. Radmacher | RWE Energy Capital Market Day | October 26, 2006
Today’s Topics
I Positioning of RWE Energy in the German energy marketafter the first phase of liberalisation
II RWE Energy's value-oriented retail strategy
III Efficiency enhancement as an additional value driver
28
A. Radmacher | RWE Energy Capital Market Day | October 26, 2006
Central retail management of RWE Energy AG acts as a platform for best practice transfer
III Efficiency enhancement as an additional value driver
Create transparency and understanding as a starting point, e.g.
Definition of KPIs (revenues, costs and margin)Benchmarking between RECs
Product: electricity fund at SÜWAG applicable to other RECs
Reduction of cost-to-serve by harmonisation of IT-structure across RECsFurther stimuli by tracking of KPIsand process performance –internal competition
Identify best-practiceprocesses/products, e.g.
Roll-out best practice approach throughout the group, e.g.
Customer segmentationDifferentiated products and value-added servicesCustomer retention tools
Achieve efficiency gainsand set stimuli for further improvements, e.g.
29
A. Radmacher | RWE Energy Capital Market Day | October 26, 2006
Efficiency: Reducing cost-to-serve –example of optimising IT
1 Cost-to-serve B2C: Front & back office customer care and billing activities2 Gross margin: Revenues – (governmental charges + energy procurement + grid fees)
Reduction ofcost-to-serve
Market-driven harmonisation of the group-wide IT-requirements and IT-operations Realisation of synergies through group-wide best practice transferRoll-out of IT-approach to other cost drivers
III Efficiency enhancement as an additional value driver
Cost-to-serve1 B2CReducing IT-costs despite increasing requirements
Cost driverscost-to-serve
Gross margin2
Profit
Sales costs
– Cost-to-serve
– Marketing
– Acquisition
– Bad debt losses
– Other sales costs
Per-sonnel
Other
IT
Increasing requirements
Unbundling
Complex products
Customer interfaces
...
90%
100%
2005 2007 2009
ReducingIT-costs
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