Regulation

The RWE Group’s exposure to the constant change in the political, legal and social environment in which it does business can be expected to have a substantial impact on earnings. Lignite and hard coal power plants account for a significant portion of our electricity generation portfolio. This represents a substantial risk due to the EU-wide CO₂ emissions trading system. Risks can arise above all from increases in the cost of procuring CO₂ certificates. We must assume that the generators in our core markets, i.e., Germany and the UK, will no longer be allocated free certificates in the third emissions trading period (2013 to 2020). The heads of state of the EU agreed on this in December 2008. RWE thus anticipates that CO₂ costs will be much higher than in the current trading period, which will last until 2012. We intend to continue reducing our emissions and make our power generation portfolio more flexible primarily through our investment programme. Furthermore, we limit CO₂ risks through climate-protection projects in developing and newly industrializing countries within the scope of the Kyoto “Clean Development Mechanism” Glossary (CDM) and “Joint Implementation” Glossary (JI).

Our German electricity and gas grid companies are exposed to earnings risks largely arising from incentive-based regulation in effect since January 2009. Uncertainty exists in part because some of the parameters of the regulatory framework have not been finalized. One of the outstanding issues is the mechanism for determining how to take grid operator energy procurement costs into account. We intend to partially offset the effects of regulation on our earnings by taking measures to cut costs and enhance efficiency throughout RWE Energy.

In Germany, risks can also arise from the stricter monitoring of anti-competitive pricing practices, which entered into force at the end of 2007. Therefore, our pricing in the supply business might be subject to review.