Development of the economy and the energy market

A low level of economic growth has been forecast once again for Germany in 2006. We do not expect macroeconomic developments to provide any notable momentum for the development of our core business. The German market for energy-related services, by contrast, is expected to continue to show double-digit annual percentage growth. The market for the incineration of non-recyclable waste, which is important for our company, can be expected to be characterised by a lack of incineration capacities in the medium term on account of the Technical Guidelines for the Disposal of Municipal Solid Waste(TASi), which came into force on 1 June 2005. We therefore expect prices for waste requiring incineration, and thus earnings, to remain at least stable and to see high capacity utilisation rates at our facilities.

One imponderable involves the introduction by the Federal Network Agency of regulation for grid utilisation fees for electricity and gas. All grid operators are required to submit applications to their respective regulatory authorities for the approval of their grid utilisation fees. These applications had to be submitted by the end of October 2005 in the case of electricity and by the end of January 2006 in the case of gas. In view of the lack of experience in dealing with the regulatory authorities to date, the manner and extent to which this procedure will result in any change in the level of grid utilisation fees cannot be assessed. On this basis, the regulatory authorities will develop a system of incentive regulation for grid utilisation fees, whose entry into force can be expected to result in a further increase in the pressure on fees. This applies both to the utilisation of high-voltage transmissions grids and to end distribution grids. Moreover, we assume that the regulatory authority will provide for greater competition in the domestic electricity and gas markets. We would be pleased if this could provide momentum for greater competition in the markets for conducted energy. Given that we attuned ourselves at a nearly stage to the establishment of a regulatory authority, the measures we have taken enable us to feel well-prepared for this new phase of competition in the conducted energy supply market.

Crude oil prices showed a further sharp increase in the past 2004/05 financial year. As a result of their link to the oil price, gas prices will rise significantly on the procurement markets in 2006. This development will also impact on the prices charged to end customers. Prices for carbon dioxide (CO₂) within the framework of the newly launched emissions trading were initially highly volatile, but have settled down in recent months. We expect further European integration to result in a higher level of liquidity in the emissions trading market.