Energy Market Fundamentals& Procurement

Dean Marsh - Senior Account Executive (North)

Gary Ward - Senior Account Executive (South)

Energy Markets – what you need to know

Content

Energy price build up

Market Overview

Gas

Electricity

What Influences price

Current market conditions

Why use a third party?

Fixed vs. Flex

Energy price build up- Gas

100%MeteringMargin

LDZ Charges

NTS Charges

Commodity

Swing

Energy price build up-Electricity

Energy 77%

Margin & Imbalance 1%

BSUoS 1%

RO 3%

Tlosses 1%

TUoS 2%

Dlosses 3%

DUoS 8%

Other 0%

CCL 4%

Market overview - Gas

Where does our gas come from?Gas pipeline imports from Norway (Langeled) Netherlands (BBL) Belgium (IUK)Gas LNG imports from -Trinidad &TobagoQatarAlgeriaEgypt

Imports History2000 UKCS 99% 1% imports2005 UKCS 82.7% imports 17.3%2008 UKCS 61% imports 38.8%(LNG 1.1%,pipeline 37.7%) 2009 UKCS 41.6% imports 58.4%

Market overview - ElectricityHow is our electricity generated?Coal fired power plants Gas fired power plants Nuclear Renewable Percentage of generation can and does change dependent on generation fuel costs (Coal & Gas) primarily

Forward supply issuesDecrease in coal fired power plants due to EU carbon directives LCPD (More information at http://www.defra.gov.uk/environment/airquality/eu-int/eu-directives/lcpd/index.htm)Less capacity ( Non compliant power stations will have to close by 2015)

Market fundamentals

Fundamentals drive supply and demand

Do not always dictate price

Prices can disconnect themselves from fundamentals

Speculation can play large part in market movements

What Influences Price?

Oil – Can Influence gas prices (Due to indexation)

Coal –used for generation

Supply & demand- positive & negative GDP

EU carbon price- feeds into the cost of power generation

Exchange rates- Crude oil/ Freight/ Coal

Global tensions – political/economic etc

Transportation cost of shipping LNG and coal

Weather- can dictate demand on the NTS and the grid

Maintenance- Gas field outages/power station maintenance

Market volatilityM-1 Gas Index

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Index ICE p/therm latest close p/therm

Spot prices are more volatile than forward prices

Spot prices more closely reflect genuine supply and demand

Gas - UK October Gas Year Price (Flat Cost) p/therm

May 2006 – May 2010

Electricity - Annual Forward Baseload Price £MW/h

(Flat Cost)

May 2006 - May 2010

Brent Forward Curve

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Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15

$/bb

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Source: Bloomberg, analysis Utilyx

Smr10 Gas Correlation with FTSE 100

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Smr10 Gas Correlation

Current Situation

Oil-Oil prices remain supported above $85/bbl on a bullish economic outlook, strong equities and growth in emerging market demandSupply remains healthy but demand from China is the most bullish fundamental driver

Gas-If oil remains at $85 we could expect to see continued support to gas prices on longer dated contractsFurther potential upside can come from an upturn in demand as we come out of recession, supported by increased continental demand

Power-Prompt power prices have firmed in line with the upturn in gas prices last weekStrong prices in underlying fuel markets have supported the curve, with corresponding contracts in both gas and coal having gained over the last week. This remains a risk to the upside in the near-term.

· CarbonCarbon prices have reached a 10 month high adding support to the curve, in particular the 2012 contracts and beyond

· Bearish factors remain however - demand is significantly below pre-recessionary levels and a drop back down in oil and gas would feed through to have a bearish affect on the power curve· Supply side issues also represent a longer-term risk to the UK power market e.g. governmental policy with respect to nuclear build

ENERGY PROCUREMENT-WHY USE A THIRD PARTY?

Electricity-Complex price structures

DUOS –Distribution Use of System Charges

TUOS- Transmission Use of System Charges

BSUOS- Balance System use of System Charges

T-Losses Transmission Losses

D-Losses Distribution Losses

CCL- Climate Change Levy

Renewable Obligation (supplier)

Available Capacity

Green/Renewable Premiums

ENERGY PROCUREMENT-WHY USE A THIRD PARTY?

Gas-Complex price structures

LDZ – Local Distribution Charges

NTS – National Transmission Charges

Balancing (swing) – charges

CCL – Climate Change Levy

ENERGY PROCUREMENT-WHY USE A THIRD PARTY?

Additional Services

OJEU Compliance

E-Procurement

Market Intelligence

Bureau Services – Bill validation

EUETS/CRC – Guidance & advise

Retrospective Cost Auditing

Best Practice - Flexible Risk Managed contracts gas/power

Dedicated Account Management

ENERGY PROCUREMENT-WHY USE AN APPROVED

PBO?

Fixed or Flex?

ENERGY PROCUREMENT-WHY USE AN APPROVED

PBO?

Fixed

Fixed on a single dayAdvantages Fix and forgetKnown budget price

Disadvantages1 in 250 chanceHigh risk premiumExposed budgets

ENERGY PROCUREMENT-WHY USE AN APPROVED PBO?

Flex

Purchasing prior to and during contractAdvantages Discount on forward priceAccess to market falls Protection from market highs

Budget management & planning

DisadvantagesReconciliationsSkills required Size requirements

Useful Links

www.ogc.gov.uk/energy_gas_and_electricity.asp

www.energyconsortium.org.uk

Thank you for listening

Any questions?