Key Alliance - JHA 2004
Energy - Key Issues for Today
23rd. June 2004
John Hall
Managing Director
John Hall Associates Limited
John Hall Associates
1973 - Set up UK Oil Services to Buyers 1973 - Conferences & Seminars 1985 - UK Gas Market De-regulation 1990 - Electricity Market De-regulated 1990 - Contract Management Services 1999 - Extended to Pan-European 2004 - US Affiliation – Summit Energy
JHA Approach
Team Focus Provision of Dedicated Resource Resource as Extension to Client’s Own Working at Site or Group Level Tailored to meet Client’s Needs
JHA Business Ethics
Totally Independent & “Unique” Fixed Fee Basis – Agreed in Advance No Shared Savings No Third Party Remuneration No Affiliation with any Supplier No Sponsorship No Tele Sales or Agents!
JHA Systems
In-house Development Specified to JHA/Client Requirement Host Own Web Site On & Off-Line Services Electronic Data Transfer Best Mix of People & Technology We drive systems not they us!
JHA Company Profile
Around 300 clients High Retention Rate 60 – 80 Pan-European Electricity - 10 TWh Gas - 1.5 Billion Therms Oil - 1.5 Billion Litres Working with all assessed suppliers
JHA Services UK to Pan-European
Electricity, Gas, Oil, Water & Telecoms Market Reports – Daily/Weekly/Monthly Bespoke Reporting Services Day-to-day Market Support Contract Management In-house Training & Client Briefing Conferences & Seminars
JHA European Energy Services
Contract Management: -
- Data & Information Collection
- Profile Generation & Management
- Invoice Management
- Performance Benchmarking
- Procurement Services
- Environmental Services
JHA European Energy Services
Continuous Market Monitoring
- Market Conditions
- Supplier/Market Intelligence/Gossip
- Real Time On-Screen Pricing Profiles in State of Readiness
- Tender or Extend or Renew? Fixed or Flexible or Mixed Pricing?
JHA Profile Management
Site Consumption Reporting Comparison of Site Consumption Profiles Identification of Production Anomalies Profiles Maintained
JHA Invoice Management
Invoice Simulation Compare to Supplier Invoice or Self Bill? Pay or Withhold? Anomalies Investigated Monthly & Annualised Reporting
JHA Performance Brnchmarking
Internal
- Site to Site
- Against Budget External
- Company to Company
- Against Market Indicators
JHA Procurement Services
Invitation to Tender (ITT) Prepared ITT Agreed with Client ITT Submitted Electronically to Suppliers On-Line Auction Facility Offers Analysed Results Selectively Viewed On/Off-line Offer Analysis to Client’s Specification
JHA Offer Analysis
Offers Analysed by Site/Group/Division Site by Site or Group Overall? Also Analysed by Supplier Provision of Best Mix or Single Site
Key Market Factors
Energy = Oil + Gas + Electricity Oil Prices Influence/Control Gas Prices Gas Prices Influence Electricity Prices
Key Market Factors
Profile not Volume Driven Country by Country not Pan-European Terms & Conditions Significant as Price Suppliers do Make Mistakes Suppliers are not well Co-ordinated Markets more Favourable to Suppliers Timing more important than Means
Key Market Drivers
Economic Factors - World Events Supply & Demand - Capacity/Storage Weather Interconnector Flows Short Term Supply Constraints Outages Trading Activity
Opening Views
Who would have known…. Effect of Iraq Conflict on:- UK Government – Elections looming European Industrial Energy Markets The vulnerability of OPEC The threat of Oil supply disruptions The alignment of European Energy Prices
Opening Views
Who would have known…. The effect of Emissions Trading on:- The Electricity-Gas market The meaning of “Spark/Dark Spread” The adverse role of both on the market
Market Irritants - Consumers
Daily phone calls from consultants We can make you big savings Won’t cost you a penny! Not from JHA – we can’t do them! JHA gets them too! Lack of supplier response within contract Poor administration – all round
Market Irritants - Consultants
Suppliers that try to exclude the consultant Suppliers that try to fool the consumer Suppliers that try to manipulate the data Suppliers that don’t follow procedure Consumers that appoint two consultants Consumers that appoint but ignore consultants Consumers that don’t listen
Market Myths
Prices only ever fall We always achieve savings We always have the best price We employ experts so we know We just can not exceed our budget allowance So the market is rising - we still want the “wins”
Market Reality
Why didn’t you warn us it was going to happen We can not accept an increase If you want to retain our business…… We want the same price again! Tell the supplier to hold his price another week We respond when it suits us not the supplier My Board will not accept this! My Board doesn’t want to hear this!
Market Reality
Where are the fundamentals? What are they? Weather/Stocks/Supply/Demand/Exchange Do they really matter? In part, but not in entirety What does matter? Rumour/Perception/Trading Activity
UK Weather Pattern
-4
-2
0
2
4
6
8
10
12
14
16
18
20
Degre
es C
UK Monthly Temperature Pattern
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
11.00
12.00
13.00
14.00
15.00
16.00
17.00
De
gre
es
C
Market Reality
Three months on – market prices still rising Media Attention solely on “petrol prices”! Energy Costs now a Boardroom Agenda If not, make it one! UK Government “unaware” of any issue! Energy still part-time for UK Minister
Market Reality
EU Emissions Trading Scheme Bad for UK within Europe Bad for Europe within World UK Climate Change Levy Electricity +0.43 ppkwh & Gas +0.15ppkwh UK Renewables Obligation +£1.49 pMWH
Market Concerns - Geo Political
Shortage of Oil, Gas & Electricity supplies Terrorist attack Producer cut back Inability/Ability of OPEC to manage Oil market Effect of higher Oil prices on consumers Effect of higher Oil prices on producers
Market Concerns
Decreasing number of suppliers Each Supplier with limited capacity Buyer/Supplier risk awareness – price/supply Can supplier deliver – can buyer pay?
Market Interest - Consumers
Better Supplier Administration Accurate Consumption Data Flow Awareness to buyer needs Clear Understanding of price structure Flexible & Fixed Price options Financial Tools Take opportunity to manage own risk
Market Interest - Consumers
Understand Best Practice Price competition is still fierce! Evaluate Suppliers before seeking price Ensure that they can provide required service Then, Consider Energy Management
Market Needs - Consumers
Pan-European Support New or Old EU Members? Country by Country or Overall? Same supplier - Different deals in each country Improved pan-European Supplier Integration Transparency/Harmonisation on Taxation Common views across organisations Same language – different culture!
Market Rumblings - Consumers
What does the UK offer? Higher Energy Taxation Higher Environmental Controls Higher Delivery Charges Higher Energy Costs Higher Labour costs Benefit of weaker Dollar-Sterling Exchange UK Government aware on Labour Costs only! Are they moving away and if so, where to?
Market Prices
Relativity between different sources Duty has played a major role Oil – back up to the 1985 levels Gas – back to the 1985-1992 levels Electricity – Moving up!
UK Annualised Price Index
405060708090
100110120130140150160170180190200210220230240250
Ja
nu
ary
19
93
= 1
00
Derv Electricity
Gas (F) Gas (I)
Gas Oil Heavy Fuel Oil
UK Oil Market Prices
1
4
7
10
13
16
19
22
25
28
31
34
37
40
43
46
49
52
55
58
61
Pe
nc
e P
er
Th
erm
GAS OIL HEAVY FUEL OIL
UK Gas Market Prices
12
14
16
18
20
22
24
26
28
30
32
34
36
Pe
nc
e P
er
Th
erm
Firm Interruptible
UK Electricity Market Price
75
80
85
90
95
100
105
110
115
120
125
130
135
140
145
150
Pe
nc
e P
er
Th
erm
Oil-Gas-Electricity Link
Oil drives Gas which drives Electricity Continental Gas prices linked to Oil Price UK Gas price linked to Continental Gas Price 40% UK Generation fired by Gas By 2010 UK Generation will be 50% Gas fired Oil-Gas Relationship Electricity-Gas Relationship
UK prices 1 January – 21 June 2004
90
95
100
105
110
115
120
125
130
£/M
Wh
Electricity Gas Oil
Oil-Gas-Electricity Link
Gas follows Oil up Electricity follows Gas But Gas is slow to follow when Oil falls Realistic lag or market manipulation?
Understanding Spark Spread
Which drives the other – Gas or Electricity? If Spread is above £6.00 per MWH Electricity is generated If Spread is below £6.00 per MWH Gas can be sold back in to system Electricity is not generated Higher return for selling gas than generating!
Spark Spread – Day Ahead
-10
-5
0
5
10
15
20
25
30
35
40
45
50
(£/M
Wh
)
NBP Gas Power Spark Spread
Spark Spread – Month Ahead
0
3
6
9
12
15
18
21
24
27
30
33
36
(£/M
Wh
)
NBP Gas Power Spark Spread
Spark Spread – Season Ahead
0
3
6
9
12
15
18
21
24
27
30
33
(£/M
Wh
)
NBP Gas Power Spark Spread
European Electricity Prices
All moving up UK prices based on Year from specific month Continental prices based on calendar year France & Germany at bottom end UK has overtaken Holland to hit the top spot
European Market Prices 2004
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
Eu
ro/M
Wh
Dutch Cal-05 French Cal-05 German Cal-05 UK Oct-04 UK Apr-05
European Market Opportunities
Analyse requirement by site and by country Understand supplier coverage Talk to suppliers in each country Cross reference them to get optimum fit Investigate Tax Reduction Benefits Potential CCL Exemption in UK
Issues For Today
What is the outlook for energy supplies? Are we going to run out soon? Will UK Government make it’s decision? UK – with or without Nuclear? Take out 20% - Replace it with what?
Issues For Today
UK Government still advocating Renewables If Renewables are to take such a large share Who will invest in back-up power supply? Are prices high enough to safeguard supply? Are new investors coming in? Where should investment come from? Can consumers afford to pay higher prices?
Issues For Today
Is the UK truly disadvantaged? Why are UK Gas prices the highest in Europe Will new supplies arrive in time? From Norway & Netherlands but at what price? What will stimulate generation investment? Energy Taxation:- How will the UK cope in Europe? How will Europe cope in the World?
EU Emissions Trading Scheme
Kyoto Agreement EU ETS to begin in January 2005 Direct emissions backed up by tradable allowances Price of allowance will impact on power price Generators may generate or sell allowance!
EU Emissions Trading Scheme
Kyoto Agreement EU to reduce emissions by 8% of 1990 level UK accounts for 12% of this UK Government to go further it seems UK Phase 1 2005-07 at 15.20% by 2010 UK Phase 2 2008-10 at 20% by 2010
EU Emissions Trading Scheme
National Allocation Plans – NAPs 14 member States have submitted to EC 3 published internally but 6 not published Some Allocations too “generous” EU will demand more from certain member States EU allowances for 2005 around €10 MtCO2
(Updates in JHA Daily Bulletin) Result - Higher prices but disproportionate sharing
Issues For Tomorrow
Planning ahead is more critical How far? 1, 2 or 3 years or more? What are the tools that are needed? Fundamentals – Market Awareness Business Acumen – Brinkmanship?
Daily Briefing Report
MARKET COMMENT – Oil, Gas Electricity JHA Recommendations Pan European Pricing A daily update Supported by telephone dialogue
Conclusion - Whatever Your View
Expect the unexpected Monitor Weekly or Daily but don’t lose contact Listen to whatever advice is being given Don’t ignore market gossip – talk to people Don’t make wild claims Keep everyone informed! No one likes a surprise!
JHA - Key Alliance
GETTING THE STRATEGY RIGHT
23rd June 2004
Noreen Guy
Director of Operations
Getting the Strategy Right
Wholesale price movements / consumer costs
Best practice for energy procurement
Constructing a strategy
Conclusions
Background – Costs and Price
Wholesale Electricity for April 2003 and 2004
– Consumer price – cost breakdown
Wholesale Gas for October 2002 and 2003
– Consumer price – cost breakdown
Wholesale Electricity – April Year Price
15.0
15.5
16.0
16.5
17.0
17.5
18.0
18.5
19.0
19.5
20.0
20.5
21.0
21.5
22.0
22.5
23.0
23.5
£/M
Wh
2003 2004
Consumer Price – April Cost Breakdown
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
2003 2004
Av
era
ge
Pe
nc
e P
er
Un
it
Commodity
41.4%
Commodity
47%
Delivery Charges(TUoS, DUoS,
Transmission Losses,Distribution Losses,
& Settlements)
38.4%
Delivery Charges(TUoS, DUoS,
Transmission Losses,Distribution Losses,
& Settlements)
34.8%
CCL
9.6%
CCL
9.0%RO 3.1%
RO 3.4%Supplier (BSUoS, Margin, Risk) 7.4%
Supplier (BSUoS, Margin, Risk) 5.8%
Wholesale Gas –October Year Price
18.0
18.5
19.0
19.5
20.0
20.5
21.0
21.5
22.0
22.5
23.0
Pe
nc
e P
er
Th
erm
2002 2003
Consumer Price – October Price Breakdown
0
2
4
6
8
10
12
14
16
18
20
22
24
26
28
30
32
34
2002 2003
Pe
nc
e P
er
Th
erm
Commodity
64.5%
Commodity
67.9%
Transportation& Metering
18.1%
Transportation& Metering
17%
Supplier 4%
Supplier 3%
CCL
13.3%
CCL
12.1%
Best Practice in EnergyProcurement
Timing
Data
Analysis
Process
Approach to Market
Timing
Constraints– Contract start date– Customer Expectation– Supplier Response
The major element of cost Variance – October 2004 Electricity
– Lowest point – Dec ‘03 – £21.00/MWh– Highest point – May ‘04 - £27.50/MWh
Difference - £6.50/MWh Rising market – cost avoidance
Data
Completeness and credibility– Minimise risk premium
Predictability– Penalties for imbalance
Forecasting Maintained at all times
– Readiness for market– Offer and cost variance analysis
Offer Analysis
Offers– Structures– Rates
Evaluate added value Like for like comparison Validity
– Time to analyse– What if
Approval process
Approach to Market
Consider requirements Supplier selection Notify / gauge interest in advance Provide credible material Monitor market – final bid or auction Re-bidding Consolidated buying?
– Profile– Access to more sophisticated contract structures– Common objectives and decision process
Process
Renewal– Market movement exceeds value of competition– Confident in incumbent
Conventional Tender– Negotiation based on compromise– Low to moderate competition
Auction– Price is dominant factor– High competition
Constructing Strategy
Objectives
Price risk
Supplier performance
Key elements to consider
Electricity – April Year Price
15
16
17
18
19
20
21
22
23
24
25
26
27
28
£/M
Wh
2002 2003 2004
Gas – October Year Price
18
19
20
21
22
23
24
25
26
27
28
29
30
31
Pen
ce
Pe
r T
he
rm
2002 2003 2004
Key Elements
Price risk– Contract structures and pricing mechanisms
Suppliers– Single or multiple– Performance– Selection
Review process Implications of change
– Resource– Performance Measurement
Price Risk
VULNERABLE MARGIN
Predominantly fixed limited variable - Floating
POTENTIALLY STABLE MARGIN
Managed Price
Fixe
d
B
usin
ess
Cos
ts
Var
iabl
e
STABLE MARGIN
Fixed Period Fixed Price
VULNERABLE MARGIN
Predominantly floating with limited fixed
Fixed Sales Revenue Variable
Fixed Price Contract
Fixed price for a fixed period
Set review frequency
Tender or Auction
Support– Analysis– Timing
Floating Prices
Moves with market Not necessarily a set frequency Supplier Evaluation
– Charges– Flexibility
Contract Structure Index Support
– Buying Points– Performance Measurement
Managed Contract
Cover policy – limits - authorisation Aim to outperform market Longer term framework agreement Continual market assessment Active buying participation Financial tools Forecasts Variance reporting
Conclusions
Increased awareness Review objectives Price risk is dominant factor now Actions relate to achievement of objectives Ongoing resource and information