Key Alliance - JHA 2004

Energy - Key Issues for Today

23rd. June 2004

John Hall

Managing Director

John Hall Associates Limited

John.Hall@jhal.com

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