Tuesday 30th. November 2004

British Institute of Facilities ManagersRetail Sector Forum

Energy Procurement Strategies

John Hall Associates Limited9 Piries Place, Horsham, RH12 1EH

Tel: 01403 269430 - Fax: 01403 269451E-mail: peter.ind@jhal.com Internet: www.jhal.com

Presentation Content

Background – Electricity Prices 2000 - 2003 Energy Price Drivers in 2004 The Electricity Generation Mix Further Back in the Chain - Oil Price Drivers Electricity Price Movements 2004 & Beyond Gas Price Developments 1998 – 2003 Gas Price Movements 2004 & Beyond Buying Strategies - Contract Options and

Targets An Eye to the Future

Electricity Market Background (2000 – 2002)

Historic Generation Over-Capacity (31%) New Electricity Trading Arrangements

(NETA) Increased Competition - Prices weaken ENRON collapse releases more Power Generators/Suppliers in Trouble General Market Instability Lowest Prices below £15.50 per MWh

Electricity Market Developments(2003)

The Aftermath of NETA Generators/Suppliers Hit Back Generating Plant taken off Line Rationalisation of Suppliers = less

Competition Surplus Capacity falls from 31% to 17% NGTransco issues Capacity Warnings Prices spiral upwards

Energy Price Drivers in 2004

The Oil Price The Oil/Gas Link The Gas/Electricity Link - 40% of Generation Supply & Demand - Capacity Concerns “1 in 20” Winter Planning

Generation MixPower - Generation Feedstock Mix

0%

20%

40%

60%

80%

100%

1996 1997 1998 1999 2000 2001 2002

Gas Coal Nuclear Hydro and other Renewables Oil

High Oil Prices What is driving the market?

Strong Global Demand fuelled by Growth in

China Inadequate Global Supply Capacity Low Inventory Levels Instability in four Key OPEC Producer States Political Problems in Russia (Yukos) Inadequate Refining Capacity Worldwide Weak Dollar

Brent Crude Price Movements

17

19

21

23

25

27

29

31

33

35

37

39

41

43

45

47

49

51

53

Jan-01

Apr-01

Jul-01

Oct-01

Jan-02

Apr-02

Jul-02

Oct-02

Jan-03

Apr-03

Jul-03

Oct-03

Jan-04

Apr-04

Jul-04

Oct-04

$ /

barr

el

IPE Brent Crude

Electricity – Baseload Prices

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

37

38

39

40

Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04 Jul-04 Aug-04 Sep-04 Oct-04 Nov-04

Source: www.heren.com

Pri

ce

- £

/MW

h

Apr-05 Oct-05

Apr-06 Oct-06

Oct-04

OCTOBER 2004 ELECTRICITY CONTRACT ROUND: Best Offer Energy Prices at Grid Supply Point

1.71.81.9

22.12.22.32.42.52.62.72.82.9

33.13.23.33.43.53.63.73.83.9

44.14.2

5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85

Load Factor %

En

erg

y P

rice

s at

GS

P p

/kW

h

October 2004 offers October 2003 contracts Linear (October 2003 contracts) Linear (October 2004 offers)

OCTOBER 2004 ELECTRICITY CONTRACT ROUND: Best Offer Offer Energy Prices at Grid Supply Point

1.71.81.9

22.12.22.32.42.52.62.72.82.9

33.13.23.33.43.53.63.73.83.9

44.14.2

2.5 5.0 7.5 10.0 12.5 15.0 17.5 20.0 22.5 25.0 27.5 30.0

Night Factor %

En

erg

y P

rice

s at

GS

P p

/kW

h

October 2004 offers October 2003 contracts Linear (October 2004 offers) Linear (October 2003 contracts)

Electricity – Cost Breakdown

Electricity Cost Breakdown

Energy at NBP, 62.07%

Renewable Obligation, 4.32%

BSUoS, 2.0%

Margin inc shape & volume risk, 3.85%

Settlements, 0.09%

Transmission Losses, 1.38%

Triad Charges, 3.22%

Distribution Losses, 3.74%

Distribution Charges (DUoS), 11.10%

Available Capacity, 8.23%

Electricity – 2004 & Beyond

October 2004 Year Prices moved from 21.43 per MWh (September 2003) to £35.5 per MWh (September 2004)

Supply/Demand Balance will remain tight High Oil/Gas Prices will keep Electricity Prices up EU Emissions Trading Scheme (EUETS) will

continue to put Pressure on Prices HOWEVER Prices may now have peaked! October 2005 Year Price currently £30.50 MWh October 2006 Year Price currently £30.20 MWh

Buying Strategies

Budget Priority Opportunity

FINANCIAL CERTAINTY

Predominantly Fixed with limited Variable

RISK WILLING

Predominantly Variable

Lo

w

%

of

Co

sts

Hig

h

RISK AVERSE

Fixed Period Fixed Price

FINANCIAL FLEXIBILITY

Balance of Fixed and Variable

Low Ability to Pass Through Costs High

Electricity Purchasing Strategies

Fix or Float? Flexible Deals increasingly available Separation of Baseload & Peak Baseload Purchases in

Months/Quarters/Seasons Current Minimum Baseload – 10 MWh Tranche Purchasing

Electricity – Consumption A

pri

l

Jun

e

July

Augus t

Septe

mb

er

Oct

ober

Novem

ber

Dece

mber

Janu

ary

Feb

ruary

Mar c

h

May

Consumption Profile

Base Load Volume

MW

Residual

Market Increase since Settle Date

1/7/03 1/8/03 1/9/03 1/10/03 1/11/03 1/12/03 1/1/04 1/2/04 1/3/04 1/4/04 1/5/04 1/6/04 1/7/04 1/8/04 1/9/04

2 Year Contract

0

5

10

15

20

25

30

35

£/M

Wh

Date

2 Year Contract Market Increase

Market increase since 3rd July 2003

Market Price when Contract Settled on the 3rd July

Electricity Baseload Price – October

2005

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

37

38

Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04 Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04Date

Co

mm

od

ity

Pri

ce

(£

/MW

h)

October 2005 curve 2 Year Settle Price October 2004 curve

Gas Market Developments (1998 – 2003)

Installation of Interconnector in October 1998 Gas Price Link between UK and Europe set up Oil Prices at $10 per Barrel - Gas Imports from

Europe keep Year Gas Prices down at 11/12 ppt Oil Price rises in 1999 from $10 to $25 per Barrel Gas/Oil Price Lag sees Gas Prices follow Oil Forward Gas Prices peak at above 23 ppt in 2000 2001-2003 Year Gas Prices in Range of 18-24 ppt

Gas Prices – 2004 & Beyond

2004 Brent Oil Price peaks at $51.56 per Barrel Oil Price Premium estimated no more than 10% October 2004 Year Prices moved from 22.00 ppt

(September 03) to 40.07 ppt (September 04) Supply and Demand Issues predominate Sentiment, Uncertainty, and Speculation keep

Gas Price up October 2005 Year Prices now at 34.23 ppt

Gas Purchasing Strategies

Fix or Float? Index-linked Deals well established Most popular - Day Ahead/Month Ahead Minimum Volume – 0.5 m Therms p.a.(15m

KWh) Tranche Purchase (Min Volume – 4m

Therms p.a.) Fix & Float Option provides good Balance

Gas Cost 70-75%

Margin/Admin 2-4%

Transportation 10-12%

Gas – Cost Breakdown

Metering 1-3%

CCL 8 - 12%

October 2005 Wholesale Gas Prices

10

12

14

16

18

20

22

24

26

28

30

32

34

36

38

40

42

44

Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep

Pe

nc

e P

er

Th

erm

0.34

0.41

0.48

0.55

0.61

0.68

0.75

0.82

0.89

0.96

1.02

1.09

1.16

1.23

1.30

1.36

1.43

Pe

nc

e P

er

kW

h

1998 1999 2000 2001 2002 2003 2004 2005

Wholesale Gas Price – October 2005

22.00

24.00

26.00

28.00

30.00

32.00

34.00

36.00

38.00

40.00

42.00

44.00

Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04 Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04

Co

mm

od

ity

Pri

ce (

p/t

her

m)

October 2005 Year Ahead Price Current Contract

Index Benchmark Chart

15.0016.0017.0018.0019.0020.0021.0022.0023.0024.0025.0026.0027.0028.0029.0030.0031.0032.0033.0034.0035.0036.0037.0038.0039.0040.0041.0042.0043.00

Dec-04 Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05

Co

mm

od

ity

Pri

ce (

p/t

her

m)

1,000

4,000

7,000

10,000

13,000

16,000

19,000

22,000

25,000

28,000

31,000

34,000

37,000

40,000

43,000

46,000

49,000

52,000

55,000

Vo

lum

e (

the

rms)

Fixed Prices Declined IPE (04-May-04) IPE Prices on (insert today's date) Last Yrs Actual Prices

Months Bought Partial Bought Volume (therms)

Take partial cover

-300000

200000

700000

1200000

1700000

2200000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Con

sum

ptio

n M

wh

High Risk - Portion Defaulting to Chosen Market Index (d-1/m-1)

Medium Risk - Floating Portion

Low Risk - Fixed Portion with Options to Fix

Taking the Price

Buys at an agreed and pre-determined fixed priceBrings certainty, helps budgetingSimpleRemoves price volatilitybut

–requires good timing –risks losing out against competitors–no flexibility

Zero risk exposureZero downside benefitBudget certainty

0

2

4

6

8

10

12

14

16

18

Use a financial Hedging tool

0

2

4

6

8

10

12

14

16

18

J M M J S N

Buys on index price, but agrees a maximum ‘ceiling’

Consumer pays a premium for this protection

Maximum risk is limited Consumer not ‘locked in’ to a fixed

price Benefit of lower prices retained but

– requires premium to be paid

Events which may determine the Direction of the Market in 2006/07

Slowdown in Chinese Economy Iraq – Gradual Improvement Resolution of Yukos Issue Interconnector Import Capacity Expansion in

2005 New Gas Pipelines from Norway & Holland in

2007 Major LNG Capacity planned for 2007

BUT increasing Dependence on OPEC/Russia andoutstanding long Term Problems will keep Prices

relatively high

Planning the Strategy

Monitor Wholesale Market Price Trends Set realistic Targets at Start of Year Always plan with a twelve Month Window on

Market Recognise the Importance of Timing Assess optimum Contract Length Explore alternative purchasing Methods,

including Market-related Deals Conduct Regular Strategy Reviews

European Energy ServicesJohn Hall Associates

9 Piries Place, Horsham, RH12 1EHTel: +44 (0) 1403 269430 Fax: +44 (0) 1403 269451

Email: peter.ind@jhal.com Internet@ www.jhal.com