Winter Consultation 2007/ 8 Philip Davies Director, GB Markets 2 October 2007
Outline � W inter 2 0 0 7 / 8 � gas - supply outlook and prices � electricity – generation outlook and carbon prices � Gas netw ork capacity � Norw egian flow s � Building integrated European m arkets � GB Markets � Beyond W inter Consultation 2
3 W inter 2 0 0 7 / 8
W inter 2 0 0 7 / 8 - sum m ary Increased focus on gas network issues – developments in transfer and trade Gas supply outlook m ore positive than last w inter Key uncertainties More positive remain for demand and outlook reflected in supply forward prices Generation m argin m anageable even in severe w inter EU ETS Phase II not change NG assumption that coal generation preferred to gas 4
5 W inter 2 0 0 7 / 8 - gas
Gas supply outlook 2007/ 8 Final view Average peak 2007/ 8 Revised view demand 2007/ 8 I nitial View 1 in 20 peak demand Max 2007/ 8 capacity 2006/ 7 Base Case 0 100 200 300 400 500 600 700 UK Cont inent al Shelf Norway IUK BBL LNG import s Long Range St orage (Rough) Medium Range St orage Short Range St orage Source: Table 6 in Winter Consultation Report 2007/ 8 NG have reiterated their view that outlook is m ore positive than last year 6
Forw ard prices reflect m ore positive outlook 120 Cold snap in 100 Q4 05 80 p/ th 60 40 Mild weather in Q4 06 + infrastructure delivered 20 Q1 - 2006 Q1 - 2007 Q1 - 2008 0 360 330 300 270 240 210 180 150 120 90 60 30 Trading days before delivery Source: Bloomberg Q1 0 8 gas price currently trading below Q1 0 7 price this tim e last year 7
Forw ard prices m ay not equal out-turn prices 50 45 40 Uncertainties remain for demand and 35 supply 30 p/ th 25 20 15 Winter 06/ 07 prices (outturn, day ahead) Winter 07/ 08 prices (forward, quarterly) 10 5 0 Oct Nov Dec Jan Feb Mar Source: Heren Energy Gas prices for this w inter above the DA gas prices seen during last w inter 8
Price m ovem ents beyond GB m arket 50 W ill w e see LNG 46 diverted to GB/ EU ( ?) 42 p/ th 38 NBP Zeebrugge 34 US TTF 30 01/ 10/ 2007 01/ 11/ 2007 01/ 12/ 2007 01/ 01/ 2008 01/ 02/ 2008 01/ 03/ 2008 Source: Heren Energy/ www.energywindow.com Price differentials betw een EU and US for this w inter reversed since June 9
10 Electricity supply
Elec m argin m anageable in severe conditions 66 64 62 60 58 GW 56 54 Short Term Operating Reserve Requirement 52 Demand (1 in 50 w inter) 86% of generation + 2GW from France 50 48 05 12 19 26 03 10 17 24 31 07 14 21 28 04 11 18 25 03 10 17 Nov Nov Nov Nov Dec Dec Dec Dec Dec Jan Jan Jan Jan Feb Feb Feb Feb Mar Mar Mar Week Commencing Source: Figure 18 in Winter Consultation Report 2007/ 8 (National Grid) Coal plant expected to provide baseload generation 11
Phase I I of EU ETS ( from 1 Jan 2 0 0 8 ) 3 5 2007 2008 3 0 2 5 €/ tonne of carbon dioxide 2 0 1 5 Forward prices for carbon in 1 0 2008 higher than seen for Phase I in 5 2007 0 Jan- 0 5 Apr- 0 5 Jul- 0 5 Oct- 0 5 Jan- 0 6 Apr- 0 6 Jul- 0 6 Oct- 0 6 Jan- 0 7 Apr- 0 7 Jul- 0 7 Source: Bloomberg Carbon prices not high enough to drive sw itching from coal to gas 12
13 Gas netw ork capacity
Gas entry capacity for this w inter - overview Need capacity available where Authority shippers wish has now directed Authority placed price to land gas control obligation on UNC Mod 169 Demand for entry NG to im plem ent to be implemented capacity at each transfer ( of unsold AND terminal can capacity) and trade approved NG’s Pattern of change quickly ( of sold capacity) for gas supplies transfer and trade this w inter and imports methodology to GB is statement constantly changing Transfer & trade arrangem ents in place for this w inter 14
Gas entry capacity– im plem entation of transfer and trade arrangem ents for this w inter NG invites Authority accept shippers to Second UNC 1 6 9 and First round identify ASEPs at round of rejects UNC 1 5 6 , of transfer w hich they w ant transfer and 1 5 6 A, 1 6 9 A and trade to bid for trade auction capacity auction 5 6 1 0 1 4 2 7 1 0 Nov - - Oct Sept 1 2 1 8 Direction issued to im plem ent Transfer and NG invites transfer and Authority trade affects shippers to trade licence approve NG’s w inter capacity participate in obligations transfer and allocations from capacity trade Nov onw ards surrender m ethodology process statem ent 15
Gas entry capacity – beyond this w inter Transfer and trade need for improved and enduring arrangements to be in place ahead of next winter NG has obligations to develop, maintain and operate a safe, efficient and economical network Capacity Capacity baselines substitution Ofgem reconsulting facilitate on price control permanent transfer baselines to apply of unsold entry from 1 Apr 08 capacity 16
Gas netw ork capacity - exit � Com petition Com m ission upheld EON appeal in part – key area of concern on flexibility product � Decision to be retaken by Authority � Next steps – Ofgem to consider scope of re-decision – NGG and EON proposal or broader? � Ofgem to publish open letter on scope of re-decision – UNC Review Group 166 considering way forward Any reform s to exit regim e w ill not be im plem ented during this w inter 17
18 Norw egian flow s
Norw egian flow s � Concerns raised by industry about the im pact of Langeled flow pattern on W D and DA gas prices � is Langeled price-setting or price-responsive? � Constraints on ability of Norw egian producers to respond to NBP prom pt prices – supply (eg upstream flexibility and availability, annual production permits) – demand (NCS also directly connected to 3 other European countries) � Constrained optim isation m uddies the link betw een flow s and W D gas prices � Higher prices in m id-sum m er also coincided w ith num ber of factors – CATS, IUK exports, unseasonably high demand, UKCS maintenance Ofgem continues to m onitor the m arket and w ill act w here it has concerns 19
20 Building integrated European m arkets
“3 rd Package” - Tim etable Jan 2 0 0 7 – Commission publish Sector Inquiry and “Strategic Energy Review”: Blueprint for future EU energy policy to achieve “sustainability, security, competitiveness” March – Spring European Council Heads of Government endorse Commission plans, including 3 rd package and 2020 targets 1 9 Sept – Com m ission publish 3 rd package proposals October – formal negotiations between European Parliament/ Council begin No fixed time limit. Crunch points in Member State discussions expected in December 07 and June 08 June 2 0 0 9 – Final agreement before European Parliamentary elections/ end of Commission mandate? 21
Highlights of the “3 rd package” Unbundling EU Regulation full ownership unbundling, Establishment of ACER with possible derogations (Agency for Cooperation for ‘deep’ ISO model of Energy Regulators) Transparency Binding requirements on storage and LNG operators Power/ independence TSO co-ordination of NRAs establish formal networks enhanced powers and to improve cooperation on operations and investment independence alongside new duties Kick-starts negotiations betw een European Parliam ent and European Council 22
23 GB Markets
GB Markets w ork on w holesale issues System Operator ( SO) Review Distributed Energy ( DE) • Full review of electricity and gas • Gain a better understanding of SO functions and incentives difficulties faced by DE and look into • New scheme must be in place potential solutions from April 2008 • Aim to publish consultation • Dec 2 0 0 7 - Initial Proposals (and document in Novem ber 2 0 0 7 thoughts on long-term scheme) GB Markets Cash out Review Gas Quality • Wide ranging review to simplify I nfrastructure • Reviewing current arrangements • Exemptions industry • Mod proposals in latter stages • Anti-hoarding responses of industry assessment process 24
25 Next Steps
W hat happens after today? W inter 2 0 0 7 / 8 May 0 8 – NG publish Sum m er 0 8 – NG publish regular initial Winter Ofgem/ NG information and Consultation 2008/ 9 workshop commentary on key WCR (alongside a focusing on trends and summer outlook?) responses and developments in winter Supported by Ofgem areas for further so far seminar discussion Oct 0 7 Dec 0 7 Mar 0 8 Jun 0 8 Sept 0 8 Late Sept 0 8 – Apr 0 8 – NG NG publish publish final July 0 8 – Winter summary of Oct 2 – consultation Consultation events of winter Ofgem seminar responses due Report 2008/ 9 2007/ 8 (8 week accompanied by consultation) Ofgem seminar I m portant that you let NG know w hat you w ould like to see from this process 26
Calm er sum m er for electricity prices 120 100 Day-ahead 2006 Day-ahead 2007 80 Driven by lower demand £/ MWh 60 and/ or higher supply? 40 20 0 01-Apr 01-May 01-Jun 01-Jul 01-Aug 01-Sep Source: Heren Energy W ould a sum m er consultation report be helpful? 27
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