Delivering Security of Supply: UKPower and Gas Markets

CERT – 31 May 2005Aleck Dadson - Director, Regulatory Affairs

Centrica plc

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Centrica Group Companies

• 11.8 m residential gas customers• 6.0 m residential electricity customers • No.1 in maintenance & installation of domestic central

heating• Offers plumbing, drain services, home electrical, and

kitchen appliance cover• 368,000 business gas customers• 515,000 business electricity customers

• 1.75 m active telecommunications services

• 3.2 m residential & small commercial gas & electricity customers

• 1.8 m home and business service customers

• Approx. 80% of UK gas storage in Rough facility

• 600,000 electricity and 200,000 gas customers in Belgium• Emerging SME business in Spain

• Manages energy supply, contracts, trading and UK resources

• 2.4 tcf proven & probable gas reserves• 2.9 GW power generation capability

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Roosecote 229 MW100% Centrica Energy£105/kW 2003

32 staff

Barry 240 MW100% Centrica Energy£165/kW 2003

30 staff

Peterborough 2x180 MW100% Centrica Energy£248/kW 2001

46 staff Kings Lynn 325 MW100% Centrica Energy£248/kW 2001

48 staff

Glanford Brigg 4x60 MW100% Centrica Energy£154/kW 2002

46 staff

Humber Power 1260 MWJV: 60% Centrica Energy/ 40% TFE £343/kW 2001

70 staff

Killingholme 652 MW100% Centrica Energy£218/kW 1/7/2004

52 staff

Morecambe BayGas Fields100% Centrica Energy

Centrica StorageLimited100% Centrica Group

385 staff

150 staff

Centrica UK Gas and Electricity Assets

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How can we best secure the new investment and new resources the energy sector needs?

• UK experience is that markets can deliver security of supply

• Features of the UK framework

• Consistent regulatory approach for gas and electricity

• Clear vision of the desired “end game”

• Political support for “staying the course”

• Government has resisted temptation to intervene

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Electricity experience

Electricity generation build – historic drivers

• High wholesale prices

• Need for competition in generators – supported by offtake

• Environmental pressure on coal plants

• Delivered over 20 GW of new CCGT plant over 10 years

Going forward – new drivers

• NETA started with an “overhang” of generating capacity: much since mothballed

• Industry structure changed: fewer larger players, most with some vertical integration

• Influence of Government policy/legislation

• Low carbon future: renewables obligation, EU ETS

• Nuclear review

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Electricity prospects

• In the near term• Return of mothballed plant plus renewables maintain plant margin

• Plant margin ok but prices relatively high because of high input fuel costs

• In the medium to long term• Significant ongoing investment in renewables

• Getting close to point of new build as margins get tighter in 2008/2009

• Several power stations have consents to build and some could go forward relatively quickly if decision to build made

• Nuclear plant decommissioning

• Government nuclear review

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Electricity - Forward Prices and Plant Returning to the System

Pric

e (£

/MW

h)

45

40

35

30

25

20

15

50Winter 03 Peak and Baseload Forward Prices (£/MWh) and De-Mothballed Plant

Innogy announce they will operate 2 of the 3 mothballed units at Fitoots from Dec 03 to Mar 04 (220 MW)

Return of Dinorwig unit 2 (288 MW)

Innogy announce return of GT at Tilbury (17 MW)

Return of Grain unit 4 announced (675 MW)

Return of Grain unit 1 announced (650 MW)

International Power announce the return of Deeside 2 (250 MW)

01/05/03 29/05/03 26/06/03 24/07/03 21/08/03 18/09/03 16/10/03 13/11/03

Winter 03 Baseload

Winter 03 Peak

Return of Baglan-1 (500 MW)

Return of Killingholme PG1 + PG2 (both 280 MW) - standing reserve contract

Return of Ffestiniog 3 (90 MW)Return of Dinorwig unit

3 (288 MW)

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Gas experience and prospects

• In the near term• UK gas prices driven to high, previously unseen levels in 2004/2005

• Liquidity in traded market has fallen

• Structural decline in UKCS production: UK moving to position of net importer

• Tight UK gas supply/demand through 2005/2006 with imports filling the gap

• In the medium to long term• Significant new investment in new pipeline and LNG capacity 2007+

• Capable of meeting 20% of GB demand

• Improving demand/supply balance

• Over longer term, key issues will be success of European gas market liberalisation and development of global LNG market

9* Data From BP Statistical Review

1659

1410

1002

168

109

176

160

69

46 62

110

6754

48

268

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Trinidad

Nigeria

Available Reserves (tcf)

Gas – Europe is surrounded by abundant reserves

Relative Size of Reserves

0 500 1000 1500 2000

N Europe

North Sea

Iraq

Algeria

Caspian Sea

Nigeria

Middle East North

Middle East South

Russian Federation

tcf

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Milford Haven - LNG terminal Dragon - Petroplus / BG Group - 6.3 bcm/yr due 2007. Potential expansion to 12.6 bcm/yrSouth Hook - Qatar Petroleum / Exxon Mobil - 10.4 bcm/yr end 2007. Potential expansion of 10.4 bcm/yr by end 2010

Gas - Timing of new import projects is critical

LangeledOrmen Lange Partners - 27 bcm/yr Pipeline completion due Oct 2006. Ormen Lange start-up due Oct 2007

Isle of Grain - LNG terminal National Grid Transco - 4.6 bcm/yr 2005 Possible expansion 9.3 bcm/yr in 2007+

IUK enhancement (currently 8.5bcm/yr)8 bcm/yr additional reverse flow Dec 2005Further 8 bcm/yr by Dec 2006. Possible further modifications takes total to 25 bcm

Dutch Interconnector (BBL)GasUnie - 16 bcm/yrPipeline contract awardedStart-up due end 2006.

Vesterled (existing)13bcm/yr

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Conclusions and Observations

• Huge investment is required in order to secure new energy supplies: i.e. $40 billion in Ontario

• In liberalised markets, risk of government intervention can chill investment decisions

• In such circumstances, private investment may still be secured, but most likely only under arrangements that see risk borne by ratepayers/taxpayers rather than by investors

• Markets may not be perfect: but there are no perfect alternatives