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The France–England (IFA 2000) electric interconnection, a strategic link at the heart of the European electricity market. Thursday 30 November 2006

RTE Press Contacts

Michel Derdevet: + 33 (0)659 45 87 or + 33 (0)141 021 973 Thierry Lartigau: + 33 (0)623 678 393 or + 33 (0)141 021 678 Karine de Usatorre: + 33 (0)608 822 137 or + 33 (0)141 021 569

National Grid Press Contact

Stewart Larque: + 44 (0)1926 655 274

For more information:

www.rte-france.com

www.nationalgrid.com/UK

PRES

S KIT

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CONTENTS

THE FRANCE-ENGLAND IFA 2000 ELECTRIC INTERCONNECTION ................................3 • The 20th anniversary of the IFA 200 interconnection.....................................................3 • The interconnection's technical characteristics...............................................................3 • A co-ordinated, transparent and non-discriminatory mechanism for allocating exchange capacities..................................................................................................................4 • An interconnection now open to a host of operators ......................................................5 • Over the last 20 years, IFA 2000 has transported the equivalent of half France's entire annual electricity consumption ......................................................................................5 • Future prospects for the IFA link: a joint RTE - NG project............................................6

THE ELECTRIC INTERCONNECTIONS BETWEEN FRANCE AND ITS NEIGHBOURS...8 • A network at the very heart of Europe, connected to its neighbours via 46 interconnection lines .................................................................................................................8 • An increasing volume of cross-border exchanges..........................................................9 • Insufficient interconnection capacities .............................................................................9 • A auction mechanism introduced widely by RTE and neighbouring TSOs ................10 • Large numbers of players use interconnections, reflecting wider access to the electricity transmission network .............................................................................................13 • The need to develop electric interconnections..............................................................14

INTERCONNECTIONS, AT THE HEART OF THE EUROPEAN POWER SYSTEM ..........15 • Interconnections: crucial to European "power sharing" ................................................15 • Interconnections: essential for guaranteeing security of supply ..................................16 • Moving toward new measures promoting the development of interconnection .........16

APPENDIX 1: A brief presentation of RTE............................................................................18

APPENDIX 2: Brief presentation of National Grid...............................................................19

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THE FRANCE-ENGLAND IFA 2000 ELECTRIC INTERCONNECTION

• The 20th anniversary of the IFA 200 interconnection In 1961, France and the United Kingdom were linked by an electrical connection known as IFA 160 (the 160 MW "Interconnexion France-Angleterre"). The results proved disappointing, since the cables laid along the seabed regularly became caught up in fishing trawler's nets. Consequently, in 1974 the two countries agreed to build a new link, with cables laid in trenches dug into the seabed. The new link was officially intended to meet a target of more than 95% availability. The power rating chosen, 2000 MW, determined the link's name: IFA 2000. In 1986, the IFA 2000 undersea link entered service, allowing electricity exchanges between England and the rest of Europe. Built outside Calais, this interconnection is crucial to the safety and fluidity of the pan-European transmission system. With a power level of 2000 MW, IFA 2000 is capable of meeting the electricity requirements of up to three million people. • The interconnection's technical characteristics Given the distance between the two countries, a direct current link clearly offered the best technical and economic compromise. The interconnection required the construction of two converter substations, one on either side of the Channel, to convert AC current into DC current and connect the English network with mainland Europe. One is located at Mandarins near Calais, the other at Sellindge in Kent. The direct current link is used to connect the two networks without synchronising their frequencies, and therefore to decouple the French and English networks. The converters also mean that the level of power exchanged can be regulated accurately and quickly. They can therefore be used to quickly arrange the exchange programmes sent by users of the interconnection to the English and French transmission system operators, RTE and NG (National Grid). The French and English stations are linked by four pairs of cables running across the Channel, buried in 1.5 metre-deep trenches dug into the seabed. The route taken by the cables has two advantages: it is close to the English coast, meaning the length of undersea cables needed is kept to a minimum, whilst the nature of the sea floor (chalk or soft rock) makes the task of digging trenches relatively straightforward. The cables used were specially designed for this particular interconnection, and installing them in the trenches in the seabed was the single most challenging task of the entire project. It required the use of some pioneering techniques, as at the time there was no machine capable of doing such work. The French and English engineers opted for two different methods. In France, the trenches were dug and the cables installed in a single operation, using underwater

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machines. On the English side, the two phases were carried out separately, using remote-controlled machines on the seabed. The interconnection is joint-owned by the French and English transmission system operators (TSOs), RTE and NG respectively. • A co-ordinated, transparent and non-discriminatory mechanism for allocating

exchange capacities In 2000, RTE, the company responsible for operating the French power transmission network, was set up. In 2001, both TSOs opened up electricity exchange capacities (= electrical energy that can be transmitted via a power line) to competition. However, the maximum power that can be transported across the link is restricted to 2000 Megawatts (MW). To ensure that rights to use transmission capacities on the link are allocated to market players (traders, suppliers, generators, etc.) in a strictly fair and non-discriminatory manner, on 1st April 2001, RTE and NG introduced a co-ordinated bilateral system of periodic auctions. The mechanism was hailed by the then European Competition Commissioner, Mr Mario Monti: “UK-French electricity interconnector opens up, increasing scope for competition » ; « This marks an important improvement towards a more competitive and integrated electricity market in the European Union and a step further to bring the benefits of intra-EU trade in electricity to business users and ultimately households.” The auctions help ensure that power is exchanged smoothly and transparently, while guaranteeing enhanced security of supply in both countries. In December 2003, RTE and NG signed mutual assistance agreements. Under the terms of these agreements, if one of the two power systems fails for any reason, either TSO can gain priority access to a real-time power reserve capacity of up to 1,000 MW. In both directions (France - England or England - France), different types of products are sold, depending on the deadlines involved: annual, quarterly, monthly, daily and, since 2004, semesterly and week-end products. The 2,000 MW available in each direction are split between these various products. The results of auctions (which are anonymous) are published daily on RTE's website. The "use it or lose it" principle is applied: any capacities that customers do not use are automatically ceded back. A player wishing to acquire and use transmission capacity on the IFA link must also meet the conditions for accessing both the British and French power networks. Users therefore agree separate contracts with both RTE and NG for accessing their respective transmission networks. Consequently, a user wishing to transfer electricity between the continent and the English network must approach RTE to sign a Participation Agreement for the Rules on Access to the French Public Electricity Transmission System for Imports and Exports. The provisions governing access to the IFA interconnection are described in the "IFA Access Rules" (available on the RTE website), which set out the rules on acquiring and using transmission capacities on the link in detail. The revenue gained from the auctions enables both TSOs to cover the costs of operating and amortizing the link: RTE's transmission tariff therefore does not cover access to the IFA, which has its own financial accounts.

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• An interconnection now open to a host of operators Until March 2001, use of the IFA 2000 interconnection was reserved exclusively for EDF for exports to the UK, under the terms of agreement on the way the link should be managed. The British electricity company, CEGB, was the link's other potential user. However, electricity transfers were almost exclusively from France to England. Since the IFA 2000 link was opened up to other operators in 2001, the number of users has risen consistently. In 2006, there are some 25 operators using the link's exchange capacities.

Number of players using IFA 2000 over 20 years

(for each year as of 31-12) The profile of the interconnection's users is as follows:

- approximately 40% are traders: banks, independent brokerage firms or subsidiaries of energy companies (oil, gas);

- approximately 60% are electricity generators (i.e. companies that own generating facilities in Europe), often via their trading subsidiaries.

• Over the last 20 years, IFA 2000 has transported the equivalent of half France's

entire annual electricity consumption Since it entered service in 1986, IFA 2000 has transported a total of 277 TWh, equivalent to half of the total amount of electricity consumed in France each year. Looking back at records of exchanges over the years, it is clear that between 1986 and 2000, the link was almost exclusively used to transfer electricity from France to the UK. From 2001, when exchange capacities on the interconnection were finally opened up to competition, IFA 2000 began to be used to import electricity into France.

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In 2003, particularly attractive electricity prices in England saw French imports from the UK hit an all-time high of nearly 3 TWh.

• Future prospects for the IFA link: a joint RTE - NG project The technical reliability of the electricity transmission infrastructure is crucial for allowing mutual backup between the two countries, and vital for ensuring an efficient European electricity market and competitive economic players. The availability of the link is therefore of great importance, both for its users and for the two operators. The availability rate targeted for the link is therefore high (in the order of 97%), and substantial resources are devoted to keeping it running on a daily basis, by both RTE and NG.

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Both operators are careful to ensure that they constantly have staff on hand with the expertise and specialist equipment needed to maintain the interconnection. To maintain a high level of reliability for the IFA's infrastructure and ensure that it remains available to meet the needs of the market, RTE and NG are researching ways of refurbishing the interconnection. In particular, RTE and NG are looking at joint efforts to renew the valves at the conversion stations on either side of the Channel. These pieces of equipment are sensitive to the constraints associated with converting direct current into alternating current. Studies are currently being carried out with a number of the market's leading manufacturers, to assess the feasibility of such a project. This work should eventually culminate in a joint project to renew the valves at the conversion stations at Mandarins and Sellindge. Work is likely to begin in 2008, with a total budget of approximately €80M, and the new equipment is expected to enter service from 2010.

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THE ELECTRIC INTERCONNECTIONS BETWEEN FRANCE AND ITS NEIGHBOURS

• A network at the very heart of Europe, connected to its neighbours via 46 interconnection lines

France has land borders with the Benelux countries, Germany, Switzerland, Italy, and is linked to England via an undersea cable. In addition, all transit between the Iberian Peninsula and the rest of Europe must pass through it. As a result, France is in a key position for electricity exchanges in the European Union. This makes RTE a crucial player in the construction of the European electricity market. Currently, there are some 46 electric interconnection lines linking the RTE transmission system with those in the neighbouring countries.

The 46 electric interconnections linking France with its neighbours

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• An increasing volume of cross-border exchanges In 2005, the cumulative volume of import and export transactions reached a new annual record of 123.2 TWh, beating the previous record from 2001. Overall, in 2005, the volume of exports remained in line with the figures seen in previous years, whilst imports continued to grow (up by 11% on 2004). • Insufficient interconnection capacities The commercial exchange capacity between France and neighbouring countries is now around 12,000 MW and, under favourable conditions, it can even be as much as 14,000 MW. The interconnections are invaluable for the development of the European electricity market, as they are the only way for different networks to provide each other with backup in the event of incidents. Faced with the rising volume of commercial exchanges, the lack of sufficient exchange capacities is leading to congestion on the borders between different countries and their networks, stifling the development of the European power system. The physical (or thermal, expressed in Amperes) capacity of a line depends on the infrastructure's technical characteristics and the time of year (capacities tend to be higher in winter). However, owing to the complex workings of a meshed network, the relationship between commercial capacities and physical capacities is a fine one. This is because the physical flows themselves depend solely on "injections" (generation) and "extractions" (consumption) at the network's various nodes, and are not determined by the exports and imports declared by market players. For this reason, RTE has developed a special method to determine commercial capacities based on the physical capacities available on the network. The commercial capacities of the various electric interconnections are shown on the map below.

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Commercial exchange capacities on borders

• A auction mechanism introduced widely by RTE and neighbouring TSOs In a growing European electricity market, the numbers of commercial transactions taking place are rising fast and cross-border exchanges are becoming increasingly frequent. This situation is leading to congestion on international interconnections. The mechanisms used to allocate capacities to market players are a means of managing the "scarcity" of available capacities, whilst guaranteeing the reliability of the European power system and the security of supply. In accordance with the European Regulation1, RTE now allocates available interconnection capacities via an auction mechanism on all its borders. These allocation methods help to ensure that requests are met in a transparent and non-discriminatory manner. In 2001, RTE began auctioning capacities on the undersea link between France and the UK, IFA 2000, thereby anticipating the systems that would be introduced by the European Regulation.

1 Regulation (EEC) No. 1228/2003 of the European Parliament and of the Council on Conditions for Access to the Network for Cross-Border Exchanges in Electricity.

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In 2005, RTE conducted intense negotiations with the TSOs in neighbouring countries to develop interconnection capacity auctions, which are an excellent, transparent and non-discriminatory way of allocating available capacity to operators, as stipulated in the 2003 European Directive. These mechanisms have been in place since 1st January 2006 on each border, extending the system which already existed with England. In accordance with the rules approved by the French Energy Regulator CRE, auctions concerning annual, monthly and daily products take place as follows: prior to each auction session, RTE publishes a set of auction specifications on its website, indicating the nature of the product to be sold (e.g. an annual capacity band of 1,300 MW in lots of 1 MW); on the day of the auction itself, the session lasts approximately one hour, during which time bidders can submit offers, indicating the volume of capacity they wish to acquire, together with the purchase price offered. At the end of the session, the highest bids are selected in decreasing order, and the payment price is the price of the lowest bid selected. Following a decision by CRE, the "historic" long-term contracts with other EU countries ceased to entail priority access to interconnections from 1st January 2006. Based on recommendations by the association of European Transmission System Operators, ETSO, congestion has been managed by the coupling of the French, Belgian and Dutch spot markets since 21 November 2006. As a result of this decision, the Belgian power exchange Belpex was set up in 2005. Its shareholders are the three TSOs concerned (Elia, TenneT and RTE), along with Powernext and its Dutch counterpart, APX. By introducing trilateral coupling of the daily markets, the transmission system operators RTE, Elia and TenneT are improving the management of capacities by enabling capacity and energy to be allocated simultaneously. The transmission system operators retain responsibility for allocating interconnection capacities and guaranteeing cross-border transactions, thereby continuing to oversee the safety of the power systems. The revenues obtained are paid into a specific fund and used to finance three objectives set down by European Regulations: guaranteeing exchange capacities made available at auction despite contingencies, strengthening interconnections, and lowering the tariff charged for accessing the transmission network, if the revenues from that tariff cannot be employed completely for the other two objectives. The map below shows the capacity allocation mechanisms used by RTE with neighbouring TSOs. More details about the rules governing capacity allocations can be found on the RTE website.

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The existing capacity allocation mechanisms on borders

At the start of 2007, a secondary capacity market will be set up on the interconnections with Belgium, Germany, Italy and Spain. Its purpose will be to transfer the capacities acquired at annual/monthly auctions from one player to another, or to enable players to ask RTE to make capacities available for sale once more subject to specific conditions. RTE, acting under the aegis of the ETSO, is continuing to work with its counterpart TSOs on proposals aimed at boosting the efficiency of access to interconnections:

- As part of the four Regional Initiatives in which France is involved, RTE is actively working on moves to harmonise the methods used in particular regions to calculate and allocate capacities. In particular, the operator is looking at introducing so-called "flow-based" regional allocation mechanisms, extending market coupling, and developing intraday access to interconnections;

- In 2007, common rules will be introduced governing the allocation of capacities on the France-Italy interconnection;

- Changes to the rules governing intraday access to interconnections, moving towards market mechanisms.

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Expected changes to capacity allocation mechanisms on borders

• Large numbers of players use interconnections, reflecting wider access to the

electricity transmission network The sheer number of players who have negotiated periodic and/or daily transactions on each interconnection reflects the extent to which the electric interconnections between France and its neighbours have now been opened up.

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A host of different players using

electric interconnections • The need to develop electric interconnections In 2005, RTE and ELIA boosted the capacity available on the France-Belgium interconnection by approximately 1,000 MW, by installing a second circuit on the 400 kV Avelin - Avelgem line. As a response to the rising volume of electricity exchanges between France and Belgium and to improve mutual backup possibilities between the two countries' transmission networks, the two TSOs have approached the French and Belgian energy ministers with proposals to add a second circuit to the line linking Moulaine in Lorraine with Aubange in southern Belgium. The project is expected to be completed by 2010, and will raise the interconnection capacity between the two countries by between 10 and 15%. For RTE, strengthening the links between Spain and Italy remains a priority. In Spain, following a lively public debate, the project to almost double the exchange capacity between the two countries (which would rise from 1,400 MW to 2,600 MW) is still under discussion. In Italy, there are plans to install phase-shifter transformers on both sides of the border in the short-term. Improvements to the lines' transit capacity (which would see the current capacity of 2,650 MW raised by a further 1,000 MW) are currently being looked at. This could possibly be carried out in conjunction with work on the future high-speed rail link between Lyons and Turin. RTE has also launched an exploratory initiative to look at the possibility of raising the capacity for exchanges between France and England from 2,000 to 3,000 MW.

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INTERCONNECTIONS, AT THE HEART OF THE EUROPEAN POWER SYSTEM

• Interconnections: crucial to European "power sharing" The European energy project has always been a step ahead of its political counterpart. One of the foundations of economic reconstruction in the aftermath of the war and the mortar that held together the new-found peace, energy saw its key role affirmed by the various agreements and treaties marking the construction of the European Community. As early as the 1950s, well before the European Coal and Steel Community Treaty (ECSC - 1951) and the Treaty of Rome (EEC and Euratom - 1957), the European power networks were already interconnected, with the central purpose of enabling each power system to come to the aid of its neighbours if necessary. The 1992 Maastricht Treaty included a section on trans-European networks, seen as a cornerstone of the EU's economic and social cohesion, and since then considerable new ground has been broken. Back in 1993, the European Council and the Commission, in its white paper "Growth, Competitiveness, Employment", already recognised the importance of energy transmission systems, highlighting their role in the economic development of electricity exchanges. In 1996, a list of common interest projects on priority links was drawn up. It was subsequently updated in December 2003, to take account of the accession of the new Member States. One project, which seems to be a priority candidate for European financing, is the plan to strengthen energy links between France, Belgium, the Netherlands and Germany. The European Commission subsequently published a green paper on security of supply in November 2000, in which it confirmed that the development of trans-European energy networks was a strategic priority. At a summit in Barcelona in March 2002, the EU heads of government agreed to set a concrete target for electric interconnections, of at least 10% of each country's generating capacity. The trans-European energy and transport networks are one of the ten major areas for action identified by the Commission for 2005. All of this should give new impetus to the development of the essential new power "highways".

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• Interconnections: essential for guaranteeing security of supply The challenges are considerable: on the one hand, the security of energy supply must be ensured for the enlarged Union, which now includes 25 Member States, and preparations must be made for the accession of further countries in the years ahead. On the other hand, secure access must be guaranteed to energy sources in countries neighbouring the EU. All the available statistics underline the growing dependence of the European Union, which is consuming more and more energy. If no action is taken by 2030, the enlarged EU will be forced to import 68% of its energy needs, compared with 50% at the present time. Our dependence on imported oil could rise from 75% in 2000 to 90% in 2030, whilst our dependence on natural gas could increase from 45% in 2000 to 80% in 2030. By providing 20% of the financing for priority cross-border energy projects, the European Commission hopes to encourage private investment. If these European interconnection projects are completed by 2020, they should do much to ease bottlenecks and congestion, and reduce "missing links". They should also help to strengthen interconnections with energy networks located in isolated, outlying or enclosed regions. Europe is now home to one of the world's largest interconnected power systems. There are now some 23 countries running at the same electric "speed". • Moving toward new measures promoting the development of interconnection The peoples of Europe have been placing increasing importance on environmental concerns in recent years. However, the procedures for authorising the construction of new lines seem to vary widely from one country to the next, and this is holding back efforts to develop interconnections. In an effort to surmount these obstacles, in December 2003 the Commission issued a proposal for a decision setting out guidelines on trans-European energy networks, in which it suggested mechanisms designed to facilitate the construction of new electric infrastructures. The proposed mechanisms involve issuing a "Declaration of European Interest", to simplify the planning procedures required for priority cross-border projects that are deemed to be of great benefit to the EU. They also include appointing a European co-ordinator to ensure that specific projects are prepared and executed smoothly. In addition to this initiative, better consultation is needed with the local authorities and populations, at the pre-project stage. Transmission system operators also need to be given a greater role in developing infrastructures. An attempt was made to address this by the Directive on the security of electricity supply, approved by the European Council on 1st December 2005. The Directive is intended to guarantee a high level of security of electricity supply, by clarifying the roles and responsibilities incumbent upon each of the market players concerned. It acknowledges the central role played by TSOs in producing forecasts of supply and demand for electricity, as well as in terms of investment projects for electric infrastructures.

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Meanwhile, the ETSO is currently defining minimum operating requirements designed to be adopted universally.

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APPENDIX 1: A brief presentation of RTE

RTE is the company responsible for running the French electricity transmission system. It is a public service company responsible for operating, maintaining and developing the high and extra high voltage network. It guarantees the safety and proper operation of the power system. RTE transports electricity between electricity suppliers (French and European) and consumers, whether they are electricity distributors (EDF and the local distribution companies) or industrial consumers directly connected to the transmission system. With 100,000 km of lines between 63,000 and 400,000 volts and 46 cross-border lines, the network operated by RTE is the biggest in Europe. In 2005, RTE posted turnover of €4,041M and currently employs some 8,300 staff.

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APPENDIX 2: Brief presentation of National Grid

National Grid is the operator responsible for the main public energy transport networks in Great Britain. NG owns, operates and develops the high voltage power network in England and Wales, as well as Great Britain's principal natural gas transportation system. NG's portfolio of other businesses is mainly concerned with infrastructure provision and related services. These businesses operate in areas such as wireless network infrastructure for broadcast and mobile telephones, metering, Grain LNG import, interconnections and property.