Delivering Security of Supply: UK Power and Gas Markets

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Delivering Security of Supply UKPower and Gas
Markets

• CERT 31 May 2005
• Aleck 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

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Centrica UK Gas and Electricity Assets
385 staff
Morecambe Bay Gas Fields 100 Centrica Energy
150 staff
Centrica Storage Limited 100 Centrica Group
46 staff
Peterborough 2x180 MW 100 Centrica
Energy 248/kW 2001
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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
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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

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Gas Europe is surrounded by abundant reserves
Data From BP Statistical Review
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Gas - Timing of new import projects is critical
Vesterled (existing) 13bcm/yr
Langeled Ormen Lange Partners - 27 bcm/yr
Pipeline completion due Oct 2006. Ormen Lange
start-up due Oct 2007
Dutch Interconnector (BBL) GasUnie - 16
bcm/yr Pipeline contract awarded Start-up due end
2006.
Milford Haven - LNG terminal Dragon - Petroplus
/ BG Group - 6.3 bcm/yr due 2007. Potential
expansion to 12.6 bcm/yr South Hook - Qatar
Petroleum / Exxon Mobil - 10.4 bcm/yr end 2007.
Potential expansion of 10.4 bcm/yr by end 2010
IUK enhancement (currently 8.5bcm/yr) 8 bcm/yr
additional reverse flow Dec 2005 Further 8 bcm/yr
by Dec 2006. Possible further modifications takes
total to 25 bcm
Isle of Grain - LNG terminal National Grid
Transco - 4.6 bcm/yr 2005 Possible expansion 9.3
bcm/yr in 2007
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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