EUROPE

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EUROPES ENERGY CHALLENGES SECURING SUPPLY
CONFERENCE ROYAL UNITED SERVICES INSTITUTE

• THE ENERGY MIX

• Alistair Buchanan, CE Ofgem - 21 May 2007

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CONTENTS

• Introduction Meet my dolls! Britannia, Europa
  and Russia.
• Britannia Markets working but increasingly
  reliant on Europe.
• Europa Big pro market changes both at local
  and pan Europe levels but can Europe stand
  alone?
• Russia (ROW) How will the relations with
  Europa and Britannia work?
• Low probability/High Impact Do networks and
  regulators help/hinder de facto markets?

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BRITANNIA MARKETS ARE WORKING

• Looking into 2007 and 2008
• Markets deliver on assets.
• Competition is in good health.
• Sustainable/renewables push ahead.
• Prices reacting as expected.
• But lessons learned in last 4 years
• The value and power of information.
• The need to involve and alert market
  participants.
• Britannia cannot deal in isolation

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BRITANNIA CANT GO IT ALONE

• It could try!
• Electricity - Interconnection low.
• Gas - Majority still from North Sea.
• But realistically
• Increased interconnection (gas, electricity)
  local gas in decline.
• EU ETS trading.
• DG Tren/DG Comp impacts on structure behaviour
  and prices.

Future of Britannia linked to Europe
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EUROPE BIG PRO MARKET MOVES
Kroes and DG Comp Dawn raids await
results. Reviewing Spanish and French low
tariffs IEA criticises Hungarys
tariffs. Keen on re-structuring solutions
but Unbundling and Corporate deals. Pielbags
and DG Tren Information The Big
Three Unbundling. Regulatory structures
Post 10 January 2007 very encouraging
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EUROPA LOCAL LEVEL BIG STRIDES

• Structures - Belgium and Distrigas.
• - Holland and Unbundling legislation.
• - Germany and new competition law.
• Better information In 2007 big improvements in
  France, Belgium and Germany.
• More local regulatory impact and powers - France.

Maybe one step back but two forwards
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EUROPA TEST CASE GERMANY
4 years ago Barriers to entry, no incentive for
competition, legacy contracts etc. 2005 2007
Major moves on network regulation, trading,
information. 2007 Retail competition
re-launched (E.ON in electricity and EnBW in
gas) more market information released, gas zones
reduced and simplified, new entrants.
Fear or Principle? The end result is better
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BUT IS BRITANNIAS AND EUROPAS MARKET VISION
REALISTIC?

• Exposed to global LNG trends?
• Exposed to small number of key suppliers?
• Reliant on key pipelines?
• Players not used to markets?

Russia (ROW) will dictate?
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MARKETS CAN WORK EVEN WITH RUSSIA (ROW)

• LNG players attracted to UK market.
• Ofgem has insisted that players agree to
  pro-market rules.
• Gazprom global trading base at Hampton Court,
  London.
• Keep the umbilical cord risk in perspective
• UK Norway, Qatar indeed very low reliance on
  Russian gas by 2020 in UK
• Only Hungary and Slovakia over 30 reliant on
  Russian gas.
• Russia/Gazprom need EU and EU markets
• New LNG facilities Rotterdam/Wilhemshaven new
  local coal projects new nuclear more
  renewables contain reliance on pipelines

Britannia an Europa have to ensure Russia (ROW)
dances with them.
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EVEN RUSSIA LOOKING AT WORKING WITH GRAIN OF
MARKETS

• Pielbags/Khristenho agree way forward on April
  26.
• Market developments in Russia
• ETP (gas, electronic trading exchange)
• Power Auctions set for September and December
  2007.
• Limited market opening further out.
• Deals tie both sides closer
• E.ON/Gazprom swap in 1st half 2007
• Nordpool developments

The test comes on Corporate deals or macro issues
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ENERGY SECURITY IS ABOUT HIGH IMPACT/LOW
PROBABILITY EVENTS

• Arguably the focus should be on networks and not
  the product.
• UK has met the challenge RPI-X save to RPI-X
  spend. Also Ofgem assists new grid
  configuration (renewables, local generation) on
  gas and electricity.
• Europe also focused on networks DG Tren and the
  European Regulators pushing forward new plans
  focus on interconnection.

Strong networks assist markets