First Hydro Analysts Conference July 2005

1
First Hydro Analysts ConferenceJuly 2005
2
IntroductionPaul Jenkinson
3
First Hydro Company

• Key locations
• Commercial Office - Bala House
• Dinorwig pumped storage power station
• Ffestiniog pumped storage power station
• Visitor centre
• The only Pumped Storage Power Stations in England
  and Wales (representing 75 of Great Britain Pump
  Storage capacity)
• Station built initially to support the management
  of the System
• now well placed to participate in the competitive
  market place
• Full time employees 188
• reorganisation programme completed - 20 staff
  reduction delivered
• Experienced management and operational teams
• integrated teams across all locations
• incentives aligned to financial performance

4
Asset overview
Mike Maudsley Director ProductionMike Hickey
Director Asset Management
5
The pumped storage principle
6
Dinorwig
7
DinorwigThe largest pumped storage plant in
Western Europe

• Commissioned in 1983
• Total plant capacity 1,728 MW
• 6 reversible pump/turbines
• each generating up to 288 MW and pumping at 275
  MW
• capable of achieving full load from stand still
  in lt 2 minutes
• capable of achieving full load from Spinning in lt
  20 seconds
• Cycle Efficiency 74-75
• Total water storage capacity 9 GWh
• Connection to the National Grid via six 18/400kV
  340 MVA transformers
• Two 3.3kV 2 MW diesel generators provide black
  start capability

8
DinorwigPlant design profile
9
Dinorwig inside the mountain
10
DinorwigShaft base and High Pressure water tunnel
11
DinorwigWater manifold
12
DinorwigSection of plant
13
DinorwigGenerator/motor
14
DinorwigPump/turbine
15
Ffestiniog
16
Ffestiniog First major pumped storage station in
the UK

• Commissioned in 1963
• Total plant capacity 360 MW
• 4 units (with separate pump and turbines on the
  same shaft)
• each generating up to 90 MW and pumping at 75 MW
• capable of achieving full load from stand still
  in lt 5 minutes
• capable of achieving full load from Spinning in lt
  60 seconds
• Cycle efficiency 72-73
• Remotely operated from Dinorwig
• Total water storage capacity 1.4 GWh
• Connection to the National Grid via two 16/275kV
  190 MVA transformers

17
Ffestiniog Plant design profile
18
Ffestiniog Section of plant
19
FfestiniogStwlan Dam
20
Plant performance
21
Dinorwig mode times change (seconds)
Pump
Generate
90 s
360 s
Shutdown
12 s
30 s
SpinPump
SpinGenerate
All times are typical
22
Competitive advantage
Typical start up times (minutes)
Typical loading rates (MW/minute)
3000
90
60
2.5
10
10
1.5
300
Dinorwig
Ffestiniog
CCGT(hot)
Coal(hot)
Dinorwig
Ffestiniog
CCGT(hot)
Coal(hot)
23
First Hydro Company

• Reliability and availability
• Mode changes per annum c.35,000
• Overall mode changes reliability c.99
• Overall technical availability c. 95

24
Plant focus

• Safety first (no compromise)
• Operate and maintain plant to achieve competitive
  flexibility and reliability
• working expertise in Electrical, CI, Mechanical,
  Civil and IT
• experienced, broad based and flexible teams
• balance of quality in-house maintenance and
  specialist contract work
• Close working relationship between Plant and
  Commercial Teams
• Shift Trading and plant control room
• daily and weekly operational strategy
• long term operational and maintenance programme

25
Commercial overviewDavid Alcock, TradingKevin
Dibble, Marketing
26
Commercial efficiency

• Buy electricity overnight - pump water to top
  reservoir
• Release water to generate at times of peak price

Marchlyn
Pumping
Generation
Peris
Import 1 MWh
Export .75 MWh

• Overall cycle efficiency approximately 75
• Additional costs include transmission losses and
  Balancing System charges

27
Markets

• First Hydro operates in three markets
• Has competitive advantage
• Proportion of revenues from each market changes
  year on year

Competitive Advantage
Market
Frequency response and fast reserve capabilities
Ancillary Services
Premium dynamics
Balancing Mechanism
Plant Reliability
Ability to deliver almost any contract shape and
despatch plant right up to gate closure
Trading
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Maximising asset value

• People
• Solid understanding of physical market drivers
  (real-time and long term)
• Strong commercial and plant integration
• Systems
• Robust trading and despatch systems
• Customised real time information and decision
  support systems
• Processes
• Strong focus on understanding and managing
  business opportunities
• Traders discretion on price/product
• strict risk management limits
• daily (half-hourly) benchmarking of trading
  performance

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Capacity allocation

• Capacity/energy allocated according to value

2,088 MW10.5 GWh/day
Ancillary Services
Balancing Mechanism
Trading
30
Ancillary services overview

• Physical services to facilitate system security
  and power quality
• wholesale markets operate on half-hourly basis
• ancillary services enable system balancing on a
  second-by-second basis
• Procured by National Grid Company (NGC)
• GB System Operator
• NGC obliged to operate the system in an
  efficient, economic and co-ordinated manner
• costs managed via a regulated annual incentive
  scheme

31
Key ancillary servicesReserve
MW

• Forward procurement options
• Standing Reserve (20 mins. notice)
• annual or seasonal tender
• hydro, OCGT, demand-side
• approximately 2000 MW procured annually
• Fast Reserve (2 mins. notice)
• monthly tender, few eligible providers, small
  volumes
• Short term procurement
• Inherent level of reserve delivered by the market
• Residual reserve purchased by NGC via the
  Balancing Mechanism
• Require 3500 MW of reserve in total

Source NGC
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Key ancillary servicesFrequency response

• NGC manage system frequency in line with
  statutory obligations (within 1 of 50Hz) and
  operational requirements
• Dynamic Frequency Response
• units operate at part-load with output varying in
  response to frequency deviations - provides
  second-by-second energy balancing
• basic level of capability is mandatory for all
  generators - utilised as required, mainly from
  steam plant
• Static Frequency Response
• automatically triggered by low frequency events
  - pumped storage, demand-side providers have
  capability
• NGC currently forward contracts for enhanced
  services through negotiation

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Balancing Mechanism (BM)

• Deals with residual energy balancing once traded
  markets have closed
• Generators have sold half-hourly energy, and
  scheduled plant to meet contract position
• System operator matches generation to actual
  demand by adjusting generation (or demand) via
  offers or bids in the BM
• All parties required to bid into the BM, but due
  to flexible nature of assets, FHC is well-placed

Example
BM offersrequired
Scheduledenergy
Required Demand
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Fast-acting plant in the BM

• Morning run-up
• Gas/coal unit synchronisation risk
• High rate of change of demand greater risk
• Plant trip
• Unpredictable events that require fast-acting
  plant held in reserve
• Evening TV pickups
• Domestic load swings driven by TV events
• Largely predictable
• NGC able to plan using combination of fast and
  slow plant

System Demand and Fast Response BOAs
(25 May 2005)
Fast Response BOAs
Demand
45 GW
800 MW
700 MW
40 GW
600 MW
500 MW
35 GW
400 MW
300 MW
30 GW
200 MW
100 MW
25 GW
0 MW
20 GW
-100 MW
1
3
5
7
9
11
13
15
17
19
21
23
25
27
29
31
33
35
37
39
41
43
45
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Half-hourly Settlement Period
BOAs Bid-Offer Acceptances
35
Demand pick-upsChampions League Final
Source NGC
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BM activityChampions League Final
Offers
Fast
Gas
Coal
Bids
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Wholesale markets (trading)

• Trading considerations
• Capacity and energy dedicated to ancillary
  services
• Margin (net of pumping) available in traded
  markets
• Probability of being used in balancing mechanism
• Reservoir management
• Key advantages
• Asset physical ability to deliver any shape close
  to real time
• Experienced traders in APX/short term markets
• Proprietary live market information and decision
  support tools
• Systems facilitate trading up to gate closure

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Trading process 1Week ahead position

• Developed over time through combination of
• structured deals with counterparties
• standard products traded OTC
• Broadly balanced position
• Handed to shift trading team Friday morning

MW
600
ve Sales
400
200
Generation
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
-200
Hour
-vePurchases
Pumping
-400
-600
Example of energy-balanced book4,800 MWh
pumping 3,600 MWh generation
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Trading process 2Typical power exchange price
shape - winter
/MWh
Generate
Marginal Cost
Pump
1
3
5
7
9
11
13
15
17
19
21
23
25
27
29
31
33
35
37
39
41
43
45
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Half-hourly Settlement Period
Tradingexample
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Trading process 3Generation optimisation
MW
300 MWh moved from hour 19-20Net value-added
15,000
600
Buy _at_30/MWh
Sell _at_80/MWh
400
200
Generation
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
-200
Hour
Pumping
-400
-600
Tradingexample
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Trading process 4Pump/generation optimisation
MW
Net value-added 6,000
600
Buy 450 MWh _at_ 20/MWh
400
200
Generation
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
-200
Hour
Pumping
-400
-600
Sell 600 MWh_at_ 25/MWh
Tradingexample
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Trading process 5Evolution of final position
Long term trading
Shift trading
APX
Bilateral
Final position
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Summary

• Diversity in revenue streams
• Competitive advantage through assets
• includes people and proprietary systems
• Niche expertise in short term markets and system
  services
• The UKs most dynamic provider of electricity

44
UK portfolio overviewSteve Riley
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First Hydro

• Key addition
• excellent fit within portfolio
• Unique asset with competitive advantage
• speed of response and reliability
• positioned to benefit from tightening reserve
  margin
• Energy trading
• deep market knowledge - benefits entire portfolio

46
UK asset portfolio
IPRShare(MW)
GrossCapacity(MW)
FuelType
Country
Name
Rugeley Deeside Derwent First Hydro Saltend Total
England Wales England Wales England
1,050 500 214 2,088 1,200 5,052
1,050 500 50 1,462 840 3,902
Coal Gas Gas PS Gas
Saltend
Deeside
Derwent
First Hydro

• 5 assets with gross capacity of just over 5 GW
• IPR net share 7th largest portfolio in the UK
• Largely merchant capacity
• Good fuel diversity
• gas, coal and pumped storage
• Robust operational and environmental performance

Rugeley
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UK recovery signals

• Tightening reserve margin
• 2.4 GW nuclear plant (Magnox) expected to retire
  before 2010
• limited new-build anticipated before 2010
• 2.6 GW interconnector links to Netherlands and
  Norway unlikely to proceed before 2010
• renewable growth largely from intermittent wind
  power - requirement for firm power during peaks
• environmental legislation will restrict 10-12 GW
  non-FGD output
• Increasing development and acquisition activity

England Wales Reserve Marginabove Peak Demand
(2004-10)
25
Notional Target Reserve
20
ForecastReserve Margin
15
Notional New-Entrant Point
10
5
2004
2005
2006
2007
2008
2009
2010
Source National Grid January 2005 Update.
Forecast includes all generation projects under
construction and all planned closures of
generation.
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Spreads - recent history

• Over the past 12 months, gas prices have
  increased on the back of rising oil price
• current oil prices remain close to all time high
• Coal prices (delivered ARA) have declined since
  Jan 05 from 80/t to 65/t
• EU ETS commenced January 05
• CO2 credit prices have increased since Jan 05
• Baseload power prices increased end 04/early 05
  driven by rising gas price and CO2 cost

UK Historic BaseloadGas Coal Spreads
/MWh
20
Coal Spread pre CO2
15
Gas Spreadpre-CO2
10
5
0
M
J
J
A
S
O
N
D
J
F
M
A
M
2004
2005
49
UK market - forward view

• Forward spreads indicate recovery
• gas prices are expected to decline
• coal prices expected to remain steady
• As environmental constraints tighten Rugeley will
  shift to a more peaking role
• From Jan 2005, cost of emitting CO2 has been
  treated as an additional marginal cost
• will be offset by NAP allocation
• market liquidity increasing
• early clarity on Phase 2 allocations important

Forward Baseload Gas Spreads,
/MWh
14
Gas Spreads post-CO2, no allocation
12
Gas Spreads pre-CO2
10
8
6
4
2
0
2005
2006
2007
2008
Forward prices sourced from Argus
50
Environment - implications for IPR

• Legislation
• EU Emissions Trading Scheme commenced Jan 05
• CO2 credits trading at 20-23/t in June 05 for
  Phase 1
• Large Combustion Plant Directive (2008)
• reduces emissions of SOx, NOx and dust from
  coal/oil plant
• Targets for renewable generation
• EU policy to reduce long term dependence on
  fossil fuels
• current HMG target of 10 generation by 2010
  under pressure

• IPR strategy
• Actively trade emissions to support plant
  operations and maximise asset value
• May 05 allocations imply load factors of 44 for
  Rugeley, 55 for Deeside, 64 for Saltend
• Rugeley
• final decision, likely December 2005
• focus on low sulphur coals to maximise value
  under LCPD constraints
• Renewables
• biomass co-firing at Rugeley

51
Summary

• Well balanced asset portfolio
• positioned to benefit from recovering spreads
• portfolio enhanced with acquisition of Saltend
• First Hydro - key asset
• excellent fit in UK portfolio
• particularly in a tightening reserve margin
• Focus on maximising financial returns