Energy Market Fundamentals

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Energy Market Fundamentals Procurement
Dean Marsh - Senior Account Executive
(North) Gary Ward - Senior Account Executive
(South)
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Energy Markets what you need to know
Content Energy price build up Market
Overview Gas Electricity What Influences
price Current market conditions Why use a
third party? Fixed vs. Flex
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Energy price build up-Electricity
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Where does our gas come from? Gas pipeline
imports from Norway (Langeled) Netherlands (BBL)
Belgium (IUK) Gas LNG imports from - Trinidad
Tobago Qatar Algeria Egypt
Imports History 2000 UKCS 99 1 imports 2005
UKCS 82.7 imports 17.3 2008 UKCS 61 imports
38.8 (LNG 1.1,pipeline 37.7) 2009 UKCS 41.6
imports 58.4
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Market overview - Electricity
How is our electricity generated? Coal fired
power plants Gas fired power plants Nuclear
Renewable Percentage of generation can and does
change dependent on generation fuel costs (Coal
Gas) primarily Forward supply issues Decrease
in coal fired power plants due to EU carbon
directives LCPD (More information at
http//www.defra.gov.uk/environment/airquality/eu-
int/eu-directives/lcpd/index.htm) Less capacity (
Non compliant power stations will have to close
by 2015)
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Market fundamentals
Fundamentals drive supply and demand Do not
always dictate price Prices can disconnect
themselves from fundamentals Speculation can
play large part in market movements
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What Influences Price? Oil Can Influence gas
prices (Due to indexation) Coal used for
generation Supply demand- positive negative
GDP EU carbon price- feeds into the cost of
power generation Exchange rates- Crude oil/
Freight/ Coal Global tensions
political/economic etc Transportation cost of
shipping LNG and coal Weather- can dictate
demand on the NTS and the grid Maintenance- Gas
field outages/power station maintenance
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Market volatility
Spot prices are more volatile than forward
prices Spot prices more closely reflect genuine
supply and demand
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Gas - UK October Gas Year Price (Flat Cost)
p/therm
May 2006 May 2010
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Electricity - Annual Forward Baseload Price MW/h
(Flat Cost)
May 2006 - May 2010
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Source Bloomberg, analysis Utilyx
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Current Situation
Oil-Oil prices remain supported above 85/bbl on
a bullish economic outlook, strong equities and
growth in emerging market demand Supply remains
healthy but demand from China is the most bullish
fundamental driver Gas-If oil remains at 85 we
could expect to see continued support to gas
prices on longer dated contracts Further
potential upside can come from an upturn in
demand as we come out of recession, supported by
increased continental demand Power-Prompt power
prices have firmed in line with the upturn in gas
prices last week Strong prices in underlying fuel
markets have supported the curve, with
corresponding contracts in both gas and coal
having gained over the last week. This remains a
risk to the upside in the near-term. Carbon
prices have reached a 10 month high adding
support to the curve, in particular the 2012
contracts and beyond Bearish factors remain
however - demand is significantly below
pre-recessionary levels and a drop back down in
oil and gas would feed through to have a bearish
affect on the power curve Supply side issues
also represent a longer-term risk to the UK power
market e.g. governmental policy with respect to
nuclear build
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ENERGY PROCUREMENT-WHY USE A THIRD PARTY?
Electricity-Complex price structures DUOS
Distribution Use of System Charges TUOS-
Transmission Use of System Charges BSUOS- Balance
System use of System Charges T-Losses
Transmission Losses D-Losses Distribution
Losses CCL- Climate Change Levy Renewable
Obligation (supplier) Available
Capacity Green/Renewable Premiums
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ENERGY PROCUREMENT-WHY USE A THIRD PARTY?
Gas-Complex price structures LDZ Local
Distribution Charges NTS National Transmission
Charges Balancing (swing) charges CCL Climate
Change Levy
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ENERGY PROCUREMENT-WHY USE A THIRD PARTY?
Additional Services OJEU Compliance E-Procurement
Market Intelligence Bureau Services Bill
validation EUETS/CRC Guidance
advise Retrospective Cost Auditing Best Practice
- Flexible Risk Managed contracts
gas/power Dedicated Account Management
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ENERGY PROCUREMENT-WHY USE AN APPROVED PBO?
Fixed or Flex?
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ENERGY PROCUREMENT-WHY USE AN APPROVED PBO?
Fixed
Fixed on a single day Advantages Fix and
forget Known budget price
Disadvantages 1 in 250 chance High risk
premium Exposed budgets
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ENERGY PROCUREMENT-WHY USE AN APPROVED PBO?
Flex
Purchasing prior to and during contract Advantages
Discount on forward price Access to market
falls Protection from market highs Budget
management planning
Disadvantages Reconciliations Skills required
Size requirements

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Useful Linkswww.ogc.gov.uk/energy_gas_and_electr
icity.aspwww.energyconsortium.org.uk
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Thank you for listeningAny questions?