Keith Budinger Chief Executive

1
The Future of Gas and Electricity Storage Gas
Storage latest developments 11th November
2014 Allen Overy LLP One Bishops Square London

• Keith Budinger Chief Executive

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Todays presentation

• State of the Nation
• The UK gas market as is (4 slides)
• The UK gas market to be (3 slides)
• Import dependency
• Demand fluctuations
• Deliverability
• Gas storage new developments (1 slide)
• The future is fast cycle (1 slide)

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National Grids winter wish list (source Utility
Week 31st October 2014)

• Kind weather mild enough to cap demand and windy
  enough to keep renewable generation high.
• Timely capacity returns November 2014 could
  provide a make or break month, power generation
  units at Ferrybridge, Heysham and Hartlepool will
  return.
• An end to unexpected disasters the UK has seen
  an unprecedented number of unexpected outages
  this year including three fires at thermal
  generation plants.
• Fewer Russia-Ukraine headlines the plan for what
  might happen if Russian gas supplies to Europe
  are constrained? Reliance on LNG market will be
  expensive.
• Similar security for the rest of Europe with
  electricity imports currently around 7 per cent,
  Europes security of supply matters to the UK
  too.

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The UK gas market at a very high level

• In many ways, UKs gas market is healthy.
• The market has responded well (and without the
  need for Government intervention) to the
  reduction in domestic production, and we now have
  a diverse mix of supply sources.
• Increasingly open access to infrastructure means
  resources including storage can be utilised
  more efficiently between GB and continental
  markets.
• However, we do have vulnerabilities and these
  leave us prone to price spikes which are costly
  for customers and national headlines (which are
  unpleasant for politicans).
• Whilst everything worked in March 2013, the
  sequence of events provided a telling preview of
  the way in which stresses can combine to generate
  difficult situations.
• There will continue to bee political and
  technical uncertainty.

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The UK gas market one level down on the plus
side

• GB has very significant gas supply capacity on a
  name-plate basis (around 700 mcm/day relative
  to a 1-in-20 year peak demand of around 500
  mcm/day)
• We are increasingly dependent on imported gas
  (around 60 percent in 2012/13) which means GB
  is competing for gas with both continental
  markets
• IUK and BBL flows increasingly driven by hub
  prices in GB v continent
• Norwegian flexibility to flow either to GB or
  continent on same basis
• and global markets
• LNG directed to Asia if price is higher
• Theoretically this should not present a problem
  where the markets work efficiently, can respond
  quickly, and infrastructure operates as planned

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The UK gas market one level down but risks
remain

• Markets are not fully efficient and subject to
  political interference, particularly in regions
  where full competition is less developed than in
  Europe.
• Whilst interconnectors enable quick physical
  response, the same is not true of LNG, given the
  nature of the supply chain ships can be days
  away, preventing a timely market response in
  terms of supplies into GB for more quickly
  developing supply/demand events.
• Infrastructure is subject to unplanned outages
  particularly at times of stress or under winter
  conditions. A key difference relative to UKCS
  supplies is the dependence on a few large
  infrastructure elements rather than the diverse
  mix of North Sea production and terminal routes.

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The UK gas market - March 2013

• March 2013 was an illustration of how these risks
  can materialise
• A prolonged cold spell leading to higher demand
  late in winter (when storage supplies are
  naturally at low levels).
• LNG responding to high prices in Asia, and hence
  low levels in UK terminals and significant lag
  for new shipments.
• Demand therefore being met by interconnector
  imports and (already depleted storage)
• As cold spell continued and storage declined
  further, price spikes resulted as LNG could not
  react in time.
• Exacerbated by (thankfully short) IUK outage.
• 4-6 weeks of extreme prices and system stress
• Risks likely to increase
• Reducing UKCS and increasing LNG reliance
• Coal retirements limiting fuel-switching options
  in power sector

8
Halite believes the UK gas market is structurally
changing

• There are two major long term structural shifts
  taking place in the UK gas market
• Import dependency UK import dependency is
  increasing as domestic gas production declines.
  This is resulting in a greater UK exposure to
  external supply shocks and an increase in
  dependency on key imports.
• Demand fluctuations Short term fluctuations in
  UK power sector gas demand are increasing, as
  intermittent renewable generation capacity rises.
  This is acting to increase UK gas system stress
  and price volatility.
• The UK government has openly expressed its
  concerns as to the potential security of supply
  risks associated with these changes
• Import dependence Our increased exposure to
  international gas markets has also increased the
  range and likelihood of possible sources of
  disruption, including certain shocks that could
  have profound impacts on GB security of
  supply..the potential impact of the closure of
  critical LNG shipping lanes an unexpected
  curtailment of Russian supplies.
• Intermittency Looking forward, there is likely
  to be an increase in the need for flexibility
  from our gas supplies.to meet larger and faster
  swings in demand from gas-fired electricity
  generators asrenewable generation increases
  
• (Source DECC/Ofgem Statutory Security
  of Supply Report 2013).

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1. Increase in import dependency

• UK Continental Shelf (UKCS) gas production is in
  steady decline.
• Major sources of UKCS supply replacement are
• Norwegian (NCS) imports (plateauing)
• Imports from the Continent (e.g., Russia)
• LNG imports
• All 3 of these sources are price dependent
  contingent on supply chain dynamics
• This increases UK exposure to external market
  shocks (e.g., Russian gas disruption, NCS
  outages)
• LNG imports are particularly sensitive, given the
  global gas market there maybe significant
  delays (e.g. 2-4 weeks) before supply can respond
  to system stress.
• The evolution of the UKs gas supply mix is
  resulting in an increasing dependency on several
  larger supply sources (e.g. NCS fields pipes, 2
  Interconnectors, LNG imports) as opposed to a
  diversified mix of UKCS fields, pipelines
  processing plants.
• This in turn increases UK exposure to large
  infrastructure failures (e.g. IUK outage Mar 13,
  NCS outages Feb 12, Rough outage 2006).
• It also increases UK exposure to risk of major
  market and political supply disruptions (e.g.
  Fukushima, Russian disruptions, LNG shipping lane
  disruptions).
• The UK has ample import infrastructure capacity.
  But there are often time lags in response of
  imports to periods of high gas demand and price
  signals.
• Fast cycle gas storage plays a key bridging
  role in providing deliverability response to
  cover supply disruption gaps.

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2. Increase in intermittency

• The UK governments Energy Market Reform (EMR)
  package is focused on trying to meet a number of
  targets relating to renewable generation build
  and emissions reduction.
• EMR is supporting strong growth in intermittent
  renewable generation capacity (wind solar),
  which is structurally transforming the UK power
  market.
• Gas-fired CCGT power plants (which have
  traditionally run base load / mid-merit) are
  increasingly being pushed into a peaking role to
  support fluctuations in wind/solar output and
  system demand.
• A significant volume of UK coal plant capacity
  (currently predominantly base load) will retire
  by 2023 as a result of EU emissions legislation
  (LCPD, IED).
• New build of flexible plant will be focused on
  gas fired generation (CCGT / OCGT) supported by
  capacity payments).
• As UK renewable capacity increases, so to does
  the magnitude of short term fluctuations in
  wind/solar output.
• These fluctuations are supported by swings in
  gas-fired plant output, which translate into
  swings in power sector gas demand.
• Fast cycle gas storage plays a key role in
  providing rapid flexibility response to absorb
  these short term swings in demand, dampening
  their impact on price volatility system stress.
• Fast cycle storage can be thought of as a rapid
  charge and release gas battery that supports
  the role of gas-fired peaking plant in backing up
  renewable intermittency.
• Fast and medium cycle storage assets play a key
  role in balancing the UK gas market, seasonal
  storage still has a role to play however this
  will be more focused on balancing winter vs.
  summer requirements.

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Why Halite believes deliverability is critical

• Increases in import dependency and renewable
  intermittency both drive a requirement for an
  increase in short term gas deliverability (vs.
  longer term seasonal flexibility).
• In the medium to longer term horizon (e.g. gt 1
  month), a strong price signal and ample import
  infrastructure can respond to pull more gas into
  the UK (DECC reiterated its belief in this in the
  Sept 2013 gas storage intervention decision).
• The vulnerability of the UK gas market is to
  short term swings in demand, infrastructure
  outages supply chain response delays.
• In periods of system pressure what is most
  important is the bridging role played by short
  term deliverability (this will increase with
  intermittency), not higher volumes of gas in
  store.
• The short term requirement for deliverability and
  the longer term effectiveness of the day-ahead
  National Balancing Point (NBP) price signal in
  attracting imports can be seen during periods of
  system stress over the last three winters (e.g.,
  March 2013 Feb 2012 price shocks).

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Gas storage new developments

• UKs current gas storage amounts to only 14 days
  worth of gas supply a dangerously low level
  compared with France (87 days), Germany (69) and
  Italy (59) Source UK Commons Select Committee
  2011
• The UKs storage requirements are commonly
  misunderstood. As well as specific storage sites,
  the UK is very well interconnected with other
  large sources of longer range gas flexibility
  (NCS, Continental Europe, LNG imports).
• So rather than measuring UK storage based on
  working gas volume, it is more important to focus
  on deliverability (mcm/d).
• UK storage investment development over the last
  decade has been focused on smaller fast cycle
  salt cavern assets.
• The ability of fast cycle assets to cycle
  multiple times each year means they provide much
  more system flexibility per unit of working
  capacity.
• The benefit of fast cycle assets needs to be
  considered based on contribution via
  multi-cycling deliverability, not based on
  working volume.
• Both the government and National Grid recognise
  the requirement for further investment in storage
  deliverability.
• DECC / OFGEM point to a large volume of
  consented projects. But the majority of this will
  not be built given poor economics (spread
  weakness), e.g. in 2005 DECC listed 5 bcm (10
  assets) to come online by 2010 vs. only 0.4bcm
  delivered Source DECC/Ofgem Statutory Security
  of Supply Report (Oct 2013)
• There is a much smaller volume of consented salt
  cavern fast cycle capacity. The development
  incremental investment economics of this capacity
  is favourable given a value skew towards
  volatility. It represents relatively low cost
  deliverability.

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Why Halite believes the future is fast cycle
storage (fcs)

• Fcs provides within system deliverability as
  insurance against major import disruptions (e.g.
  outages).
• Fcs provides reliable and rapid response
  flexibility to support renewable intermittency.
• Fcs working capacity can be cycled multiple times
  in a year to enhance effective contribution to
  system deliverability.
• Fcs acts to damper shorter price volatility,
  increase prompt gas market liquidity hence
  reduce supplier cost of managing customer
  portfolio risk.
• Fcs is a relatively cheap source of
  deliverability (low capex per unit), with
  incremental expansion costs.
• The UK market has been delivering fast cycle
  capacity (Aldborough, Holford, Stublach)
  reflecting these points.
• The expansion and/or building of more fast cycle
  storage can make a material contribution to
  security of supply by increasing the volume and
  duration of deliverability to the UK market.
• The critical message here is that, without
  government intervention, market investment in Fcs
  is key to delivering security of supply for gas
  customers

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Thank you for listening

• Any questions?