CBI NI energy conference: Andrew Greer

CBI Northern Ireland Energy Conference29th February 2012“Suppliers perspective on Energy Supply in NI”Andrew GreerAirtricity

1. NORTHERN IRELAND IN CONTEXT2. CHANGES IN GB MARKET3. KEY ISSUES FOR CUSTOMERS

With recent market volatility thePurchasing Dilemmas for 2012; Buy Now or Wait? Fixed or flexible? Length of Contract?All in the context of;•Internal pressure to reduce costs•Budget Risk v Market Risk•Commodity & FX volatility

NORTHERN IRELAND IN CONTEXTFUEL MIXNORTHERN IRELAND UK SEM Fuel Mix 2010-2011 UK fuel mix 2010-2011 Renewables Oil 2% Other 1.7% Renewables 7.9% 12% Coal 28.9% Nuclear 17.3%Coal 16% Peat 6% Gas 64% Natural Gas 44.2%

Historic Average Monthly SMP and GB Gas (NBP) 100 80 90 70 80 60 Monthly NBP average (GBp/therm)Monthly SMP Average (€/MWh) 70 50 60 50 40 40 30 30 20 20 10 10 Average monthly SMP (€/MWh) Average monthly GB gas (GBp/therm) 0 0 SMP values are highly correlated to GB gas prices

Fuel Mix for 2011 outlines Ireland’s Addiction to Gas

NORTHERN IRELAND IN CONTEXTGB GAS INFRASTRUCTURE

NORTHERN IRELAND IN CONTEXTGAS INFRASTRUCTURESource: Gazprom UGSS

GB Natural Gas Production & Gross Imports (TWh)• GB Net Production lowest level in 17 years • 2011 production c 40% of peak production in 2000• 2011 - Imports exceed Production for the first time

GB Natural Gas Consumption & Gross Exports (TWh) 1,400 1,200 1,000 800 Exports 600 GB Net Consumption 400 200 - 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 p• 2011 Net Consumption lowest level since 1995 • Combination of milder weather & reduced gas generation • 17% lower consumption than 2010• 2011 – Record exports – higher than during peak GB Production

GB Natural Gas Imports(TWh) 700 600 500 Other LNG 400 Qatar 300 Norway Pipeline Other Pipeline 200 100 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 p• Imports Rise to offset reducing GB Production • Norway key Pipeline flow (c40% of imports) Liquefied Natural Gas (LNG) increase substantially in the last 2 years • Qatar now accounts for c 40% of total imports

GB Natural Gas Exports(TWh) 200 180 160 140 120 Ireland 100 Netherland 80 Belgium 60 40 20 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 p• • 2011 GB Exports Rise to record levels • Exports to ROI increase 80% since 2000 – 2011 – 58.3 TWh c 64% for power generation

•Gas cooled to -162C•Volume reduction – 1/600th•Largest Importer – Japan•Largest Exporter - Qatar

ENERGY PRICE TRENDS LNG - Price Setter. • Tightening global LNG Market – Increased re-Gasification Plants – High Plant Utilisation – Next 4 years will only see limited production increases • Around 30% of LNG cargos on spot market ie non contract , balance largely shipped to Asia on oil-indexed long term contracts – Behaviour of Qatar crucial on availability of spot cargos • Other Key Factors include – Japanese Market & extent of gas generation substitution v Nuclear – Availability of LNG tankers – Availability of spot cargos – UK long term contract position – Iran

UK LNG GAS SUPPLIES PASS THROUGH GULF

Future Issues Impacting Pricing•Producer behaviour – in particular Qatar – Maintenance schedules & unscheduled outages•Gazprom (Russia)/Statoil(Norway) reaction to market ie productionv price•Economic factors – Global slowdown, Greek debt, Europeanuncertainty, Asian Growth – China & India• Geopolitical events eg Middle East, Earthquakes•Northern Hemisphere weather•Oil indexation (European Pricing) & future FX volatility•Germany & a non – nuclear future•Trading Sentiment - UK market traded 17 times physical demand

Current Issues• Dec & Jan unseasonably mild – reduced consumption • Prices trended downwards• Feb saw exceptional cold weather hit mainland Europe& Eastern GB • Prices reacted with large increases & 6 year day-ahead highs• Higher oil prices and weaker dollar have contributed toincreasing forward prices • S12 hit a 3 month high over 62p/therm• Storage being replenished after cold snap • Supporting prices as storage injection continues • Exports to Europe to replenish storage• Concern over LNG shipments to Europe

Other factors Influencing SEM Prices• Other Fuel costs eg Coal• Demand Forecast• Temperature• FX• Wind generation• Unplanned outages• Maintenance• System Constraints• Carbon costs• Interconnectors

Key Issues for Customers toConsider When Considering Energy Procurement

1. Understanding the key market drivers and their fundamentals2. What is your risk appetite ? - Timing is everything3. Understanding the products available – Energy Pricing strategy including small print – Pass-through costs – Greenness4. Shopping Around5. Managing Use6. Energy Brokers

Risk AppetiteEnergy Procurement Strategy is dependent on the appetitefor risk within an organisation • What strategy will your current corporate governance permit? • Have you looked at alternative products? • Internal skill base v external consultancy?• Risk Management Strategy reflected in the energy productselected Budget Risk v Market Risk • Relative Priority of Budget Risk v Cost CompetitivenessDilemma 1: Fix prices and set Dilemma 2: Price linked to wholesalebudget: market:What if market falls? What if market rises?

Fixed Price Contract – Timing is Everything Apr-12 Apr -12 07/01/11 07/03/11 07/05/11 07/07/11Date 07/09/11 07/11/11 07/01/12 Pricing of 12 Month contract Commencing 1 April 2012

Products Available to Meet Your Risk Appetite • Fixed Price Contract • Index Linked eg ICE • Pool Price Pass-through • Flexible fix/unfix

Don’t forget about the Pass-through costs• Duos, Tuos, SEMO, PSO, SSS, NIROCS • Over 40% % of total bill – Future investment in network upgrades to support decarbonisation – Inflation – Smaller volumes to recover fixed costs – Impact of EU targets/legislation e.g. Carbon• 2010 & 2011 have seen changes in Duos & Tuos shape • More cost reflective • Has changed pricing signals particularly around winter peak• NIROC increasing to 0.081 ROC per MWh from 1 April • Currently 0.055 ROC per MWh

SHOP AROUND - WHAT CAN AIRTRICITY OFFER?Offer a range of competitive electricity products –Fixed price contracts of varying durations –Ability to advance purchase –Flexible purchasing options including –Gas linked electricity pricing –Fix/unfixWork with you or your appointed broker in deliveringyour agreed procurement strategy

MANAGING YOUR ENERGY USEREDUCING ENERGY USAGE• ADVICE Number of independent organisations offer energy management advice (Invest NI + Carbon Trust)• AUDITS AND SURVEYS Each Business is different – savings can be found in places ranging from:Simple Behavioural Changes Major Energy Efficiency Investments

Credit• Tough economic environment• Credit is just another risk to manage• Each supplier will have their own criteria• Security could be requested

Stop Press - Shale Gas or “Fracking”• Transformed US Natural Gas Market• USA basically self sufficient in gas • Taken out of acquisition market• Considering exporting gas as LNG• Dramatic reduction in gas pricing (27/2/12) • Henry Hub Spot $2.59/Mmbtu ( 16.4p/therm) • UK Day ahead c 61p/therm• Pricing at levels which is deterring further investment• Gives US large energy users a huge cost advantage• What will the UK do?

Conclusions• Prices have a global dimension• Prices are volatile• Keep an eye on the fundamentals• Review your procurement approach & strategy• Consider doing something different• Shop around

Thank youAndrew.Greer@airtricity.com 02890 437470

CBI NI energy conference: Andrew Greer

by Confederation of British Industry

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