Competitive markets and the home of the future in a world of climate change


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Ian Peters, COO British Gas, presented on "Energy policy, competitive markets and the home of the future in a world of climate change." at Warwick Business School 19/10/2009

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Competitive markets and the home of the future in a world of climate change

  1. 1. Competitive markets and the home of C titi k t d th h f the future in a world of climate change Ian Peters Chief Operating Officer, British Gas p g , Sept 09
  2. 2. Our businesses We secure and supply gas and electricity for millions of homes and businesses and offer a distinctive range of home energy solutions and low-carbon products and services: i • Largest energy supplier • 15.6m residential accounts • 1m business accounts •81 H 8.1m Home S i Services customer accounts t t • 9000 engineers • Gas production fields in Morecambe and the North Sea (Venture) • 7 gas fired power stations with 8th about to go live • Expanding renewables business including offshore wind farm • 20% stake in new nuclear via British Energy • Major participant in LNG • Rough gas storage facility - the largest storage operation in the UK • Providing more than 70% of the UK’s gas storage capacity • 2 more in planning • Over 5m gas, electricity and services customers g , y • 3 gas fired power stations in Texas 2 • Extensive wind power in Texas • Significant gas fields in Canada
  3. 3. Our Challenges g • Volatile energy markets • North S G d l ti ( t i N th Sea Gas depleting (net importer) t ) • Storage limitation/interconnector dynamics • Power generation gap (Coal/Old Nuclear) • Investment need (£100-200bn over 15 years – E&Y) • Competitive markets and consumer prices • Gas and power hedging dynamics • Political pressure to reduce prices • Increasing regulation • Fuel poverty programmes • Climate change and energy efficiency • Emissions directives and targets • Renewable wind projects • Microgeneration • Sourcing new energy • Gas exploration • Nuclear • LNG 3
  4. 4. Competitive Markets Have Delivered for UK consumers UK domestic gas prices lowest in EU-15 for 8.00 last 5 years 7.00 7 00 6.00 nce/ KWH 5.00 EU average Tax Component 4.00 Price (excl tax) Pen 3.00 2.00 1.00 0.00 0 00 he tria 15 ds um K g or n l k w y y B ce d en n ga ar ur an l i U an e Ita pa an an U ed tu m us gi bo m el E S Fr rl el A er Ir m S P D G xe et Lu N • UK price approximately 38% less than the average EU price over last 5 years. • Exhaustive Ofgem inquiry conducted in 2008 found no evidence to justify referral to competition commission • Calls for competition inquiry bring uncertainty to sector at a time when record investment is needed • European markets beginning to liberalise but slow and still causing problems for UK p g g gp 4 Source: Source: UK Government, DECC DECC
  5. 5. UK gas supplies are declining g pp g U K a n n u a l g a s d e m a n d (b c f) Projected • UKCS decline continues - import dependency continues to 4 ,0 0 0 grow. Norwegian production will plateau. FRENCH ANNUAL 3 ,5 0 0 Scenario 1 3 DEMAND ,0 0 0 • Af Norway, future UK prices will be set by LNG or After N f i ill b b 2 ,5 0 0 Scenario 2 Russian gas 2 ,0 0 0 • Europe’s most gas intensive economy has moved from Scenario 3 1 ,5 0 0 being a source of cheap gas to an “end of pipe” importer 1 ,0 0 0 requiring th hi h t prices t support t i i the highest i to t transportation costs t ti t 5 0 0 across Russia and Europe 0 2 0 0 0 2 0 0 4 2 0 0 8 2 0 1 2 2 0 1 6 2 0 2 0 2 0 2 4 2 0 2 8 • Security of supply is critical to UK future stability 4,000 100% Scenario 2 90% 3,500 80% 3,000 %) Imp dependence (% 70% upply (bcf per year) 2,500 60% 2,000 50% port 40% Su 1,500 1 500 30% 1,000 20% 500 10% 0 0% 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 5 Imports UK Gas %age imports
  6. 6. UK Wholesale Gas Prices – Outlook Uncertain 100 UK Gas Prices, p/th Month Ahead Actuals 90 12 Month Average* 80 Forward Curve (9 Sep 09) 70 60 th p/t 50 40 30 20 10 0 * • Outlook for winter 2009/2010 - UK will be well supplied • Collapse in international energy demand as result of the global economic downturn, most notably demand in South East Asia and increased US production, led to increased availability of LNG for UK. • There are a number of potential threats to this: • Re-ignition of Russia-Ukraine crisis • International energy event (similar to Japanese nuclear outages in 2007 or effects on energy markets following hurricane Katrina) • Higher forward prices reflect the uncertainty over level of future supplies – Prices 9/9/09 winter 2009 @34 p/therm, winter 2010 @51 p/therm from 20 p/therm now 6
  7. 7. New power sources to fill generation gap Cumulative Plant Closures, New Build and Demand 60,000 New Build 40,000 20,000 MW 0 M 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 -20,000 -40,000 Station Closures -60,000 New Nuclear Nuclear Closure Wind @35% Tidal Wave Biomass CHP New CCGT Old CCGT CCS Old Coal Oil Demand Total Margin (wind@35%) Large amounts of intermittent wind and large amounts of base- 7 load nuclear create new dynamic beyond 2020
  8. 8. Government has agreed an EU target of 15% of all energy to be from renewable sources by 2020 • Electricity sector will deliver vast bulk of this • possibly 30-35% or 30- 40 GW of all electricity from renewable sources by 2020 vs 4% or 4GW now with a f th 8GW i construction or planned ith further in t ti l d • Centrica will play its part • We have got 360MW operational • Consent for another 250MW (Lincs) • Applied for consent for 1 GW (Docking Shoal/Race Bank) • Totalling T t lli over 1.5GW 1 5GW • Economics of renewables difficult • Centrica welcomed Government decision to award 2 ROCs for offshore wind • Renewables will evolve to include Biomass etc 8
  9. 9. What makes up every £100 of the average UK gas bill? p y g g This analysis is based on average figures over the last 7 years. 9
  10. 10. Retailers faced with growing network and environmental costs, which will increase bills Estimated potential increases in customer electricity charges (2004/05 to 2014/15) • Network and environmental costs associated with supplying electricity CCS/ FIT increasing about 9% year on year 200 EU ETS EUETS £11? RO £18? EEC/CERT/CESP/HES Transmission • Cost of supporting low carbon and Distribution network investment is growing in ustomer per yea r 150 £8? absolute t b l t terms and as % of th bill d f the £18 £23? • This will help accelerate the p £ per cu £7 transformation to decarbonised 100 £14 £2? energy supply £2 £16? 50 £1 • But it also increases stakeholder and customer pressure on suppliers as a Compound annual C d l whole growth rate = 9% 0 10 2004/5 2009/10 2014/15
  11. 11. Vision of a retail energy services market is becoming clearer gy g Low Carbon Transition Plan commitment to cut emissions in homes by 29% on 2008 levels by 2020 Community Energy Renewable Heat Feed-In Tariffs from Saving Programme Incentive to be April 2010 for small of £350m launched introduced from April p scale generation this autumn 2011 Carbon Emission Smart meters in every Reduction Target resulting home by end of 2020 in £1.9bn energy savings to April 2011 p 11 11
  12. 12. Competition has key role to play in delivering decarbonisation as efficiently as possible Clear opportunity for suppliers Potential of competition to enable decarbonisation needs to be recognised • Low cost carbon abatement • Ofgem p g probe focused on opportunities in households critical fairness and on relative to meet targets outcomes for different customers • Suppliers will compete to provide energy services to customers, as • Role of retail competition in part of richer set of customer harnessing and delivering offerings innovation is critical • Ofgem and government need to • Competition is a resource that align government schemes and can help determine most market rules to help the market effective ways of delivering deliver at least cost energy efficiency 12 12
  13. 13. Competition more relevant as demand for transformation becomes more pressing • Many US energy markets based on “thinner” version of thinner retail competition – Retailers provide customer access to wholesale hedging and pricing options – Retailer has no direct relationship with the customer and operationally depends on the systems of the regulated default utility provider id • Potential offered by “thicker” GB model should be more valued given today’s challenges g y g – Government is investing customer money to accelerate decarbonisation – Duty on all stakeholders to make sure customers get value for money for their investment – Success of competition should be measured in how successfully it facilitates this transformation 13 13
  14. 14. Suppliers are best-placed to discover the energy services customers want and value Suppliers have Supplier demand will customer drive what relationships, and manufacturers of new can build trust to technologies bring to deliver new solutions market Central role for suppliers in delivering energy efficiency solutions Suppliers will market solutions customers want through new a t t oug e product structures, time 14 of use pricing etc 14
  15. 15. Energy efficiency services are emerging as basis for differentiation between suppliers • British Gas increasingly competing on provision of energy efficiency services – and other suppliers are responding BG Energy Savers report- Supported the delivery of Technology innovation over 2 5m people to date 2.5m over 100m energy efficiency partnerships with leading have used the report (up to products into UK homes brands 30% reduction) Social housing projects, giving Retail partnerships – e.g. with energy saving advice, products B&Q to subsidise loft insulation and funding prices of £1 per roll Council Tax rebate scheme- Insulate 500,00 homes pa (18% working with 68 councils to reduction) and install 100,000 A provide rebates of up to £125 rated boilers (21%) for loft and cavity insulation 15
  16. 16. Smart technology we will be installing up to 2020 will enable an integrated proposition – but the supplier led model is uncertain/at risk • Roll out of smart a key enabler Roll-out of future energy efficiency Microgen innovation • E bl of “ti Enabler f “time of use” pricing – f ” i i Wireless data transfer expected to be a major driver of Heating & customer behaviour change Smart advanced Meter M t controls Key Customer Benefits (£) Data Hub Save energy Produce energy Broadband VDU Provide demand response Smart Appliances Access broader tariff range (including time of use) Get more accurate bills Data Processing 16
  17. 17. British Gas Portfolio of Energy Efficiency Products and Services gy y Year 1- 64 homes in 8 streets in UK CESP CERT competed to save the most - Solid wall - Heating Over 100m Energy Efficiency energy: 25% - Partnerships products subsidised in 5 years energy usage 89 tonnes of CO2 saved reduced, Local Authority Partnerships Since the launch in May 2008 Energy Experts Council Tax 9,488 schools have signed up 50k home visits planned for 2009 Over 250 partnerships with Local Authorities and Housing Associations REGULATED OBLIGATION ENERGY EFFICIENCY B2B New Innovation Retail schemes Energy efficiency consultancy business acquired q LOW CARBON TECHNOLOGIES - First year of CERT, B&Q hav Energy Savers Report delivered over 12 million m2 Completed 2.5m ESR’s LCBP2 DIY loft insulation (460k Framework homes) Supplier British Gas provide solutions for PV, Insulation £7m installed Solar thermal installations. Solar Thermal 1.5m homes insulated in in 2008 £8.5m turnover in 2009 last 5 years ASHP provides b id bespoke k British Gas solutions to reduce bought energy consumption 17 20% equity Fuel cell technology and CO2 emissions stake development agreement
  18. 18. Full energy audits an important part of our energy efficiency offering 18
  19. 19. Summary y • UK generation mix will fundamentally change • The carbon agenda is driving significant shifts in all aspects of the energy value chain • Competitive markets offer the best prospects for innovation • Centrica/British Gas are leading the market in security g y of supply and energy efficiency • Smart meters should provide a transformational opportunity to revolutionise the industry, customer experience and consumption management 19