CBI energy conference: Andrew Horstead

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Andrew Horstead, director, of energy markets, Utilyx, at the CBI's energy conference. London, September 2010.

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CBI energy conference: Andrew Horstead

  1. 1. Energy Market Trends CBI Energy Conference 15 th September 2010 Andrew Horstead Director Energy Markets, Utilyx
  2. 2. Agenda <ul><li>Introduction to Utilyx </li></ul><ul><li>Recent, market developments: undersupply to oversupply </li></ul><ul><li>Understanding the relationship between coal and gas </li></ul><ul><li>Prospects for Winter-10 and Summer-11 </li></ul><ul><li>Longer term issues </li></ul><ul><li>Final thoughts </li></ul>
  3. 3. Utilyx: Market share & credentials <ul><li>TRACK RECORD </li></ul><ul><li>Largest Buyer of energy for I&C users in the UK with a book size of 20TWh (power) and 11TWh (gas); 230+ customers </li></ul><ul><li>First Organisation in our sector to be FSA approved </li></ul><ul><li>First to offer end-user PPAs </li></ul><ul><li>First to offer “open book” price discovery (and only?!) </li></ul><ul><li>Over 200 years collective experience in energy supply, trading & structuring </li></ul><ul><li>INDUSTRY RECOGNITION </li></ul><ul><li>CORE SERVICES </li></ul><ul><li>Contract structuring, procurement and benchmarking </li></ul><ul><li>Energy and Carbon Risk management </li></ul><ul><li>Asset structuring and pre-development </li></ul><ul><li>Specialist bureau – bill validation, revenue recovery and data management </li></ul>
  4. 4. Gas price development reflects transition to oversupply In 2009 as US prices fell below European hub prices, spot LNG supplies pressurised EU prices lower Source: Bafa, Nymex, ICE – analysis Utilyx Research Tight market conditions of 2006 & 2008 forced buyers to compete for LNG cargoes with the US and Asia Lag in long term contracts meant falling oil has taken longer to feed into gas prices
  5. 5. Market responding due changing fundamentals Source: Bloomberg, IHS McCloskey – analysis Utilyx Research Due to lower demand and increasing supplies, gas prices drop below coal Gas responds to LNG shortfall and summer maintenance Despite coldest Jan in 30yrs and highest gas demand, gas did not go substantially above coal switching price
  6. 6. Coal generation traditionally profitable in Winter Source: Bloomberg – analysis Utilyx Research Prior to March 2009, CDS spiked during the winter, reflecting the seasonality in gas contracts 1 2 3 4 As gas becomes more competitive, coal has moved to mid-merit with gas as baseload
  7. 7. Coal burn remains depressed relative to gas Gas generation has increased relative to coal Source: Enappsys– analysis Utilyx Research
  8. 8. Gas consistently outperformed coal through 2009 Source: Bloomberg – analysis Utilyx Research Throughout 2009, clean darks were consistently below clean sparks
  9. 9. Gas prices to trend higher over longer term UK prices likely to be bound by oil-indexed and US Henry Hub levels Source: Bafa, Nymex, ICE – analysis Utilyx Research
  10. 10. But…potential for gas softening in period ahead IUK exports have been well above average, but maintenance period could mean extra gas available to the UK market Source: Interconnector, National Grid – analysis Utilyx Research LNG flows have returned to pre-maintenance levels which could exacerbate the supply situation
  11. 11. Coal prices governed by Pacific market fundamentals Source: Bloomberg, McCloskey – analysis Utilyx Research Drought conditions in China, Indian buying and port and rail strike action S.A. providing strong boost to coal prices $ weakness against £ limits impact of change in coal price
  12. 12. Winter-10: gas resumed traditional place at the margin Source: Bloomberg – analysis Utilyx Research Uncharacteristically coal was the price setter for W-10 during Mar / Apr SRMC is the cost of the fuel and carbon allowances at standard conversions Climate spread is the difference between the clean dark and clean spark spread (CDS- CSS) Since July climate spread has narrowed in line with softer gas from £8 to £2/MWh
  13. 13. Summer-11: gas competing with coal Source: Bloomberg – analysis Utilyx Research Coal pushed back to the margin in Q1, but rising gas prices from April has seen coal becoming increasingly competitive SRMC is the cost of the fuel and carbon allowances at standard conversions Climate spread is the difference between the clean dark and clean spark spread (CDS- CSS) Since July climate spread has narrowed in line with softer gas to £0.50/MWh
  14. 14. Gas remains at the margin …but for how long? Coal currently competitive relative to gas but with gas sentiment bearish, order could change Source: Bloomberg – analysis Utilyx Research
  15. 15. The emerging energy gap Source: Utilyx Research Under our scenarios plant margin falls sharply over the coming decade reflecting weak investment signals and policy uncertainty
  16. 16. Prices set to rise over the long-term Source: Utilyx Research
  17. 17. Non-commodity charges also expected to rise Source: Utilyx Research
  18. 18. Final Thoughts <ul><li>Fundamental (& Technical) Market View……is indeed just a view </li></ul><ul><ul><li>It is not guaranteed </li></ul></ul><ul><ul><li>It changes </li></ul></ul><ul><ul><li>It should be considered along-side a commercial view in decision making </li></ul></ul><ul><li>Structured and pre-agreed policy is key </li></ul><ul><ul><li>What cost/price strategy are we managing against/towards </li></ul></ul><ul><ul><li>Pre-defined degree of risk you are willing to take </li></ul></ul><ul><ul><li>Controls at what point you step into the market to reduce exposure to energy market prices </li></ul></ul><ul><ul><li>Long-term it should mean smoother cost base –not fully exposed to peaks in the market </li></ul></ul><ul><ul><li>Won’t necessarily deliver cheapest price </li></ul></ul><ul><ul><li>Should be supported by the business </li></ul></ul>
  19. 19. Utilyx This presentation and or proposal (the Document) has been prepared by Utilyx. “Utilyx” is the trading name of “Utilyx Limited” and “Utilyx Risk Management Limited” (URML). URML is authorised and regulated by the Financial Services Authority (FSA). The information published and opinions expressed in the Document are provided by Utilyx for general circulation and your use only.  The contents are intended for informational purposes only and are not to be used or considered as an invitation to trade or an offer in respect of any of the products or services mentioned.  Utilyx makes no representation (either express or implied) or other assurances (either express or implied) that the information and opinions expressed in this Document are accurate, complete or up to date.    To the full extent permissible at law, Utilyx, and its affiliates, agents and licensors disclaim, without limitation, all liability for any damages or losses of any kind, whether foreseeable or not, (including, but without limitation, financial loss, damages for loss in business projects, loss of profits or other consequential losses) arising in contract, tort, or otherwise, as a direct or indirect result from action taken or decisions made as a result of reliance on material, in whole or in part, contained in the Document.  Nothing contained in the Document constitutes financial, legal, tax or other advice, nor should any investment or any other decisions be made solely based on the Documents content. You should obtain advice from a qualified expert before making any investment decision.   This Document may contain price projections that are based on assumptions that are subject to uncertainties and contingencies.  Because of the subjective judgements and inherent uncertainties of projections and because events frequently do not occur as expected, there can be no assurance that the projections contained herein will be realised and actual results may be different from projected results.  Hence the projections supplied are not to be regarded as firm predictions of the future, but rather as illustrations of what might happen.  Parties are advised to base their actions on awareness of the range of such projections and to note that the range necessarily broadens in the latter years of the projections. While Utilyx considers that the information and opinions given are sound, all parties must rely upon their own skill and judgement when making use of it.  Utilyx does not make any representation or warranty, expressed or implied, as to the accuracy or completeness of the information contained in this proposal and assumes no responsibility for the accuracy or completeness of such information. Utilyx will not assume any liability to anyone for any loss or damage arising out of the information or opinions.
  20. 20. Andrew Horstead Director Energy Markets, Utilyx [email_address] T: +44 (0) 20 7087 8644 M: +44 (0) 7825 661 021 www.utilyx.com

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