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Winter Outlook 2009-10 Cathy McClay EDF Energy

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Agenda

Summer 09

 Power and spreads  Plant running

Winter 09

 Fuel price movements  System margin  Power prices and clean spreads

Implications

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Summer 09 Power & Spreads

Prompt prices were significantly lower than last year

 Summer 09 baseload out-turned at £34.3/MWh

down £49.9/MWh from last year

 Summer 09 peaks out-turned at £41.5/MWh down

£64.20/MWh from last year

The sharp decline was in part driven by underlying fuels and carbon

 Summer gas down 36.3p/th year-on-year  API2 coal prices down $107/t year-on-year  Carbon prices down €10.8/t year-on-year

Marginal clean spreads have also declined

 Coal plant was at the margin for the entire

summer with a clean baseload spread of £1.85/MWh (£9.50/MWh peakload)

 Lowest marginal clean spread since 2003

Key drivers of the reduction in spreads

 Temperature corrected daily peak demand out-

turned 2-3.5GW below normal

 Output from the UK nuclear fleet has been at the

highest level since 2005

 New plant commissioned

• Immingham CHP (April 450MW)
• Marchwood CCGT (June 850MW)

Prompt Power Prices

20 40 60 80 100 120 140 160 Apr May Jun Jul Aug Sep Price (£/MWh) Baseload 2008 Baseload 2009 Peak 2008 Peak 2009

Day-ahead Clean Spreads

20 40 60 Apr May Jun Jul Aug Sep Spread (£/MWh) Baseload Spark 2008 Baseload Spark 2009 Baseload Dark 2008 Baseload Dark 2009

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Shifts in Generation Output

Plant running has been significantly different this summer compared to last

 Gas plant output declined by 9% to

64.6TWh

 Coal plant output declined by 32% to

29.8TWh

Combined fossil output decline of 20.3TWh Opted-out coal plant running declined sharply from 9.1TWh to 2.4TWh Changes in plant running are primarily driven by the recession and higher nuclear generation

 Demand declined from 153TWh last

summer to 145TWh

 Nuclear output up by 10.2TWh from last

summer

Gas Plant Running

2 4 6 8 10 12 14 Apr May Jun Jul Aug Sep TWh

Gas - '08 Gas - '09 Opted in Coal Plant Running

2 4 6 8 10 Apr May Jun Jul Aug Sep TWh

Coal - Opted in '08 Coal - Opted in '09 Opted out Coal Plant Running

1 2 3 4 Apr May Jun Jul Aug Sep TWh

Coal - Opted out '08 Coal - Opted out '09

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Winter 09 Gas, Coal & Oil price movements

Prior to March 09 coal, gas, and oil prices were correlated relatively strongly

 Oil price rally was fuelled by lower non-

OPEC production, booming Asian demand, and a shortage of refining capacity

 Delays to new UK LNG re-gasification

infrastructure and European oil-indexation, pulled UK NBP gas prices higher

 Coal pushed to record highs

• A range of production problems
• Port capacity limitations
• Rallying non-energy commodities

Post March 09, gas and oil prices for the front Winter have diverged significantly

 NBP Winter 09 gas lost 35% of its value

from March 09 to expire at 34.8p/th

 Oil has rallied 50% from 2009 lows of

$40/bbl

 Coal has traded sideways in a range of

$63-85/tonne

UK Coal and Gas Prices

2 4 6 8 10 12 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09

Price (£/GJ)

W09 Gas W09 Coal W09 Oil

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UK NBP Gas – The Changes

Winter 09 gas price declined 75p/th from record highs seen in July ‘08 of 110.3p/th

 Driven by a combination of falling oil prices and

weaker fundamentals

LDZ demand has declined by 12% year-on- year and is at its lowest level since 2002

 Driven by recession and higher prices  Latest NGT view is that LDZ demand will be flat on

last year with normal weather

Gas to power demand has declined by approximately 10% year-on-year UK storage facilities have filled in record time and currently stand at a record high of 4.4bcm



Up 0.25bcm year-on-year through the addition of Aldbrough MRS

Flows from UKCS are significantly lower than last year

 Field decline and maintenance contributed to

average flows of 146mcm/d ’09 vs 175mcm/d ’08

 Low prices encouraged swing field production to

drop sharply from July 09 onwards due to low prices

Strong LNG flows have replaced declines from UKCS

LDZ Gas demand and Temperature Compared with Seasonal Normal 50 100 150 200 250 300 350 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Gas Demand (mcm/d)

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5 10 15 20 25 30 35 Temperauture DegC LDZ Gas Demand Normal LDZ Gas Demand Effective Daily Temperature Normal Effective Daily Temperature

Rough Storage Level

500 1000 1500 2000 2500 3000 3500 4000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec mcm 5 Year Range 2008 2009

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UK NBP Gas – The Changes

UK LNG infrastructure has expanded and Milford Haven is a key supply hub

 South Hook started commissioning April 09

• Operating at c.20mcm/d since July 09
• Phase II scheduled for Q1 2010

 Dragon started commissioning August 09

and has started commercial operation

2009 LNG deliveries up 3.3bcm on 2008

 Demand weakness in major LNG markets

• Asian markets 8bcm lower across S09

 New liquifaction facilities

Key uncertainties for gas this winter

 How much LNG will come to UK?

• Price of US gas market relative to UK
• The level of demand recovery in Asia
• New liquifaction

 Continental appetite for UK gas through IUK

• Current flows suggest that long-term

contract holders have little flexibility to take UK gas due to ToP or full storage

 Weather - W08 was cold

Cumulative UK LNG Deliveries

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec LNG Delivered (bcm)

2006 2007 2008 2009

2009 Year-on-Year Change in LNG Imports

• 1.5
• 1.0
• 0.5

0.0 0.5 1.0 1.5 Jan Feb Mar Apr May Jun Jul Aug Yr-on-Yr Change (bcm)

Japan S.Korea Taiwan

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Coal Price Drivers

Coal prices for Winter 09 have declined from record highs in July 08 of $218/t

 Coal stocks at ARA are at record highs at

95% full (8.2mt)

• Spread of spot coal to forward contracts

has encouraged stockpiling

 UK coal stocks are reported to be at the

highest levels since 1995

 Russian coal production costs, estimated at

around $60/t, have supported spot prices

Demand from China has also acted as a support for coal prices

 China net imported a record 15mt in June09

• Net swing of 20mt from last year
• UK coal consumption in 2007 was 49mt

 Fiscal spend of $580bn to shield the

economy from the global slowdown

 International coal prices have been

competitive relative to domestic production

API 2 Coal Prices

40 50 60 70 80 90 100 110 120 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Price ($/t)

Q4 09 Cal-10 Cal-11 Cal-12

Chinese Coal Net Imports - 2008 - 2009

• 5
• 3
• 1

1 3 5 7 9 11 13 15 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec $m/te

• 100
• 50

50 100 150 200 250 300 $m/te

2008 Production 2009 Production 2008 Net Import 2009 Net Import

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Winter 2009-10 UK System Margin

Demand destruction unlikely to wane

 No major recovery in the economy is

currently projected

 Industrial demand is likely to be similar to

the end of Winter 08

 Domestic energy saving likely to continue  Embedded wind generation is increasing

NGT estimate that around 66GW of 77GW available to generate over peak

 Higher availability of nuclear generation  New plant online

Forecast system margin significantly higher than last year

 Downward pressure on power prices  Cold weather unlikely to tighten margin

enough to get price spikes

How will opted out coal fleet optimise their remaining running hours?

 Will they be available if dark spreads

deteriorate further?

 Coal stock levels are high

• Will this force running?

Winter 2008 Vs Winter 2009 Demand Forecast (NGT)

40 45 50 55 60 44 46 48 50 52 2 4 6 8 10 12 14 16 18

Week Number GW 2009 Forecast 2008 Forecast

Winter 2008 Vs Winter 2009 Available Capacity Forecast (NGT)

50 55 60 65 70 75 80

44 46 48 50 52 2 4 6 8 10 12 14 16 18

Week Number GW 2009 Forecast 2008 Forecast

10 10

Winter 09 Power Price History

Winter 09 power fell dramatically from a high of £113/MWh to £37.65/MWh at expiry

 Weakening fuel prices have eroded a

significant amount of the value

 Realisation that low demand and wide

system margins are likely to persist has narrowed spreads

Clean baseload dark spread fell from a high of £30/MWh to £7/MWh at expiry

 At expiry dark spreads were trading lower

than spark spreads

 Suggests coal plant will be marginal this

winter – very unusual

Winter 09 Clean Baseload Spreads

5 10 15 20 25 30 35 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Spread (£/MWh) Spark Dark

Winter 09 UK Power Track

20 40 60 80 100 120 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Price (£/MWh) Winter 09 Baseload Winter 09 Peakload

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Winter 09 Power & Spreads - Q4/Q1 split

The gas price slump has significantly altered the generation pattern for Winter 09

 Coal at the margin for Q4 2009  Coal and gas generation are price neutral

for Q1 2010

Coal firmly at the margin for Q4 2009

 Q409 gas to coal switching price currently

stands at approximately 6p/th

 Balance of Q409 NBP currently trading at

32.8p/th

Not clear which fuel will be on the margin for Q1 2010

 Price drivers on the gas market appear to

be more bearish than those on coal

 The coal switching price should present a

strong resistance point for gas prices

 Will stock levels force coal plant running?  Could the fuels chase each other down?

Q4 2009 C lean B as eload S preads

2 4 6 8 10 12 14 Apr-09 May-09 J un-09 J ul-09 Aug-09 S ep-09 S pread (£/MWh) Q4 C lean Dark S pread Q4 C lean S park S pread

Q1 2010 C lean B as eload S preads

2 4 6 8 10 12 14 16 18 Apr-09 May-09 J un-09 J ul-09 Aug-09 S ep-09 S pread (£/MWh) Q1 C lean Dark S pread Q1 C lean S park S pread

12 12

Implications

There has been a major shift in fuel price dynamics through Summer 09

 Breakdown of correlation between gas and oil  Precipitated by a structural change in the gas market  LNG has changed the oil - gas price dynamic due to gas-on-gas competition  The supply overhang in the global LNG market will take time to clear due to a combination of

the economic downturn and new liquefaction capacity

Coal assets have suffered the least profitable Summer since 2003

 A combination of relatively resilient coal prices, weak gas, recession, and highest nuclear

generation for several years

 Winter 09 offers little comfort as the current gas market outlook remains weak (barring a major

supply side event – Russia/Ukraine or in US)

 Forward clean dark spreads for 2010 are at historic lows  Current clean dark spreads threaten the viability of flexible plant during a period of uncertainty

due to commissioning of new CCGT plant