Winter Consultation 2007/ 8 Philip Davies Director, GB Markets 2 - - PowerPoint PPT Presentation

Winter Consultation 2007/ 8

Philip Davies Director, GB Markets 2 October 2007

2

Outline

W inter 2 0 0 7 / 8

gas - supply outlook and prices electricity – generation outlook and carbon prices

Gas netw ork capacity Norw egian flow s Building integrated European m arkets GB Markets Beyond W inter Consultation

3

W inter 2 0 0 7 / 8

4

W inter 2 0 0 7 / 8 - sum m ary

More positive

• utlook reflected in

forward prices Increased focus on gas network issues – developments in transfer and trade Key uncertainties remain for demand and supply

Gas supply outlook m ore positive than last w inter Generation m argin m anageable even in severe w inter

EU ETS Phase II not change NG assumption that coal generation preferred to gas

5

W inter 2 0 0 7 / 8 - gas

6

NG have reiterated their view that outlook is m ore positive than last year

Gas supply outlook

100 200 300 400 500 600 700 2006/ 7 Base Case Max 2007/ 8 capacity 2007/ 8 I nitial View 2007/ 8 Revised view 2007/ 8 Final view

UK Cont inent al Shelf Norway IUK BBL LNG import s Long Range St orage (Rough) Medium Range St orage Short Range St orage

1 in 20 peak demand Average peak demand

Source: Table 6 in Winter Consultation Report 2007/ 8

7

Q1 0 8 gas price currently trading below Q1 0 7 price this tim e last year

Source: Bloomberg

Forw ard prices reflect m ore positive outlook

20 40 60 80 100 120 360 330 300 270 240 210 180 150 120 90 60 30

Trading days before delivery p/ th

Q1 - 2006 Q1 - 2007 Q1 - 2008

Cold snap in Q4 05 Mild weather in Q4 06 + infrastructure delivered

8

Gas prices for this w inter above the DA gas prices seen during last w inter

5 10 15 20 25 30 35 40 45 50 Oct Nov Dec Jan Feb Mar p/ th

Winter 06/ 07 prices (outturn, day ahead) Winter 07/ 08 prices (forward, quarterly)

Forw ard prices m ay not equal out-turn prices

Uncertainties remain for demand and supply

Source: Heren Energy

9

Price differentials betw een EU and US for this w inter reversed since June

Price m ovem ents beyond GB m arket

30 34 38 42 46 50 01/ 10/ 2007 01/ 11/ 2007 01/ 12/ 2007 01/ 01/ 2008 01/ 02/ 2008 01/ 03/ 2008 p/ th

NBP Zeebrugge US TTF

W ill w e see LNG diverted to GB/ EU ( ?)

Source: Heren Energy/ www.energywindow.com

10

Electricity supply

11

Elec m argin m anageable in severe conditions

Coal plant expected to provide baseload generation

Source: Figure 18 in Winter Consultation Report 2007/ 8 (National Grid)

48 50 52 54 56 58 60 62 64 66

05 Nov 12 Nov 19 Nov 26 Nov 03 Dec 10 Dec 17 Dec 24 Dec 31 Dec 07 Jan 14 Jan 21 Jan 28 Jan 04 Feb 11 Feb 18 Feb 25 Feb 03 Mar 10 Mar 17 Mar

Week Commencing GW

Short Term Operating Reserve Requirement Demand (1 in 50 w inter) 86% of generation + 2GW from France

12

5 1 0 1 5 2 0 2 5 3 0 3 5 Jan- 0 5 Apr- 0 5 Jul- 0 5 Oct- 0 5 Jan- 0 6 Apr- 0 6 Jul- 0 6 Oct- 0 6 Jan- 0 7 Apr- 0 7 Jul- 0 7

€/ tonne of carbon dioxide

2007 2008

Phase I I of EU ETS ( from 1 Jan 2 0 0 8 )

Carbon prices not high enough to drive sw itching from coal to gas Forward prices for carbon in 2008 higher than seen for Phase I in 2007

Source: Bloomberg

13

Gas netw ork capacity

14

Gas entry capacity for this w inter - overview

Authority placed price control obligation on NG to im plem ent transfer ( of unsold capacity) and trade ( of sold capacity) for this w inter Pattern of gas supplies and imports to GB is constantly changing Need capacity available where shippers wish to land gas Demand for entry capacity at each terminal can change quickly Transfer & trade arrangem ents in place for this w inter

Authority has now directed UNC Mod 169 to be implemented AND approved NG’s transfer and trade methodology statement

15

Gas entry capacity– im plem entation of transfer and trade arrangem ents for this w inter

NG invites shippers to participate in capacity surrender process First round

• f transfer

and trade auction Nov Transfer and trade affects w inter capacity allocations from Nov onw ards NG invites shippers to identify ASEPs at w hich they w ant to bid for capacity Sept 1 4

• 1 8

1 0

• 1 2

2 7 Second round of transfer and trade auction Oct Direction issued to im plem ent transfer and trade licence

• bligations

Authority approve NG’s transfer and trade m ethodology statem ent 5 6 Authority accept UNC 1 6 9 and rejects UNC 1 5 6 , 1 5 6 A, 1 6 9 A 1 0

16

Gas entry capacity – beyond this w inter

Transfer and trade need for improved and enduring arrangements to be in place ahead

• f next winter

Capacity substitution facilitate permanent transfer

• f unsold entry

capacity Capacity baselines Ofgem reconsulting

• n price control

baselines to apply from 1 Apr 08

NG has obligations to develop, maintain and

• perate a safe, efficient and

economical network

17

Gas netw ork capacity - exit

Com petition Com m ission upheld EON appeal in part

– key area of concern on flexibility product

Decision to be retaken by Authority Next steps

– Ofgem to consider scope of re-decision – NGG and EON proposal or broader? Ofgem to publish open letter on scope of re-decision – UNC Review Group 166 considering way forward Any reform s to exit regim e w ill not be im plem ented during this w inter

18

Norw egian flow s

19

Norw egian flow s

Concerns raised by industry about the im pact of Langeled flow

pattern on W D and DA gas prices is Langeled price-setting or price-responsive?

Constraints on ability of Norw egian producers to respond to NBP

prom pt prices – supply (eg upstream flexibility and availability, annual production permits) – demand (NCS also directly connected to 3 other European countries) Constrained optim isation m uddies the link betw een flow s and W D gas prices Higher prices in m id-sum m er also coincided w ith num ber of factors –CATS, IUK exports, unseasonably high demand, UKCS maintenance Ofgem continues to m onitor the m arket and w ill act w here it has concerns

20

Building integrated European m arkets

21

June 2 0 0 9 – Final agreement before European Parliamentary elections/ end of Commission mandate? Jan 2 0 0 7 – Commission publish Sector Inquiry and “Strategic Energy Review”: Blueprint for future EU energy policy to achieve “sustainability, security, competitiveness” March – Spring European Council Heads of Government endorse Commission plans, including 3rd package and 2020 targets 1 9 Sept – Com m ission publish 3 rd package proposals October – formal negotiations between European Parliament/ Council begin No fixed time limit. Crunch points in Member State discussions expected in December 07 and June 08

“3 rd Package” - Tim etable

22

Highlights of the “3 rd package”

Kick-starts negotiations betw een European Parliam ent and European Council

Unbundling

full ownership unbundling, with possible derogations for ‘deep’ ISO model

EU Regulation

Establishment of ACER (Agency for Cooperation

• f Energy Regulators)

TSO co-ordination

establish formal networks to improve cooperation on

• perations and investment

Power/ independence

• f NRAs

enhanced powers and independence alongside new duties

Transparency

Binding requirements on storage and LNG

• perators

23

GB Markets

24

I nfrastructure

• Exemptions
• Anti-hoarding

GB Markets w ork on w holesale issues

System Operator ( SO) Review

• Full review of electricity and gas

SO functions and incentives

• New scheme must be in place

from April 2008

• Dec 2 0 0 7 - Initial Proposals (and

thoughts on long-term scheme) Cash out Review

• Wide ranging review to simplify

current arrangements

• Mod proposals in latter stages
• f industry assessment process

Distributed Energy ( DE)

• Gain a better understanding of

difficulties faced by DE and look into potential solutions

• Aim to publish consultation

document in Novem ber 2 0 0 7

GB Markets

Gas Quality

• Reviewing

industry responses

25

Next Steps

26

W hat happens after today?

Oct 0 7 Dec 0 7 Mar 0 8 Sept 0 8 Jun 0 8

W inter 2 0 0 7 / 8 NG publish regular information and commentary on key trends and developments in winter so far Apr 0 8 – NG publish final summary of events of winter 2007/ 8 May 0 8 – NG publish initial Winter Consultation 2008/ 9 WCR (alongside a summer outlook?) Supported by Ofgem seminar July 0 8 – consultation responses due (8 week consultation) Sum m er 0 8 – Ofgem/ NG workshop focusing on responses and areas for further discussion Late Sept 0 8 – NG publish Winter Consultation Report 2008/ 9 accompanied by Ofgem seminar Oct 2 – Ofgem seminar

I m portant that you let NG know w hat you w ould like to see from this process

27

20 40 60 80 100 120 01-Apr 01-May 01-Jun 01-Jul 01-Aug 01-Sep £/ MWh

Day-ahead 2006 Day-ahead 2007

Calm er sum m er for electricity prices

W ould a sum m er consultation report be helpful?

Source: Heren Energy

Driven by lower demand and/ or higher supply?

28

Energy Markets Outlook ( EMO)

Energy White Paper commitment to “a new energy market information and analysis service from this autumn” that “will be jointly run by DTI and Ofgem”

Analyse potential developments in gas and electricity markets

• ver next 15 years

Provide industry participants with credible long term market scenarios First annual report to be launched in the autumn

EMO should provide long-term com plem ent to W inter Consultation process

29

Sum m ary

30

Sum m ary

Gas supply-dem and outlook for this w inter appears m ore positive than in previous years

– big challenges surround network capacity this winter and beyond Elec m argin looks m anageable even in severe w inter – EU ETS Phase II and LCPD both kick in from 1 Jan 08

Significant developm ents expected in Europe

– EC have adopted 3rd Package of liberalisation legislation

Going beyond W inter Consultation

– what do you want from the Winter Consultation process? – first Energy Markets Outlook report to be published next month

Your engagem ent is key in a successful W inter Consultation process

31