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					Tuesday 30th. November 2004

British Institute of Facilities Managers
Retail Sector Forum

Energy Procurement Strategies

John Hall Associates Limited
9 Piries Place, Horsham, RH12 1EH

Tel: 01403 269430 - Fax: 01403 269451
E-mail: peter.ind@jhal.com
Internet: www.jhal.com
                Presentation Content


   Background – Electricity Prices 2000 - 2003
   Energy Price Drivers in 2004
   The Electricity Generation Mix
   Further Back in the Chain - Oil Price Drivers
   Electricity Price Movements 2004 & Beyond
   Gas Price Developments 1998 – 2003
   Gas Price Movements 2004 & Beyond
   Buying Strategies - Contract Options and Targets
   An Eye to the Future
           Electricity Market Background
                    (2000 – 2002)


   Historic Generation Over-Capacity (31%)
   New Electricity Trading Arrangements (NETA)
   Increased Competition - Prices weaken
   ENRON collapse releases more Power
   Generators/Suppliers in Trouble
   General Market Instability
   Lowest Prices below £15.50 per MWh
          Electricity Market Developments
                       (2003)


   The Aftermath of NETA
   Generators/Suppliers Hit Back
   Generating Plant taken off Line
   Rationalisation of Suppliers = less Competition
   Surplus Capacity falls from 31% to 17%
   NGTransco issues Capacity Warnings
   Prices spiral upwards
            Energy Price Drivers in 2004


   The Oil Price
   The Oil/Gas Link
   The Gas/Electricity Link - 40% of Generation
   Supply & Demand - Capacity Concerns
   “1 in 20” Winter Planning
                           Generation Mix
                   Power - Generation Feedstock Mix

100%




80%




60%




40%




20%




 0%
   1996   1997            1998          1999            2000          2001   2002

             Gas   Coal     Nuclear   Hydro and other   Renewables   Oil
                 High Oil Prices
           What is driving the market?



   Strong Global Demand fuelled by Growth in China
   Inadequate Global Supply Capacity
   Low Inventory Levels
   Instability in four Key OPEC Producer States
   Political Problems in Russia (Yukos)
   Inadequate Refining Capacity Worldwide
   Weak Dollar
                                 Brent Crude Price Movements
             53
             51
             49
             47
             45
             43
             41
             39
$ / barrel




             37
             35
             33
             31
             29
             27
             25
             23
             21
             19
             17
                  Jan- Apr-   Jul-   Oct-   Jan- Apr-   Jul-   Oct-   Jan- Apr-   Jul-   Oct-   Jan- Apr-   Jul-   Oct-
                   01   01     01     01     02   02     02     02     03   03     03     03     04   04     04     04

                                                         IPE Brent Crude
                                                 Electricity – Baseload Prices
                  40
                  39
                  38
                                      Apr-05             Oct-05
                  37
                                      Apr-06             Oct-06
                  36
                                      Oct-04
                  35
                  34
                  33
  Price - £/MWh




                  32
                  31
                  30
                  29
                  28
                  27
                  26
                  25
                  24
                  23
                  22
                  21
                   Oct-03   Nov-03   Dec-03    Jan-04   Feb-04   Mar-04   Apr-04   May-04   Jun-04   Jul-04   Aug-04   Sep-04   Oct-04   Nov-04



Source: www.heren.com
                                                                       OCTOBER 2004 ELECTRICITY CONTRACT ROUND:
                                                                         Best Offer Energy Prices at Grid Supply Point


                                            October 2004 offers            October 2003 contracts            Linear (October 2003 contracts)             Linear (October 2004 offers)

                             4.2
                             4.1
                               4
                             3.9
                             3.8
                             3.7
                             3.6
                             3.5
Energy Prices at GSP p/kWh




                             3.4
                             3.3
                             3.2
                             3.1
                               3
                             2.9
                             2.8
                             2.7
                             2.6
                             2.5
                             2.4
                             2.3
                             2.2
                             2.1
                               2
                             1.9
                             1.8
                             1.7
                                   5   10      15        20       25      30        35       40        45         50     55        60          65   70         75        80        85
                                                                                                  Load Factor %
                                                                OCTOBER 2004 ELECTRICITY CONTRACT ROUND:
                                                                Best Offer Offer Energy Prices at Grid Supply Point


                                         October 2004 offers          October 2003 contracts              Linear (October 2004 offers)          Linear (October 2003 contracts)


                             4.2
                             4.1
                               4
                             3.9
                             3.8
                             3.7
                             3.6
                             3.5
Energy Prices at GSP p/kWh




                             3.4
                             3.3
                             3.2
                             3.1
                               3
                             2.9
                             2.8
                             2.7
                             2.6
                             2.5
                             2.4
                             2.3
                             2.2
                             2.1
                               2
                             1.9
                             1.8
                             1.7
                                   2.5   5.0           7.5     10.0           12.5         15.0          17.5          20.0              22.5   25.0         27.5           30.0
                                                                                               Night Factor %
Electricity – Cost Breakdown
                                             Electricity Cost Breakdown


                                  Available Capacity, 8.23%



         Distribution Charges (DUoS),
                     11.10%




    Distribution Losses, 3.74%
        Settlements, 0.09%

       Triad Charges, 3.22%

 Transmission Losses, 1.38%
Margin inc shape & volume risk,
             3.85%                                                        Energy at NBP, 62.07%
                    BSUoS, 2.0%

        Renewable Obligation, 4.32%
             Electricity – 2004 & Beyond


   October 2004 Year Prices moved from 21.43 per
    MWh (September 2003) to £35.5 per MWh
    (September 2004)
   Supply/Demand Balance will remain tight
   High Oil/Gas Prices will keep Electricity Prices up
   EU Emissions Trading Scheme (EUETS) will
    continue to put Pressure on Prices
   HOWEVER Prices may now have peaked!
   October 2005 Year Price currently £30.50 MWh
   October 2006 Year Price currently £30.20 MWh
                           Buying Strategies
 High
             Budget                  Priority              Opportunity



               FINANCIAL CERTAINTY                RISK WILLING

              Predominantly Fixed with      Predominantly Variable
                  limited Variable
% of Costs




                      RISK AVERSE          FINANCIAL FLEXIBILITY

                      Fixed Period              Balance of Fixed and
                       Fixed Price                   Variable
 Low




             Low          Ability to Pass Through Costs            High
          Electricity Purchasing Strategies


   Fix or Float?
   Flexible Deals increasingly available
   Separation of Baseload & Peak
   Baseload Purchases in Months/Quarters/Seasons
   Current Minimum Baseload – 10 MWh
   Tranche Purchasing
     Electricity – Consumption

                                 Consumption Profile


                                  Residual
MW




                                 Base Load Volume
                               Market Increase since Settle Date
        35



        30
                                        Market increase since 3rd July 2003


        25



        20
£/MWh




        15


                                                Market Price when Contract Settled on the 3rd July
        10



        5



        0
        1/7/03   1/8/03   1/9/03 1/10/03 1/11/03 1/12/03   1/1/04   1/2/04 1/3/04     1/4/04   1/5/04   1/6/04   1/7/04   1/8/04   1/9/04
                                                                        Date


                                                 2 Year Contract    Market Increase
                                Electricity Baseload Price – October 2005
                          38
                          37
                          36
                          35
                          34
                          33
                          32
Commodity Price (£/MWh)




                          31
                          30
                          29
                          28
                          27
                          26
                          25
                          24
                          23
                          22
                          21
                          20
                          19
                          18
                           Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04    Jul-04    Aug-04 Sep-04 Oct-04 Nov-04 Dec-04
                                                                              Date

                                                     October 2005 curve    2 Year Settle Price        October 2004 curve
             Gas Market Developments
                  (1998 – 2003)


   Installation of Interconnector in October 1998
   Gas Price Link between UK and Europe set up
   Oil Prices at $10 per Barrel - Gas Imports from
    Europe keep Year Gas Prices down at 11/12 ppt
   Oil Price rises in 1999 from $10 to $25 per Barrel
   Gas/Oil Price Lag sees Gas Prices follow Oil
   Forward Gas Prices peak at above 23 ppt in 2000
   2001-2003 Year Gas Prices in Range of 18-24 ppt
           Gas Prices – 2004 & Beyond


   2004 Brent Oil Price peaks at $51.56 per Barrel
   Oil Price Premium estimated no more than 10%
   October 2004 Year Prices moved from 22.00 ppt
    (September 03) to 40.07 ppt (September 04)
   Supply and Demand Issues predominate
   Sentiment, Uncertainty, and Speculation keep Gas
    Price up
   October 2005 Year Prices now at 34.23 ppt
             Gas Purchasing Strategies


   Fix or Float?
   Index-linked Deals well established
   Most popular - Day Ahead/Month Ahead
   Minimum Volume – 0.5 m Therms p.a.(15m KWh)
   Tranche Purchase (Min Volume – 4m Therms p.a.)
   Fix & Float Option provides good Balance
 Gas – Cost Breakdown


 Margin/Admin 2-4%
    Metering 1-3%
     CCL 8 - 12%
Transportation 10-12%


  Gas Cost 70-75%
                                    October 2005 Wholesale Gas Prices
                  44                                                                                    1.43
                  42                                                                                    1.36
                  40                                                                                    1.30
                  38                                                                                    1.23
                  36                                                                                    1.16
                  34                                                                                    1.09
                  32
Pence Per Therm




                                                                                                        1.02




                                                                                                               Pence Per kWh
                  30
                                                                                                        0.96
                  28
                                                                                                        0.89
                  26
                                                                                                        0.82
                  24
                                                                                                        0.75
                  22
                  20                                                                                    0.68

                  18                                                                                    0.61
                  16                                                                                    0.55
                  14                                                                                    0.48
                  12                                                                                    0.41
                  10                                                                                    0.34
                       Oct   Nov    Dec   Jan    Feb     Mar   Apr    May   Jun    Jul    Aug     Sep
                                   1998   1999    2000     2001      2002   2003   2004    2005
                                           Wholesale Gas Price – October 2005
                            44.00

                            42.00

                            40.00

                            38.00
Commodity Price (p/therm)




                            36.00

                            34.00

                            32.00

                            30.00

                            28.00

                            26.00

                            24.00

                            22.00
                                Oct-03 Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04 Jul-04 Aug-04 Sep-04 Oct-04 Nov-04 Dec-04


                                               October 2005 Year Ahead Price                          Current Contract
                                                               Index Benchmark Chart
                            43.00                                                                                                               55,000
                            42.00
                                                                                                                                                52,000
                            41.00
                            40.00                                                                                                               49,000
                            39.00
                            38.00                                                                                                               46,000
                            37.00                                                                                                               43,000
                            36.00
Commodity Price (p/therm)




                            35.00                                                                                                               40,000
                            34.00                                                                                                               37,000
                            33.00




                                                                                                                                                         Volume (therms)
                            32.00                                                                                                               34,000
                            31.00
                                                                                                                                                31,000
                            30.00
                            29.00                                                                                                               28,000
                            28.00
                                                                                                                                                25,000
                            27.00
                            26.00                                                                                                               22,000
                            25.00
                            24.00                                                                                                               19,000
                            23.00                                                                                                               16,000
                            22.00
                            21.00                                                                                                               13,000
                            20.00                                                                                                               10,000
                            19.00
                            18.00                                                                                                               7,000
                            17.00
                                                                                                                                                4,000
                            16.00
                            15.00                                                                                                               1,000
                                    Dec-04     Jan-05      Feb-05     Mar-05     Apr-05     May-05      Jun-05   Jul-05    Aug-05      Sep-05

                              Fixed Prices Declined IPE (04-May-04)      IPE Prices on (insert today's date)       Last Yrs Actual Prices
                              Months Bought                              Partial Bought                            Volume (therms)
                                  Take partial cover
                  2200000



                  1700000
Consumption Mwh




                  1200000



                  700000



                  200000


                            Jan   Feb   Mar    Apr    May     Jun    Jul    Aug    Sep     Oct      Nov   Dec
                  -300000
                                  High Risk - Portion Defaulting to Chosen Market Index (d-1/m-1)
                                  Medium Risk - Floating Portion
                                  Low Risk - Fixed Portion with Options to Fix
                     Taking the Price

                                Buys at an agreed and pre-
                                determined fixed price
                                Brings certainty, helps budgeting
18
                                Simple
16
                                Removes price volatility
14                              but
12                                        –requires good timing
10                                        –risks losing out against
 8                                        competitors
 6                                        –no flexibility
 4
                                Zero risk exposure
 2
                                Zero downside benefit
 0
                                Budget certainty
 J




             J

                 S

                     N
     M

         M
             Use a financial Hedging tool

18
16                            Buys on index price, but agrees a
                               maximum ‘ceiling’
14
                              Consumer pays a premium for this
12                             protection
10                            Maximum risk is limited
 8                            Consumer not ‘locked in’ to a fixed
 6                             price
 4                            Benefit of lower prices retained
 2                            but
 0                               – requires premium to be paid
 J




             J

                 S

                     N
     M

         M
           Events which may determine
      the Direction of the Market in 2006/07

    Slowdown in Chinese Economy
    Iraq – Gradual Improvement
    Resolution of Yukos Issue
    Interconnector Import Capacity Expansion in 2005
    New Gas Pipelines from Norway & Holland in 2007
    Major LNG Capacity planned for 2007

    BUT increasing Dependence on OPEC/Russia and
    outstanding long Term Problems will keep Prices
                     relatively high
              Planning the Strategy


   Monitor Wholesale Market Price Trends
   Set realistic Targets at Start of Year
   Always plan with a twelve Month Window on
    Market
   Recognise the Importance of Timing
   Assess optimum Contract Length
   Explore alternative purchasing Methods, including
    Market-related Deals
   Conduct Regular Strategy Reviews
        European Energy Services
          John Hall Associates


          9 Piries Place, Horsham, RH12 1EH
Tel: +44 (0) 1403 269430  Fax: +44 (0) 1403 269451
               Email: peter.ind@jhal.com
                Internet@ www.jhal.com

				
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