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
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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)
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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)
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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
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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
Gas
1998
Coal
Nuclear
1999
Hydro and other
2000
Renewables
2001
Oil
2002
High Oil Prices
What is driving the market?
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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
$ / barrel
Brent Crude Price Movements
53
51
49
47
45
43
41
39
37
35
33
31
29
27
25
23
21
19
17
Jan- Apr01
01
Jul01
Oct01
Jan- Apr02
02
Jul02
Oct02
Jan- Apr03
03
IPE Brent Crude
Jul03
Oct03
Jan- Apr04
04
Jul04
Oct04
Electricity – Baseload Prices
40
39
38
37
Apr-05
Oct-05
Apr-06
Oct-06
36
Oct-04
35
34
Price - £/MWh
33
32
31
30
29
28
27
26
25
24
23
22
21
Oct-03
Nov-03
Source: www.heren.com
Dec-03
Jan-04
Feb-04
Mar-04
Apr-04
May-04
Jun-04
Jul-04
Aug-04
Sep-04
Oct-04
Nov-04
OCTOBER 2004 ELECTRICITY CONTRACT ROUND:
Best Offer Energy Prices at Grid Supply Point
Energy Prices at GSP p/kWh
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
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
Load Factor %
50
55
60
65
70
75
80
85
OCTOBER 2004 ELECTRICITY CONTRACT ROUND:
Best Offer Offer Energy Prices at Grid Supply Point
Energy Prices at GSP p/kWh
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
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
Night Factor %
20.0
22.5
25.0
27.5
30.0
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%
BSUoS, 2.0%
Renewable Obligation, 4.32%
Energy at NBP, 62.07%
Electricity – 2004 & Beyond
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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
Priority
Opportunity
High
Budget
RISK WILLING
Predominantly Fixed with
limited Variable
Predominantly Variable
RISK AVERSE
FINANCIAL FLEXIBILITY
Fixed Period
Fixed Price
Balance of Fixed and
Variable
Low
% of Costs
FINANCIAL CERTAINTY
Low
Ability to Pass Through Costs
High
Electricity Purchasing Strategies
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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
MW
Residual
Base Load Volume
Market Increase since Settle Date
35
30
Market increase since 3rd July 2003
25
£/MWh
20
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
Date
2 Year Contract
Market Increase
1/4/04
1/5/04
1/6/04
1/7/04
1/8/04
1/9/04
Electricity Baseload Price – October 2005
38
37
36
35
34
Commodity Price (£/MWh)
33
32
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)
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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
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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
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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%
44
1.43
42
1.36
40
1.30
38
1.23
36
1.16
34
1.09
32
1.02
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
1998
Jan
1999
Feb
2000
Mar
Apr
2001
May
2002
Jun
2003
Jul
2004
Aug
2005
Sep
Pence Per kWh
Pence Per Therm
October 2005 Wholesale Gas Prices
Wholesale Gas Price – October 2005
44.00
42.00
Commodity Price (p/therm)
40.00
38.00
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
43.00
42.00
41.00
40.00
39.00
38.00
37.00
36.00
35.00
34.00
33.00
32.00
31.00
30.00
29.00
28.00
27.00
26.00
25.00
24.00
23.00
22.00
21.00
20.00
19.00
18.00
17.00
16.00
15.00
55,000
52,000
49,000
46,000
43,000
40,000
37,000
34,000
31,000
28,000
25,000
22,000
19,000
16,000
13,000
10,000
7,000
4,000
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)
Volume (therms)
Commodity Price (p/therm)
Index Benchmark Chart
Take partial cover
2200000
Consumption Mwh
1700000
1200000
700000
200000
Jan
-300000
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
High Risk - Portion Defaulting to Chosen Market Index (d-1/m-1)
Medium Risk - Floating Portion
Low Risk - Fixed Portion with Options to Fix
Nov
Dec
Taking the Price
Buys at an agreed and predetermined fixed price
Brings certainty, helps budgeting
Simple
Removes price volatility
but
–requires good timing
–risks losing out against
competitors
–no flexibility
N
S
J
M
Zero risk exposure
Zero downside benefit
Budget certainty
M
J
18
16
14
12
10
8
6
4
2
0
Use a financial Hedging tool
 Buys on index price, but agrees a
maximum ‘ceiling’
 Consumer pays a premium for this
protection
 Maximum risk is limited
 Consumer not ‘locked in’ to a fixed
price
 Benefit of lower prices retained
 but
N
S
J
M
– requires premium to be paid
M
J
18
16
14
12
10
8
6
4
2
0
Events which may determine
the Direction of the Market in 2006/07
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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
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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