Energy Market Fundamentals
& Procurement
Dean Marsh - Senior Account Executive
(North)
Gary Ward - Senior Account Executive
(South)
Energy Markets – what you
need to know
Content
Energy price build up
Market Overview
Gas
Electricity
What Influences price
Current market conditions
Why use a third party?
Fixed vs. Flex
Energy price build up- Gas
100%
Margin
Metering
LDZ Charges
NTS Charges
Swing
Commodity
Energy price build up-Electricity
CCL 4%
Other 0%
DUo S 8%
Dlo sses 3%
TUo S 2%
Tlo sses 1%
RO 3%
B SUo S 1%
M argin & Imbalance 1%
Energy 77%
Market overview - Gas
Where does our
gas come from?
Gas pipeline
imports from
Norway (Langeled)
Netherlands (BBL)
Belgium (IUK)
Gas LNG imports
from Trinidad &Tobago
Qatar
Algeria
Egypt
Imports History
2000 UKCS 99% 1%
imports
2005 UKCS 82.7%
imports 17.3%
2008 UKCS 61%
imports 38.8%
(LNG 1.1%,pipeline
37.7%)
2009 UKCS 41.6%
imports 58.4%
Market overview - Electricity
How is our electricity generated?
Coal fired power plants
Gas fired power plants
Nuclear
Renewable
Percentage of generation can and does change dependent on
generation fuel costs (Coal & Gas) primarily
Forward supply issues
Decrease in coal fired power plants due to EU carbon directives
LCPD (More information at
http://www.defra.gov.uk/environment/airquality/eu-int/eudirectives/lcpd/index.htm)
Less capacity ( Non compliant power stations will have to close by
2015)
Market fundamentals
Fundamentals drive supply and demand
Do not always dictate price
Prices can disconnect themselves from
fundamentals
Speculation can play large part in
market movements
What Influences Price?
Oil – Can Influence gas prices (Due to indexation)
Coal –used for generation
Supply & demand- positive & negative GDP
EU carbon price- feeds into the cost of power generation
Exchange rates- Crude oil/ Freight/ Coal
Global tensions – political/economic etc
Transportation cost of shipping LNG and coal
Weather- can dictate demand on the NTS and the grid
Maintenance- Gas field outages/power station maintenance
Sep-01
Spot prices are more volatile than forward prices
Spot prices more closely reflect genuine supply and
demand
Mar-10
Dec-09
Sep-09
Jun-09
Mar-09
Dec-08
Sep-08
Jun-08
Mar-08
Dec-07
Sep-07
Jun-07
Mar-07
Dec-06
Index ICE p/therm
Sep-06
Jun-06
Mar-06
Dec-05
Sep-05
Jun-05
Mar-05
Dec-04
Sep-04
Jun-04
Mar-04
Dec-03
Sep-03
Jun-03
Mar-03
Dec-02
Sep-02
Jun-02
Mar-02
Dec-01
p/therm
Market volatility
110
M-1 Gas Index
100
latest close p/therm
90
80
70
60
50
40
30
20
10
0
Gas - UK October Gas Year Price (Flat Cost) p/therm
May 2006 – May 2010
Electricity - Annual Forward Baseload Price £MW/h
(Flat Cost)
May 2006 - May 2010
Brent Forward Curve
98
96
94
$/bbl
92
90
88
86
84
82
80
Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15
Source: Bloomberg, analysis Utilyx
Smr10 Gas Correlation with FTSE 100
120
1
Sm10 Gas (p/therm)
100
0.6
0.4
80
0.2
60
0
-0.2
40
-0.4
-0.6
20
-0.8
0
Jan-08
-1
Jul-08
Jan-09
Smr10 Gas
Jul-09
Jan-10
Correlation
Smr10 Gas Correlation with FTSE 100
0.8
Current Situation
Oil-Oil prices remain supported above $85/bbl on a bullish economic outlook, strong equities and
growth in emerging market demand
Supply remains healthy but demand from China is the most bullish fundamental driver
Gas-If oil remains at $85 we could expect to see continued support to gas prices on longer dated
contracts
Further potential upside can come from an upturn in demand as we come out of recession,
supported by increased continental demand
Power-Prompt power prices have firmed in line with the upturn in gas prices last week
Strong prices in underlying fuel markets have supported the curve, with corresponding contracts in
both gas and coal having gained over the last week. This remains a risk to the upside in the nearterm.
· Carbon prices have reached a 10 month high adding support to the curve, in particular the 2012
contracts and beyond
· Bearish factors remain however - demand is significantly below pre-recessionary levels and a
drop back down in oil and gas would feed through to have a bearish affect on the power curve
· Supply side issues also represent a longer-term risk to the UK power market e.g. governmental
policy with respect to nuclear build
ENERGY PROCUREMENTWHY USE A THIRD PARTY?
Electricity-Complex price structures
DUOS –Distribution Use of System Charges
TUOS- Transmission Use of System Charges
BSUOS- Balance System use of System Charges
T-Losses Transmission Losses
D-Losses Distribution Losses
CCL- Climate Change Levy
Renewable Obligation (supplier)
Available Capacity
Green/Renewable Premiums
ENERGY PROCUREMENTWHY USE A THIRD PARTY?
Gas-Complex price structures
LDZ – Local Distribution Charges
NTS – National Transmission Charges
Balancing (swing) – charges
CCL – Climate Change Levy
ENERGY PROCUREMENTWHY USE A THIRD PARTY?
Additional Services
OJEU Compliance
E-Procurement
Market Intelligence
Bureau Services – Bill validation
EUETS/CRC – Guidance & advise
Retrospective Cost Auditing
Best Practice - Flexible Risk Managed contracts gas/power
Dedicated Account Management
ENERGY PROCUREMENTWHY USE AN APPROVED
PBO?
Fixed or Flex?
ENERGY PROCUREMENTWHY USE AN APPROVED
PBO?
Fixed
Fixed on a single day
Advantages
Fix and forget
Known budget price
Disadvantages
1 in 250 chance
High risk premium
Exposed budgets
ENERGY PROCUREMENT-WHY USE
AN APPROVED PBO?
Flex
Purchasing prior to and during contract
Advantages
Discount on forward price
Access to market falls
Protection from market highs
Budget management & planning
Disadvantages
Reconciliations
Skills required
Size requirements
Useful Links
www.ogc.gov.uk/energy_gas_and_
electricity.asp
www.energyconsortium.org.uk
Thank you for listening
Any questions?