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Key Alliance - JHA 2004 Energy - Key Issues for Today 23 rd. June 2004 John Hall Managing Director John Hall Associates Limited

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Presentation on theme: "Key Alliance - JHA 2004 Energy - Key Issues for Today 23 rd. June 2004 John Hall Managing Director John Hall Associates Limited"— Presentation transcript:

1 Key Alliance - JHA 2004 Energy - Key Issues for Today 23 rd. June 2004 John Hall Managing Director John Hall Associates Limited

2 John Hall Associates  Set up UK Oil Services to Buyers  Conferences & Seminars  UK Gas Market De-regulation  Electricity Market De-regulated  Contract Management Services  Extended to Pan-European  US Affiliation – Summit Energy

3 JHA Approach  Team Focus  Provision of Dedicated Resource  Resource as Extension to Client’s Own  Working at Site or Group Level  Tailored to meet Client’s Needs

4 JHA Business Ethics  Totally Independent & “Unique”  Fixed Fee Basis – Agreed in Advance  No Shared Savings  No Third Party Remuneration  No Affiliation with any Supplier  No Sponsorship  No Tele Sales or Agents!

5 JHA Systems  In-house Development  Specified to JHA/Client Requirement  Host Own Web Site  On & Off-Line Services  Electronic Data Transfer  Best Mix of People & Technology  We drive systems not they us!

6 JHA Company Profile  Around 300 clients  High Retention Rate  60 – 80 Pan-European  Electricity - 10 TWh  Gas Billion Therms  Oil Billion Litres  Working with all assessed suppliers

7 JHA Services UK to Pan-European  Electricity, Gas, Oil, Water & Telecoms  Market Reports – Daily/Weekly/Monthly  Bespoke Reporting Services  Day-to-day Market Support  Contract Management  In-house Training & Client Briefing  Conferences & Seminars

8 JHA European Energy Services  Contract Management: - - Data & Information Collection - Profile Generation & Management - Invoice Management - Performance Benchmarking - Procurement Services - Environmental Services

9 JHA European Energy Services  Continuous Market Monitoring - Market Conditions - Supplier/Market Intelligence/Gossip - Real Time On-Screen Pricing  Profiles in State of Readiness - Tender or Extend or Renew?  Fixed or Flexible or Mixed Pricing?

10 JHA Profile Management  Site Consumption Reporting  Comparison of Site Consumption Profiles  Identification of Production Anomalies  Profiles Maintained

11 JHA Invoice Management  Invoice Simulation  Compare to Supplier Invoice or Self Bill?  Pay or Withhold?  Anomalies Investigated  Monthly & Annualised Reporting

12 JHA Performance Brnchmarking  Internal - Site to Site - Against Budget  External - Company to Company - Against Market Indicators

13 JHA Procurement Services  Invitation to Tender (ITT) Prepared  ITT Agreed with Client  ITT Submitted Electronically to Suppliers  On-Line Auction Facility  Offers Analysed  Results Selectively Viewed On/Off-line  Offer Analysis to Client’s Specification

14 JHA Offer Analysis  Offers Analysed by Site/Group/Division  Site by Site or Group Overall?  Also Analysed by Supplier  Provision of Best Mix or Single Site

15 Key Market Factors  Energy = Oil + Gas + Electricity  Oil Prices Influence/Control Gas Prices  Gas Prices Influence Electricity Prices

16 Key Market Factors  Profile not Volume Driven  Country by Country not Pan-European  Terms & Conditions Significant as Price  Suppliers do Make Mistakes  Suppliers are not well Co-ordinated  Markets more Favourable to Suppliers  Timing more important than Means

17 Key Market Drivers  Economic Factors - World Events  Supply & Demand - Capacity/Storage  Weather  Interconnector Flows  Short Term Supply Constraints  Outages  Trading Activity

18 Opening Views  Who would have known….  Effect of Iraq Conflict on:-  UK Government – Elections looming  European Industrial Energy Markets  The vulnerability of OPEC  The threat of Oil supply disruptions  The alignment of European Energy Prices

19 Opening Views  Who would have known….  The effect of Emissions Trading on:-  The Electricity-Gas market  The meaning of “Spark/Dark Spread”  The adverse role of both on the market

20 Market Irritants - Consumers  Daily phone calls from consultants  We can make you big savings  Won’t cost you a penny!  Not from JHA – we can’t do them!  JHA gets them too!  Lack of supplier response within contract  Poor administration – all round

21 Market Irritants - Consultants  Suppliers that try to exclude the consultant  Suppliers that try to fool the consumer  Suppliers that try to manipulate the data  Suppliers that don’t follow procedure  Consumers that appoint two consultants  Consumers that appoint but ignore consultants  Consumers that don’t listen

22 Market Myths  Prices only ever fall  We always achieve savings  We always have the best price  We employ experts so we know  We just can not exceed our budget allowance  So the market is rising - we still want the “wins”

23 Market Reality  Why didn’t you warn us it was going to happen  We can not accept an increase  If you want to retain our business……  We want the same price again!  Tell the supplier to hold his price another week  We respond when it suits us not the supplier  My Board will not accept this!  My Board doesn’t want to hear this!

24 Market Reality  Where are the fundamentals?  What are they?  Weather/Stocks/Supply/Demand/Exchange  Do they really matter?  In part, but not in entirety  What does matter?  Rumour/Perception/Trading Activity

25 UK Weather Pattern

26 UK Monthly Temperature Pattern

27 Market Reality  Three months on – market prices still rising  Media Attention solely on “petrol prices”!  Energy Costs now a Boardroom Agenda  If not, make it one!  UK Government “unaware” of any issue!  Energy still part-time for UK Minister

28 Market Reality  EU Emissions Trading Scheme  Bad for UK within Europe  Bad for Europe within World  UK Climate Change Levy  Electricity ppkwh & Gas +0.15ppkwh  UK Renewables Obligation  +£1.49 pMWH

29 Market Concerns - Geo Political  Shortage of Oil, Gas & Electricity supplies  Terrorist attack  Producer cut back  Inability/Ability of OPEC to manage Oil market  Effect of higher Oil prices on consumers  Effect of higher Oil prices on producers

30 Market Concerns  Decreasing number of suppliers  Each Supplier with limited capacity  Buyer/Supplier risk awareness – price/supply  Can supplier deliver – can buyer pay?

31 Market Interest - Consumers  Better Supplier Administration  Accurate Consumption Data Flow  Awareness to buyer needs  Clear Understanding of price structure  Flexible & Fixed Price options  Financial Tools  Take opportunity to manage own risk

32 Market Interest - Consumers  Understand Best Practice  Price competition is still fierce!  Evaluate Suppliers before seeking price  Ensure that they can provide required service  Then, Consider Energy Management

33 Market Needs - Consumers  Pan-European Support  New or Old EU Members?  Country by Country or Overall?  Same supplier - Different deals in each country  Improved pan-European Supplier Integration  Transparency/Harmonisation on Taxation  Common views across organisations  Same language – different culture!

34 Market Rumblings - Consumers  What does the UK offer?  Higher Energy Taxation  Higher Environmental Controls  Higher Delivery Charges  Higher Energy Costs  Higher Labour costs  Benefit of weaker Dollar-Sterling Exchange  UK Government aware on Labour Costs only!  Are they moving away and if so, where to?

35 Market Prices  Relativity between different sources  Duty has played a major role  Oil – back up to the 1985 levels  Gas – back to the levels  Electricity – Moving up!

36 UK Annualised Price Index

37 UK Oil Market Prices

38 UK Gas Market Prices

39 UK Electricity Market Price

40 Oil-Gas-Electricity Link  Oil drives Gas which drives Electricity  Continental Gas prices linked to Oil Price  UK Gas price linked to Continental Gas Price  40% UK Generation fired by Gas  By 2010 UK Generation will be 50% Gas fired  Oil-Gas Relationship  Electricity-Gas Relationship

41 UK prices 1 January – 21 June 2004

42 Oil-Gas-Electricity Link  Gas follows Oil up  Electricity follows Gas  But Gas is slow to follow when Oil falls  Realistic lag or market manipulation?

43 Understanding Spark Spread  Which drives the other – Gas or Electricity?  If Spread is above £6.00 per MWH  Electricity is generated  If Spread is below £6.00 per MWH  Gas can be sold back in to system  Electricity is not generated  Higher return for selling gas than generating!

44 Spark Spread – Day Ahead

45 Spark Spread – Month Ahead

46 Spark Spread – Season Ahead

47 European Electricity Prices  All moving up  UK prices based on Year from specific month  Continental prices based on calendar year  France & Germany at bottom end  UK has overtaken Holland to hit the top spot

48 European Market Prices 2004

49 European Market Opportunities  Analyse requirement by site and by country  Understand supplier coverage  Talk to suppliers in each country  Cross reference them to get optimum fit  Investigate Tax Reduction Benefits  Potential CCL Exemption in UK

50 Issues For Today  What is the outlook for energy supplies?  Are we going to run out soon?  Will UK Government make it’s decision?  UK – with or without Nuclear?  Take out 20% - Replace it with what?

51 Issues For Today  UK Government still advocating Renewables  If Renewables are to take such a large share  Who will invest in back-up power supply?  Are prices high enough to safeguard supply?  Are new investors coming in?  Where should investment come from?  Can consumers afford to pay higher prices?

52 Issues For Today  Is the UK truly disadvantaged?  Why are UK Gas prices the highest in Europe  Will new supplies arrive in time?  From Norway & Netherlands but at what price?  What will stimulate generation investment?  Energy Taxation:-  How will the UK cope in Europe?  How will Europe cope in the World?

53 EU Emissions Trading Scheme  Kyoto Agreement  EU ETS to begin in January 2005  Direct emissions backed up by tradable allowances  Price of allowance will impact on power price  Generators may generate or sell allowance!

54 EU Emissions Trading Scheme  Kyoto Agreement  EU to reduce emissions by 8% of 1990 level  UK accounts for 12% of this  UK Government to go further it seems  UK Phase at 15.20% by 2010  UK Phase at 20% by 2010

55 EU Emissions Trading Scheme  National Allocation Plans – NAPs  14 member States have submitted to EC  3 published internally but 6 not published  Some Allocations too “generous”  EU will demand more from certain member States  EU allowances for 2005 around €10 MtCO 2  (Updates in JHA Daily Bulletin)  Result - Higher prices but disproportionate sharing

56 Issues For Tomorrow  Planning ahead is more critical  How far? 1, 2 or 3 years or more?  What are the tools that are needed?  Fundamentals – Market Awareness  Business Acumen – Brinkmanship?

57 Daily Briefing Report  MARKET COMMENT – Oil, Gas Electricity  JHA Recommendations  Pan European Pricing  A daily update  Supported by telephone dialogue

58 Conclusion - Whatever Your View  Expect the unexpected  Monitor Weekly or Daily but don’t lose contact  Listen to whatever advice is being given  Don’t ignore market gossip – talk to people  Don’t make wild claims  Keep everyone informed!  No one likes a surprise!

59 JHA - Key Alliance GETTING THE STRATEGY RIGHT 23 rd June 2004 Noreen Guy Director of Operations

60 Getting the Strategy Right  Wholesale price movements / consumer costs  Best practice for energy procurement  Constructing a strategy  Conclusions

61 Background – Costs and Price  Wholesale Electricity for April 2003 and 2004 –Consumer price – cost breakdown  Wholesale Gas for October 2002 and 2003 –Consumer price – cost breakdown

62 Wholesale Electricity – April Year Price

63 Consumer Price – April Cost Breakdown

64 Wholesale Gas – October Year Price

65 Consumer Price – October Price Breakdown

66 Best Practice in Energy Procurement  Timing  Data  Analysis  Process  Approach to Market

67 Timing  Constraints –Contract start date –Customer Expectation –Supplier Response  The major element of cost  Variance – October 2004 Electricity –Lowest point – Dec ‘03 – £21.00/MWh –Highest point – May ‘04 - £27.50/MWh  Difference - £6.50/MWh  Rising market – cost avoidance

68 Data  Completeness and credibility –Minimise risk premium  Predictability –Penalties for imbalance  Forecasting  Maintained at all times –Readiness for market –Offer and cost variance analysis

69 Offer Analysis  Offers –Structures –Rates  Evaluate added value  Like for like comparison  Validity –Time to analyse –What if  Approval process

70 Approach to Market  Consider requirements  Supplier selection  Notify / gauge interest in advance  Provide credible material  Monitor market – final bid or auction  Re-bidding  Consolidated buying? –Profile –Access to more sophisticated contract structures –Common objectives and decision process

71 Process  Renewal –Market movement exceeds value of competition –Confident in incumbent  Conventional Tender –Negotiation based on compromise –Low to moderate competition  Auction –Price is dominant factor –High competition

72 Constructing Strategy  Objectives  Price risk  Supplier performance  Key elements to consider

73 Electricity – April Year Price

74 Gas – October Year Price

75 Key Elements  Price risk –Contract structures and pricing mechanisms  Suppliers –Single or multiple –Performance –Selection  Review process  Implications of change –Resource –Performance Measurement

76 Price Risk

77 Fixed Price Contract  Fixed price for a fixed period  Set review frequency  Tender or Auction  Support –Analysis –Timing

78 Floating Prices  Moves with market  Not necessarily a set frequency  Supplier Evaluation –Charges –Flexibility  Contract Structure  Index  Support –Buying Points –Performance Measurement

79 Managed Contract  Cover policy – limits - authorisation  Aim to outperform market  Longer term framework agreement  Continual market assessment  Active buying participation  Financial tools  Forecasts  Variance reporting

80 Conclusions  Increased awareness  Review objectives  Price risk is dominant factor now  Actions relate to achievement of objectives  Ongoing resource and information


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