1. EUROPE’S ENERGY CHALLENGES: SECURING SUPPLY CONFERENCE ROYAL UNITED SERVICES INSTITUTE Alistair Buchanan, CE Ofgem - 21 May 2007 THE ENERGY MIX

2. RUSI Conference 2 CONTENTS  Introduction:Meet my dolls!: Britannia, Europa and Russia.  “Britannia”:Markets working but increasingly reliant on Europe.  “Europa”:Big pro market changes both at local and pan Europe levels but can Europe stand alone?  “Russia” (ROW):How will the relations with Europa and Britannia work?  Low probability/High Impact:Do networks and regulators help/hinder de facto markets?

3. RUSI Conference 3 BRITANNIA: MARKETS ARE WORKING Looking into 2007 and 2008: Markets deliver on assets. Competition is in good health. Sustainable/renewables push ahead. Prices reacting as expected. But lessons learned in last 4 years: The value and power of information. The need to involve and alert market participants. Britannia cannot “deal” in isolation

4. RUSI Conference 4 BRITANNIA: CAN’T GO IT ALONE It could try! Electricity- Interconnection low. Gas - Majority still from North Sea. But realistically Increased interconnection (gas, electricity)… local gas in decline. EU ETS trading. DG Tren/DG Comp impacts on structure behaviour and prices. Future of Britannia linked to Europe

5. RUSI Conference 5 EUROPE – BIG PRO MARKET MOVES Kroes and DG Comp:Dawn raids – await results. Reviewing Spanish and French “low” tariffs… IEA criticises Hungary’s tariffs. Keen on re-structuring solutions … but Unbundling and Corporate deals. Pielbags and DG Tren:Information “The Big Three”Unbundling. Regulatory structures Post 10 January 2007 – very encouraging

6. RUSI Conference 6 EUROPA – LOCAL LEVEL: BIG STRIDES Structures - Belgium and Distrigas. - Holland and Unbundling legislation. - Germany and new competition law. Better information –In 2007 big improvements in France, Belgium and Germany. More local regulatory impact and powers - France. Maybe one step back … but two forwards

7. RUSI Conference 7 EUROPA: TEST CASE GERMANY 4 years ago: Barriers to entry, no incentive for competition, legacy contracts etc. 2005 – 2007: Major moves on network regulation, trading, information. 2007: Retail competition re-launched: (E.ON in electricity and EnBW in gas) more market information released, gas zones reduced and simplified, new entrants. Fear or Principle?: The end result is better

8. RUSI Conference 8 BUT IS BRITANNIA’S AND EUROPA’S MARKET VISION REALISTIC? Exposed to global LNG trends? Exposed to small number of key suppliers? Reliant on key pipelines? Players not used to markets? Russia (ROW) will dictate?

9. RUSI Conference 9 MARKETS CAN WORK EVEN WITH RUSSIA (ROW) LNG players attracted to UK market. Ofgem has insisted that players agree to pro-market rules. Gazprom – global trading base at Hampton Court, London. Keep the “umbilical cord” risk in perspective: UK – Norway, Qatar … indeed very low reliance on Russian gas by 2020 in UK Only Hungary and Slovakia over 30% reliant on Russian gas. Russia/Gazprom need EU and EU markets New LNG facilities … Rotterdam/Wilhemshaven … new local coal projects … new nuclear … more renewables… contain reliance on pipelines Britannia an Europa have to ensure Russia (ROW) dances with them.

10. RUSI Conference 10 EVEN RUSSIA LOOKING AT WORKING WITH “GRAIN OF MARKETS”  Pielbags/Khristenho agree “way forward” on April 26.  Market developments in Russia ETP (gas, electronic trading exchange) Power Auctions set for September and December 2007. Limited market opening further out.  Deals tie both sides closer: E.ON/Gazprom swap in 1 st half 2007 Nordpool developments The test comes on Corporate deals or macro issues

11. RUSI Conference 11 ENERGY SECURITY IS ABOUT HIGH IMPACT/LOW PROBABILITY EVENTS Arguably the focus should be on networks and not the product. UK has met the challenge – RPI-X = save to RPI-X = spend. Also Ofgem assists new grid configuration (renewables, local generation) on gas and electricity. Europe also focused on networks – DG Tren and the European Regulators pushing forward new plans … focus on interconnection. Strong networks assist markets