1. Energy Risk Management – 3 October 2006 Increasing interactions with global energy markets - the impact on the GB gas market Jo Witters Wholesale Markets, Ofgem

2. Energy Risk Management – 3 October 2006 Overview GB gas market – meeting the ‘supply gap’  Moving from ‘energy island’ to ‘net importer’ New investment coming on stream…  Market response - changing supply picture  Importance of the demand side Outlook for Winter 2006/07…  Will new capacity = more gas?  Split winter scenario likely Information is key

3. Energy Risk Management – 3 October 2006 GB as an ‘energy island’ Up to 1998  Largely self sufficient  Small volume imported from Norway 1998 - 2003  Self sufficient  GB = net exporter via IUK

4. Energy Risk Management – 3 October 2006 Market in transition UCKS is a mature production area  Production rates are in decline Imports necessary to meet forecast demand Net importer – winter and summer?

5. Energy Risk Management – 3 October 2006 Market response Investment facilitated by  Liquid traded market  Stable, light touch, regulatory environment  TPA ‘exemption’ process - open for investors to apply Over £10bn of private sector money is being invested to meet Britain’s energy needs Market response to supply gap  Investment in new infrastructure  Pipelines / Storage / LNG import facilities

6. Energy Risk Management – 3 October 2006  Grain LNG  IUK upgrade I  Teesside GasPort LNG  BBL & Langeled pipelines  IUK upgrade II  Dragon & South Hook LNG  Langeled II (Ormen Lange)  Grain II & South Hook II New investment … Planning process currently acting as barrier  Canvey Island – local authorities rejected application 2005/06 2006/07 2007/08 2008/09

7. Energy Risk Management – 3 October 2006 Diverse supply sources … Sources of supply – 1990/91Sources of supply – 2007/08

8. Energy Risk Management – 3 October 2006 Part of a global market Competing with other markets – e.g. Asia / US  GB market impacted by events elsewhere  Cargoes can be diverted to higher priced markets Hurricanes Katrina/Rita

9. Energy Risk Management – 3 October 2006 LNG: GB experience to date Effective UIOLI arrangements are key Winter 2005/06  Occasions where flows did not respond to price  Missed berths in Late Dec and Early Jan

10. Energy Risk Management – 3 October 2006 Effective UIOLI is key Effective UIOLI arrangements = LNG supplies optimised Significant potential for spot cargoes to GB market Allocation mechanism  Open, transparent, non-discriminatory Mechanism to ensure capacity is not ‘hoarded’  Facilitates secondary trading Transparency of information is important

11. Energy Risk Management – 3 October 2006 UIOLI at Grain Winter 2005/06  Third party concerns re effectiveness of Grain UIOLI - Access to berthing slots - Information transparency Ofgem will continue to monitor effectiveness of arrangements  May need to evolve over time in response to market conditions  Formal review of exemption an option if problems persist Effective UIOLI – key exemption requirement  Grain shippers worked to address concerns  Enhanced arrangements now in place

12. Energy Risk Management – 3 October 2006 Outlook for Winter 2006/07: the markets view Wholesale prices falling……but still suggest gas will flow to GB

13. Energy Risk Management – 3 October 2006 Split winter seems likely  Langeled on stream…  But limited (if any) increase in flows from Norway  IUK enhancement in place – 2 months early  Rough at full capacity  BBL on track – schedule remains tight  GasPort on track (1 st flows early Jan) Like last winter storage cycling is likely to be important October December  BBL enhancement due…  But what will the storage position be? March Gas and electricity interactions also likely to be important

14. Energy Risk Management – 3 October 2006 Winter 2006/07: supply picture  More capacity than last winter  Potential for demand side response  Experience of last winter…will the gas flow?

15. Energy Risk Management – 3 October 2006 Commercial options for customers – managing price risk Contract terms reflect opportunity cost to customer Customers can contract for different types of interruption Commercia l Interruptio n Fuel Switching GBA Based Contracts Turn Down A range of commercial options developed by industry

16. Energy Risk Management – 3 October 2006 Demand side response last winter Industrial customers reduced consumption by up to 16.6mcm/day  Most customers switched fuels  Provision of flexibility to gas system – effective form of gas storage

17. Energy Risk Management – 3 October 2006 Factors affecting gas supplies Impact on flows Price Volume Availability of gas /ships Information transparency Access to capacity Gas Quality Operational factors Market liberalisation Political instability Will new capacity equal new gas?

18. Energy Risk Management – 3 October 2006 Why the gas should flow: Positive developments in Europe  More storage information now being released  Gas quality – working with Fluxys to establish materiality  New supplies from Egypt (to France & Spain)  New train in Trinidad & Tobago  New terminal at Fos Cavaou (France)  New terminal + increased capacity at 2 existing terminals in Spain  Upgrade of East-West transportation in Germany  Working to remove constraints New Investment New LNG Increased transparency EU Commission continues to take steps forward in sectoral enquiry

19. Energy Risk Management – 3 October 2006 European storage: information available for winter Quantities of gas in store Examples of information available from GdF and Total Injection volumes Withdrawals

20. Energy Risk Management – 3 October 2006 Positive developments in GB: New information this winter  New gas flow data – released to market today  Users to develop understanding  NG workshops held in September

21. Energy Risk Management – 3 October 2006 Positive developments in GB: new incentives on NG Ofgem developed new incentives on NG  Working with customers and shippers Customer concerns re: quality of market information Website performance incentive  Availability/timely delivery of key gas data Gas demand forecasting incentive  System gas demand  Day ahead forecast Incentives take effect today

22. Energy Risk Management – 3 October 2006 Summary Declining GB production means increasing reliance on imported gas  Market has responded…significant levels of investment But…new capacity may not equal new gas  Effective and transparent arrangements are key Outlook for Winter 2006/07…  Market responding to reduced infrastructure risk  ‘Split winter’ scenario still likely  Commercial options for customers – manage price risks

23. Energy Risk Management – 3 October 2006 Promoting choice and value for all gas and electricity customers