The information in this presentation has been collated by ELEXON and while all due care has been taken to ensure the accuracy of this information, ELEXON accepts no responsibility for errors. New Arrangements in the UK Market Brian Saunders CEO, ELEXON Ltd The information in this presentation has been collated by ELEXON and while all due care has been taken to ensure the accuracy of this information, ELEXON accepts no responsibility for errors.

Problems of the Pool One price Mechanism Manipulation Supply sets the price Demand Takes the price Barrier

Longer-term bilateral trading Participants trade bilaterally on a range of markets (OTC and exchange based) emerging in response to market needs. Years ahead (?) 24 hours (?) Short-term bilateral trading Participants secure the majority of their generation/load under longer term products... …then fine tune their position on- the-day as uncertainty reduces. Exchanges are operating Gate Closure

Trading period 3.5 hours½ hour Balancing Mechanism Balancing services contracts Gate Closure Bilateral trading To balance the system in real time and resolve transmission constraints the System Operator …...accepts Balancing Mechanism Bids and Offers......and calls-off Balancing Services contracts Voluntary, pay-as-bid, firm Participants deliver/take energy based on contractual obligations Years ahead (?) At Gate Closure... …bilateral trading stops,…...contracts volumes are notified to Settlement,......and Bids and Offers are submitted to the Balancing Mechanism

Trading period 3.5 hours½ hour Settlement Balancing Mechanism Balancing services contracts Gate closure Bilateral trading Years ahead (?) Payments for bilateral contracts are settled between counterparties. In central Settlement… …participants’ energy imbalances only (contract volume less metered output) are cashed-out at imbalance prices......and payments for BM actions are made After the event

How It Works Imbalances Top-up and Spill prices Contract volumes Meter readings Balancing Bids and Offers x Cash-out Payments Imbalance Bills Facilitates and has to be consistent with full competition in supply of electricity to all customers

System Buy and Sell Prices Settlement System Bids to decrease output or increase consumption Offers to increase output or decrease consumption SO Sells £ SO Buys £ Paid at Bid/offer prices Over-production or Under consumption Spill price (System Sell Price) £ Top-up price (System Buy Price) £ Under-production or Over consumption Cash out prices -the average of bids and average of offers accepted Balancing MechanismImbalance Cash-out (Note: the flow of money is shown for positive prices. Prices can go negative) (Compared to Physical Notification) (Compared to Contract Notification) Before the EventAfter the Event

What Changes Under NETA? Little physical change –Generators still generate (FULL COMPETITION) –Suppliers still supply (FULL COMPETITION) –Customers still deal mainly with suppliers –SO still manages the system in real time –Half hourly Changes in economic incentives, information & instructions and settlement Changes in Governance - independent of industry

What Changes Under NETA? No Central Despatch - Balancing Mechanism and Balancing Services Commitments are firm –contracts notified - imbalances are paid for –bids and offers are firm commercially Settlement is nett Balancing participation is voluntary No explicit capacity payments

Market Structure 153 signatories to the new Code and rising 116 active participants Separate entities ~10 Pure traders 8 Large vertically integrated

Progress so far It’s worked but lots of operational challenges for the Company

How Has It Gone? >414,000 contract notifications BM activity and indicative prices on BMREPORTS.COM

Participation Contract Position? - close to total National Demand Physical Position? - System over notified

What Does That Mean? Nett exposure to imbalance is small Volume in BM is small - Cash Out prices driven by small volumes -Price of energy not set by Imbalance Settlement or the Balancing Mechanism

Imbalance Prices

Volatility

Summary of Market views and prices