Keith Budinger Chief Executive The Future of Gas and Electricity Storage Gas Storage – latest developments 11 th November 2014 Allen & Overy LLP One Bishops Square London

Today’s presentation ‘State of the Nation’ The UK gas market “as is” (4 slides) The UK gas market “to be” (3 slides) –Import dependency –Demand fluctuations –Deliverability Gas storage – new developments (1 slide) The future is fast cycle (1 slide)

National Grid’s winter wish list (source: Utility Week 31 st October 2014) Kind weather: mild enough to cap demand and windy enough to keep renewable generation high. Timely capacity returns: November 2014 could provide a make or break month, power generation units at Ferrybridge, Heysham and Hartlepool will return. An end to unexpected disasters: the UK has seen an unprecedented number of unexpected outages this year including three fires at thermal generation plants. Fewer Russia-Ukraine headlines: the plan for what might happen if Russian gas supplies to Europe are constrained? Reliance on LNG market will be expensive. Similar security for the rest of Europe: with electricity imports currently around 7 per cent, Europe’s security of supply matters to the UK too.

The UK gas market at a very high level  In many ways, UK’s gas market is healthy.  The market has responded well (and without the need for Government intervention) to the reduction in domestic production, and we now have a diverse mix of supply sources.  Increasingly open access to infrastructure means resources – including storage – can be utilised more efficiently between GB and continental markets.  However, we do have vulnerabilities – and these leave us prone to price spikes which are costly for customers and national headlines (which are unpleasant for politicans).  Whilst everything “worked” in March 2013, the sequence of events provided a telling preview of the way in which stresses can combine to generate difficult situations.  There will continue to bee political and technical uncertainty.

The UK gas market – one level down on the plus side GB has very significant gas supply capacity on a “name-plate’ basis (around 700 mcm/day relative to a 1-in-20 year peak demand of around 500 mcm/day) We are increasingly dependent on imported gas (around 60 percent in 2012/13) – which means GB is competing for gas with both continental markets –IUK and BBL flows increasingly driven by hub prices in GB v continent –Norwegian flexibility to flow either to GB or continent on same basis …and global markets –LNG directed to Asia if price is higher Theoretically this should not present a problem where the markets work efficiently, can respond quickly, and infrastructure operates as planned……

The UK gas market – one level down but risks remain  Markets are not fully efficient – and subject to political interference, particularly in regions where full competition is less developed than in Europe.  Whilst interconnectors enable quick physical response, the same is not true of LNG, given the nature of the supply chain – ships can be days away, preventing a timely market response in terms of supplies into GB for more quickly developing supply/demand events.  Infrastructure is subject to unplanned outages – particularly at times of stress or under winter conditions. A key difference relative to UKCS supplies is the dependence on a few large infrastructure elements rather than the diverse mix of North Sea production and terminal routes.

The UK gas market - March 2013  March 2013 was an illustration of how these risks can materialise:  A prolonged cold spell leading to higher demand late in winter (when storage supplies are naturally at low levels).  LNG responding to high prices in Asia, and hence low levels in UK terminals and significant lag for new shipments.  Demand therefore being met by interconnector imports and (already depleted storage)  As cold spell continued and storage declined further, price spikes resulted as LNG could not react in time.  Exacerbated by (thankfully short) IUK outage.  4-6 weeks of extreme prices and system stress  Risks likely to increase:  Reducing UKCS and increasing LNG reliance  Coal retirements limiting fuel-switching options in power sector

Halite believes the UK gas market is structurally changing There are two major long term structural shifts taking place in the UK gas market: 1.Import dependency: UK import dependency is increasing as domestic gas production declines. This is resulting in a greater UK exposure to external supply shocks and an increase in dependency on key imports. 2.Demand fluctuations: Short term fluctuations in UK power sector gas demand are increasing, as intermittent renewable generation capacity rises. This is acting to increase UK gas system stress and price volatility. The UK government has openly expressed its concerns as to the potential security of supply risks associated with these changes: 1.Import dependence: “Our increased exposure to international gas markets has also increased the range and likelihood of possible sources of disruption, including certain shocks that could have profound impacts on GB security of supply……..the potential impact of the closure of critical LNG shipping lanes; an unexpected curtailment of Russian supplies”. 2.Intermittency: “Looking forward, there is likely to be an increase in the need for flexibility from our gas supplies….to meet larger and faster swings in demand from gas-fired electricity generators as…renewable generation increases” (Source: DECC/Ofgem Statutory Security of Supply Report 2013).

1. Increase in import dependency  UK Continental Shelf (UKCS) gas production is in steady decline.  Major sources of UKCS supply replacement are:  Norwegian (NCS) imports (plateauing)  Imports from the Continent (e.g., Russia)  LNG imports  All 3 of these sources are price dependent & contingent on supply chain dynamics  This increases UK exposure to external market shocks (e.g., Russian gas disruption, NCS outages)  LNG imports are particularly sensitive, given the global gas market & there maybe significant delays (e.g. 2-4 weeks) before supply can respond to system stress.  The evolution of the UK’s gas supply mix is resulting in an increasing dependency on several larger supply sources (e.g. NCS fields & pipes, 2 Interconnectors, LNG imports) as opposed to a diversified mix of UKCS fields, pipelines & processing plants.  This in turn increases UK exposure to large infrastructure failures (e.g. IUK outage Mar 13, NCS outages Feb 12, Rough outage 2006).  It also increases UK exposure to risk of major market and political supply disruptions (e.g. Fukushima, Russian disruptions, LNG shipping lane disruptions).  The UK has ample import infrastructure capacity. But there are often time lags in response of imports to periods of high gas demand and price signals.  Fast cycle gas storage plays a key ‘bridging’ role in providing deliverability response to cover supply disruption gaps.

2. Increase in intermittency  The UK government’s Energy Market Reform (EMR) package is focused on trying to meet a number of targets relating to renewable generation build and emissions reduction.  EMR is supporting strong growth in intermittent renewable generation capacity (wind & solar), which is structurally transforming the UK power market.  Gas-fired CCGT power plants (which have traditionally run base load / mid- merit) are increasingly being pushed into a peaking role to support fluctuations in wind/solar output and system demand.  A significant volume of UK coal plant capacity (currently predominantly base load) will retire by 2023 as a result of EU emissions legislation (LCPD, IED).  New build of flexible plant will be focused on gas fired generation (CCGT / OCGT) supported by capacity payments).  As UK renewable capacity increases, so to does the magnitude of short term fluctuations in wind/solar output.  These fluctuations are supported by swings in gas-fired plant output, which translate into swings in power sector gas demand.  Fast cycle gas storage plays a key role in providing rapid flexibility response to absorb these short term swings in demand, dampening their impact on price volatility & system stress.  Fast cycle storage can be thought of as a rapid charge and release “gas battery” that supports the role of gas-fired peaking plant in backing up renewable intermittency.  Fast and medium cycle storage assets play a key role in balancing the UK gas market, seasonal storage still has a role to play however this will be more focused on balancing winter vs. summer requirements.

Why Halite believes deliverability is critical Increases in import dependency and renewable intermittency both drive a requirement for an increase in short term gas deliverability (vs. longer term seasonal flexibility). In the medium to longer term horizon (e.g. > 1 month), a strong price signal and ample import infrastructure can respond to pull more gas into the UK (DECC reiterated its belief in this in the Sept 2013 gas storage intervention decision). The vulnerability of the UK gas market is to short term swings in demand, infrastructure outages & supply chain response delays. In periods of system pressure what is most important is the ‘bridging’ role played by short term deliverability (this will increase with intermittency), not higher volumes of gas in store. The short term requirement for deliverability and the longer term effectiveness of the day-ahead National Balancing Point (NBP) price signal in attracting imports can be seen during periods of system stress over the last three winters (e.g., March 2013 & Feb 2012 price shocks).

Gas storage – new developments  UK’s current gas storage amounts to only 14 days worth of gas supply – a dangerously low level compared with France (87 days), Germany (69) and Italy (59) – Source: UK Commons Select Committee 2011  The UK’s storage requirements are commonly misunderstood. As well as specific storage sites, the UK is very well interconnected with other large sources of longer range gas flexibility (NCS, Continental Europe, LNG imports).  So rather than measuring UK storage based on working gas volume, it is more important to focus on deliverability (mcm/d).  UK storage investment & development over the last decade has been focused on smaller fast cycle salt cavern assets.  The ability of fast cycle assets to cycle multiple times each year means they provide much more system flexibility per unit of working capacity.  The benefit of fast cycle assets needs to be considered based on contribution via multi- cycling deliverability, not based on working volume.  Both the government and National Grid recognise the requirement for further investment in storage deliverability.  DECC / OFGEM* point to a large volume of consented projects. But the majority of this will not be built given poor economics (spread weakness), e.g. in 2005 DECC listed 5 bcm (10 assets) to come online by 2010 vs. only 0.4bcm delivered *Source: DECC/Ofgem Statutory Security of Supply Report (Oct 2013)  There is a much smaller volume of consented salt cavern fast cycle capacity. The development & incremental investment economics of this capacity is favourable given a value skew towards volatility. It represents relatively low cost deliverability.

Why Halite believes the future is fast cycle storage (fcs) Fcs provides ‘within system’ deliverability as insurance against major import disruptions (e.g. outages). Fcs provides reliable and rapid response flexibility to support renewable intermittency. Fcs working capacity can be cycled multiple times in a year to enhance effective contribution to system deliverability. Fcs acts to damper shorter price volatility, increase prompt gas market liquidity & hence reduce supplier cost of managing customer portfolio risk. Fcs is a relatively cheap source of deliverability (low capex per unit), with incremental expansion costs. The UK market has been delivering fast cycle capacity (Aldborough, Holford, Stublach) reflecting these points. The expansion and/or building of more fast cycle storage can make a material contribution to security of supply by increasing the volume and duration of deliverability to the UK market. The critical message here is that, without government intervention, market investment in Fcs is key to delivering security of supply for gas customers

Thank you for listening Any questions?