1. Prospects for Energy Prices Presented to Sustainable Energy Ireland by Dr Gareth Davies, Managing Consultant Thursday July 22nd 2004

2. Overview recent trends in European energy prices –implications of liberalisation? –where next? identifying the drivers of energy prices –impacts on different cost components of bills path of cost drivers in Ireland –what does this mean for end-user prices? –competition or regulation?

3. Recent Price Trends

4. I&C Electricity Prices 2003 (£/MWh) RankCountryPrice 9Netherlands35.99 10Finland39.65 11Portugal50.63 12Denmark55.51 13Ireland57.34 14Italy68.93 15Japan70.15 RankCountryPrice 1Austria23.18 2Spain25.01 3Germany26.84 4France27.45 5Greece28.06 6Belgium29.28 7USA30.50 8UK31.72

5. European Electricity Price Trends Price levels Trend since Jan 1999LowMediumHigh FallingUKFR, ES, LXDE StableELBE, PT RisingDK, FL, SEIT, IR Large users (24GWh/yr) 1 Price levels Trend since Jan 1999LowMediumHigh FallingUK, SEFR, ATIT, BE, DE, LX StableEL, ESIR, PT RisingDK, FlNL Small commercial users (50GWh/yr)

6. I&C Gas Prices 2003 (p/therm) RankCountryPrice 7 USA34.02 8 Netherlands34.19 9 France35.22 10 Greece35.89 11 Portugal44.21 12 Japan60.01 RankCountryPrice 1 Canada21.06 2 UK23.82 3 Finland24.39 4 Ireland30.89 5 Germany31.3 6 Spain31.36

7. European Gas Price Trends Price levels Trend since Jul 2000LowMediumHigh FallingLX, UKSE,DK,BE, ESIT StableDE, AT, FR, IRPT Rising Small commercial users (~120GWh/yr) 1

8. Electricity Price Drivers

9. Composition of Bills costs represented in the bills –generation –network charges –retail costs broad categories of drivers –market fundamentals –policy requirements –regulatory regime

10. Wholesale Generation Costs supply–demand balance –strong demand growth –new investment in generation  volume and mix –short-term and long-term adequacy input fuel costs –growing reliance on gas-fired generation the EU ETS new trading arrangements –scope for competition? –increase in risk?

11. Generation Adequacy

12. Emissions Trading cost of the EU ETS is influenced by –carbon intensity of generation mix –cost of carbon in traded market –structure of national allocation plans cost pass-through is influenced by –level/form of competition  wholesale and retail levels –regulatory intervention?

13. Comparison of European Fuel Mixes (%) CoalOilGasNuclearHydroOther Ireland37.621.137.1–2.41.7 UK34.81.937.223.51.11.6 France4.51.03.177.113.60.7 Germany51.91.19.929.53.54.1 Italy13.527.638.3–17.23.4 Denmark47.311.124.6–0.117.0 Portugal29.520.215.6–30.44.2

14. Carbon Price 2005 (€/tCO 2 )

15. Retail Costs impact of competition –positive  more choice  more efficient pricing signals  removal of cost inefficiencies –negative  higher marketing costs  more risk (and hence required return)  cost pass-through more likely (greater volatility in prices)

16. Summary drivers for increased prices –continuing generation adequacy pressures –adverse impact of the EU ETS –uncertainty and risk introduced by new trading arrangements drivers for lower prices (or smaller increases) –regulatory intervention? –lack of competition? conflict between competition and competitiveness?

17. Gas Price Drivers

18. Composition of Bills costs represented in the bills –gas purchase costs –balancing and storage –network charges –retail costs broad categories of drivers –market fundamentals –policy requirements –regulatory regime

19. Gas Purchase Costs supply–demand balance –shift in import dependence –potential benefit of Corrib  timing  still importing at the margin –GB as marginal supply source  GB gas price drivers important

20. Gas Demand Growth

21. Current Gas Supply Position

22. GB Wholesale Gas Price Drivers (I) supply–demand balance –expectation of ‘tighter’ GB position in short to medium term –additional anticipated infrastructure investment will ease the position in medium to long term –rising import dependence marginal supply source –increasing use of non-EU/EEA supply sources  higher transport costs  greater supply risk  need for broad-based import infrastructure (eg, LNG, pipeline, offshore storage)

23. GB Wholesale Gas Price Drivers (II) UK–EU gas price covariance –Bacton–Zeebrugge interconnector  price arbitrage  from net exports to net imports gas-on-gas competition –direct impact of crude oil price increases due to predominance of long-term, indexed take-or-pay contracts in the EU NBP forward curve indicates 29–31p/therm to 2005/06

24. Increasing Import Dependence UK import dependence rising faster than for the EU –UK import dependence to increase from 9% to 40% in the period 2004–10 –EU import dependence to increase from 43% to 49% in the same period  UK and EU increasingly bidding for the same imported gas NBP and ZH spot prices show that –net UK exports resulted in historically lower prices compared with the EU –net UK imports are expected to give higher UK prices compared with the EU in future  if total UK import capacity (ie, pipeline, interconnector, and LNG) does not keep up with gas demand, UK price competitiveness will deteriorate dramatically (ie, UK becomes a gas ‘island’)

25. Gas Spot Market Differentials

26. Gas-on-gas Competition EU Gas Directive 1 expected to result in –greater TPA –‘eligibility’ extended to all gas consumers by 2007  unclear what the actual timescale for greater upstream competition is, but moving in this direction increased competition between gas producers/ shippers expected to be further enhanced by –standard terms for transmission access –promotion of cross-border trade main obstacle to gas-on-gas competition is high wholesale market concentration in many EU countries

27. Retailing Costs and Price–Cost Margins retail competition may increase supply costs –greater marketing effort to gain and retain customers –higher levels of bad debt –front-loading of depreciation charges due to more aggressive adoption of IT –increased financing charges due to higher business risk  ie, a higher cost of capital retail costs should be mitigated by efficiency gains switching by customers to drive wholesale cost reductions

28. Summary strong gas demand growth expected import dependence remains prices driven by arbitrage considerations with GB –but increasingly linked to continental prices –slow gas-on-gas competition development GB and Ireland at extremities of the transportation network –issues for security of supply?

29. Thank you www.oxera.co.uk