1. Tuesday 30 th. November 2004 British Institute of Facilities Managers Retail Sector Forum Energy Procurement Strategies John Hall Associates Limited 9 Piries Place, Horsham, RH12 1EH Tel: 01403 269430 - Fax: 01403 269451 E-mail: peter.ind@jhal.com Internet: www.jhal.com

2. Presentation Content  Background – Electricity Prices 2000 - 2003  Energy Price Drivers in 2004  The Electricity Generation Mix  Further Back in the Chain - Oil Price Drivers  Electricity Price Movements 2004 & Beyond  Gas Price Developments 1998 – 2003  Gas Price Movements 2004 & Beyond  Buying Strategies - Contract Options and Targets  An Eye to the Future

3. Electricity Market Background (2000 – 2002)  Historic Generation Over-Capacity (31%)  New Electricity Trading Arrangements (NETA)  Increased Competition - Prices weaken  ENRON collapse releases more Power  Generators/Suppliers in Trouble  General Market Instability  Lowest Prices below £15.50 per MWh

4. Electricity Market Developments (2003)  The Aftermath of NETA  Generators/Suppliers Hit Back  Generating Plant taken off Line  Rationalisation of Suppliers = less Competition  Surplus Capacity falls from 31% to 17%  NGTransco issues Capacity Warnings  Prices spiral upwards

5. Energy Price Drivers in 2004  The Oil Price  The Oil/Gas Link  The Gas/Electricity Link - 40% of Generation  Supply & Demand - Capacity Concerns  “1 in 20” Winter Planning

6. Generation Mix

7. High Oil Prices What is driving the market?  Strong Global Demand fuelled by Growth in China  Inadequate Global Supply Capacity  Low Inventory Levels  Instability in four Key OPEC Producer States  Political Problems in Russia (Yukos)  Inadequate Refining Capacity Worldwide  Weak Dollar

8. Brent Crude Price Movements

9. Electricity – Baseload Prices

12. Electricity – Cost Breakdown

13. Electricity – 2004 & Beyond  October 2004 Year Prices moved from 21.43 per MWh (September 2003) to £35.5 per MWh (September 2004)  Supply/Demand Balance will remain tight  High Oil/Gas Prices will keep Electricity Prices up  EU Emissions Trading Scheme (EUETS) will continue to put Pressure on Prices  HOWEVER Prices may now have peaked!  October 2005 Year Price currently £30.50 MWh  October 2006 Year Price currently £30.20 MWh

14. Buying Strategies

15. Electricity Purchasing Strategies  Fix or Float?  Flexible Deals increasingly available  Separation of Baseload & Peak  Baseload Purchases in Months/Quarters/Seasons  Current Minimum Baseload – 10 MWh  Tranche Purchasing

16. Electricity – Consumption April June July August September October NovemberDecember JanuaryFebruaryMarch May Consumption Profile Base Load Volume MW Residual

17. Market Increase since Settle Date

18. Electricity Baseload Price – October 2005

19. Gas Market Developments (1998 – 2003)  Installation of Interconnector in October 1998  Gas Price Link between UK and Europe set up  Oil Prices at $10 per Barrel - Gas Imports from Europe keep Year Gas Prices down at 11/12 ppt  Oil Price rises in 1999 from $10 to $25 per Barrel  Gas/Oil Price Lag sees Gas Prices follow Oil  Forward Gas Prices peak at above 23 ppt in 2000  2001-2003 Year Gas Prices in Range of 18-24 ppt

20. Gas Prices – 2004 & Beyond  2004 Brent Oil Price peaks at $51.56 per Barrel  Oil Price Premium estimated no more than 10%  October 2004 Year Prices moved from 22.00 ppt (September 03) to 40.07 ppt (September 04)  Supply and Demand Issues predominate  Sentiment, Uncertainty, and Speculation keep Gas Price up  October 2005 Year Prices now at 34.23 ppt

21. Gas Purchasing Strategies  Fix or Float?  Index-linked Deals well established  Most popular - Day Ahead/Month Ahead  Minimum Volume – 0.5 m Therms p.a.(15m KWh)  Tranche Purchase (Min Volume – 4m Therms p.a.)  Fix & Float Option provides good Balance

22. Gas Cost 70-75% Margin/Admin 2-4% Transportation 10-12% Gas – Cost Breakdown Metering 1-3% CCL 8 - 12%

23. October 2005 Wholesale Gas Prices

24. Wholesale Gas Price – October 2005

25. Index Benchmark Chart

26. Take partial cover

27. Taking the Price  Buys at an agreed and pre- determined fixed price  Brings certainty, helps budgeting  Simple  Removes price volatility  but –requires good timing –risks losing out against competitors –no flexibility  Zero risk exposure  Zero downside benefit  Budget certainty

28. Use a financial Hedging tool  Buys on index price, but agrees a maximum ‘ceiling’  Consumer pays a premium for this protection  Maximum risk is limited  Consumer not ‘locked in’ to a fixed price  Benefit of lower prices retained  but –requires premium to be paid

29. Events which may determine the Direction of the Market in 2006/07  Slowdown in Chinese Economy  Iraq – Gradual Improvement  Resolution of Yukos Issue  Interconnector Import Capacity Expansion in 2005  New Gas Pipelines from Norway & Holland in 2007  Major LNG Capacity planned for 2007 BUT increasing Dependence on OPEC/Russia and outstanding long Term Problems will keep Prices relatively high

30. Planning the Strategy  Monitor Wholesale Market Price Trends  Set realistic Targets at Start of Year  Always plan with a twelve Month Window on Market  Recognise the Importance of Timing  Assess optimum Contract Length  Explore alternative purchasing Methods, including Market-related Deals  Conduct Regular Strategy Reviews

31. European Energy Services John Hall Associates 9 Piries Place, Horsham, RH12 1EH Tel: +44 (0) 1403 269430  Fax: +44 (0) 1403 269451 Email: peter.ind@jhal.com Internet@ www.jhal.com