Irish Electricity Market Overview & Procurement Opportunities

1. Irish Electricity Market Overview & Procurement Opportunities Peter Duffy Enercomm International

2. Overview of Presentation • Current electricity market • New electricity market • The Supply business & Suppliers in the market • Electricity Tariffs • Components of electricity prices & Price Increases • Supply Options & Scope for savings • Seeking the ‘best’ deal for your company • Suggested approaches • Longer-term options including multi-utility supply

3. Today’s Electricity Market • Licenced generators sell bulk power to licenced suppliers • These are termed ‘Bilateral Contracts’ • Shortfalls & surpluses are dealt with by Top-Up & Spill • TSO dispatches conventional plant • Wind generators (normally) self dispatch • Wholesale settlement done by SSA • Suppliers supply customers & issue bills • Based on their tariffs & electricity usage (metering) • Green suppliers must balance on an annual basis • Green tracking done through settlement system by SSA

4. Ireland’s New Electricity Market • Mandatory centralised pool (all* gens/suppliers) • Eirgrid will be the SMO (System & Market Op.) • LMP (locational marginal pricing /nodal pricing) • CER & SMOwill determine the nodes to be used • SMO will dispatch energy & reserve together • Settlement at spot market prices for actual vol.s • Generators will be paid LMP • Suppliers will buy at Universal Price (ex.dispatchable) • Gens & suppliers can hedge risks (CFDs/FTRs)

5. Supply Business with TU & Spill Gen1 Sup1 Cus.1 Gen2 Sup2 Bilateral Contracts Cus.2 Gen3 Sup3 Cus.3 Top-Up & Spill Cus.4 • All electricity traded bilaterally between Gens to Suppliers • Shortfalls & Surpluses addressed through TU & Spill

6. Supply Business with Pool SMO Gen1 Sup1 Cus.1 Gen2 Sup2 POOL Cus.2 Gen3 Sup3 Cus.3 Cus.4 Hedge • All electricity traded through pool, not from Gen to Supplier • Hedge is bilateral contract between Gen & Supplier

7. Suppliers in the Market • Airtricity • Viridian Energy (Energia) • ESB Independent Energy (ESBIE) • Bord Gáis • CH Supply Ltd. • Bord Gáis - Cogen • ESB Customer Supply (ESB PES)

8. Electricity Tariffs • Regulated tariffs • Approved/published by the CER for ESB PES • ESB PES cannot vary these • Unregulated tariffs • Driven by competition • Independent suppliers can devise/develop their own tariffs, and compete in the market

9. Regulated Tariff Categories • Urban (Standard, Nightsaver and Group); • Domestic Rural (Standard, Nightsaver and Group); • Residential Business Premises; • Commercial and Industrial General Purpose (Standard and Nightsaver); • Commercial and Industrial Maximum Demand (low voltage); • * Maximum Demand (medium voltage); • * Maximum Demand (38kV); • * Maximum Demand (110 kV) – transmission; • Public Lighting

10. Unregulated Tariffs • Come in all shapes & sizes • Some simply track the equivalent PES tariff • offer a percentage discount • Some broadly track equivalent PES tariff • May offer a flat winter/summer price element • Result in majority savings achieved during winter • Others are more sophisticated, numerous elements • Can be quite opaque & difficult to compare • Can deliver good savings • More suitable to large & very large users

11. Components of Electricity Prices • Essentially five compnents in the price: • * Energy (generation & losses) • TUoS(Transmission Use-of-System Charge) • DUoS(Distribution Use-of-System Charge) • * Supplier’s margin • Levies (PSO & Capacity Margin) • * Energy & Supplier’s margin are the competitive elements

12. Approx. Break-down of Price

13. Basis forPrice Increases • Assume independent suppliers buying most of their power from new independent generating plant • BNE price reasonably represents capital/fuel costs • BNE price for 2004, fuel = 61%, all other costs 39% • Approx 6 to 4 ratio • Assume fuel costs in 2005 increase 10% over 2004 • Then this should increase energy costs by 6% • In last slide, energy is approx 75% of supply costs • 10% increase in fuel costs  4.5% increase in elec. Costs • 20% increase in fuel costs  9 % increase in elec. costs

14. What is DrivingPrice Increases • Fuel • To what extent have independent generators hedged their fuel (gas) prices versus spot purchases • Wires Charges • CER reviewing the wires charging regime • 4% increase in these would result in approx 1% increase • PSO • CER has published possible levy • 50% increase in these would result in approx 1% increase

15. EU Emissions Trading • On average the powergen sector has received 77% of its CO2 permit requirements free • Wholesale prices should reflect the full costs of CO2 • Intended to claw back all windfall gains • Pass Through of Allowance Shortfall Cost in 2005 • Gens to submit quarterly reports to CER • 100% Allowance Cost Pass-Through and Recycling in 2006 • Enabling legislationrequired to levy generators

16. Impact of EU Emissions Trading • Consider 2006 • Assume 30 TWh total elec. & 16.5 Mtonne CO2 • Assume €10/tonne CO2 • 23% shortfall  16.5 Mtonne CO2 • Cost of 23% is €38m • Represents 0.127 cent/ kWh • BNE 2004 price is €4.79/kWh • Represents approx. 2.6% increase relative to BNE

17. Supply OptionsShort & Medium Term • Stay with or revert to PES on published tariffs • Sign suply contract with independent supplier • One or two-year contract or longer • Fixed energy price with pass-through of reg. Charges • Variable energy price with pass-through of reg. Charges • Take out a supply licence (self supply) • Must now negotiate with generator rather than supplier • Greater admin costs, low economy of scale • Difficult to cut a better deal or costs than supplier

18. 1-year v. 2-year Contract Offer • No advantage for wires charges & levies • Cannot avoid them; will be included in both • Advantage in 2-year contract if gas prices rise • Possible advantage in production planning when energy costs are largely fixed for two years • Disadvantage in 2-year contract if gas prices fall • It is hard to see energy prices falling significantly • Ensure there is common understanding in applying CER-approved increased charges for 2nd year

19. 2-Year Contract • Changes in both Wires’ charges and PSO levy will be passed through • In effect, approx 75% of the electricity price for 2004 is fixed at the 2003 price • The remaining 25% (approx) subject to change • Price clarity for the year & low risk • Suppliertakes the risk of fuel (gas) price increases and other generation costs • Makes sound economic sense in a price-rising market

20. Suggested Approach • If large production facility seeks to fix its costs over a longer rather than shorter period • For example labour, input and energy costs • Then 2-year contract offer is the better option • This fixes approx 75% of electricity costs • Enables better financial/production planning over 2-year horizon • If seeking to fix costs over a short period • Then 1-year contract offers the better option

21. Seeking the ‘Best’ Deal • Forecast demand for next two years based on historical demand & future production plans • Invite bids from independent suppliers • both 1-year and 2-year bids • Analyse bids against forecast • Suppliers usually have their own bid format • Is bid for forecasted (not supplier’s) profile? • Check supply conditions, no hidden costs/surprises • Seek last minute negotiations; can bring results • Check that savings achieved during contract

22. Supply OptionsLonger Term Considerations • Is natural gas coming to your location? • Is there scope for CHP or polygeneration (electricity/heating/cooling)? • Is there scope for autoproduction (on-site generation)?; significant wires’ savings • Stake in gen plant?; multinational supply? • Possible savings through multi-utility supply? • Electricity, gas and telecoms