Competitive markets and the home of the future in a world of climate change

C titi k t d th h fCompetitive markets and the home of the future in a world of climate changethe future in a world of climate change

Ian Peters

Chief Operating Officer, British Gas

Sept 09

p g ,

Our businessesWe secure and supply gas and electricity for millions of homes and businesses and offer a distinctive range of home energy solutions and low-carbon products and

iservices: • Largest energy supplier• 15.6m residential accounts• 1m business accounts

8 1 H S i t t• 8.1m Home Services customer accounts• 9000 engineers

• Gas production fields in Morecambe and the North Sea (Venture)Gas production fields in Morecambe and the North Sea (Venture)• 7 gas fired power stations with 8th about to go live• Expanding renewables business including offshore wind farm• 20% stake in new nuclear via British Energy• Major participant in LNG

• Rough gas storage facility - the largest storage operation in the UKProviding more than 70% of the UK’s gas storage capacity• Providing more than 70% of the UK’s gas storage capacity

• 2 more in planning

• Over 5m gas, electricity and services customers

2

g , y• 3 gas fired power stations in Texas • Extensive wind power in Texas• Significant gas fields in Canada

Our Challengesg

• Volatile energy marketsN th S G d l ti ( t i t )• North Sea Gas depleting (net importer)

• Storage limitation/interconnector dynamics• Power generation gap (Coal/Old Nuclear)• Investment need (£100-200bn over 15 years – E&Y)

• Competitive markets and consumer prices

• Gas and power hedging dynamicsGas and power hedging dynamics• Political pressure to reduce prices• Increasing regulation• Fuel poverty programmes

• Climate change and energy efficiency• Emissions directives and targets• Renewable wind projects• Microgeneration• Microgeneration

• Sourcing new energy• Gas exploration

3

• Nuclear• LNG

Competitive Markets Have Delivered for UK consumers

7 008.00

UK domestic gas prices lowest in EU-15 for last 5 years

4.005.006.007.00

Tax ComponentPrice (excl tax)

EU average

nce/

KW

H

0 001.002.003.00 Price (excl tax)

Pen

0.00

UKLuxe

mbourgIre

land

France

BelgiumSpain

Portugal

EU 15Germ

any

Austria

Netherlan

dsIta

lySwed

enDenmark

• UK price approximately 38% less than the average EU price over last 5 years.• Exhaustive Ofgem inquiry conducted in 2008 found no evidence to justify referral to

Lu Ne

• Exhaustive Ofgem inquiry conducted in 2008 found no evidence to justify referral to competition commission

• Calls for competition inquiry bring uncertainty to sector at a time when record investment is needed

• European markets beginning to liberalise but slow and still causing problems for UK

4

p g g g p

Source:DECC

Source: UK Government, DECC

UK gas supplies are decliningg pp g• UKCS decline continues - import dependency continues to

grow. Norwegian production will plateau.

Af N f UK i ill b b LNGFRENCH ANNUAL

Projected

3 , 5 0 0

4 , 0 0 0

U K a n n u a l g a s d e m a n d ( b c f )

Scenario 1• After Norway, future UK prices will be set by LNG or

Russian gas

• Europe’s most gas intensive economy has moved from being a source of cheap gas to an “end of pipe” importer

i i th hi h t i t t t t ti t

DEMAND

1 , 5 0 0

2 , 0 0 0

2 , 5 0 0

3 , 0 0 0

Scenario 2

Scenario 3

requiring the highest prices to support transportation costs across Russia and Europe

• Security of supply is critical to UK future stability0

5 0 0

1 , 0 0 0

2 0 0 0 2 0 0 4 2 0 0 8 2 0 1 2 2 0 1 6 2 0 2 0 2 0 2 4 2 0 2 8

3,000

3,500

4,000

70%

80%

90%

100%

%)

Scenario 2

1 500

2,000

2,500

uppl

y (b

cf p

er y

ear)

40%

50%

60%

70%

port

depe

nden

ce (%

500

1,000

1,500Su

10%

20%

30%

Imp

5

02001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029

0%

Imports UK Gas %age imports

UK Wholesale Gas Prices – Outlook Uncertain

UK Gas Prices, p/th

90

100

Month Ahead Actuals12 Month Average*

60

70

80

90

th

12 Month Average*Forward Curve (9 Sep 09)

20

30

40

50p/t

0

10

20

* • Outlook for winter 2009/2010 - UK will be well supplied• Collapse in international energy demand as result of the global economic downturn, most notably

demand in South East Asia and increased US production, led to increased availability of LNG for UK.

• There are a number of potential threats to this:• Re-ignition of Russia-Ukraine crisis• International energy event (similar to Japanese nuclear outages in 2007 or effects on energy

markets following hurricane Katrina)

6

• Higher forward prices reflect the uncertainty over level of future supplies – Prices 9/9/09 winter 2009 @34 p/therm, winter 2010 @51 p/therm from 20 p/therm now

New power sources to fill generation gapCumulative Plant Closures, New Build and Demand

60,000

New power sources to fill generation gap

40,000

New Build

0

20,000

MW

-20,000

02009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

M

-40,000Station Closures

-60,000New Nuclear Nuclear Closure Wind @35% TidalWave Biomass CHP New CCGTOld CCGT CCS Old Coal OilDemand Total Margin (wind@35%)

7Large amounts of intermittent wind and large amounts of base-

load nuclear create new dynamic beyond 2020

Government has agreed an EU target of 15% of all energy to be from renewable sources by 2020from renewable sources by 2020

• Electricity sector will deliver vast bulk of this• possibly 30-35% or 30- 40 GW of all electricity from renewable sources by

2020 4% 4GW ith f th 8GW i t ti l d2020 vs 4% or 4GW now with a further 8GW in construction or planned

• Centrica will play its part• We have got 360MW operational• Consent for another 250MW (Lincs)• Applied for consent for 1 GW (Docking Shoal/Race Bank)

T t lli 1 5GW• Totalling over 1.5GW

• Economics of renewables difficult• Centrica welcomed Government decision to award 2 ROCs for offshore

wind• Renewables will evolve to include Biomass etc

8

What makes up every £100 of the average UK gas bill?p y g g

This analysis isThis analysis is based on average figures over the last 7 years.

9

Retailers faced with growing network and environmental costs, which will increase billswill increase bills

Estimated potential increases in customer Network and environmental costs

200

CCS/ FIT

EUETS

electricity charges (2004/05 to 2014/15)

£11?

• Network and environmental costs associated with supplying electricity increasing about 9% year on year

200

r

EU ETS

RO

EEC/CERT/CESP/HES

Transmission

Distribution

£18? • Cost of supporting low carbon and network investment is growing in

b l t t d % f th bill150

usto

mer

per

yea

£18 £23?

£8? absolute terms and as % of the bill

• This will help accelerate the 100

£ pe

r cu

£2

£14

£7

£16?

£2?

ptransformation to decarbonised energy supply

50 £1

£16?

C d l

• But it also increases stakeholder and customer pressure on suppliers as a whole

10 02004/5 2009/10 2014/15

Compound annual growth rate = 9%

Vision of a retail energy services market is becoming clearergy g

Low Carbon Transition Plan commitment to cut emissions in homes by 29% on 2008 levels by 2020

Renewable Heat Incentive to be

introduced from April

Community Energy Saving Programme of £350m launched

Feed-In Tariffs from April 2010 for small

scale generation p2011

Carbon Emission

this autumn scale generation

Carbon Emission Reduction Target resulting in £1.9bn energy savings

to April 2011

Smart meters in every home by end of 2020

1111

p

Competition has key role to play in delivering decarbonisation as efficiently as possibleefficiently as possible

Clear opportunity for suppliers to enable decarbonisation

• Low cost carbon abatement

Potential of competition needs to be recognised

• Ofgem probe focused on opportunities in households critical to meet targets

g pfairness and on relative outcomes for different customers

• Suppliers will compete to provide energy services to customers, as part of richer set of customer

• Role of retail competition in harnessing and deliveringpart of richer set of customer

offerings

• Ofgem and government need to

harnessing and delivering innovation is critical

• Competition is a resource that• Ofgem and government need to align government schemes and market rules to help the market deliver at least cost

• Competition is a resource that can help determine most effective ways of delivering energy efficiency

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deliver at least cost energy efficiency

Competition more relevant as demand for transformation becomes more pressingpressing

• Many US energy markets based on “thinner” version of• Many US energy markets based on thinner version of retail competition

– Retailers provide customer access to wholesale hedging and pricing optionspricing options

– Retailer has no direct relationship with the customer and operationally depends on the systems of the regulated default utility

idprovider • Potential offered by “thicker” GB model should be more

valued given today’s challengesg y g– Government is investing customer money to accelerate

decarbonisation– Duty on all stakeholders to make sure customers get value forDuty on all stakeholders to make sure customers get value for

money for their investment– Success of competition should be measured in how successfully it

facilitates this transformation

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facilitates this transformation

Suppliers are best-placed to discover the energy services customers want and valuewant and value

Suppliers have Supplier demand willSuppliers have customer

relationships, and can build trust to

Supplier demand will drive what

manufacturers of new technologies bring tocan build trust to

deliver new solutionstechnologies bring to

market

Central role for suppliers in delivering

energy efficiency solutions

Suppliers will market solutions customers want through new

1414

a t t oug eproduct structures, time

of use pricing etc

Energy efficiency services are emerging as basis for differentiation between suppliersbetween suppliers

• British Gas increasingly competing on provision of energy efficiency services – and other suppliers are responding

Supported the delivery of BG Energy Savers report-over 2 5m people to dateTechnology innovation

over 100m energy efficiency products into UK homes

over 2.5m people to date have used the report (up to

30% reduction)

partnerships with leading brands

Social housing projects, giving energy saving advice, products

and funding

Retail partnerships – e.g. with B&Q to subsidise loft insulation

prices of £1 per roll

Insulate 500,00 homes pa (18% reduction) and install 100,000 A

rated boilers (21%)

Council Tax rebate scheme-working with 68 councils to

provide rebates of up to £125

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rated boilers (21%) for loft and cavity insulation

Smart technology we will be installing up to 2020 will enable an integrated proposition but the supplier led model is uncertain/at riskintegrated proposition – but the supplier led model is uncertain/at risk

Roll out of smart a key enabler

Microgen

• Roll-out of smart a key enabler of future energy efficiency innovationE bl f “ti f ” i i

Smart M t

Heating & advanced

Wireless data transfer

• Enabler of “time of use” pricing –expected to be a major driver of customer behaviour change

MeterKey Customer Benefits (£)

controls

Data Hub

VDU

Broa

Save energy

Produce energy

Provide demand response

Smart Appliances

dband

Access broader tariff range (including time of use)

Get more accurate bills

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Data Processing

British Gas Portfolio of Energy Efficiency Products and Services gy y

Year 1- 64 homes in 8 streets in UKcompeted to

CESP CERT

Since the launch

competed to save the most energy: 25%energy usage reduced,89 tonnes of CO2 saved

- Solid wall - Heating

- PartnershipsOver 100m Energy Efficiency products subsidised in 5 years

Local Authority Partnershipsin May 2008 9,488 schools have signed up

Energy Experts

50k home visits planned for 2009

Council Tax

Over 250 partnerships with Local Authorities and Housing Associations

ENERGY EFFICIENCY REGULATED OBLIGATION

B2BEnergy efficiency consultancybusiness acquired

Retail schemesNew Innovation

LOW CARBON TECHNOLOGIESEnergy Savers Report

Completed 2.5m ESR’s

q

LCBP2 Framework

- First year of CERT, B&Q havdelivered over 12 million m2

DIY loft insulation (460k homes)Framework

Supplier

£7m installed in 2008

provide solutions for PV, Solar thermal installations. £8.5m turnover in 2009

id b k

British GasSolar Thermal

ASHP

Insulation 1.5m homes insulated in last 5 years

homes)

17bought 20% equity stake

British Gasprovides bespoke solutions to reduce energy consumption and CO2 emissions Fuel cell technology

development agreement

Full energy audits an important part of our energy efficiency offeringoffering

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Summaryy

• UK generation mix will fundamentally change• The carbon agenda is driving significant shifts in all

aspects of the energy value chain• Competitive markets offer the best prospects for• Competitive markets offer the best prospects for

innovation • Centrica/British Gas are leading the market in security g y

of supply and energy efficiency• Smart meters should provide a transformational

opportunity to revolutionise the industry, customer experience and consumption management

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