European gas markets and Gas- Power integration APEX conference Paris, 15 October 2007.

European gas markets and Gas-Power integration

APEX conference Paris, 15 October 2007

Page 2

Contents

APX Group: Gas and Electricity Exchanges

Natural Gas in Europe– Gas Demand– Gas Supply

Gas trading– European Gas hubs– Vision on gas market intgration– Vision on gas and power integration

Page 3

APX Gas UK

APX Gas NL

APX Gas Zee

APX Gas in EuropeDevelopment of APX Group Members

Per Market 1999 to 2006

21 31 36 36 38 40 41 48

27 34 36 36 4151

27

39

4652 54 54

58

6758

9

11

15

19

0

20

40

60

80

100

120

140

160

180

200

1999 2000 2001 2002 2003 2004 2005 2006

Nu

mb

er

of

Me

mb

ers

APX Power NL APX Power UK APX Gas UK APX Gas Zee APX Gas NL

www.apxgroup.com

APX Gas UK Volumes (MWh) October 1999 - 2006

0

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

140,000,000

160,000,000

180,000,000

October1999

2000 2001 2002 2003 2004 2005 2006

www.apxgroup.com

APX Gas NL & APX Gas ZEE Combined Volumes (MWh) February 2005 - 2006

0

10,000

20,000

30,000

40,000

50,000

60,000

Feb2005

Apr2005

Jun2005

Aug2005

Oct2005

Dec2005

Feb2006

Apr2006

Jun2006

Aug2006

Oct2006

Dec2006

Feb2007

APX Gas ZEE APX Gas NL

Page 4

Current markets

Power NL Power UK Gas UK Gas NL ZEE

Continuously traded spot Day ahead auction planned

Forwards planned

OTC Clearing Volume (2007LF)

19 TWh 10 TWh 133 TWh 0.6 TWh 0.2 TWh

Legal counterparty

APX BV APX Commodities

Ltd

APX Commodities

Ltd

APX BV APX BV

System EL2.1 (EL4 Q1 2008)

EL2.1 (EL4 Q4 2007)

EL4 EL4 EL4

Page 5

0 200 400 600 800 1000 1200

UK

Germany

Italy

France

Netherlands

Spain

Turkey

Belgium

Romania

Poland

Others

TWh2005 2006

- 5.3%

+ 1.2%

- 2.1%

- 1.5%

- 3%

+ 4.1%

+14%

+ 0.3%

- 2.7%

+1%

European Gas Consumption

Total 2005 = 6028.2 TWh

Total 2006 = 5992.8 TWh

Overall change in European Consumption:

- 0.6% year on year

Page 6

0 200 400 600 800 1000 1200

Norway

UK

Netherlands

Germany

Romania

Italy

Denmark

Others

TWh2005 2006

- 0.8 %

- 9.4 %

- 8.3 %

- 1.2 %

- 1.6 %

- 9.6 %

+ 3.1 %

European Gas Production

Total 2005 = 3274.3 TWh

Total 2006 = 3172.1 TWh

Overall change in European Production:

- 3.1% year on year

Page 7

Changing demand and supply

Demand of gas in Europe today– Power Generation– Industrial fuel– Commercial and domestic space heating– Petrochemical feedstock

And in the future …– Increased demand– Fuel switching, with new power plants mostly gas-fired– Natural Gas vehicles

Supply Production

– Continuing depletion of Dutch gas fields, UK and Dutch Continental Shelf– New supplies from Norway

Rising importance of Imports to balance supply/demand mismatch– Increased imports from FSU– LNG

Page 8

By 2015, bringing: Choice Diversification Arbitrage

Supplying gas to Europe

LNG

150 – 200 bcm/yr

Russia

< 200 bcm/yr

Norway

< 125 bcm/yr

> 300 bcm/yr

> 250 bcm/yr

> 150 bcm/yr

Page 9

European Gas Hubs

NBP

PEG

ZEE

TTF

BEB

PSV

CEGH

Page 10

Hub Concentration

Ref. Source: European Commission DG Competition (2007), p. 41

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

NBP/beach Zeebrugge IPE TTF Bunde Eynatten Baumgarten PSV PEG

% o

f all

gas

purc

hase

s (b

y vo

lum

e)

Incumbent

Producer

New entrant

Pure trade

Page 11

European Gas Hub volumes (TWh)

Market Location Type 2005 2006 change

NBP UK Virtual hub 5768 7058 22%

TTF NL Virtual hub 122 201 64%

ZEEBRUGGE BE Physical hub 463 500 8%

MS-ATR Spain Virtual hub* 260 281 8%

CEGH Austria Physical hub 8 99 1061%

PSV Italy Virtual hub 29 78 170%

BEB Germany Virtual hub 5 13 170%

PEG’s France Virtual hub x 5 45 77 73%

* = inc. LNG

Ref. European Gas Trading 2007. Prospex Research Ltd. October 2007

Page 12

TTF Hub VolumesMonthly traded and net volume (GWh/mth)

Ref. Gas Transport Services 27.02.07

0

5,000

10,000

15,000

20,000

25,000

Jan

03

Apr

03

Jul 0

3

Oct

03

Jan

04

Apr

04

Jul 0

4

Oct

04

Jan

05

Apr

05

Jul 0

5

Oct

05

Jan

06

Apr

06

Jul 0

6

Oct

06

Jan

07

Monthly Traded Volume Monthly Traded Net Volume

Page 13

TTF Developments

APX Position Paper “Accelerating TTF Development”– Desired end state TTF: full sourcing alternative

– BUT a long way to go: • More investments to increase accessibility of the TTF • Making better use of existing cross border transport capacity • Delivery at the TTF (or at least re-entry) to enhance re-tradability• Creating ONE liquid market despite differences in gas quality • Reducing dominance in flexibility market • Removing barriers that prevent large end users becoming active• Two different gas qualities: H gas and L gas

Page 14

Zeebrugge Hub VolumesDaily average net traded vs physical throughput GWh/month

Ref. Huberator 27.02.07

0

10,000

20,000

30,000

40,000

50,000

60,000

Jan-

00

May

-00

Sep

-00

Jan-

01

May

-01

Sep

-01

Jan-

02

May

-02

Sep

-02

Jan-

03

May

-03

Sep

-03

Jan-

04

May

-04

Sep

-04

Jan-

05

May

-05

Sep

-05

Jan-

06

May

-06

Sep

-06

Jan-

07

Daily Average Net Traded Daily Physical Throughput

Page 15

UK NBP Hub Volumes Monthly average net traded vs physical throughputGWh/month

Ref. National Grid 27.02.07

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

Mar

-96

Oct

-96

May

-97

Dec

-97

Jul-9

8

Feb

Sep

-99

Apr

-00

Nov

-00

Jun-

01 Jan

Aug

-02

Mar

-03

Oct

May

Dec

-04 Jul

Feb

Sep

-06

NBP Trades (as recorded on Transco's AT-Link) Physical Throughput

APX UK OCM Volumes (GWh)

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Oct

Ap

r

Oct

Ap

r

Oct

Ap

r

Oct

Ap

r

Oct

Ap

r

Oct

Ap

r

Oct

Ap

r

Oct

Page 16

Hub Developments

TTF: Ref. DTe Draft Position Paper “Accelerating TTF Development” Desired end state TTF: full sourcing alternative. Needs:

– More investments to increase accessibility ( gas roundabout) – Making better use of existing cross border transport capacity – Delivery at the TTF (or re-entry from GOS) to enhance re-tradability– Creating ONE liquid market despite differences in gas quality – Reducing dominance in flexibility market

Zeebrugge “Zee Platform” improving hub access, boost for arbitrage.

– All transit or transport capacities to or from the 3 terminals (Interconnector, Zeepipe, LNG) give “bundled” hub access

Possible secondary market, infrastructure developments

Germany EEX initiative on two German hubs New alternative for TTF, Zeebrugge, NBP

Page 17

APX Gas UK

APX Gas NL

APX Gas ZEE

Hub Development - Requirements

Transmission interconnection Infrastructure Multiple buyers & sellers & Deliverability back-up/down Markets

Standard trading contract Systems& Title transfers & matching system Commercial Price reporting Arrangements Forward trading

Ref. “Requirements for gas Trading Places” C.Lyle EFET, E-World 6-8/02/07

Leading to: Liquidity Hub services Low transaction cost Independent hub operator Firmness Price Transparency

Page 18

APX Developments for gas&power markets

Trayport GV 8.5 viewEuroLight 4.0 View

Marketing package Cashback deals for traded volume Quote request periods, Voice brokingSummer 2007 Trading system package: One screen for all gas (NBP,ZEE, TTF) UK power and gas on one counterpart Trayport connectionTo come soon: UK power and UK gas on one screen Dutch power and gas on one screen

Page 19

New products possible

Hub-to-hub– Spreads/swaps, “Basis Trading”

(e.g. UK NBP Dutch TTF – Auctioning and re-trading of pipeline

capacity, storage, entry/exit

Between gas and power – Spark spreads

Those products already definable on Trayport Separate products on exchange

Hub-to-hub is important for integration of the gas marketsGas-to-power (spark spread): important for rising role of gas-fired generation in

Europe

UK and Netherlands are the best countries for spark spreads, due to the large role of gas-fired generation

APXAPXUK

NBP

ZEE

TTF

Page 20

Conclusions

Gas market on UK National Balancing Point is the most liquid market today

NW European hubs now established and already acting as price setting agents

Further work required on hub construct and improvement of market rules, but some encouraging signals

“Gas Roundabout effort” from Dutch gas parties (Gasunie grid company) in order to develop transport, transit, TTF role

Hub-to-hub trading may set the pace in the near future Spark spread trading: integration between gas and power trading is

an exciting prospect

Page 21

A VITAL LINK IN ENERGY TRADING