Delivering Security of Supply: UK Power and Gas Markets

1. Delivering Security of Supply: UKPower and Gas Markets CERT – 31 May 2005 Aleck Dadson - Director, Regulatory Affairs Centrica plc

2. Centrica Group Companies • 11.8 m residential gas customers • 6.0 m residential electricity customers • No.1 in maintenance & installation of domestic central heating • Offers plumbing, drain services, home electrical, and kitchen appliance cover • 368,000 business gas customers • 515,000 business electricity customers • 1.75 m active telecommunications services • 3.2 m residential & small commercial gas & electricity customers • 1.8 m home and business service customers • Approx. 80% of UK gas storage in Rough facility • 600,000 electricity and 200,000 gas customers in Belgium • Emerging SME business in Spain • Manages energy supply, contracts, trading and UK resources • 2.4 tcf proven & probable gas reserves • 2.9 GW power generation capability

3. 70 staff Humber Power 1260 MW JV: 60% Centrica Energy/ 40% TFE £343/kW 2001 Roosecote 229 MW 100% Centrica Energy £105/kW 2003 52 staff Killingholme 652 MW 100% Centrica Energy £218/kW 1/7/2004 32 staff 46 staff Glanford Brigg 4x60 MW 100% Centrica Energy £154/kW 2002 Barry 240 MW 100% Centrica Energy £165/kW 2003 Kings Lynn 325 MW 100% Centrica Energy £248/kW 2001 48 staff 30 staff Centrica UK Gas and Electricity Assets 385 staff Morecambe Bay Gas Fields 100% Centrica Energy 150 staff Centrica Storage Limited 100% Centrica Group 46 staff Peterborough 2x180 MW 100% Centrica Energy £248/kW 2001

4. How can we best secure the new investment and new resources the energy sector needs? • UK experience is that markets can deliver security of supply • Features of the UK framework • Consistent regulatory approach for gas and electricity • Clear vision of the desired “end game” • Political support for “staying the course” • Government has resisted temptation to intervene

5. Electricity experience Electricity generation build – historic drivers • High wholesale prices • Need for competition in generators – supported by offtake • Environmental pressure on coal plants • Delivered over 20 GW of new CCGT plant over 10 years Going forward – new drivers • NETA started with an “overhang” of generating capacity: much since mothballed • Industry structure changed: fewer larger players, most with some vertical integration • Influence of Government policy/legislation • Low carbon future: renewables obligation, EU ETS • Nuclear review

6. Electricity prospects • In the near term • Return of mothballed plant plus renewables maintain plant margin • Plant margin ok but prices relatively high because of high input fuel costs • In the medium to long term • Significant ongoing investment in renewables • Getting close to point of new build as margins get tighter in 2008/2009 • Several power stations have consents to build and some could go forward relatively quickly if decision to build made • Nuclear plant decommissioning • Government nuclear review

7. Electricity - Forward Prices and Plant Returning to the System Return of Killingholme PG1 + PG2 (both 280 MW) - standing reserve contract Innogy announce return of GT at Tilbury (17 MW) 50 Winter 03 Peak and Baseload Forward Prices (£/MWh) and De-Mothballed Plant Return of Baglan-1 (500 MW) Return of Grain unit 4 announced (675 MW) 45 Innogy announce they will operate 2 of the 3 mothballed units at Fitoots from Dec 03 to Mar 04 (220 MW) 40 Return of Dinorwig unit 2 (288 MW) Return of Ffestiniog 3 (90 MW) Return of Dinorwig unit 3 (288 MW) Price (£/MWh) 35 International Power announce the return of Deeside 2 (250 MW) 30 Winter 03 Peak Return of Grain unit 1 announced (650 MW) 25 20 Winter 03 Baseload 15 01/05/03 29/05/03 26/06/03 24/07/03 21/08/03 18/09/03 16/10/03 13/11/03

8. Gas experience and prospects • In the near term • UK gas prices driven to high, previously unseen levels in 2004/2005 • Liquidity in traded market has fallen • Structural decline in UKCS production: UK moving to position of net importer • Tight UK gas supply/demand through 2005/2006 with imports filling the gap • In the medium to long term • Significant new investment in new pipeline and LNG capacity 2007+ • Capable of meeting 20% of GB demand • Improving demand/supply balance • Over longer term, key issues will be success of European gas market liberalisation and development of global LNG market

9. Available Reserves (tcf) 1659 109 67 69 54 168 48 8 Trinidad 26 1002 Nigeria 110 176 11 1410 160 46 62 Gas – Europe is surrounded by abundant reserves * Data From BP Statistical Review

10. Gas - Timing of new import projects is critical Vesterled (existing) 13bcm/yr Langeled Ormen Lange Partners - 27 bcm/yr Pipeline completion due Oct 2006. Ormen Lange start-up due Oct 2007 Dutch Interconnector (BBL) GasUnie - 16 bcm/yr Pipeline contract awarded Start-up due end 2006. Milford Haven - LNG terminal Dragon - Petroplus / BG Group - 6.3 bcm/yr due 2007. Potential expansion to 12.6 bcm/yr South Hook - Qatar Petroleum / Exxon Mobil - 10.4 bcm/yr end 2007. Potential expansion of 10.4 bcm/yr by end 2010 IUK enhancement (currently 8.5bcm/yr) 8 bcm/yr additional reverse flow Dec 2005 Further 8 bcm/yr by Dec 2006. Possible further modifications takes total to 25 bcm Isle of Grain - LNG terminal National Grid Transco - 4.6 bcm/yr 2005 Possible expansion 9.3 bcm/yr in 2007+

11. Conclusions and Observations • Huge investment is required in order to secure new energy supplies: i.e. $40 billion in Ontario • In liberalised markets, risk of government intervention can chill investment decisions • In such circumstances, private investment may still be secured, but most likely only under arrangements that see risk borne by ratepayers/taxpayers rather than by investors • Markets may not be perfect: but there are no perfect alternatives