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First Hydro Analysts Conference July 2005

First Hydro Analysts Conference July 2005. Introduction Paul Jenkinson. First Hydro Company. Key locations: Commercial Office - Bala House Dinorwig pumped storage power station Ffestiniog pumped storage power station Visitor centre

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First Hydro Analysts Conference July 2005

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  1. First Hydro Analysts ConferenceJuly 2005

  2. IntroductionPaul Jenkinson

  3. First Hydro Company • Key locations: • Commercial Office - Bala House • Dinorwig pumped storage power station • Ffestiniog pumped storage power station • Visitor centre • The only Pumped Storage Power Stations in England and Wales (representing 75% of Great Britain Pump Storage capacity) • Station built initially to support the management of the System • now well placed to participate in the competitive market place • Full time employees 188 • reorganisation programme completed - 20% staff reduction delivered • Experienced management and operational teams • integrated teams across all locations • incentives aligned to financial performance

  4. Asset overview Mike Maudsley Director ProductionMike Hickey Director Asset Management

  5. The pumped storage principle

  6. Dinorwig

  7. DinorwigThe largest pumped storage plant in Western Europe • Commissioned in 1983 • Total plant capacity 1,728 MW • 6 reversible pump/turbines: • each generating up to 288 MW and pumping at 275 MW • capable of achieving full load from stand still in < 2 minutes • capable of achieving full load from Spinning in < 20 seconds • Cycle Efficiency 74-75% • Total water storage capacity ~9 GWh • Connection to the National Grid via six 18/400kV 340 MVA transformers • Two 3.3kV 2 MW diesel generators provide ‘black start’ capability

  8. DinorwigPlant design profile

  9. Dinorwig – inside the mountain

  10. DinorwigShaft base and High Pressure water tunnel

  11. DinorwigWater manifold

  12. DinorwigSection of plant

  13. DinorwigGenerator/motor

  14. DinorwigPump/turbine

  15. Ffestiniog

  16. Ffestiniog First major pumped storage station in the UK • Commissioned in 1963 • Total plant capacity 360 MW • 4 units (with separate pump and turbines on the same shaft): • each generating up to 90 MW and pumping at 75 MW • capable of achieving full load from stand still in < 5 minutes • capable of achieving full load from Spinning in < 60 seconds • Cycle efficiency 72-73% • Remotely operated from Dinorwig • Total water storage capacity ~1.4 GWh • Connection to the National Grid via two 16/275kV 190 MVA transformers

  17. Ffestiniog Plant design profile

  18. Ffestiniog Section of plant

  19. FfestiniogStwlan Dam

  20. Plant performance

  21. Dinorwig mode times change (seconds) Pump Generate 360 s 90 s Shutdown 30 s 12 s SpinPump SpinGenerate All times are typical

  22. Competitive advantage Typical start up times (minutes) Typical loading rates (MW/minute) 3000 90 60 2.5 10 10 1.5 300 Dinorwig Ffestiniog CCGT(hot) Coal(hot) Dinorwig Ffestiniog CCGT(hot) Coal(hot)

  23. First Hydro Company Reliability and availability • Mode changes per annum c.35,000 • Overall mode changes reliability c.99% • Overall technical availability c. 95%

  24. Plant focus • Safety first (no compromise) • Operate and maintain plant to achieve competitive flexibility and reliability • working expertise in Electrical, C&I, Mechanical, Civil and IT • experienced, broad based and flexible teams • balance of quality in-house maintenance and specialist contract work • Close working relationship between Plant and Commercial Teams • Shift Trading and plant control room • daily and weekly operational strategy • long term operational and maintenance programme

  25. Commercial overviewDavid Alcock, TradingKevin Dibble, Marketing

  26. Commercial efficiency • Buy electricity overnight - pump water to top reservoir • Release water to generate at times of peak price Marchlyn Pumping Generation Peris Export ~.75 MWh Import 1 MWh • Overall cycle efficiency approximately 75% • Additional costs include transmission losses and Balancing System charges

  27. Markets • First Hydro operates in three markets • Has competitive advantage • Proportion of revenues from each market changes year on year Market Competitive Advantage Ancillary Services Frequency response and fast reserve capabilities Plant Reliability Balancing Mechanism Premium dynamics Trading Ability to deliver almost any contract shape and despatch plant right up to gate closure

  28. Maximising asset value People • Solid understanding of physical market drivers (real-time and long term) • Strong commercial and plant integration Systems • Robust trading and despatch systems • Customised real time information and decision support systems Processes • Strong focus on understanding and managing business opportunities • Traders discretion on price/product • strict risk management limits • daily (half-hourly) benchmarking of trading performance

  29. Capacity allocation • Capacity/energy allocated according to value 2,088 MW10.5GWh/day Ancillary Services Balancing Mechanism Trading

  30. Ancillary services overview • Physical services to facilitate system security and power quality • wholesale markets operate on half-hourly basis • ancillary services enable system balancing on a second-by-second basis • Procured by National Grid Company (NGC) • GB System Operator • NGC obliged to operate the system in an ‘efficient, economic and co-ordinated’ manner • costs managed via a regulated annual incentive scheme

  31. Forward procurement options Standing Reserve (20 mins. notice) annual or seasonal tender hydro, OCGT, demand-side approximately 2000 MW procured annually Fast Reserve (2 mins. notice) monthly tender, few eligible providers, small volumes Short term procurement Inherent level of reserve delivered by the market Residual reserve purchased by NGC via the Balancing Mechanism Require ~3500 MW of reserve in total Key ancillary servicesReserve MW Source: NGC

  32. Key ancillary servicesFrequency response • NGC manage system frequency in line with statutory obligations (within 1% of 50Hz) and operational requirements • Dynamic Frequency Response • units operate at part-load with output varying in response to frequency deviations - provides “second-by-second energy balancing” • basic level of capability is mandatory for all generators - utilised as required, mainly from steam plant • Static Frequency Response • automatically triggered by low frequency events - pumped storage, demand-side providers have capability • NGC currently forward contracts for enhanced services through negotiation

  33. Balancing Mechanism (BM) • Deals with residual energy balancing once traded markets have closed • Generators have sold half-hourly energy, and scheduled plant to meet contract position • System operator matches generation to actual demand by adjusting generation (or demand) via offers or bids in the BM • All parties required to bid into the BM, but due to flexible nature of assets, FHC is well-placed Example: BM offersrequired Scheduledenergy Required Demand

  34. Fast-acting plant in the BM System Demand and Fast Response BOAs Morning run-up • Gas/coal unit synchronisation risk • High rate of change of demand = greater risk Plant trip • Unpredictable events that require fast-acting plant held in reserve Evening TV pickups • Domestic load swings driven by TV events • Largely predictable • NGC able to plan using combination of fast and slow plant (25 May 2005) Fast Response BOAs Demand 45 GW 800 MW 700 MW 40 GW 600 MW 500 MW 35 GW 400 MW 300 MW 30 GW 200 MW 100 MW 25 GW 0 MW 20 GW -100 MW 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 Half-hourly Settlement Period BOAs = Bid-Offer Acceptances

  35. Demand pick-upsChampions League Final Source: NGC

  36. BM activityChampions League Final Offers Fast Gas Coal Bids

  37. Wholesale markets (trading) Trading considerations • Capacity and energy dedicated to ancillary services • Margin (net of pumping) available in traded markets • Probability of being used in balancing mechanism • Reservoir management Key advantages • Asset physical ability to deliver any shape close to real time • Experienced traders in APX/short term markets • Proprietary live market information and decision support tools • Systems facilitate trading up to gate closure

  38. Trading process 1Week ahead position • Developed over time through combination of: • structured deals with counterparties • standard products traded OTC • Broadly balanced position • Handed to shift trading team Friday morning MW 600 +ve Sales 400 200 Generation 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -200 Hour -vePurchases Pumping -400 -600 Example of energy-balanced book4,800 MWh pumping; 3,600 MWh generation

  39. Trading process 2Typical power exchange price shape - winter £/MWh Generate Marginal Cost Pump 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 Half-hourly Settlement Period Tradingexample

  40. Trading process 3Generation optimisation MW 300 MWh moved from hour 19-20Net value-added £15,000 600 Buy @£30/MWh Sell @£80/MWh 400 200 Generation 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -200 Hour Pumping -400 -600 Tradingexample

  41. Trading process 4Pump/generation optimisation MW Net value-added £6,000 600 Buy 450 MWh @ £20/MWh 400 200 Generation 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 -200 Hour Pumping -400 -600 Sell 600 MWh@ £25/MWh Tradingexample

  42. Trading process 5Evolution of final position Long term trading Shift trading Bilateral APX Final position

  43. Summary • Diversity in revenue streams • Competitive advantage through assets • includes people and proprietary systems • Niche expertise in short term markets and system services • The UK’s most dynamic provider of electricity

  44. UK portfolio overviewSteve Riley

  45. First Hydro • Key addition • excellent fit within portfolio • Unique asset with competitive advantage • speed of response and reliability • positioned to benefit from tightening reserve margin • Energy trading • deep market knowledge - benefits entire portfolio

  46. UK asset portfolio GrossCapacity(MW) IPRShare(MW) FuelType Name Country • 5 assets with gross capacity of just over 5 GW • IPR net share = 7th largest portfolio in the UK • Largely merchant capacity • Good fuel diversity • gas, coal and pumped storage • Robust operational and environmental performance Rugeley Deeside Derwent First Hydro Saltend Total England Wales England Wales England 1,050 500 214 2,088 1,200 5,052 1,050 500 50 1,462 840 3,902 Coal Gas Gas PS Gas Saltend Deeside Derwent First Hydro Rugeley

  47. UK recovery signals England & Wales Reserve Marginabove Peak Demand (2004-10) • Tightening reserve margin • 2.4 GW nuclear plant (Magnox) expected to retire before 2010 • limited new-build anticipated before 2010 • 2.6 GW interconnector links to Netherlands and Norway unlikely to proceed before 2010 • renewable growth largely from intermittent wind power - requirement for firm power during peaks • environmental legislation will restrict 10-12 GW non-FGD output • Increasing development and acquisition activity 25% Notional Target Reserve 20% ForecastReserve Margin 15% Notional New-Entrant Point 10% 5% 2004 2005 2006 2007 2008 2009 2010 Source – National Grid January 2005 Update. Forecast includes all generation projects under construction and all planned closures of generation.

  48. Spreads - recent history UK Historic BaseloadGas & Coal Spreads • Over the past 12 months, gas prices have increased on the back of rising oil price • current oil prices remain close to all time high • Coal prices (delivered ARA) have declined since Jan 05 from ~$80/t to ~$65/t • EU ETS commenced January 05 • CO2 credit prices have increased since Jan 05 • Baseload power prices increased end 04/early 05 driven by rising gas price and CO2 cost £/MWh 20 Coal Spread pre CO2 15 Gas Spreadpre-CO2 10 5 0 M J J A S O N D J F M A M 2004 2005

  49. UK market - forward view Forward Baseload Gas Spreads, • Forward spreads indicate recovery • gas prices are expected to decline • coal prices expected to remain steady • As environmental constraints tighten Rugeley will shift to a more peaking role • From Jan 2005, cost of emitting CO2 has been treated as an additional marginal cost: • will be offset by NAP allocation • market liquidity increasing • early clarity on Phase 2 allocations important £/MWh 14 Gas Spreads post-CO2, no allocation 12 Gas Spreads pre-CO2 10 8 6 4 2 0 2005 2006 2007 2008 Forward prices sourced from Argus

  50. Legislation EU Emissions Trading Scheme commenced Jan 05 CO2 credits trading at €20-€23/t in June 05 for Phase 1 Large Combustion Plant Directive (2008) reduces emissions of SOx, NOx and dust from coal/oil plant Targets for renewable generation EU policy to reduce long term dependence on fossil fuels current HMG target of 10% generation by 2010 under pressure IPR strategy Actively trade emissions to support plant operations and maximise asset value May 05 allocations imply load factors of 44% for Rugeley, 55% for Deeside, 64% for Saltend Rugeley final decision, likely December 2005 focus on low sulphur coals to maximise value under LCPD constraints Renewables biomass co-firing at Rugeley Environment - implications for IPR

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