Ian Peters, COO British Gas, presented on "Energy policy, competitive markets and the home of the future in a world of climate change." at Warwick Business School 19/10/2009

1. Competitive markets and the home of
C titi k t d th h f
the future in a world of climate change
Ian Peters
Chief Operating Officer, British Gas
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Sept 09

2. Our businesses
We 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
services:
i • Largest energy supplier
• 15.6m residential accounts
• 1m business accounts
•81 H
8.1m Home S i
Services customer accounts
t t
• 9000 engineers
• 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 UK
• Providing more than 70% of the UK’s gas storage capacity
• 2 more in planning
• Over 5m gas, electricity and services customers
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• 3 gas fired power stations in Texas
2 • Extensive wind power in Texas
• Significant gas fields in Canada

3. Our Challenges
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• Volatile energy markets
• North S G d l ti ( t i
N th Sea Gas depleting (net importer)
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• 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 dynamics
• Political pressure to reduce prices
• Increasing regulation
• Fuel poverty programmes
• Climate change and energy efficiency
• Emissions directives and targets
• Renewable wind projects
• Microgeneration
• Sourcing new energy
• Gas exploration
• Nuclear
• LNG
3

4. Competitive Markets Have Delivered for UK consumers
UK domestic gas prices lowest in EU-15 for
8.00
last 5 years
7.00
7 00
6.00
nce/ KWH
5.00 EU average
Tax Component
4.00
Price (excl tax)
Pen
3.00
2.00
1.00
0.00
0 00
he tria
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• 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
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
p g g gp
4 Source:
Source: UK Government, DECC
DECC

5. UK gas supplies are declining
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U K a n n u a l g a s d e m a n d (b c f)
Projected • UKCS decline continues - import dependency continues to
4 ,0 0 0
grow. Norwegian production will plateau.
FRENCH ANNUAL
3 ,5 0 0 Scenario 1
3 DEMAND
,0 0 0 • Af Norway, future UK prices will be set by LNG or
After N f i ill b b
2 ,5 0 0
Scenario 2 Russian gas
2 ,0 0 0
• Europe’s most gas intensive economy has moved from
Scenario 3
1 ,5 0 0 being a source of cheap gas to an “end of pipe” importer
1 ,0 0 0 requiring th hi h t prices t support t
i i the highest i to t transportation costs
t ti t
5 0 0
across Russia and Europe
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 • Security of supply is critical to UK future stability
4,000 100%
Scenario 2 90%
3,500
80%
3,000
%)
Imp dependence (%
70%
upply (bcf per year)
2,500
60%
2,000 50%
port
40%
Su
1,500
1 500
30%
1,000
20%
500
10%
0 0%
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029
5 Imports UK Gas %age imports

6. UK Wholesale Gas Prices – Outlook Uncertain
100
UK Gas Prices, p/th
Month Ahead Actuals
90
12 Month Average*
80
Forward Curve (9 Sep 09)
70
60
th
p/t
50
40
30
20
10
0
*
• 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)
• 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
6

7. New power sources to fill generation gap
Cumulative Plant Closures, New Build and Demand
60,000
New Build
40,000
20,000
MW
0
M
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
-20,000
-40,000
Station Closures
-60,000
New Nuclear Nuclear Closure Wind @35% Tidal
Wave Biomass CHP New CCGT
Old CCGT CCS Old Coal Oil
Demand Total Margin (wind@35%)
Large amounts of intermittent wind and large amounts of base-
7 load nuclear create new dynamic beyond 2020

8. Government has agreed an EU target of 15% of all energy to be
from 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 vs 4% or 4GW now with a f th 8GW i construction or planned
ith further in t ti l d
• 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)
• Totalling
T t lli over 1.5GW
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

9. What makes up every £100 of the average UK gas bill?
p y g g
This analysis is
based on average
figures over the last
7 years.
9

10. Retailers faced with growing network and environmental costs, which
will increase bills
Estimated potential increases in customer
electricity charges (2004/05 to 2014/15) • Network and environmental costs
associated with supplying electricity
CCS/ FIT
increasing about 9% year on year
200 EU ETS
EUETS
£11?
RO
£18?
EEC/CERT/CESP/HES
Transmission
• Cost of supporting low carbon and
Distribution network investment is growing in
ustomer per yea r
150 £8? absolute t
b l t terms and as % of th bill
d f the
£18 £23?
• This will help accelerate the
p
£ per cu
£7 transformation to decarbonised
100
£14 £2? energy supply
£2
£16?
50 £1 • But it also increases stakeholder and
customer pressure on suppliers as a
Compound annual
C d l
whole
growth rate = 9%
0
10
2004/5 2009/10 2014/15

11. Vision of a retail energy services market is becoming clearer
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Low Carbon Transition Plan commitment to cut
emissions in homes by 29% on 2008 levels by 2020
Community Energy Renewable Heat
Feed-In Tariffs from
Saving Programme Incentive to be
April 2010 for small
of £350m launched introduced from April
p
scale generation
this autumn 2011
Carbon Emission
Smart meters in every Reduction Target resulting
home by end of 2020 in £1.9bn energy savings
to April 2011
p
11
11

12. Competition has key role to play in delivering decarbonisation as
efficiently as possible
Clear opportunity for suppliers Potential of competition
to enable decarbonisation needs to be recognised
• Low cost carbon abatement • Ofgem p
g probe focused on
opportunities in households critical fairness and on relative
to meet targets outcomes for different
customers
• Suppliers will compete to provide
energy services to customers, as • Role of retail competition in
part of richer set of customer harnessing and delivering
offerings innovation is critical
• Ofgem and government need to • Competition is a resource that
align government schemes and can help determine most
market rules to help the market effective ways of delivering
deliver at least cost energy efficiency
12
12

13. Competition more relevant as demand for transformation becomes more
pressing
• Many US energy markets based on “thinner” version of
thinner
retail competition
– Retailers provide customer access to wholesale hedging and
pricing options
– Retailer has no direct relationship with the customer and
operationally depends on the systems of the regulated default utility
provider
id
• Potential offered by “thicker” GB model should be more
valued given today’s challenges
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– Government is investing customer money to accelerate
decarbonisation
– Duty 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
13
13

14. Suppliers are best-placed to discover the energy services customers
want and value
Suppliers have Supplier demand will
customer drive what
relationships, and manufacturers of new
can build trust to technologies bring to
deliver new solutions market
Central role for
suppliers in delivering
energy efficiency
solutions
Suppliers will market
solutions customers
want through new
a t t oug e
product structures, time
14 of use pricing etc
14

15. Energy efficiency services are emerging as basis for differentiation
between suppliers
• British Gas increasingly competing on provision of energy
efficiency services – and other suppliers are responding
BG Energy Savers report-
Supported the delivery of Technology innovation
over 2 5m people to date
2.5m
over 100m energy efficiency partnerships with leading
have used the report (up to
products into UK homes brands
30% reduction)
Social housing projects, giving Retail partnerships – e.g. with
energy saving advice, products B&Q to subsidise loft insulation
and funding prices of £1 per roll
Council Tax rebate scheme-
Insulate 500,00 homes pa (18%
working with 68 councils to
reduction) and install 100,000 A
provide rebates of up to £125
rated boilers (21%)
for loft and cavity insulation
15

16. Smart technology we will be installing up to 2020 will enable an
integrated proposition – but the supplier led model is uncertain/at risk
• Roll out of smart a key enabler
Roll-out
of future energy efficiency
Microgen innovation
• E bl of “ti
Enabler f “time of use” pricing –
f ” i i
Wireless data transfer
expected to be a major driver of
Heating & customer behaviour change
Smart
advanced
Meter
M t
controls
Key Customer Benefits (£)
Data
Hub
Save energy
Produce energy
Broadband
VDU
Provide demand response
Smart Appliances Access broader tariff range
(including time of use)
Get more accurate bills
Data Processing
16

17. British Gas Portfolio of Energy Efficiency Products and Services
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Year 1- 64 homes in 8 streets in UK CESP CERT
competed to
save the most - Solid wall - Heating Over 100m Energy Efficiency
energy: 25% - Partnerships products subsidised in 5 years
energy usage
89 tonnes of CO2 saved
reduced, Local Authority Partnerships
Since the launch
in May 2008
Energy Experts Council Tax
9,488 schools
have signed up 50k home visits planned for 2009 Over 250 partnerships with Local
Authorities and Housing Associations
REGULATED OBLIGATION
ENERGY EFFICIENCY
B2B New Innovation Retail schemes
Energy efficiency consultancy
business acquired
q
LOW CARBON TECHNOLOGIES - First year of CERT, B&Q hav
Energy Savers Report delivered over 12 million m2
Completed 2.5m ESR’s LCBP2 DIY loft insulation (460k
Framework homes)
Supplier British Gas
provide solutions for PV, Insulation
£7m installed Solar thermal installations. Solar Thermal 1.5m homes insulated in
in 2008 £8.5m turnover in 2009 last 5 years
ASHP
provides b
id bespoke k
British Gas solutions to reduce
bought
energy consumption
17 20% equity Fuel cell technology
and CO2 emissions
stake development agreement

18. Full energy audits an important part of our energy efficiency
offering
18

19. Summary
y
• 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
innovation
• Centrica/British Gas are leading the market in security
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of supply and energy efficiency
• Smart meters should provide a transformational
opportunity to revolutionise the industry, customer
experience and consumption management
19