Convergence of the Gas and Electricity Market Implications for the Traditional Players

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O Convergence of the Gas and Electricity Market Implications for the Traditional Players

The 10th European Gas Conference May 12,1999 CD | H. Dieter Waffel Member, Board of Management

Hannover^ Germany

Insert Slide Control Number 1 » Oslo (Jas Confenence - May, 1999 Agenda

European Electricity Market Developments Gas and Electric Convergence

Insert Slide Control Ni.nr.Uer 2 ^ Oslo Oas Conference - May, 1999 CC"

PreussenElektra Overview

linn SIMeCoNiol Number 3 . Oslo Gas OMfememx - M.y, I!W> PreussenEIektra is well interconnected and has significant generation capabilities

Viking Cable/ EuroKabe) (N Baltic Cable (SE)

• Hard Coal Generation = 7,521 MW • Nuclear Generation = 5,609 MW • Gas Generation = 2,331 MW • Third Party Renewable Generation « 2,000 MW • Brown Coal Generation =1,126 MW • Oil Generation. = 902 MW • Pump Storage Generation = 800 MW • With its distributors and Thiiga PreussenEIektra has a 25 % market share in gas distribution in Germany

Insert Slide Control Number Oslo Gas Conftmence - May, 1999 PreussenElektra AG Group Holding Company Structure for Competitive Market

PreussenElektra M

as of: 7.98

Insert Slide Control Number Oslo Gas Confetnente ~ May, 1599 Industry Position of PreussenElektra in Germany and in Europe

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0,8- 3,0-

0,6- - 2,0 0,4- -

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Insert Slide Control Number Osto GasConfsmenoe - ¡Vsy, 1999 PreussenElektra's location is a natural trading hub in north central Europe

PreussenEIekta is well positioned between low cost markets to the north and east and potentially active trading markets to the west and south It meets all requirements as a ,,natural" electricity trading hub: - geographic location - open access transmission - capacity (grid & 1? - TV-1-:-' iv .••*-•'.• generation) - connections to multiple markets - price transparency - generation flexibility 7/n CH

Insert Si id? Control Number Oslo Gas Confemcnce - Mav, 1999 Central European Power Index (CEPI) Example of the new developments in European market

PreussenElektra sponsored the Central Europe Price; Indexwith Dow Jones and

listed in;tne iidjuinmg box

9 Trading at^PreussenElekfra's Border A - -'*:' - referent Jjpohit trading hub N : ^ :; •..= :l'";-aniiuiaberjof aqtiVitespartidnants :: - j' :

•V: ^ firnvpeaki off-peak and base load products '--:/- trailed at/#reussenE!ektra4§ border- Stadtwerke Hannover; MVY Energie"-

Insert Slide Control Number Oslo GasConfernence - May, 1999 Integrated approach - plant utilization, sales and trading - PreussenElektra's competitive positioning

Bilateral and index contracts

NordlPooi

APX (Anksterdam power exchange)

German power exchanges (Hannover, Dusseldorf, Frankfurt)

Insert Slide Control Number Oslo GasConfemerH-e- May, European ElectricityMarket Developments

rnseri Slide Control Number 1C , Oslo Gas Confemente - May, 1-999 Electricity Market developments - USA 1992 compared with Germany and Europe today

USA 1992 Europe Today Excess Generation • Excess Generation Uncertain reponse to reregulation • Uncertain reponse to reregulation Certain companies eager for change • Certain companies eager for change Many incumbants resisting change • Many incumbants resisting change Consolidations and merges on rise • Consolidations and merges on rise Limited market liquidity • Limited market liquidity Limited price transparency • Limited price transparency Customers pushing competition • Customers pushing competition Wholesale margins threatened • Wholesale margins threatened Open access being implemented • Open access being implemented

Similarities between these markets at the inception of competitive is striking.

Inserf Slide Cnntrol Number 11 Oslo Gas Confernenos - May, Excess Generating Capacity in Europe by Country -1997

MW 8.000 -i

6.000

4.000

2.000

J_L1 1 I r T i I J I i i I I CH F A N + S DK B NL CZ SF

Data compiled in 1997 from publicaUy available sources

Insert Slide ConfioJ Number J2 Oslo Gas Conference - May, 1999 What's Next for Electric Competition in Europe (I)?

Customer choice and reregulation will continue price pressure on wholesale market The pace of consolidations, allliances, mergers, and globalization activities will quicken Market liquidity and price transparency will rise in Europe Market entrants will increase rapidly in the short-term An industry shakeout is inevitable (USA summer of 1998)

Insert Slide ConftoJ Number J3 » Oslo Gas Convenience - May, What's Next for Electric Competition in Europe (II)? Financial risk management activities will increase and become a core skill for successful companies Competition will be achieved much quicker in Europe (likely 18-24 months in Europe vs. 5+ years in USA) Market lessons and participants with US experience will speed the pace of change in Europe Resistance to competition by incumbents will prove as ineffective in Europe as it was in the United States Branding, product development, and marketing activities will increase dramatically Electricity deregulation will increase the speed of gas deregulation Gas/Electricity convergence is the result

Insert Stide Control Number 14 , Oslo Gas Confernence-May, 1939 Gas and Electric Convergence

I nssn Slide Control NumhRr 2 5 , Oslo Gas Con femence - May, 1999 Comparison of Market Developments

Gas Electricity

Exchanges * UK Spot Market • UK Pool • Nord Pool • Fledgling index at Zeefomgge • Dutch Spot Market • German Spot Market • Bi-Lateral trades • Laufenberg Spot Market

Trading • Incumbents with • Incumbents plus few others Counterparties established positions

Transport • Negotiated Tariffs * Indicative tariffs published • Indicative tariffs in on internet Netherlands

Insen Slide Conbrol Nembef Oslo Gas Confemence - May, i^as and Electric Convergence

There are many questions underlying the convergence of the gas and electic markets* These questions include:

* Is convergence an opportunity, a threat, or both? * If we are an incumbent gas company, should we resist or encourage convergence? * What has been the experience in other markets such as the USA? Can lessons from USA market be applied in Europe? * What issues should be considered to evaluate the opportunities or threats posed by convergence? * Which industry is better positioned in Europe to exploit convergence, gas or electric?

Insert Slide Canto! Number 17 , - Oslo Gas Coafemence - May, 19'39 Convergence of Gas and Electric [P[T(§ySSiffl}Efe)Ildb Industries - Threat or Opportunity?

In the USA, gas deregulation led electricity deregulation Many aspects of USA gas market deregulation were applied to electricity deregulation including: => Open and non-discriminatory transport system => Reservation system =» On-line bidding systems => Establishment of regional trading hubs Because gas deregulation led electric deregulation in the USA, gas companies developed core skills and experience in many key areas; Physical and Derivative Trading and Physical Delivery Risk Management and Hedging Practices International Capital Placement and Sourcing =$ Multinational Workforce

lnsen Slide Control Number jk Oslo GasConfernence- May, Convergence of Gas and Electric Industries - Threat or Opportunity?

Lessons from the USA market suggest the following: => Progressive companies developed new core skills ==> New skills were transferable for electric deregulation Incumbency does not assure success, only a place at the table Risk and portfolio management expertise was key in both markets *=- CD

In Europe however, electric deregulation is leading gas deregulation. The implications for incumbent gas firms remain to be seen.

Inserl Slide Control Number 19 Oslo GasConlemenee- May, I&99 European Convergence Issues (I)

There are also many issues and questions to be considered for European convergence, These include: • Will there be price correlation between gas and electric markets within individual countries or across borders? * Does gas tolling provide an opportunity to overcome electric grid transportation congestion? • Might gas storage help contain price volatility in the electric market? * Are there enough gas fired generation to take advantage of high optionality gas units • Will the trend toward increased levels of gas generation sources lead to a natural convergence between the electricity and gas markets and firms? * Is there a natural synergy or financial benefit by joint management of gas and electric commodity portfolios and books?

Insen Slide Control Number 20 Osl° Gas Confemenc; - May, European Convergence Issues (II)

What are the implications of convergence from a consolidation and merger perspective? What will the impacts of convergence be on end use customers (one- stop shopping, brand loyalty leveraged joint marketing programs, cross commodity market share gains)? What will convergence mean for self generating industrial customers? Will convergence lead to extensive distributed generation and facilitate the adoption of fuel cell technologies? How will convergence and deregulation effect EU member nations compared to non-EU members?

Insert Slide Control Number 21 Oslo Gas Confemeisce - May, 1999 Summary

Experience from the USA suggests that experience gained during gas deregulation was beneficial for application with electric deregulation There are many natural synergies between the electric and gas market which could facilitate the speed of convergence One of the first signals of convergence will be strategic alliances between gas and electric companies There are a tremendous numbers of open issues to be considered as deregulation is implemented and convergence occurs Convergence in Europe promises to be a near-term growth opportunity for advocates and consultants Market dynamics promise that there will be winners and losers. Incumbency is an advantage not an assurance of success. jisert Slide Control Number 22 Oslo Gas Confemence-May,