The information in this presentation has been collated by ELEXON and while all due care has been taken to ensure the accuracy of this information, ELEXON accepts no responsibility for errors.

New Arrangements in the UK Market

Brian SaundersCEO, ELEXON Ltd

The information in this presentation has been collated by ELEXON and while all due care has been taken to ensure the accuracy of this information, ELEXON accepts no responsibility for errors.

Problems of the Pool

•One price•Mechanism•Manipulation

Supplysets the price

DemandTakes the price

•Barrier

Longer-term bilateral trading

Participants trade bilaterally on a range of markets (OTC and exchange based) emerging in response to market needs.

Years ahead (?) 24 hours (?)

Short-term bilateral trading

Participants secure the majority of their generation/load under longer term products ...

…then fine tune their position on-the-day as uncertainty reduces.

Exchanges are operating

Gate

C

losu

re

Tra

din

g

peri

od

3.5 hours ½ hour

Balancing Mechanism

Balancing services contracts

Gate

C

losu

re

Bilateral trading

To balance the system in real time and resolve transmission constraints the System Operator …

...accepts Balancing Mechanism Bids and Offers...

...and calls-off Balancing Services contracts

Voluntary, pay-as-bid, firm Part

icip

ants

deliv

er/

take

energ

y b

ase

d o

n

contr

act

ual oblig

ati

ons

Years ahead (?)

At Gate Closure...

…bilateral trading stops,…

...contracts volumes are notified to Settlement,...

...and Bids and Offers are submitted to the Balancing Mechanism

Tra

din

g

peri

od

3.5 hours ½ hour

Settlement

Balancing Mechanism

Balancing services contracts

Gate

cl

osu

re

Bilateral trading

Years ahead (?)

Payments for bilateral contracts are settled between counterparties. In central Settlement…

…participants’ energy imbalances only(contract volume less metered output)are cashed-out at imbalance prices ...

...and payments for BM actions are made

After the event

How It Works

Imbalances

Top-up and Spill prices

Contractvolumes

Meter readings

Balancing Bids and

Offers

x Cash-outPayments

ImbalanceBills

Facilitates and has to be consistent with full competition in supply of electricity to all customers

System Buy and Sell Prices

Settlement System

Bids to decreaseoutput or increase consumption

Offers to increase output or decrease consumption

SOSells £

SO Buys £

Paid at Bid/offerprices

Over-production orUnder consumption

Spill price(System SellPrice) £

Top-up price(System BuyPrice) £ Under-production or

Over consumption

Cash out prices -the average of bids and average of offers acceptedBalancing Mechanism Imbalance Cash-out

(Note: the flow of money is shown for positive prices. Prices can go negative)

(Compared to Physical Notification)

(Compared to Contract Notification)

Before the Event After the Event

What Changes Under NETA?

• Little physical change

– Generators still generate (FULL COMPETITION)

– Suppliers still supply (FULL COMPETITION)

– Customers still deal mainly with suppliers

– SO still manages the system in real time

– Half hourly

• Changes in economic incentives, information & instructions and settlement

• Changes in Governance - independent of industry

What Changes Under NETA?

• No Central Despatch - Balancing Mechanism and Balancing Services

• Commitments are firm

– contracts notified - imbalances are paid for

– bids and offers are firm commercially

• Settlement is nett

• Balancing participation is voluntary

• No explicit capacity payments

Market Structure

• 153 signatories to the new Code and rising

• 116 active participants

• 60-80 Separate entities

• ~10 Pure traders

• 8 Large vertically integrated

Progress so far

It’s worked but lots of operational

challenges for the Company

How Has It Gone?

• >414,000 contract notifications

• BM activity and indicative prices on BMREPORTS.COM

Participation

Contract Position?

- close to total National Demand

Physical Position?

- System over notified

What Does That Mean?

Nett exposure to imbalance is small

Volume in BM is small

- Cash Out prices driven by small volumes- Price of energy not set by Imbalance Settlement

or the Balancing Mechanism

Imbalance PricesMedian Best Prices by Settlement Period 27 March 2001 P01 to 16 May 2001 P17

-10

10

30

50

70

90

110

130

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48

Settlement Period

£/M

Wh

Median Best SSP - Weekdays Median Best SBP - Weekdays

Median Best SSP - Holidays Median Best SBP - Holidays

N.B. Prices shown are selected in order: 1/ Latest settlement run; 2/ Indicative, excluding large defaults.

Volatility

Median Best Prices by Settlement Period 27 March 2001 P01 to 16 May 2001 P17

-10

10

30

50

70

90

110

130

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48

Settlement Period

£/M

Wh

Median Best SSP - Weekdays Median Best SBP - Weekdays Median UKPX - Weekdays

Median Best SSP - Holidays Median Best SBP - Holidays Median UKPX - Holidays

N.B. Prices shown are selected in order: 1/ Latest settlement run; 2/ Indicative, excluding large defaults.

Summary of Market views and prices